<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1997.
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
VALERO REFINING AND MARKETING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 2911 74-1828067
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
530 MCCULLOUGH AVENUE
SAN ANTONIO, TEXAS 98215
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
RAND C. SCHMIDT
530 MCCULLOUGH AVENUE
SAN ANTONIO, TEXAS 98215
(210) 246-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
WITH A COPY TO:
EDWARD D. HERLIHY, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019
(212) 403-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the Merger of PG&E Acquisition Corporation with and into Valero
Energy Corporation pursuant to the Agreement and Plan of Merger dated as of
January 31, 1997, have been satisfied or waived.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(2)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... 57,000,000 $26.26 $1,496,820,000 $453,581.81
- ----------------------------------------------------------------------------------
Preferred Share Purchase
Rights(3).............. 57,000,000 -- -- None
- ----------------------------------------------------------------------------------
Total................... $453,581.81
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated maximum amount which may be issued.
(2) The registration fee for the securities registered hereby has been
calculated pursuant to Rule 457(f)(2) under the Securities Act and is
based upon the book value of the Common Stock computed as of March 31,
1997 as adjusted for the acquisition of Basis Petroleum, Inc.
(3) Rights initially are carried and traded with the Common Stock. The value
attributable to the Rights, if any, is reflected in the market price of
the Common Stock.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
VALERO REFINING AND MARKETING COMPANY
(TO BE RENAMED "VALERO ENERGY CORPORATION")
COMMON STOCK
Valero Energy Corporation (Valero) proposes to spin off Valero Refining and
Marketing Company (New Valero) to our stockholders, and to merge Valero, which
at that time will consist only of Valero's remaining natural gas related serv-
ices business, with a wholly owned subsidiary of PG&E Corp.
The Board of Directors of Valero is recommending that you vote in favor of a
tax-free spinoff and merger that, if accomplished, will result in the following
changes:
NEW VALERO WILL:
. continue to own and operate Valero's refining and marketing business, in-
cluding the business of Basis Petroleum, Inc. recently acquired by Valero
and expected to be contributed to New Valero prior to the spinoff, as de-
scribed herein.
VALERO WILL:
. continue to own and operate only Valero's natural gas related services
business;
. prior to the spinoff, receive a dividend from New Valero of $210 million;
and
. be owned by PG&E Corp.
FOR EACH SHARE OF VALERO COMMON STOCK YOU OWN ON THE RECORD DATE FOR THE
SPINOFF, YOU WILL RECEIVE:
. one share of New Valero common stock; and
. a portion of a share of PG&E common stock. This is explained more fully
in the Proxy Statement-Prospectus. You will receive cash in lieu of frac-
tional shares.
These transactions will occur only if the Valero stockholders approve the spin-
off and the merger and the parties either meet or waive the other conditions
described in the Proxy Statement-Prospectus.
WE URGE YOU TO READ THE PROXY STATEMENT-PROSPECTUS AND THIS DOCUMENT CAREFULLY
SINCE EACH CONTAINS INFORMATION THAT IS IMPORTANT TO YOU. ALSO, PAY PARTICULAR
ATTENTION TO THE "RISK FACTORS" BEGINNING ON PAGE 16.
Immediately after the spinoff and merger, New Valero will change its name to
"Valero Energy Corporation." We expect that New Valero's common stock will
trade on the New York Stock Exchange under the symbol "VLO."
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULA-
TORS HAVE APPROVED THE NEW VALERO COMMON STOCK TO BE ISSUED OR DETERMINED IF
THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WE MAILED THIS DOCUMENT TO OUR STOCKHOLDERS ON OR ABOUT MAY 14, 1997.
<PAGE>
PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE SPINOFF OF NEW VALERO COMMON STOCK......... 1
SUMMARY OF CERTAIN INFORMATION............................................. 2
NEW VALERO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................................ 4
Balance Sheet............................................................ 4
Income Statement......................................................... 4
Natural Gas Business Historical.......................................... 5
Historical Consolidated Financial Statements............................. 5
VALERO UNAUDITED PRO FORMA CONDENSED INCOME STATEMENTS..................... 10
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION.......................... 12
WHERE STOCKHOLDERS CAN FIND MORE INFORMATION............................... 13
INTRODUCTION............................................................... 14
RISK FACTORS............................................................... 16
No Operating History as an Independent Company........................... 16
No Prior Market for New Valero Common Stock.............................. 16
New Valero Dividend Policy............................................... 17
Certain Anti-takeover Effects............................................ 17
Certain Federal Income Tax Considerations................................ 17
Basis Acquisition........................................................ 17
Indemnification.......................................................... 18
Effect of Economic and Other Conditions on Operating Margins............. 18
Effect of Political and Regulatory Factors on New Valero's Operations.... 18
Operating Hazards........................................................ 18
Commodity Pricing and Demand............................................. 19
Feedstock Supply......................................................... 19
Competition.............................................................. 19
Environmental Matters.................................................... 20
THE DISTRIBUTION........................................................... 20
Background and Reasons for the Distribution.............................. 20
Manner of Effecting the Distribution..................................... 21
Certain Federal Income Tax Considerations................................ 21
Listing and Trading of New Valero Common Stock........................... 22
REGULATORY MATTERS......................................................... 22
AGREEMENTS BETWEEN VALERO AND NEW VALERO................................... 22
Distribution Agreement................................................... 23
Tax Sharing Agreement.................................................... 26
Employee Benefits Agreement.............................................. 26
Interim Services Agreement............................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 30
Overview................................................................. 30
The Proposed Transactions................................................ 30
Change in Segment Reporting.............................................. 30
Acquisition of VNGP, L.P................................................. 31
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Results of Operations.................................................... 32
1996 Compared to 1995................................................... 33
Consolidated Results................................................... 33
Segment Results........................................................ 33
Refining Business..................................................... 33
Natural Gas Business.................................................. 35
1995 Compared to 1994................................................... 36
Consolidated Results................................................... 36
Segment Results........................................................ 37
Refining Business..................................................... 37
Natural Gas Business.................................................. 38
Other................................................................. 38
Basis Petroleum......................................................... 38
Outlook................................................................. 42
Refining Business...................................................... 42
Liquidity and Capital Resources.......................................... 43
Current Structure....................................................... 43
BUSINESS AND PROPERTIES.................................................... 46
Overview................................................................. 46
Strategy................................................................. 46
Refining Operations...................................................... 46
Sales.................................................................... 47
Feedstock Supply......................................................... 48
Acquisition of Basis Petroleum........................................... 48
Factors Affecting Operating Results...................................... 50
Competition.............................................................. 51
Environmental Matters.................................................... 51
Employees................................................................ 51
Properties............................................................... 52
Litigation............................................................... 52
DESCRIPTION OF CERTAIN NEW VALERO INDEBTEDNESS............................. 54
MANAGEMENT................................................................. 56
Directors of New Valero.................................................. 56
Audit Committee.......................................................... 57
Compensation Committee................................................... 57
Executive Committee...................................................... 58
Compensation of Directors................................................ 58
Executive Officers of New Valero......................................... 59
EXECUTIVE COMPENSATION..................................................... 60
Stock Option Grants and Related Information.............................. 61
Retirement Benefits...................................................... 63
Description of Executive Bonus, Stock Incentive and Stock Option Plans... 65
Description of Thrift Plan............................................... 65
Description of Other Benefit Plans....................................... 66
Arrangements with Certain Officers and Directors......................... 66
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION................ 67
TRANSACTIONS WITH MANAGEMENT............................................... 68
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 69
DESCRIPTION OF NEW VALERO CAPITAL STOCK................................... 71
Authorized Capital Stock................................................ 71
New Valero Common Stock................................................. 71
New Valero Preferred Stock.............................................. 71
New Valero Purchase Rights.............................................. 71
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS............................... 74
Limitations on Changes in Board Composition and Other Actions by Stock-
holders................................................................ 74
Preferred and Common Stock.............................................. 75
Amendment of Certain Provisions of the New Valero Certificate and New
Valero By-laws......................................................... 75
Rights.................................................................. 76
Management Stability Agreements; Other Severance Arrangements........... 76
Business Combinations................................................... 76
Statutory Provisions.................................................... 76
VALIDITY OF SECURITIES.................................................... 77
EXPERTS................................................................... 77
STOCKHOLDER PROPOSALS..................................................... 77
INDEX OF DEFINED TERMS.................................................... 78
INDEX TO FINANCIAL INFORMATION............................................ F-1
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE SPINOFF OF
NEW VALERO COMMON STOCK
Q. WHEN WILL THE SPINOFF OCCUR?
A: If the Valero stockholders approve the spinoff and merger and the other
conditions are satisfied, the parties will complete the transactions as
soon as possible. Currently, the parties anticipate completing the spinoff
and the merger in the third quarter of 1997, subject to regulatory approv-
al.
Q. WHAT BUSINESS WILL NEW VALERO OWN?
A. After the spinoff, New Valero will continue to own the refining and market-
ing business currently owned by New Valero and, indirectly, by Valero. New
Valero will also own the business of Basis Petroleum, Inc. (Basis). Please
read the information on New Valero's business and the associated risks be-
ginning on pages 46 and 16.
Q. WHAT WILL I RECEIVE IN THE SPINOFF?
A. For every share of Valero common stock you own, you will receive one share
of New Valero common stock. You should receive your New Valero common stock
certificates within several weeks after the completion of the transactions.
Q. WILL NEW VALERO PAY DIVIDENDS?
A. The New Valero Board of Directors, in its sole discretion, will declare the
future payment and amount of dividends, if any. The decision to declare a
dividend will depend upon the financial condition, capital requirements and
earnings of New Valero, and such other factors that the New Valero Board of
Directors determines to be relevant. Following the spinoff, the New Valero
Board of Directors will consider declaring a quarterly cash dividend with
respect to the New Valero common stock.
Q. DO I HAVE TO PAY TAXES ON THE RECEIPT OF NEW VALERO COMMON STOCK?
A. No. Valero has received an opinion of counsel that the spinoff of New
Valero common stock will be tax free to Valero stockholders for United
States federal income tax purposes. Valero expects to receive, at the time
of the spinoff and merger, an additional opinion of counsel confirming this
treatment. These opinions are not binding on the Internal Revenue Service.
To review certain tax consequences of the spinoff and merger in greater de-
tail, see pages 17 and 21.
Q. WHERE WILL I BE ABLE TO TRADE THE SHARES OF NEW VALERO COMMON STOCK?
A. We are applying to list the shares of New Valero common stock on the New
York Stock Exchange.
Q. WHAT HAPPENS TO MY EXISTING VALERO STOCK?
A. PG&E Corp., through an exchange agent, will send you written instructions
for exchanging your existing Valero common stock for shares of PG&E Corp.
common stock and a cash payment in lieu of any fractional share.
Q. WHAT DO I NEED TO DO NOW?
A. Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the annual meeting at
which the transactions will be considered. Valero stockholders should NOT
send in their stock certificates at this time. If you continue to hold your
Valero shares at the time of the spinoff, you will automatically receive
your New Valero shares. After the merger, you will receive instructions for
exchanging your Valero stock certificates for PG&E Corp. stock and cash, as
described in the Proxy Statement-Prospectus.
1
<PAGE>
SUMMARY OF CERTAIN INFORMATION
This summary highlights selected information from this document. It may not
contain all of the information that is important to you. To better understand
the transactions and for a more complete description of the legal terms of the
spinoff and the merger, you should read carefully this entire document, the
Proxy Statement-Prospectus, and other documents referred to therein and in this
summary.
THE SPINOFF
If you have questions about If you have questions about the
Valero, New Valero or your mailing or receipt of your New
stockholdings in either company Valero stock certificates please
please contact: contact:
Valero Energy Corporation 530 Harris Trust and Savings Bank P.O.
530 McCullough Avenue P.O. Box A3504
San Antonio, Texas 78215 Chicago, Illinois 60690-3504
Attn: Investor Relations Proxy Services
(210) 246-2099 (312) 461-6001
THE SPINOFF AND MERGER
PG&E Corp. and Valero have agreed that PG&E Corp. will acquire Valero's natu-
ral gas and natural gas liquids related services business, power marketing
business and related risk management business, which we refer to as the "Natu-
ral Gas Business." In order to separate the Natural Gas Business from Valero's
other businesses, which we refer to as the "Refining Business," Valero will
transfer certain assets and related liabilities of the Refining Business from
Valero and subsidiaries of Valero that engage primarily in the Natural Gas
Business to subsidiaries that engage primarily in the Refining Business and
will transfer certain assets and related liabilities of the Natural Gas Busi-
ness from subsidiaries that engage primarily in the Refining Business to sub-
sidiaries that engage primarily in the Natural Gas Business. Immediately prior
to the merger, New Valero will pay a cash dividend to Valero, and Valero will
distribute (as a dividend) the shares of New Valero to Valero's stockholders.
Immediately after the spinoff, a subsidiary of PG&E Corp. will be merged into
Valero, common stockholders of Valero will receive common stock of PG&E Corp.
and cash in lieu of fractional shares in exchange for their Valero stock cer-
tificates and Valero will become a wholly owned subsidiary of PG&E Corp.
As a result of these transactions, former stockholders of Valero will own (i)
the same proportional interest in the Refining Business, through their owner-
ship of New Valero common stock, as immediately prior to the transactions and
(ii) an indirect interest in the Natural Gas Business through their ownership
of PG&E Corp. common stock.
Immediately after the spinoff and merger, New Valero will change its name to
"Valero Energy Corporation."
RELATIONSHIP BETWEEN VALERO AND NEW VALERO AFTER THE SPINOFF AND MERGER
After the spinoff, Valero and New Valero will be separate companies. Valero
and New Valero will enter into agreements to help in the separation and transi-
tion of the Natural Gas Business and the Refining Business. The agreements deal
with many operational issues, including:
. the separation of the Natural Gas Business from the Refining Business;
. transitional services to be provided by each of Valero and New Valero
to the other from the effective time of the merger until December 31,
1998; and
. the allocation of certain tax, employee benefits and other liabili-
ties between Valero and New Valero.
2
<PAGE>
Under these agreements, Valero and New Valero will agree to compensate each
other after the spinoff for certain losses, damages, claims and liabilities re-
sulting from various actions. Each of Valero and New Valero will also provide
the other, in exchange for certain fees, with various services following the
merger including financial, regulatory, information, tax, computer, administra-
tive and other services. Additionally, Valero and New Valero will each agree to
indemnify the other from and against certain tax liabilities. Detailed informa-
tion about these agreements can be found in the section titled "Agreements Be-
tween Valero and New Valero."
RISK FACTORS
Stockholders should carefully review the matters discussed under the section
titled "Risk Factors."
3
<PAGE>
NEW VALERO
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On April 22, 1997, Valero entered into a stock purchase agreement with Salo-
mon Inc (Salomon) to acquire Basis, a wholly owned subsidiary of Salomon (the
Basis Acquisition), and on May 1, 1997, Valero acquired Basis. The Basis Acqui-
sition will be accounted for by New Valero under the purchase method of ac-
counting, and, as a result, pro forma adjustments are reflected in the accompa-
nying unaudited pro forma condensed combined financial statements (Pro Forma
Financial Statements) to reflect, among other things:
. a preliminary allocation of Valero's purchase cost among the assets
acquired and liabilities assumed;
. the elimination of operating results and shutdown costs for operations of
Basis which were discontinued prior to the Basis Acquisition; and
. the elimination of the effect from the sale of certain assets by Basis
prior to the Basis Acquisition.
The assets acquired and liabilities assumed by Valero as a result of the Ba-
sis Acquisition will become part of the Refining Business. The accompanying Pro
Forma Financial Statements show the effects on the financial position and re-
sults of operations of New Valero of both the Basis Acquisition and the pro-
posed spinoff and merger. For more information concerning the Basis Acquisi-
tion, see "Business and Properties--Acquisition of Basis Petroleum" and "Man-
agement's Discussion and Analysis of Financial Condition and Results of Opera-
tions--Results of Operations--Basis Petroleum."
BALANCE SHEET
The accompanying unaudited pro forma condensed combined balance sheet at De-
cember 31, 1996 presents the combined financial position of New Valero assuming
the Basis Acquisition and the spinoff and merger had occurred on that date.
This balance sheet has been derived from the historical balance sheet of Valero
adjusted for:
. the effects of the Basis Acquisition;
. the divestiture of the Natural Gas Business;
. the $210,000,000 dividend to Valero;
. the refunding of industrial revenue bonds; and
. an adjustment to the par value of the shares of New Valero (the
Recapitalization).
INCOME STATEMENT
The accompanying unaudited pro forma condensed combined statement of income
for the year ended December 31, 1996 presents the combined results of opera-
tions of New Valero assuming the Basis Acquisition and the spinoff and merger
had occurred on January 1, 1996. This statement of income has been derived from
the historical statement of income of Valero adjusted for:
. the effects of the Basis Acquisition;
. the elimination of operating results and shutdown costs for operations of
Basis which were discontinued prior to the Basis Acquisition;
. the elimination of the effect from the sale of certain assets by Basis
prior to the Basis Acquisition; and
. the divestiture of the Natural Gas Business as contemplated by the
Distribution Agreement.
4
<PAGE>
NATURAL GAS BUSINESS HISTORICAL
The "Natural Gas Business Historical" column in the unaudited pro forma con-
densed combined balance sheet represents the combined historical assets and li-
abilities directly attributable to the Natural Gas Business plus a portion of
certain corporate assets and liabilities allocated to the Natural Gas Business
based upon methods deemed reasonable by Valero's management. Included in such
corporate assets and liabilities allocated to the Natural Gas Business is a
portion of the corporate debt of Valero allocated to the Natural Gas Business
based on the ratio of the Natural Gas Business' net assets, excluding the
amounts of intercompany notes receivable or payable with corporate entities, to
Valero's consolidated net assets. The "Natural Gas Business Historical" column
in the unaudited pro forma condensed combined statement of income represents
the combined historical results of operations of the Natural Gas Business plus
the effects on results of operations of the allocation of corporate assets and
liabilities noted above. No general corporate overhead has been allocated to
the discontinued operations. Interest expense related to corporate debt has
been allocated to the Natural Gas Business based on the net asset ratios noted
above.
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
The Pro Forma Financial Statements should be read in conjunction with the
historical consolidated financial statements and the related notes of Valero
and Basis which are included beginning on pages F-2 and F-33 of this Prospec-
tus. The Pro Forma Financial Statements are not necessarily indicative of the
financial position that actually would have been obtained or the results that
actually would have occurred if the Basis Acquisition and the spinoff and
merger had been consummated as of December 31, 1996 or January 1, 1996. The Pro
Forma Financial Statements are also not necessarily indicative of the financial
position or results which may be attained in the future. The pro forma adjust-
ments, as described in the Notes to Pro Forma Condensed Combined Financial
Statements, are based upon available information and upon certain assumptions
that management believes are reasonable.
5
<PAGE>
NEW VALERO
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
BASIS ACQUISITION
----------------------
NEW
VALERO NATURAL GAS TRANSACTIONS VALERO
VALERO PRO FORMA PRO FORMA BUSINESS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS COMBINED
ASSETS ---------- ---------- ----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (233,683)(a) $ 9,990 (A)
(150,000)(b) 1,396 (B)
CURRENT ASSETS.......... $ 888,169 $ 906,529 65,328 (b) $1,476,343 $ (556,065) (1,150)(D) $ 930,514
PROPERTY, PLANT AND
EQUIPMENT, NET......... 2,079,079 817,967 (540,868)(b) 2,356,178 (850,245) -- 1,505,933
(7,865)(a)
8,000 (b) (1,994)(B)
DEFERRED CHARGES AND
OTHER ASSETS........... 167,526 9,448 10,640 (b) 187,749 (44,618) (1,852)(C) 139,285
---------- ---------- ---------- ---------- ----------- -------- ----------
$3,134,774 $1,733,944 $ (848,448) $4,020,270 $(1,450,928) $ 6,390 $2,575,732
========== ========== ========== ========== =========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES, ex-
cluding short-term debt
and current $(122,807) (a)
maturities of long-term
debt................... $ 720,813 $ 673,145 (38,992) (b) $1,232,159 $ (524,892) $ (4,194)(C) $ 703,073
---------- ---------- ---------- ---------- ----------- -------- ----------
TOTAL DEBT:
Short-term............. 82,000 -- -- 82,000 (82,000) -- --
Current maturities..... 72,341 -- -- 72,341 (72,341) -- --
219,990 (A)
3,955 (B)
Long-term maturities... 868,300 -- 254,150 (b) 1,122,450 (431,428) (338,372)(C) 576,595
Notes payable to affil-
iates................. -- 618,438 (618,438)(c) -- -- -- --
---------- ---------- ---------- ---------- ----------- -------- ----------
1,022,641 618,438 (364,288) 1,276,791 (585,769) (114,427) 576,595
---------- ---------- ---------- ---------- ----------- -------- ----------
DEFERRED INCOME TAXES
AND OTHER DEFERRED
CREDITS AND OTHER
LIABILITIES............ 314,345 69,171 (69,171)(a) 314,345 (59,580) (686)(B) 254,079
---------- ---------- ---------- ---------- ----------- -------- ----------
REDEEMABLE PREFERRED
STOCK, SERIES A........ 1,150 -- -- 1,150 -- (1,150)(D) --
---------- ---------- ---------- ---------- ----------- -------- ----------
(49,570)(a) (210,000)(A)
618,438 (c) (3,867)(B)
STOCKHOLDERS' EQUITY.... 1,075,825 373,190 (822,058)(b) 1,195,825 (280,687) 340,714 (C) 1,041,985
---------- ---------- ---------- ---------- ----------- -------- ----------
$3,134,774 $1,733,944 $ (848,448) $4,020,270 $(1,450,928) $ 6,390 $2,575,732
========== ========== ========== ========== =========== ======== ==========
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
6
<PAGE>
NEW VALERO
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
BASIS ACQUISITION
-----------------------
NEW
VALERO NATURAL GAS TRANSACTIONS VALERO
VALERO PRO FORMA PRO FORMA BUSINESS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING $ (200,565)(g)
REVENUES............... $4,990,681 $9,504,844 (1,936,506)(d) $12,358,454 $(2,257,605) $ 24,777 (E) $10,125,626
---------- ---------- ----------- ----------- ----------- -------- -----------
COSTS AND EXPENSES: (1,918,229)(d)
12,032 (e)
Cost of sales and oper-
ating (7,460)(f) 24,777 (E)
expenses............... 4,606,320 9,565,499 (245,066)(g) 12,013,096 (2,050,785) 1,792 (F) 9,988,880
Selling and administra-
tive
expenses............... 81,665 36,141 (3,316)(d) 114,490 (50,381) 44 (F) 64,153
(1,396)(d)
(1,493)(g)
Depreciation expense.... 101,787 46,510 (34,063)(h) 111,345 (46,465) (1,404)(F) 63,476
---------- ---------- ----------- ----------- ----------- -------- -----------
Total................. 4,789,772 9,648,150 (2,198,991) 12,238,931 (2,147,631) 25,209 10,116,509
---------- ---------- ----------- ----------- ----------- -------- -----------
OPERATING INCOME
(LOSS)................. 200,909 (143,306) 61,920 119,523 (109,974) (432) 9,117
LOSS ON INVESTMENT IN
PROESA JOINT VENTURE... (19,549) -- -- (19,549) -- -- (19,549)
REVERSAL OF ACQUISITION
EXPENSE
ACCRUAL................ 18,698 -- -- 18,698 (18,698) -- --
OTHER INCOME 2,282 (e)
(EXPENSE), NET......... 8,820 82,030 (82,030)(g) 11,102 (1,001) -- 10,101
(12,207)(I)
30,628 (H)
INTEREST AND DEBT
EXPENSE, NET........... (95,177) (39,172) 28,594 (i) (105,755) 56,655 5,207 (G) (25,472)
---------- ---------- ----------- ----------- ----------- -------- -----------
INCOME (LOSS) BEFORE IN-
COME TAXES............. 113,701 (100,448) 10,766 24,019 (73,018) 23,196 (25,803)
INCOME TAX EXPENSE (BEN-
EFIT).................. 41,000 (34,782) 3,393 (j) 9,611 (26,289) 8,119 (J) (8,559)
---------- ---------- ----------- ----------- ----------- -------- -----------
NET INCOME (LOSS)....... 72,701 (65,666) 7,373 14,408 (46,729) 15,077 (17,244)
Less: preferred stock
dividend requirements.. 11,327 -- -- 11,327 (10,781) (546)(G) --
---------- ---------- ----------- ----------- ----------- -------- -----------
NET INCOME (LOSS)
APPLICABLE TO
COMMON STOCK........... $ 61,374 $ (65,666) $ 7,373 $ 3,081 $ (35,948) $ 15,623 $ (17,244)
========== ========== =========== =========== =========== ======== ===========
EARNINGS (LOSS) PER
SHARE OF COMMON STOCK.. $ 1.40 $ .07 $ (.32)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
(in thousands)......... 43,926 47,356 54,371
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
7
<PAGE>
NEW VALERO
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
PRO FORMA ADJUSTMENTS RELATED TO BASIS ACQUISITION
(a)To reflect assets and liabilities to be retained by Salomon as follows (in
millions):
<TABLE>
<S> <C>
Current assets.................................................... $ 234
Deferred charges and other assets................................. 8
Current liabilities............................................... (123)
Deferred income taxes............................................. (69)
-----
$ 50
=====
(b) To reflect the issuance of $254 million of debt (including the incurrence
of $8 million of debt issuance costs) under a new $835 million revolving
credit facility with a group of banks, the issuance of $120 million of
equity, and the receipt of $150 million pursuant to an inventory purchase
agreement whereby New Valero intends to sell a portion of its base
inventory to a third party, the proceeds of which are used to fund the
acquisition of all of the common stock of Basis. Also reflected are
adjustments to certain of Basis's historical assets and liabilities to
reflect the estimated fair values of the assets acquired and liabilities
assumed, as follows (in millions):
Increase in current assets........................................ $ 65
Decrease in property, plant and
equipment, net................................................... (541)
Increase in deferred charges and other assets..................... 11
Decrease in current liabilities................................... 39
-----
Excess of historical cost over purchase price of Basis assets ac-
quired and liabilities assumed................................... $(426)
=====
</TABLE>
(c) To reflect the cancellation of the note payable by Basis to its parent,
Salomon.
(d) To reflect the elimination of income associated with Basis's investment in
a crude gathering business, which is being retained by Salomon, and to
reverse the elimination of sales made by Basis to the crude gathering
business.
(e) To reflect costs associated with the $150 million inventory purchase
agreement and the reclassification of certain income from Cost of Sales to
Other Income.
(f) To reflect the elimination of income relating to certain 1996 inventory
adjustments and derivative transactions resulting from the adjustment to
fair value of the assets acquired and liabilities assumed as of the date of
the acquisition, and to reduce turnaround expenses to conform to New
Valero's method of accounting.
(g) To reflect the elimination of operating losses and shutdown costs
associated with operations discontinued during 1995 and 1996, and to
eliminate the gain recorded on the sale of certain assets during 1996. Had
the operating results and shutdown costs for operations of Basis which were
discontinued prior to the Basis Acquisition and the effect from the sale of
certain assets by Basis prior to the Basis Acquisition not been eliminated
in the accompanying unaudited pro forma condensed combined financial
statements, operating income would have decreased by $46 million, other
income (expense), net would have benefited by $82 million, income (loss)
before income taxes would have benefited by $36 million and net income
(loss) would have benefited by $23 million.
(h) To reverse historical depreciation expense and record depreciation expense
on the portion of the acquisition cost allocated to property, plant and
equipment.
(i) To reflect the elimination of $45 million of interest expense on the note
payable by Basis to Salomon and to reflect interest expense on the debt
issued to partially fund the acquisition. A 1/8% change in the variable
interest rate associated with such debt would have a $.3 million effect on
interest expense.
(j) To reflect the tax effect of the pro forma pre-tax income adjustments
related to the Basis Acquisition.
PRO FORMA ADJUSTMENTS RELATED TO THE TRANSACTIONS
(A) To reflect the payment of a $210 million cash dividend to Valero and bank
borrowings required to fund such dividend and an increase in operating cash
balances to a $10 million level.
(B) In connection with the refunding of the $98.5 million of Industrial Revenue
Bonds (IRBs) of New Valero, to reflect borrowings to fund the payment of $1
million of debt issuance costs associated with the new refunding IRBs and a
$3 million premium paid in
8
<PAGE>
NEW VALERO
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
connection with the redemption of the existing IRBs, a $3 million write-off
of unamortized debt costs related to the existing IRBs, and a $2.1 million
reduction in income taxes associated with such write-off and the redemption
premium.
(C) To reduce the historical corporate debt allocated to New Valero to reflect
the assumption of all such corporate debt by Valero in accordance with the
Distribution Agreement.
(D) To reflect the redemption of the remaining shares of mandatorily
redeemable preferred stock.
(E) To reverse the elimination of sales made by New Valero to Valero.
(F) To adjust historical costs and expenses to reflect the allocation of
corporate assets and liabilities between Valero and New Valero in
accordance with the Distribution Agreement.
(G) To reduce interest expense and preferred stock dividends resulting from
the refunding and reissuance of the IRBs of New Valero and the redemption
of the mandatorily redeemable preferred stock, respectively. A 1/8% change
in the variable interest rate associated with the IRBs of New Valero would
have a $.1 million effect on interest expense.
(H) To eliminate historical interest expense on corporate debt allocated to
New Valero resulting from the assumption of all such debt by Valero in
accordance with the Distribution Agreement.
(I) To reflect interest expense on borrowings under the new bank credit line
of New Valero. A 1/8% change in the variable interest rate associated with
such borrowings under the new bank credit line would have a $.2 million
effect on interest expense.
(J) To reflect the tax effect of the pro forma pre-tax income adjustments
related to the Transactions.
9
<PAGE>
VALERO
UNAUDITED PRO FORMA CONDENSED INCOME STATEMENTS
The accompanying unaudited pro forma condensed income statements for the
years ended December 31, 1995 and 1994 show the effects on the reported results
of operations of Valero assuming the proposed spinoff and merger are
consummated and, as a result, the results of operations of the natural gas
business are presented as discontinued operations. These income statements are
presented on a pro forma basis pending the occurrence of the event that would
establish the measurement date for treatment of the natural gas business as
discontinued operations, namely approval by Valero stockholders.
The "Natural Gas Business Historical" columns in the unaudited pro forma
condensed statements of income represent the historical results of operations
of the Natural Gas Business plus the effects on results of operations of the
allocation of certain corporate assets and liabilities to the Natural Gas
Business based upon methods deemed reasonable by Valero's management. Interest
expense related to corporate debt has been allocated to the Natural Gas
Business based on the average of the beginning-of-year and end-of-year ratios
of the Natural Gas Business' net assets, exclusive of intercompany notes
receivable or payable, to Valero's consolidated net assets.
In addition, in calculating earnings per share, preferred stock dividends
have been allocated entirely to the discontinued operations of the natural gas
business since the convertible preferred stock proceeds were used to fund the
repurchase of the publicly held units of Valero Natural Gas Partners, L.P.
The unaudited pro forma condensed income statements should be read in
conjunction with the historical consolidated financial statements and the notes
related thereto of Valero which are included beginning on page F-2 of this
Prospectus. The unaudited pro forma condensed income statements are not
necessarily indicative of the results that actually would have occurred if the
spinoff and merger had been consummated as of the beginning of each year
presented, or the results which may be attained in the future.
10
<PAGE>
VALERO
PRO FORMA CONDENSED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
----------------------------------- ----------------------------------
NATURAL GAS NATURAL GAS
VALERO BUSINESS VALERO VALERO BUSINESS VALERO
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES...... $3,197,872 $(1,425,234) $1,772,638 $1,837,440 $(746,943) $1,090,497
---------- ----------- ---------- ---------- --------- ----------
COSTS AND EXPENSES:
Cost of sales and
operating expenses.... 2,830,636 (1,270,312) 1,560,324 1,561,225 (613,569) 947,656
Selling and
administrative
expenses.............. 78,120 (46,728) 31,392 66,258 (42,075) 24,183
Depreciation expense... 100,325 (43,158) 57,167 84,032 (28,985) 55,047
---------- ----------- ---------- ---------- --------- ----------
Total................ 3,009,081 (1,360,198) 1,648,883 1,711,515 (684,629) 1,026,886
---------- ----------- ---------- ---------- --------- ----------
OPERATING INCOME
(LOSS)................. 188,791 (65,036) 123,755 125,925 (62,314) 63,611
EQUITY IN EARNINGS OF
VALERO NATURAL GAS
PARTNERS, L.P. ........ -- -- -- (10,698) 10,698 --
PROVISION FOR
ACQUISITION
EXPENSE ACCRUAL........ (2,506) 2,506 -- (16,192) 16,192 --
OTHER INCOME (EXPENSE),
NET.................... 10,075 (4,199) 5,876 5,868 (1,966) 3,902
INTEREST AND DEBT
EXPENSE, NET........... (101,222) 60,287 (40,935) (76,921) 38,211 (38,710)
---------- ----------- ---------- ---------- --------- ----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES.... 95,138 (6,442) 88,696 27,982 821 28,803
INCOME TAX EXPENSE
(BENEFIT).............. 35,300 (4,846) 30,454 10,700 (408) 10,292
---------- ----------- ---------- ---------- --------- ----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.. 59,838 (1,596) 58,242 17,282 1,229 18,511
INCOME (LOSS) FROM
DISCONTINUED
OPERATIONS, NET OF
TAX.................... -- 1,596 1,596 -- (1,229) (1,229)
---------- ----------- ---------- ---------- --------- ----------
NET INCOME (LOSS)....... 59,838 -- 59,838 17,282 -- 17,282
Less: preferred stock
dividend
requirements.......... 11,818 -- 11,818 9,490 -- 9,490
---------- ----------- ---------- ---------- --------- ----------
NET INCOME (LOSS)
APPLICABLE TO COMMON
STOCK.................. $ 48,020 $ -- $ 48,020 $ 7,792 $ -- $ 7,792
========== =========== ========== ========== ========= ==========
EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing
Operations............ $ 1.33 $ .43
Discontinued
Operations............ (.23) (.25)
---------- ----------
Total................ $ 1.10 $ .18
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (in
thousands)............. 43,652 43,370
</TABLE>
11
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth Summary Selected Historical Financial Informa-
tion for Valero. For financial reporting purposes under federal securities
laws, New Valero will be a "successor registrant" to Valero. As a result, the
historical financial information set forth below and elsewhere in this Prospec-
tus is the historical financial information of Valero and includes the results
of operations and financial position of the Natural Gas Business. Accordingly,
the historical information presented below is not indicative of the results of
operations or financial position that would have been obtained if New Valero
had been an independent company during the periods shown or of New Valero's fu-
ture performance as an independent company. It is important that you read the
section titled "New Valero Unaudited Pro Forma Condensed Combined Financial
Statements" for reference to what New Valero's financial position and results
of operations might have been had New Valero been operated as an independent
company.
The financial data set forth below has been derived from the consolidated fi-
nancial statements of Valero. The data should be read in conjunction with "Man-
agement's Discussion and Analysis of Financial Condition and Results of Opera-
tions" and the consolidated financial statements of Valero and the notes
thereto included elsewhere in this Prospectus. The selected financial data set
forth below for the year ended December 31, 1996 is derived from Valero's con-
solidated financial statements. The selected financial data for the years ended
prior to December 31, 1996 is derived from the selected financial data con-
tained in Valero's Annual Report on Form 10-K for the year ended December 31,
1995 except as noted below.
The following summaries are in thousands of dollars except for per share
amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994(A) 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES..... $4,990,681 $3,197,872(b) $1,837,440 $1,222,239 $1,234,618
OPERATING INCOME....... $ 200,909 $ 188,791 $ 125,925 $ 75,504 $ 134,030
EQUITY IN EARNINGS
(LOSSES) OF AND INCOME
FROM VALERO NATURAL
GAS PARTNERS, L.P..... $ -- $ -- $ (10,698) $ 23,693 $ 26,360
NET INCOME............. $ 72,701 $ 59,838 $ 17,282(c) $ 36,424 $ 83,919
Less: Preferred stock
dividend
requirements........ 11,327 11,818 9,490 1,262 1,475
---------- ---------- ---------- ---------- ----------
NET INCOME APPLICABLE
TO COMMON STOCK....... $ 61,374 $ 48,020 $ 7,792(c) $ 35,162 $ 82,444
========== ========== ========== ========== ==========
EARNINGS PER SHARE OF
COMMON STOCK.......... $ 1.40 $ 1.10 $ .18(c) $ .82 $ 1.94
TOTAL ASSETS........... $3,134,774(c) $2,861,880(c) $2,816,558(c) $1,764,437 $1,759,100
LONG-TERM OBLIGATIONS
AND REDEEMABLE
PREFERRED STOCK....... $ 869,450 $1,042,541 $1,034,470 $ 499,421 $ 497,308
COMMON STOCK AND OTHER
STOCKHOLDERS' EQUITY.. $1,075,825(c) $1,024,213(c) $1,002,880(c) $ 842,297 $ 820,758
DIVIDENDS PER SHARE OF
COMMON STOCK.......... $ .52 $ .52 $ .52 $ .46 $ .42
</TABLE>
- --------
(a) Reflects the consolidation of Valero Natural Gas Partners, L.P. together
with its consolidated subsidiaries as of May 31, 1994.
(b) Revised to include revenues from certain refining and marketing trading ac-
tivities previously classified as a reduction of cost of sales.
(c) Restated to reflect the effects of a prior period adjustment resulting in a
charge to 1994 income for an acquisition expense accrual originally charged
to property, plant and equipment. See "Restatement of Financial Informa-
tion" in Note 1 of Valero Energy Corporation and Subsidiaries Notes to Con-
solidated Financial Statements.
12
<PAGE>
WHERE STOCKHOLDERS CAN FIND MORE INFORMATION
Valero files (and New Valero will file) annual, quarterly and special re-
ports, proxy statements and other information with the Securities and Exchange
Commission (SEC). You may read and copy any reports, statements or other in-
formation that Valero or New Valero files at the SEC's public reference rooms
in Washington, D.C., New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Valero's and New Valero's SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
SEC at "http://www.sec.gov."
New Valero has filed with the SEC a Registration Statement on Form S-1 (the
New Valero Registration Statement) under the Securities Act of 1933, as amend-
ed, relating to the shares of New Valero common stock to be issued pursuant to
the spinoff. This Prospectus, which forms a part of the New Valero Registra-
tion Statement, does not contain all of the information in the New Valero Reg-
istration Statement and the related exhibits and schedules. Statements in this
Prospectus as to the contents of any contract, agreement or other document are
summaries only and are not necessarily complete. For complete information as
to these matters, refer to the applicable exhibit or schedule to the New
Valero Registration Statement. The New Valero Registration Statement and the
related exhibits filed by New Valero may be inspected at the public reference
facilities of the SEC listed above.
The principal office of New Valero is located at 530 McCullough Avenue, San
Antonio, Texas 78215 (telephone: (210) 246-2000).
Questions concerning Valero, New Valero, the Distribution (as defined here-
in) or the Merger (as defined herein) should be directed to the Investor Rela-
tions Department, Valero Energy Corporation, P.O. Box 500, San Antonio, Texas
78292-0500 (telephone: (210) 246-2099) or Harris Trust and Savings Bank, P.O.
Box A3504, Chicago, Illinois 60690-3504, Attn: Proxy Services (telephone:
(312) 461-6001).
----------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
13
<PAGE>
INTRODUCTION
This Prospectus (the "Prospectus") is being furnished to stockholders of
Valero Energy Corporation, a Delaware corporation ("Valero"), in connection
with the contemplated pro rata distribution (the "Distribution") to Valero
stockholders of shares of common stock, par value $0.01 per share ("New Valero
Common Stock"), of Valero Refining and Marketing Company, a Delaware
corporation and wholly owned subsidiary of Valero ("New Valero"). The holders
of Valero common stock, par value $1.00 per share ("Valero Common Stock"),
will receive, at the time the Distribution is effected (the "Time of
Distribution"), one share of New Valero Common Stock, together with an
associated Valero preferred share purchase right (a "Right"), with respect to
each share of Valero Common Stock held by such holder on the record date for
the Distribution (the "Distribution Record Date") (references hereinafter to
New Valero Common Stock will be deemed to include a reference to the
associated Rights). The Distribution will result in 100% of the outstanding
shares of New Valero Common Stock being distributed to Valero stockholders on
a share-for-share basis. The Distribution is being effected by Valero in
connection with the acquisition by PG&E Corporation, a California corporation
("PG&E Corp."), of the Natural Gas Business, pursuant to a merger (the
"Merger") of a newly formed subsidiary of PG&E Corp. ("Merger Sub") with and
into Valero immediately following the Distribution. After the Merger, Valero
will be renamed "PG&E Gas Transmission, Texas, Co." and New Valero will be
renamed "Valero Energy Corporation."
Valero stockholders are being asked to vote on the Distribution and the
Merger but are not being asked to vote on any of the asset transfers or other
actions taken to facilitate the Distribution (the "Intercorporate
Reorganization") or on the acquisition (the "Basis Acquisition") of Basis
Petroleum, Inc. ("Basis"), a wholly owned subsidiary of Salomon Inc
("Salomon"). Although the Distribution will not be effected unless the Merger
is approved and about to occur, the Distribution is separate from the Merger
and the New Valero Common Stock to be received by holders of Valero Common
Stock in the Distribution will not constitute a part of the Merger
consideration. No consideration will be paid by Valero stockholders for the
shares of New Valero Common Stock to be received by them in the Distribution.
There is currently no public trading market for trading the shares of New
Valero Common Stock. New Valero intends to apply to list the New Valero Common
Stock on the New York Stock Exchange, Inc. (the "NYSE") where it is expected
to be traded under the symbol "VLO."
The Distribution has not yet been declared by the Valero Board of Directors
(the "Valero Board"), and, accordingly, the Distribution Record Date has not
yet been determined. The Distribution may be abandoned at any time prior to
the date of its effectiveness by the Valero Board in the event of the
termination of the Agreement and Plan of Merger, dated as of January 31, 1997
(as it may be amended, supplemented or otherwise modified from time to time,
the "Merger Agreement"), among Valero, PG&E Corp. and Merger Sub, which is
attached as Appendix A to the Proxy Statement-Prospectus which was mailed to
the stockholders of Valero together with this Prospectus (the "Proxy
Statement-Prospectus"). See "The Merger Agreement" in the Proxy Statement-
Prospectus.
The Distribution and the Merger (sometimes referred to herein collectively
as the "Transactions") are conditioned upon receipt of opinions of Wachtell,
Lipton, Rosen & Katz, special counsel to Valero and Orrick, Herrington &
Sutcliffe LLP, counsel to PG&E Corp. (together, the "Tax Opinions"), as to
certain income tax consequences of the Transactions. The opinion of Wachtell,
Lipton, Rosen & Katz is to be principally to the effect that, for federal
income tax purposes, the receipt of New Valero Common Stock in the
Distribution will be tax free to holders of Valero Common Stock and to Valero
and the receipt of PG&E Corp. common stock, no par value, ("PG&E Corp. Common
Stock") in the Merger also will be tax free. The opinion of Orrick, Herrington
& Sutcliffe LLP is to be principally to the effect that the receipt of PG&E
Corp. Common Stock in the Merger will be tax free for federal income tax
purposes. See "The Proposed Transactions--Material Federal Income Tax
Consequences" in the Proxy Statement-Prospectus.
14
<PAGE>
The following terms will be used throughout this Prospectus:
"Natural Gas Business"........... the business involving natural gas and
natural gas liquids related services, power
marketing and risk management activities
which is being acquired by PG&E Corp.
pursuant to the Merger Agreement.
"Refining Business".............. the business involving the refining and
processing of petroleum and other
feedstocks and the marketing of various
fuels and other products which is owned and
operated by New Valero and is being spun
off immediately prior to the Merger. The
Refining Business will include the business
of Basis.
All of the agreements, instruments, understandings, assignments and other
arrangements, excluding the Merger Agreement, to be entered into in connection
with the transactions contemplated by the Agreement and Plan of Distribution
(the "Distribution Agreement"), including, without limitation, the Tax Sharing
Agreement among Valero, New Valero and PG&E Corp. (the "Tax Sharing
Agreement"), the Employee Benefits Agreement between Valero and New Valero
(the "Employee Benefits Agreement") and the Interim Services Agreement between
Valero and New Valero (the "Interim Services Agreement") are sometimes
referred to herein collectively as the "Ancillary Agreements."
15
<PAGE>
RISK FACTORS
Stockholders should carefully consider and evaluate the following risk
factors together with the other information set forth in this Prospectus.
Stockholders should also be aware that this Prospectus includes certain
estimates, predictions, projections and other "forward-looking statements"
that involve various risks and uncertainties. While these forward-looking
statements, and any assumptions upon which they are based, are made in good
faith and reflect New Valero's current judgment regarding the direction of its
business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions, or other future
performance suggested herein. Some important factors (but not necessarily all
factors) that could affect New Valero's sales volumes, growth strategies,
future profitability and operating results, or that otherwise could cause
actual results to differ materially from those expressed in any forward-
looking statement include the following: general economic conditions in the
areas served by the Refining Business; changes in commodity pricing and
demand; renewal or satisfactory replacement of New Valero's residual oil
feedstock arrangements as well as market, political or other forces generally
affecting the pricing and availability of residual oil feedstock and other
refinery feedstocks and refined products; excess industry capacity;
competition from products and services offered by other energy enterprises;
changes in the cost or availability of third-party vessels, pipelines and
other means of transporting feedstocks and products; the acquisition of Basis
described herein and implementation of the cost reductions and operational
changes and realization of certain assumptions described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Basis Petroleum"; execution of planned capital
projects; accidents or other unscheduled shutdowns affecting New Valero's, its
suppliers' or its customers' pipelines, plants, machinery or equipment;
weather conditions affecting New Valero's operations or the areas in which New
Valero's products are marketed; state and federal environmental, economic,
safety and other policies and regulations, any changes therein, legal or
regulatory delays or other factors beyond New Valero's control; adverse
rulings, judgments, or settlements in litigation or other legal matters,
including unexpected environmental remediation costs in excess of any
reserves; the introduction or enactment of legislation including tax
legislation, affecting the spinoff and the merger; adverse changes in the
credit ratings assigned to New Valero's debt securities and trade credit and
the other factors referred to herein under "Risk Factors." New Valero
undertakes no obligation to release publicly the result of any revisions to
any such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
NO OPERATING HISTORY AS AN INDEPENDENT COMPANY
New Valero does not have an operating history as an independent public
company. While New Valero has been profitable as part of Valero, there is no
assurance that as a stand-alone company profits will continue at the same
level. The Refining Business has historically relied on Valero for various
financial and administrative services. After the Distribution, New Valero will
maintain its own lines of credit, banking relationships and administrative
functions.
NO PRIOR MARKET FOR NEW VALERO COMMON STOCK
There has been no prior trading market for New Valero Common Stock and there
can be no assurance as to the prices at which the New Valero Common Stock will
trade before or after the Time of Distribution. Until the New Valero Common
Stock is fully distributed and an orderly market develops, the prices at which
the New Valero Common Stock trades may fluctuate significantly. Prices for the
New Valero Common Stock will be determined in the trading markets and may be
influenced by many factors, including the depth and liquidity of the market
for New Valero Common Stock, investor perceptions of New Valero and the
prospects for its businesses, the amount of New Valero's reported earnings or
losses, New Valero's dividend policy and general economic and market
conditions. See "--New Valero Dividend Policy" and "The Distribution--Listing
and Trading of New Valero Common Stock."
16
<PAGE>
NEW VALERO DIVIDEND POLICY
The decision to declare a dividend and the amount thereof, if any, will be
in the sole discretion of the New Valero Board of Directors (the "New Valero
Board"). Any future payment of dividends will depend upon the financial
condition, capital requirements and earnings of New Valero, and such other
factors that the New Valero Board may deem relevant. Following the
Distribution, the New Valero Board will consider declaring a quarterly cash
dividend with respect to the New Valero Common Stock. However, the New Valero
Board may change its policy on dividends at any time.
CERTAIN ANTI-TAKEOVER EFFECTS
The Restated Certificate of Incorporation of New Valero (the "New Valero
Certificate"), the By-laws of New Valero (the "New Valero By-laws"), the
Rights and the Delaware General Corporation Law (the "DGCL") contain several
provisions that could have the effect of delaying, deferring or preventing a
change of control of New Valero in a transaction not approved by the New
Valero Board. In addition, the New Valero Board has adopted certain other
programs, plans and agreements with its management and/or employees which may
make such a change of control more expensive. See "--Certain Federal Income
Tax Considerations" and "Anti-Takeover Effects of Certain Provisions."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
As a condition to the Merger (and therefore, as a condition to the
Distribution as well), Valero and PG&E Corp. must receive Tax Opinions to the
effect that, for United States federal income tax purposes (i) the
Distribution will qualify as a transaction described in Section 355 of the
Internal Revenue Code of 1986, as amended (the "Code") and a "reorganization"
within the meaning of Section 368(a)(1)(D) of the Code and (ii) the Merger
will qualify as a "reorganization" within the meaning of Section 368(a)(1)(B)
of the Code. The Tax Opinions will be based, in part, on certain factual
representations and assumptions. PG&E Corp., Valero and New Valero have agreed
to certain restrictions on their future actions following the Distribution to
provide further assurance that the Transactions will qualify for tax-free
treatment. If the Distribution were taxable, then (i) corporate level income
taxes would be payable by the consolidated group of which Valero is the common
parent, based upon the amount by which the fair market value of the New Valero
Common Stock distributed in the Distribution exceeds Valero's basis therein
and (ii) each holder of Valero Common Stock who receives shares of New Valero
Common Stock in the Distribution would be treated as if such stockholder
received a taxable distribution, taxed as a dividend to the extent of such
stockholder's pro rata share of Valero's current and accumulated earnings and
profits. New Valero has agreed to indemnify Valero and PG&E Corp. for any
adverse corporate level income tax consequences resulting from the failure of
the Distribution and/or the Merger to qualify for tax-free treatment, except
that Valero will be liable to the extent that such failure is attributable to
actions of Valero following the Distribution that are inconsistent with the
contemplated tax treatment of the Distribution and the Merger. See "Agreements
Between Valero and New Valero--Tax Sharing Agreement." The potential corporate
level income tax liability which could arise from an acquisition of New Valero
for a period of time following the Distribution, together with the foregoing
indemnification arrangements, could have an anti-takeover effect with respect
to a potential acquisition of control of New Valero.
BASIS ACQUISITION
As is discussed more fully in "Business and Properties--Acquisition of Basis
Petroleum", "Business and Properties--Litigation" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations--Basis Petroleum," on April 22, 1997, Valero entered into a stock
purchase agreement to acquire Basis, and on May 1, 1997, pursuant to the terms
of the stock purchase agreement, Valero acquired Basis. Basis owns three
refineries located in Texas and Louisiana and conducts marketing operations.
Basis has recently completed a significant refinery upgrading project which
has not been fully reflected in its operating results; additionally, Basis has
incurred operating losses during the last several years. New Valero does not
have an operating history with respect to the Basis refineries. While New
Valero's Refining Business has been profitable, there is no assurance that,
following the Basis Acquisition, the combined entities will be profitable, or
will be able to achieve the cost savings and operational improvements
anticipated by New
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Valero or that the projected prices of refinery feedstocks and refined
products assumed by New Valero in connection with the Basis Acquisition will
be realized. Additionally, although Valero and New Valero have conducted a due
diligence investigation of Basis prior to the closing of the purchase, the
scope of such investigation, particularly in light of the volume of
environmental, litigation and other matters to be investigated, has
necessarily been limited. The stock purchase agreement provides for
indemnification from the seller with respect to suits, actions, claims and
investigations pending at the time of the acquisition and for additional
indemnification, subject to certain terms, conditions and limitations, with
respect to other matters. However, there can be no assurance that other
material matters, not identified or fully investigated in due diligence, will
not subsequently be identified or that the matters heretofore identified will
not prove to be more significant than currently expected.
INDEMNIFICATION
From and after the effective time of the Merger (the "Effective Time"), New
Valero and its successors and assigns will indemnify, defend and hold harmless
Valero and PG&E Corp. from and against, and pay or reimburse Valero and PG&E
Corp. for certain losses arising from (i) certain New Valero assets and
liabilities relating to the Refining Business, (ii) with respect to
information provided by New Valero any untrue statement of a material fact
contained in any filings with the SEC or any omission to state in such filings
a material fact so as to make the statement not misleading, (iii) certain
guarantees made by Valero relating to the Refining Business and certain
specified indebtedness of New Valero, (iv) the transfer of certain real
property by warranty deeds, (v) any breach by New Valero of the Distribution
Agreement and (vi) the enforcement by Valero and PG&E Corp. of their rights to
be indemnified, defended and held harmless under the Distribution Agreement.
The amount of any loss or liability for which indemnification is provided will
be net of any amounts actually recovered by the indemnitee from third parties.
See "Agreements Between Valero and New Valero--Distribution Agreement."
EFFECT OF ECONOMIC AND OTHER CONDITIONS ON OPERATING MARGINS
New Valero conducts significant refining and marketing operations in the
state of Texas and the surrounding region, and significant marketing
operations in the northeastern, southeastern and midwestern United States.
Results of these operations will be significantly affected by changes in the
volumes of refined products sold and the prices received on those volumes.
These, in turn, are influenced by such factors as the general economic
condition of such regions, which affect the overall demand for gasoline and
other refined products, the actions taken by competitors, including both
pricing and the expansion and retirement of refining capacity in response to
market conditions and environmental and other regulations. Projections as to
the level of future earnings are dependent on New Valero's ability to produce
and sell the volumes of refined products and to achieve the margins on which
those projections are based.
EFFECT OF POLITICAL AND REGULATORY FACTORS ON NEW VALERO'S OPERATIONS
New Valero's ability to conduct refining and marketing operations is
dependent on the political and regulatory climate in the particular geographic
regions where its properties are located, as well as environmental regulations
issued by the state and federal governments, including particularly
regulations dealing with gasoline composition and characteristics. New
Valero's ability to negotiate and implement specific projects in a timely and
favorable manner may be impacted by political considerations unrelated to or
beyond the control of New Valero. Political constraints either in the form of
express legal requirements or general political pressure may limit the margins
otherwise available to New Valero. Possible political and regulatory actions
by governments may affect future results in unpredictable ways.
OPERATING HAZARDS
New Valero's refining and marketing operations are subject to various
hazards common to the industry, including explosions, fires, and
uncontrollable flows of oil and gas. They are also subject to the additional
hazards of loss from severe weather conditions.
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COMMODITY PRICING AND DEMAND
New Valero's refining and marketing operating results are affected by the
relationship between refined product prices and residual fuel oil ("resid")
prices, which, in turn, are largely determined by market forces. The price of
resid is affected by the relationship between the growth in the demand for
fuel oil and other products (which increases crude oil demand, thereby
increasing the supply of resid when more crude oil is processed) and worldwide
additions to resid conversion capacity (which has the effect of reducing the
available supply of resid). The crude oil and refined products markets
typically experience periods of extreme price volatility and may vary based on
factors such as seasonal weather patterns, the national and regional economy,
market demand, regulatory changes, the price of resid and other feedstocks,
the ability of regional refiners and New Valero to provide a sufficient supply
of refined products and unexpected national and international events. During
such periods, disproportionate changes in the prices of refined products and
resid usually occur. Also, a substantial amount of New Valero's Refinery (as
defined herein) feedstocks and refined product production is purchased or sold
on the spot market or under short-term contracts at market sensitive prices.
Spot market prices for such feedstock and products are subject to volatile
trading patterns in the commodity futures markets, including among others, the
New York Mercantile Exchange, because of the factors mentioned above. Although
the futures markets provide some indication of feedstock and refined product
prices for the subsequent 12 to 18 months, prices in the futures markets are
subject to substantial changes in relatively short periods of time. The
potential impact of changing crude oil and refined product prices on New
Valero's results of operations is further affected by the fact that New Valero
generally buys its resid feedstock approximately 45 to 50 days prior to
processing it in the Refinery (as defined herein).
FEEDSTOCK SUPPLY
The predominant feedstock for the Refinery is resid produced at refineries
outside the United States. Most of the large refineries in the United States
are able to convert internally produced resid into higher value end-products.
Many overseas refineries, however, are less sophisticated, process a smaller
portion of resid internally, and therefore produce larger volumes of resid for
sale. As a result, New Valero acquires and expects to acquire most of its
resid in international markets. New Valero has entered into several term
agreements for the supply of approximately 58,000 barrels per day of resid
feedstocks at market-related prices which provide for approximately 70% of New
Valero's estimated resid feedstock requirements for 1997. These supply
agreements include an agreement with the Saudi Arabian Oil Company to provide
an average of 36,000 barrels per day of resid from its Ras Tanura, Saudi
Arabia, refinery through mid-1998. The Saudi Arabian Oil Company has advised
New Valero that it plans to begin operation of certain new resid conversion
units at the Ras Tanura refining complex in 1998. As a result, the production
of resid at Ras Tanura for export would be significantly reduced. A reduction
in resid production at Ras Tanura could adversely affect the price or
availability of resid feedstocks in the future. New Valero believes that if
any of its existing feedstock arrangements were interrupted or terminated,
supplies of resid could be obtained from other sources or on the open market;
however, New Valero could be required to incur higher feedstock costs or
substitute other types of resid, thereby producing less favorable operating
results. Over the past few years, demand for the type of resid feedstock now
processed at the Refinery has increased in relation to the availability of
supply. New Valero expects resid to continue to sell at a discount to crude
oil, but is unable to predict future relationships between the supply of and
demand for resid. Installation of additional refinery crude distillation and
upgrading facilities, as well as price volatility, international political
developments and other factors beyond the control of New Valero, are likely to
continue to play an important role in refining industry economics.
COMPETITION
The refining industry is highly competitive with respect to both supply and
markets. New Valero competes with numerous other companies for available
supplies of resid and other feedstocks and for outlets for its refined
products. Whereas New Valero obtains all of its resid feedstock from
unaffiliated sources, many of New Valero's competitors obtain a significant
portion of their feedstocks from company-owned production and are able to
dispose of refined products at their own retail outlets. Competitors that have
their own production or retail outlets
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may be able to offset losses from refining operations with profits from
producing or retailing operations, and may be better positioned than New
Valero to withstand periods of depressed refining margins or feedstock
shortages. See "Business and Properties--Competition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ENVIRONMENTAL MATTERS
Like others in similar businesses, Valero is, and New Valero will be,
subject to extensive federal, state and local environmental laws and
regulations. Although New Valero's environmental policies and practices are
designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent regulation could require New Valero to
make additional unforeseen expenditures relating to environmental matters. In
1996, capital expenditures for the Refining Business attributable to
compliance with environmental regulations were approximately $5 million and
are currently estimated to be $7 million for 1997 (exclusive of any
expenditures for Basis). Although the level of future expenditures for such
matters cannot be determined with absolute certainty, based on the facts
currently known to it, management does not believe that such costs are likely
to have a material effect on New Valero's financial position, results of
operations or liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business and Properties--
Environmental Matters."
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
For the past several years, Valero's management has noted significant,
ongoing changes in the natural gas industry, as well as in the electric
utility industry. Valero recognized that these trends would change the terms
and conditions upon which it would be required to compete in the future.
Over a period of years continuing until November 1996, Valero management
engaged in discussions with prospective joint venture partners regarding
possible alliances, combinations, partnerships or joint venture transactions
involving its Natural Gas Business. However, Valero management was not
successful in arranging any such transaction on satisfactory terms. Over this
same period, merger and acquisition activity in the energy industry, as well
as the size and scope of announced transactions, increased markedly.
On November 21, 1996, Valero announced that the Valero Board had determined
to pursue strategic alternatives to further position its businesses for future
growth, including accelerating existing efforts to seek a strategic alliance
for Valero's Natural Gas Business and likely spinoff of its Refining Business.
The management and Valero Board concluded that such a transaction had the
greatest potential for enhancing the competitive position of the Natural Gas
Business, and thereby enhancing overall stockholder value, since Valero
stockholders would receive--on a tax-free basis--both common stock in a new
company (i.e., the Natural Gas Business combined with the acquiror's existing
business) that would have a stronger market position and stronger earnings
growth potential than Valero's Natural Gas Business on a stand-alone basis, as
well as separate common stock in the spun off company holding the Refining
Business. Valero also concluded that a separation of the Refining Business
from the Natural Gas Business would benefit the Refining Business by
permitting it to adopt a capitalization structure and strategies and
investment opportunities that best suited its needs, without concern for or
competition for capital from the Natural Gas Business.
On January 30, 1997, the Valero Board reviewed the terms of the Merger
Agreement, the Distribution Agreement, and the Ancillary Agreements,
determined that the Distribution and the Merger were in the best interests of
Valero and Valero's stockholders and approved the Merger Agreement, the
Distribution Agreement and the Ancillary Agreements.
The Valero Board believes that the Distribution and the Merger will
accomplish a number of important business objectives. The Distribution and
Merger will allow Valero's stockholders to retain an equity
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participation in a stronger, more competitive natural gas business and to
realize a significant premium for Valero's existing Natural Gas Business. The
Valero Board also believes that the Distribution will permit Valero's
stockholders to continue their participation in the Refining Business in a
form designed to maximize its strengths and focus on its particular business
needs by adopting strategies and pursuing investment opportunities that are
appropriate to its business and operating needs without concern for or
competition for capital from the Natural Gas Business. The Distribution will
enable New Valero to have its own publicly traded equity security to finance
its own growth opportunities. By distributing the New Valero Common Stock to
Valero's stockholders, the Valero Board believes that there will be a greater
potential for increasing the long-term value of the investment of Valero's
stockholders in the Refining Business. The Valero Board believes that the
Distribution and Merger will enable investors to evaluate better the
performance, investment characteristics and the future prospects of the
Refining Business now conducted by Valero, enhancing the likelihood that it
will achieve appropriate market recognition of its performance and potential.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution is expected to be effected immediately prior to the
Effective Time. Immediately after the Time of Distribution, the New Valero
Common Stock will be delivered to the distribution agent (the "Distribution
Agent"). As soon as practicable thereafter, the Distribution Agent will begin
mailing share certificates for New Valero Common Stock to holders of Valero
Common Stock as of the close of business on the Distribution Record Date on
the basis of one share of New Valero Common Stock for every share of Valero
Common Stock held on the Distribution Record Date. Based on the number of
shares of Valero Common Stock issued and outstanding at May 2, 1997 and after
giving effect to the expected conversion of shares of Valero's $3.125
Convertible Preferred Stock (the "Convertible Preferred Stock"), the exercise
of certain Valero Options (as defined herein) and the issuance of 3,429,796
shares of Valero Common Stock to Salomon in connection with the Basis
Acquisition, approximately 56 million shares of New Valero Common Stock are
expected to be issued pursuant to the Distribution. All shares of New Valero
Common Stock will be fully paid, nonassessable and free of preemptive rights.
The New Valero Board is expected to adopt the New Valero Rights Agreement (as
defined herein) and declare a distribution of one Right for every outstanding
share of New Valero Common Stock, which Rights will be evidenced by the
outstanding certificates of New Valero Common Stock distributed in the
Distribution. Each Right, among other things, would allow stockholders to
purchase additional shares of New Valero Common Stock upon the occurrence of
certain takeover related events. See "Description of New Valero Capital
Stock--New Valero Purchase Rights."
Immediately following the Distribution, PG&E Corp., pursuant to the Merger,
will acquire the Natural Gas Business and each share of Valero Common Stock
will, at the Effective Time, be converted into a right to receive a fraction
of a share of PG&E Corp. Common Stock. Shares of Valero Common Stock owned by
PG&E Corp. or Valero and their wholly owned subsidiaries will not be so
converted. See "The Merger Agreement" in the Proxy Statement-Prospectus.
Following the Distribution, approximately 94 million shares of New Valero
Common Stock will remain authorized but unissued, of which approximately 4.8
million will be reserved for issuance pursuant to incentive compensation
awards and other employee stock plans.
NO HOLDER OF VALERO COMMON STOCK WILL BE REQUIRED TO PAY ANY CASH OR OTHER
CONSIDERATION FOR THE SHARES OF NEW VALERO COMMON STOCK TO BE RECEIVED IN THE
DISTRIBUTION OR TO SURRENDER OR EXCHANGE SHARES OF VALERO COMMON STOCK (OTHER
THAN IN REGARD TO THE EXCHANGE AS PART OF THE MERGER AS DESCRIBED IN THE PROXY
STATEMENT-PROSPECTUS) OR TO TAKE ANY OTHER ACTION IN ORDER TO RECEIVE NEW
VALERO COMMON STOCK.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For a discussion of the material United States federal income tax
consequences of the Transactions to Valero and Valero's stockholders, please
refer to "Material Federal Income Tax Consequences" in the Proxy Statement-
Prospectus. In addition to describing United States federal income tax
consequences of the Transactions, that
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section of the Proxy Statement-Prospectus also discusses the President's
budget recommendations calling for new legislation which could have an effect
on the Transactions. If the proposed United States legislative initiatives are
enacted or pending prior to the Merger with an effective date provision that
could cause Valero to be subject to tax, the Tax Opinions may not be available
and as a result the Distribution and the Merger may not be consummated.
LISTING AND TRADING OF NEW VALERO COMMON STOCK
The New Valero Common Stock is expected to be listed on the NYSE, under the
symbol "VLO." There is currently no public trading market for New Valero
Common Stock. Prices at which New Valero Common Stock may trade prior to or
following the Distribution cannot be predicted. See "Risk Factors--No Prior
Market for New Valero Common Stock." A when-issued trading market is expected
to develop on or about the Distribution Record Date. The term "when-issued"
means that shares can be traded prior to the time certificates are actually
available or issued. Prices at which the shares of New Valero Common Stock may
trade on a when-issued basis or after the Distribution cannot be predicted.
As of the Distribution Record Date, New Valero expects to have approximately
6,300 stockholders of record, based upon the number of holders of record of
Valero Common Stock as of March 31, 1997. The Transfer Agent and Registrar for
the New Valero Common Stock will be Harris Trust and Savings Bank. As of April
30, 1997, approximately 4 million options to acquire shares of Valero Common
Stock were outstanding, of which, if outstanding at the Distribution,
approximately 3 million will be converted into options to acquire shares of
New Valero Common Stock in connection with the Distribution, were held by
current or former employees of New Valero.
Shares of New Valero Common Stock distributed to Valero stockholders in the
Distribution will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of New Valero under the
Securities Act of 1933, as amended (the "Securities Act"). Persons who may be
deemed to be affiliates of New Valero generally include individuals or
entities that control, are controlled by, or are under common control with,
New Valero, and may include certain officers and directors of New Valero as
well as principal stockholders of New Valero, if any. Persons who are
affiliates of New Valero may sell their shares of New Valero Common Stock only
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act, such as
the exemptions afforded by Section 4(2) of the Securities Act and Rule 144
thereunder.
REGULATORY MATTERS
Other than as described in the Proxy Statement-Prospectus, no material
United States federal or state regulatory approvals are required in connection
with the Distribution which have not been obtained. For a discussion of United
States regulatory approvals with respect to the Transactions, see "The Merger
Agreement--Certain Regulatory Matters" in the Proxy Statement-Prospectus.
AGREEMENTS BETWEEN VALERO AND NEW VALERO
For the purpose of effecting the Distribution and governing certain of the
relationships between Valero and New Valero after the Distribution, Valero and
New Valero have entered or will enter into the various agreements described
below. The Distribution Agreement, the material features of which are
summarized below, is attached as Appendix B to the Proxy Statement-Prospectus,
and the Ancillary Agreements, the material features of which are summarized
below, have been filed as exhibits to New Valero's Registration Statement on
Form S-1 (the "New Valero Registration Statement"). The following descriptions
do not purport to be complete and are qualified in their entirety by reference
to such agreements.
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DISTRIBUTION AGREEMENT
Method of Effecting the Distribution. The Distribution Agreement provides
that, at the Time of Distribution, Valero will distribute all outstanding
shares of New Valero Common Stock to holders of record of Valero Common Stock
on the Distribution Record Date on the basis of one share of New Valero Common
Stock for each share of Valero Common Stock outstanding on the Distribution
Record Date. The Distribution will be made immediately prior to PG&E Corp.
acquiring Valero through the Merger.
Intercorporate Reorganization. Prior to or at the Time of Distribution,
Valero and New Valero will complete the Intercorporate Reorganization the
purpose and effect of which will be to facilitate the Merger by separating the
Natural Gas Business from the Refining Business. The assets retained by Valero
will consist principally of the assets that are used primarily in or held
primarily for use in or otherwise necessary for the operation, as presently
conducted, of the Natural Gas Business. The assets owned by New Valero will
consist principally of the assets that are used primarily in or held primarily
for use in or otherwise necessary for the operation, as presently conducted,
of the Refining Business.
The Distribution Agreement provides that Valero will transfer to New Valero
or to one of New Valero's subsidiaries all of Valero's right, title and
interest in certain Refining Business assets. New Valero will transfer to
Valero or a subsidiary of Valero (a "Retained Subsidiary"), all of New
Valero's right, title and interest in certain Natural Gas Business assets.
Valero or a Retained Subsidiary will assume and agree to pay, perform and
discharge in due course certain liabilities relating to or arising in
connection with the Natural Gas Business. New Valero or one of New Valero's
subsidiaries will assume and agree to pay, perform and discharge in due course
certain liabilities relating to or arising from the Refining Business,
Valero's filings with the SEC prior to the Time of Distribution, any breach or
alleged breach by any director or officer of Valero of the director's
fiduciary duties to Valero and its stockholders occurring at or prior to the
Effective Time, the MTBE plant in Mexico (as defined and described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--1996 Compared to 1995"), and certain
assumed liabilities.
Repayment of Intercompany Indebtedness and Cash Dividend. Prior to the Time
of Distribution, Valero will redeem (or convert) the Convertible Preferred
Stock. The redemption, if any, of the Convertible Preferred Stock will be
funded by Valero with the proceeds of borrowings under the $835 million credit
facility (the "New Credit Facility") which New Valero will assume immediately
prior to the Distribution. Prior to the Time of Distribution, New Valero shall
pay a cash dividend (the "Cash Dividend") to Valero in an amount equal to
$210,000,000.
Valero and New Valero will (a) eliminate without payment the $212,450,000
net amount of the intercompany note owing from Valero to New Valero as of
December 31, 1996, (b) refrain from creating any obligations under such
intercompany note after December 31, 1996, except in the ordinary course of
business consistent with past practice or as contemplated by the Ancillary
Agreements and (c) satisfy by cash payment at the Time of Distribution the
full net amount of such note for the period from January 1, 1997 to the Time
of Distribution (which intercompany note will not reflect the assumption by
New Valero of liabilities related to the acquisition of Basis and redemption
of the Convertible Preferred Stock). Prior to the assumption by New Valero of
liabilities under the New Credit Facility, all liabilities under the New
Credit Facility that are unrelated to (i) Valero's acquisition of Basis or
(ii) the redemption of the Convertible Preferred Stock will be transferred to
certain uncommitted facilities of Valero or, to the extent capacity is not
available thereunder, be borne by Valero by a reduction in amounts owed by New
Valero (or an increase in amounts owed by Valero) under the intercompany note.
Valero Guarantees. Neither New Valero nor any of its subsidiaries (the "New
Valero Group") will increase its outstanding obligations in excess of the
aggregate amount of all obligations under certain guarantees of Valero (the
"Valero Guarantees") as of January 31, 1997, nor will New Valero or the New
Valero Group renew or enter into any additional obligations for which Valero
would act as guarantor unless such guarantee by its terms expires as to Valero
and its subsidiaries (the "Valero Group") without further liability at or
prior to
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the Time of Distribution. New Valero will use its reasonable best efforts to
obtain any amendments to, or consents with respect to, the Valero Guarantees
that are necessary in order that Valero be released no later than the Time of
Distribution from any liability or obligation under the Valero Guarantees;
provided that if any such release has not been obtained by the Time of
Distribution, New Valero will: (i) provide Valero with a full indemnity with
respect thereto and (ii) continue to use its best efforts to obtain such
release as soon as practicable thereafter.
Use of Names, Trademarks, etc. Pursuant to the Distribution Agreement, from
and after the Time of Distribution, New Valero will have all rights, including
all intellectual property rights in and exclusive use of the trademarks, trade
names and service marks, the United States federal and Mexican registrations
and applications, the Internet domain registration and exclusive use of the
name "Valero," and any and all other designs, logos and slogans, related to
the names "Valero" and "Valero Energy Corporation" and the "Walking Flame"
service mark, and all other rights (whether tangible or intangible, statutory,
at common law or otherwise) in connection therewith, whether alone or in
combination with one or more other words or marks in connection therewith. As
promptly as practicable after the Effective Time, but in any event no later
than six months after the Effective Time, Valero will cease using the "Valero"
name and mark or service mark and the "Walking Flame" service mark.
Intercompany Arrangements. Certain agreements, contracts, arrangements and
commitments, between a member of the New Valero Group on the one hand, and
Valero or one of its subsidiaries on the other hand, which were entered into
prior to the closing date of the Transactions for the purchase or sale of
goods or services, will remain in effect as of and after the Time of
Distribution.
Non-Competition Covenants. From and after the Distribution until the second
anniversary of the closing date of the Transactions, New Valero will not, and
will cause its affiliates and subsidiaries not to, directly or indirectly,
within the geographic area in which such businesses are currently conducted by
the Valero Group (i) engage in marketing natural gas or marketing and trading
electric power (a "Competitive Business") (provided that nothing in the
Distribution Agreement will preclude New Valero from marketing surplus
electric power generated at its refineries), (ii) sell, assign or otherwise
transfer the trademarks, trade names, service marks, the use of the name
"Valero" or any and all other designs, logos and slogans, related to the names
"Valero" and "Valero Energy Corporation" and the "Walking Flame" service mark
to a Competitive Business, or (iii) invest in, as principal, partner or
stockholder (otherwise than through the ownership of less than 4% of the
outstanding voting securities of any corporation which are listed on a
national securities exchange or accepted for quotation on the over-the-counter
market), any person, partnership, firm, corporation or other business entity
which is engaged in a Competitive Business; provided, that New Valero will not
be precluded from acquiring (or, thereafter, from operating) a Competitive
Business if the operations constituting a Competitive Business are incidental
to a larger acquisition of a business or entity whose principal operations do
not constitute a Competitive Business.
Conditions to the Distribution. The obligations of Valero to consummate the
Distribution are subject to the fulfillment of each of the following
conditions: (i) each of the covenants and provisions in the Distribution
Agreement required to be performed or complied with on or before the Time of
Distribution having been performed and complied with; (ii) each condition to
the closing of the Merger Agreement, other than the condition as to the
consummation of the Distribution, having been fulfilled or waived by the party
for whose benefit such condition exists; (iii) the Boards of Directors of
Valero and PG&E Corp. being satisfied that Valero's surplus would be
sufficient to permit, without violation of Section 170 of the DGCL, the
Distribution and having given final approval of the Distribution; (iv) the New
Valero Common Stock having been approved for listing, upon notice of issuance,
on the NYSE; (v) the Distribution having been duly approved by the requisite
vote of the holders of Valero Common Stock; and (vi) the Intercorporate
Reorganization having been completed as contemplated by the terms of the
Distribution Agreement.
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The condition to Valero's obligation to consummate the Distribution may be
waived in whole or part as may be agreed by Valero and PG&E Corp., and to the
extent permitted by applicable law.
Indemnification. Pursuant to the Distribution Agreement, from and after the
Effective Time, New Valero and its successors and assigns, on the one hand,
and Valero and its successors and assigns, on the other hand, will indemnify
each other for certain losses (defined in the Distribution Agreement as
"Indemnifiable Losses") arising from certain matters. Additionally, pursuant
to an Agreement and Consent, dated as of March 10, 1997 (the "Consent"),
executed in connection with the letter of intent relating to the Basis
Acquisition, New Valero has agreed to indemnify Valero and PG&E Corp. with
respect to certain matters regarding the Basis Acquisition.
Specifically, New Valero and its successors and assigns will indemnify,
defend and hold harmless the Valero Group from and against, and pay or
reimburse the Valero Group for, all Indemnifiable Losses, as incurred:
(i) relating to or arising from certain New Valero assets or liabilities
relating to the Refining Business (including the failure by New Valero to
pay, perform or otherwise discharge such liabilities in accordance with
their terms), whether such Indemnifiable Losses relate to or arise from
events, occurrences, actions, omissions, facts or circumstances occurring,
existing or asserted before, at or after the Time of Distribution;
(ii) arising from or based upon any untrue statement of a material fact
contained in any of the filings with the SEC, or any omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; but only in each case with respect to information
provided by Valero relating to the New Valero Group contained in or omitted
from such filings;
(iii) relating to the Valero Guarantees and Valero's guarantee of the
industrial revenue bonds ("IRBs");
(iv) relating to the transfer of certain real property by warranty deeds;
(v) relating to any breach or violation of the Distribution Agreement by
New Valero or, prior to the Time of Distribution, by Valero; any breach by
New Valero or, prior to the Time of Distribution, by Valero, of any of the
representations, warranties or covenants made in the Distribution
Agreement, or any inaccuracy or misrepresentation in the schedules thereto
or in any certificate or document delivered in accordance with the terms of
the Distribution Agreement;
(vi) incurred in connection with the enforcement by any member of the
Valero Group of its rights to be indemnified, defended and held harmless
under the Distribution Agreement; or
(vii) relating to or arising from the Basis Acquisition of the assets or
business being acquired, or from any breach of violation of the Consent by
New Valero (or prior to the Effective Time, Valero).
Valero and its successors and assigns will indemnify, defend and hold
harmless the New Valero Group for and against, and pay or reimburse the New
Valero Group for, all Indemnifiable Losses, as incurred:
(i) relating to or arising from certain Valero assets or liabilities
relating to the Natural Gas Business (including the failure by Valero to
pay, perform or otherwise discharge such liabilities in accordance with
their terms), whether such Indemnifiable Losses relate to or arise from
events, occurrences, actions, omissions, facts or circumstances occurring,
existing or asserted before, at or after the Time of Distribution;
(ii) arising from or based upon any untrue statement of a material fact
contained in any filings with the SEC, or any omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; but only in each case with respect to information
provided by PG&E Corp. relating to PG&E Corp. or any of its subsidiaries
contained in or omitted from such filings; or
(iii) incurred in connection with the enforcement by any member of the
New Valero Group of its rights to be indemnified, defended and held
harmless under the Distribution Agreement.
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<PAGE>
The amount of any Indemnifiable Losses or other liability for which
indemnification is provided under the Distribution Agreement will be net of
any amounts actually recovered by the indemnitee from third parties
(including, without limitation, amounts actually recovered under insurance
policies) with respect to such Indemnifiable Losses or other liability.
Modification or Amendment. The Distribution Agreement provides that Valero
and New Valero may modify or amend the Distribution Agreement only by written
agreement executed and delivered by duly authorized officers of Valero and New
Valero, and the written consent of PG&E Corp. thereto.
TAX SHARING AGREEMENT
Prior to the Transactions, Valero, New Valero and PG&E Corp. will enter into
the Tax Sharing Agreement, which will set forth each party's rights and
obligations with respect to payments and refunds, if any, of federal, state,
local or other taxes for periods before the Transactions. The Tax Sharing
Agreement will also address related matters, such as the filing of tax returns
and the conduct of audits and other tax proceedings.
In general, under the Tax Sharing Agreement, Valero and New Valero will each
be responsible for its allocable share of the federal, state and other taxes
incurred by the combined operations of Valero and New Valero prior to the
Distribution. Furthermore, New Valero will be responsible for any tax
liability resulting from the Transactions, including any tax arising as a
result of the failure of the Distribution to qualify as a transaction
described in Section 355 of the Code and/or as a "reorganization" under
Section 368 of the Code, or of the Merger to qualify as a "reorganization"
under Section 368 of the Code (a "Reorganization Tax"), except as follows:
pursuant to the Tax Sharing Agreement, Valero will be responsible for any
Reorganization Tax attributable to certain actions taken by Valero and/or PG&E
Corp. and for any tax liability resulting from the Transactions other than a
Reorganization Tax liability to the extent such tax liability is less than $3
million.
EMPLOYEE BENEFITS AGREEMENT
The discussion below summarizes the terms by which assets relating to, and
liabilities arising under, various benefit plans and programs presently
maintained by Valero will be allocated pursuant to the Employee Benefits
Agreement.
Employees. The Employee Benefits Agreement provides for the transfer of
employees between New Valero and Valero in connection with the Distribution.
Stock Options and SARs. The Employee Benefits Agreement provides that,
effective as of the Time of Distribution, each option to purchase Valero
Common Stock ("Valero Option") held by a current or former New Valero employee
will be converted into an option to acquire shares of New Valero Common Stock
and, in connection with the Merger, each Valero Option held by a current or
former employee of Valero will be converted into an option to acquire shares
of PG&E Corp. Common Stock, in each case in a manner that will provide
equivalent value to each Valero Option holder by preserving the aggregate
"spread" that existed prior to the Transactions between the per share value of
Valero Common Stock and the per share exercise price of the Valero Options
being converted. Each Valero stock appreciation right ("SAR") which is held by
a current or former New Valero employee and is outstanding at the Time of
Distribution will be replaced as of the Time of Distribution with a number of
New Valero SARs equal to the number of Valero SARs held by the holder
immediately before such replacement in a manner that will provide equivalent
value to each Valero SAR holder in the manner noted above.
The Employee Benefits Agreement sets forth the manner in which the Valero
Options of current and former employees of New Valero will be converted.
Pursuant to the Employee Benefits Agreement, the per share exercise price of
each New Valero option will be equal to the product of (i) the per share
exercise price of the Valero Option immediately prior to the conversion
multiplied by (ii) a fraction, the numerator of which is the Average Price (as
defined herein) of New Valero Common Stock and the denominator of which is the
Average Price of Valero Common Stock (the "Conversion Ratio"). The number of
shares of New Valero Common Stock
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<PAGE>
for which each New Valero option will be exercisable will be equal to the
product of the number of shares of Valero Common Stock for which the Valero
Option is exercisable immediately prior to the conversion multiplied by the
reciprocal of the Conversion Ratio. "Average Price" with respect to any stock
means the average of the daily closing prices per share of such stock on the
NYSE for the 15 consecutive full NYSE trading days ending on the trading day
before the Time of Distribution, in the case of New Valero Common Stock
trading on a "when-issued" basis. The Employee Benefits Agreement also sets
forth the manner in which Valero SARs held by current and former employees of
New Valero will be converted, which is similar to the manner noted above with
regard to Valero Options.
Pension Plan. The Employee Benefits Agreement provides that, effective as of
the Time of Distribution, New Valero will become the sponsor of the Pension
Plan (as defined herein), which shall subsequently be referred to as the "New
Valero Pension Plan." New Valero and the New Valero Pension Plan will
thereafter be solely responsible for (i) pension liabilities existing
immediately prior to the Time of Distribution to, or relating to, individuals
employed by Valero after the Distribution, which liabilities shall become
payable upon the retirement of such individuals, (ii) all liabilities to or
relating to former employees of Valero and New Valero and (iii) all
liabilities to or relating to current employees of New Valero.
Non-Employee Directors Pension Plan. The Employee Benefits Agreement
provides that, effective as of the Time of Distribution, New Valero shall
assume and become solely responsible for all liabilities existing under the
Non-Employee Director Pension Plan as of the Time of Distribution.
Thrift Plan. The Employee Benefits Agreement provides that, effective as of
the Time of Distribution, New Valero shall become the sponsor of Valero's
thrift plan (the "Valero Thrift Plan"), which shall subsequently be referred
to as the "New Valero Thrift Plan." Each current Valero employee participating
in the Valero Thrift Plan prior to the Distribution shall be entitled to
either (i) maintain his or her account in the New Valero Thrift Plan; (ii)
transfer the account balance to a qualified "Individual Retirement Account";
(iii) transfer the account balance to the PG&E Corp. thrift plan; or (iv)
receive a distribution of the account balance. (The transfers described in
clauses (ii) and (iii) are hereinafter referred to as "Thrift Plan
Transfers"). New Valero and the New Valero Thrift Plan shall be solely
responsible for all liabilities arising under the New Valero Thrift Plan after
the Time of Distribution to or with respect to current New Valero employees,
former employees of both Valero and New Valero, and Valero employees who
elected to maintain their account balances in the New Valero Thrift Plan.
Excess Thrift Plan. The Employee Benefits Agreement provides that, effective
as of the Time of Distribution, New Valero shall become the sponsor of
Valero's excess thrift plan (the "Valero Excess Thrift Plan") and shall
thereby assume all liabilities to or with respect to current and former
employees of both Valero and New Valero arising under such plan.
Supplemental Retirement Plans and Supplement Executive Retirement
Agreements. The Employee Benefits Agreement provides that, effective as of the
Time of the Distribution, New Valero shall become the sponsor of Valero's
supplemental retirement plan (the "Valero Supplemental Retirement Plan") and
Valero's Supplemental Executive Retirement Plan (the "SERP") and shall thereby
assume all liabilities with respect to current and former employees of both
Valero and New Valero under such plans. Such obligations of New Valero under
the SERP are substantially fully funded through investments held in a trust
established for the SERP (the "SERP Trust").
The Employee Benefits Agreement provides further that, effective as of the
Time of Distribution, New Valero shall be solely responsible for all
liabilities arising under certain supplemental executive retirement agreements
between Valero and former and current employees of both Valero and New Valero.
Other Post Employment Benefits. The Employee Benefits Agreement provides
that, effective as of the Time of Distribution, New Valero shall be solely
responsible for all liabilities to former employees of both Valero and New
Valero as well as current employees of New Valero arising under Valero's
health care and life insurance programs.
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<PAGE>
Deferred Compensation Plans. The Employee Benefits Agreement provides that,
effective as of the Time of Distribution, New Valero shall become the sponsor
of each of the two Valero deferred compensations plans, and shall thereby
assume all liabilities of Valero arising under such plans to or relating to
former and current employees of both Valero and New Valero.
Severance Pay. The Employee Benefits Agreement provides that, for the
purpose of any policy, plan program or agreement of Valero that provides for
severance benefits, no Valero employee shall be deemed to have experienced a
termination or severance of employment as a result of the Distribution.
VESOP. The Employee Benefits Agreement provides that, at a time sufficiently
in advance of the Time of Distribution to permit subsequent transactions
relating to the leveraged employees' stock ownership plan sponsored by Valero
(the "VESOP") (which are described in this paragraph) to occur prior to the
Time of Distribution, Valero shall direct the trustee of the VESOP to sell
Valero stock held in the VESOP suspense account in an amount sufficient to
repay all outstanding debt of the VESOP. Following such transaction, Valero
shall direct the trustee of the VESOP to allocate whatever stock remains in
the suspense account to the accounts of participants in the VESOP. Valero
shall subsequently terminate or merge the VESOP into the Valero Thrift Plan in
a transaction consistent with the requirements of Section 4.14(l) of the Code.
ESOP. The Employee Benefits Agreement provides that, prior to certain Thrift
Plan Transfers, Valero shall terminate or merge the non-leveraged employees'
stock ownership plan sponsored by Valero (the "ESOP") into the Valero Thrift
Plan in a transaction consistent with the requirements of Section 4.14(l) of
the Code.
Indemnification. The Employee Benefits Agreement provides that all
liabilities allocated pursuant to such Agreement shall be treated as
Indemnifiable Losses under the Distribution Agreement. As a result, each of
Valero and New Valero will indemnify, defend and hold harmless the other for
all liabilities allocated to the indemnifying party pursuant to the Employee
Benefits Agreement. For additional discussion of indemnification obligations
and procedures, see "--Distribution Agreement--Indemnification."
INTERIM SERVICES AGREEMENT
Term and Termination. The term of the Interim Services Agreement will
commence at the Effective Time and will end on December 31, 1998, except for
any particular service that is earlier canceled or for which the Interim
Services Agreement specifically provides for an earlier or later termination.
Payment. The Interim Services Agreement provides that certain fees, which
are detailed in an exhibit to the Interim Services Agreement, will be charged
for the services rendered by Valero and New Valero under the Interim Services
Agreement. The fees will be calculated at a percentage use, cost or other
basis depending on the services to be rendered.
Information Services. In consideration for certain fees, Valero will provide
various information services to New Valero. Such information services involve,
among other things, data processing services, computer maintenance for the
Valero system computer equipment, data storage, and access and instructions
with regard to the Valero system.
Financial and Regulatory Services. In consideration for certain fees, each
of Valero and New Valero will provide the other with various financial and
regulatory services. Such financial and regulatory services involve, among
other things, tax services, governmental compliance services and check
printing.
Administrative Services. In consideration for certain fees, Valero will
provide various administrative services to New Valero. Such administrative
services involve, among other things, San Antonio, Texas office space and
parking, security, telecommunications, mail, printing and document design and
records storage, and travel.
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<PAGE>
In consideration for certain fees, New Valero will provide various
administrative services to Valero. Such administrative services involve, among
other things, Houston, Texas office space, health care, payroll services and
accounts payable processing.
Liability and Indemnification. Neither Valero nor New Valero makes any
warranty, express or implied, with respect to the services to be provided by
Valero or New Valero with respect to the quality of performance of services
provided under the Interim Services Agreement. The liability of any performing
party ("Performing Party") with respect to the quality of performance of
services provided under the Interim Services Agreement is limited to the total
compensation for the services provided by the Performing Party under the
Interim Services Agreement and will not include any contingent liability. The
sole remedy (other than the amount of damages described in the foregoing
sentence) for the Performing Party's breach of the Interim Services Agreement
will be the termination of the Interim Services Agreement.
With respect to any service performed for the benefit of a receiving party
(the "Receiving Party"), the Receiving Party will indemnify, defend and hold
the Performing Party harmless from and against any and all claims (except for
certain excepted claims) incurred by or assessed against the Performing Party
in connection with (i) the performance of services by the Performing Party
under the Interim Services Agreement, (ii) the injury to or death of any
individual during the term of the Interim Services Agreement who is an
employee of the Receiving Party at the time of the occurrence which causes
such injury or death, or (iii) loss of or damage to any property of the
Receiving Party during the term of the Interim Services Agreement. With
respect to the services performed by the Performing Party, the Performing
Party will indemnify, defend and hold the Receiving Party harmless from and
against any and all claims incurred by or assessed against the Receiving Party
in connection with the gross negligence, willful misconduct, or fraud of, or
the imposition of punitive or exemplary damages against, the Performing Party
in the performance of services under the terms of the Interim Services
Agreement.
All indemnities set forth in the Interim Services Agreement extend to the
officers, directors, employees and affiliates of the party indemnified. Unless
the Interim Services Agreement expressly provides to the contrary, the
indemnities set forth therein apply regardless of whether the indemnified
party (or its employees, agents, contractors, successors or assigns) was a
contributing cause of the indemnified claim, expressly including indemnified
claims arising out of or resulting, in whole or part, from the indemnified
party's (or its employees', agents', contractors', successors' or assigns')
sole or concurrent negligence. However, the indemnities set forth in the
Interim Services Agreement do not extend to any part of an indemnified claim
that is the result of the gross negligence, willful misconduct or fraud of the
indemnified party or the result of the imposition of punitive or exemplary
damages on the indemnified party.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For financial reporting purposes, New Valero is a "successor registrant" to
Valero and, as such, all financial information included in this discussion and
in the historical financial statements beginning on page F-2 represent the
historical financial information of Valero. Therefore, references to the
"Company" in this discussion and in the related historical financial
statements are references to Valero, without giving effect to the Distribution
or the Merger.
OVERVIEW
The Company, a Delaware corporation incorporated in 1955, is a diversified
energy company engaged in the production, transportation and marketing of
environmentally clean fuels and products. The Company conducts its business
through two business segments: the Refining Business, which refines, processes
and markets various fuels and products, and the Natural Gas Business, which
owns and operates natural gas pipeline systems and natural gas processing
plants and markets natural gas and natural gas liquids (natural gas liquids
are sometimes referred to herein as "NGL").
THE PROPOSED TRANSACTIONS
On January 31, 1997, the Company announced that it had entered into the
Merger Agreement, pursuant to which Merger Sub will merge with and into the
Company, which immediately prior to the Merger will operate only the Natural
Gas Business. Prior to the Merger, the Company will (and will cause its
subsidiaries to) (i) transfer all assets and related liabilities of the
Refining Business that are not already owned by New Valero or its subsidiaries
to New Valero or its subsidiaries and (ii) transfer all assets and related
liabilities of the Natural Gas Business that are not already owned directly by
the Company or by one of the Company's subsidiaries involved in the Natural
Gas Business to the Company or one of such subsidiaries. Immediately prior to
the Merger, the Company will spin off New Valero to the Company's stockholders
in a tax-free distribution. Each holder of Valero Common Stock will receive
one share of New Valero Common Stock for each share of Valero Common Stock
owned immediately prior to the Distribution. In addition, prior to the
Distribution, New Valero will pay a dividend to the Company pursuant to the
terms of the Distribution Agreement. See "--Liquidity and Capital Resources"
and "Description of Certain New Valero Indebtedness."
The transactions described above are subject to, among other things,
approval by the Company's stockholders, receipt of the Tax Opinions of the
Company's and PG&E Corp.'s tax counsel regarding certain tax aspects of the
Transactions and certain regulatory approvals. See "Agreements Between Valero
and New Valero" and "The Merger Agreement--Conditions" in the Proxy Statement-
Prospectus. If the transactions described above are consummated, at the Time
of Distribution the only business that will be conducted by New Valero will be
the Refining Business.
CHANGE IN SEGMENT REPORTING
Prior to January 1, 1996, the Company reported three separate business
segments: (i) a natural gas segment, (ii) a natural gas liquids segment and
(iii) a refining segment. Due to the restructuring of the interstate natural
gas pipeline industry in 1993 through Federal Energy Regulatory Commission
("FERC") Order 636 and the resulting transformation of the United States
natural gas industry into a more market and customer-oriented environment, the
Company has recently integrated its natural gas and natural gas liquids
businesses. Effective January 1, 1996, in recognition of this integration, the
Company began to report its natural gas and natural gas liquids businesses as
one industry segment. The primary effect of this change on the Company's
segment disclosures was the elimination of volume, revenue and income amounts
related to natural gas fuel and shrinkage volumes sold to and transported for
the natural gas liquids segment by the natural gas segment. The Company's 1995
and 1994 financial and operating highlights for its Natural Gas Business which
follow under "--Results of Operations," and the discussion of the Company's
Natural Gas Business which follows under "--Results of
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Operations--1995 Compared to 1994--Segment Results," have been revised from
that contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 to reflect this change in segment reporting.
ACQUISITION OF VNGP, L.P.
As described in Note 3 of Notes to Consolidated Financial Statements, the
merger of Valero Natural Gas Partners, L.P. ("VNGP, L.P." and together with
VNGP, L.P.'s consolidated subsidiaries, sometimes referred to herein as the
"Partnership") with the Company (the "VNGP Merger") was consummated on May 31,
1994. As a result of the VNGP Merger, VNGP, L.P. became a subsidiary of the
Company. The accompanying consolidated statements of income of the Company for
the years ended December 31, 1996, 1995 and 1994 reflect the Company's 100%
interest in the Partnership's operations after May 31, 1994 and its effective
equity interest of approximately 49% for all periods prior to and including
May 31, 1994. Because 1994 results of operations for the Natural Gas Business
are not comparable to subsequent and prior periods due to the VNGP Merger, the
discussion of this segment which follows under "--Results of Operations--1995
Compared to 1994--Segment Results" is based on pro forma operating results for
1994 that reflect the consolidation of the Partnership with the Company for
all of such year.
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RESULTS OF OPERATIONS
The following are the Company's financial and operating highlights for each
of the three years in the period ended December 31, 1996. For 1995 and 1994,
operating revenues and operating income (loss) by segment and certain Natural
Gas Business operating statistics have been restated to conform to the 1996
presentation. As used throughout this Prospectus, "Mbbls" is an abbreviation
for "thousand barrels," "MMcf" is an abbreviation for "million cubic feet" and
"Mcf" is an abbreviation for "thousand cubic feet."The amounts in the
following table are in thousands of dollars, unless otherwise noted:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES:
Refining Business (1).................... $2,757,801 $1,950,657 $1,090,368
Natural Gas Business (2)................. 2,445,504 1,396,468 784,287
Other (2)................................ 123 126 42,639
Intersegment eliminations (2)............ (212,747) (149,379) (79,854)
---------- ---------- ----------
Total.................................. $4,990,681 $3,197,872 $1,837,440
========== ========== ==========
OPERATING INCOME (LOSS):
Refining Business........................ $ 110,046 $ 141,512 $ 78,660
Natural Gas Business (2)................. 132,178 83,180 61,944
Corporate general and administrative ex-
penses and other, net (2)............... (41,315) (35,901) (14,679)
---------- ---------- ----------
Total.................................. $ 200,909 $ 188,791 $ 125,925
========== ========== ==========
EQUITY IN EARNINGS (LOSSES) OF AND INCOME
FROM:
Valero Natural Gas Partners, L.P. (3).... $ -- $ -- $ (10,698)
Joint ventures........................... $ 3,899 $ 4,827 $ 2,437
LOSS ON INVESTMENT IN PROESA JOINT VEN-
TURE...................................... $ (19,549) $ -- $ --
(PROVISION FOR) REVERSAL OF ACQUISITION EX-
PENSE ACCRUAL (5)......................... $ 18,698 $ (2,506) $ (16,192)
OTHER INCOME, NET.......................... $ 4,921 $ 5,248 $ 3,431
INTEREST AND DEBT EXPENSE, NET............. $ (95,177) $ (101,222) $ (76,921)
NET INCOME (5)............................. $ 72,701 $ 59,838 $ 17,282
NET INCOME APPLICABLE TO VALERO COMMON
STOCK (5)................................. $ 61,374 $ 48,020 $ 7,792
EARNINGS PER SHARE OF VALERO COMMON STOCK
(5)....................................... $ 1.40 $ 1.10 $ .18
PRO FORMA OPERATING INCOME (LOSS) (4):
Refining Business........................ $ 110,046 $ 141,512 $ 78,660
Natural Gas Business..................... 132,178 83,180 69,769
Corporate general and administrative ex-
penses and other, net................... (41,315) (35,901) (22,486)
---------- ---------- ----------
Total.................................. $ 200,909 $ 188,791 $ 125,943
========== ========== ==========
OPERATING STATISTICS:
Refining Business:
Throughput volumes (Mbbls per day)..... 170 160 146
Average throughput margin per barrel... $ 5.29 $ 6.25 $ 5.36
Sales volumes (Mbbls per day) (1)...... 291 231 140
Natural Gas Business (4):
Gas volumes (MMcf per day):
Sales................................ 1,693 1,429 1,139
Transportation....................... 1,665 1,430 1,398
---------- ---------- ----------
Total gas volumes.................. 3,358 2,859 2,537
========== ========== ==========
Average gas sales margin per Mcf....... $ .146 $ .162 $ .184
Average gas transportation fee per
Mcf................................... $ .089 $ .094 $ .102
NGL plant production:
Production volumes (Mbbls per day)... 80.9 80.3 79.5
Average NGL market price per gallon.. $ .354 $ .258 $ .265
Average gas cost per Mcf............. $ 1.93 $ 1.40 $ 1.75
Average NGL margin per gallon........ $ .103 $ .080 $ .076
</TABLE>
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- --------
(1) Revised for 1995 to include revenues and associated volumes related to
certain Refining Business trading activities previously classified as a
reduction of cost of sales.
(2) Reflects the consolidation of the Partnership commencing June 1, 1994.
(3) Represents the Company's approximate 49% effective equity interest in the
operations of the Partnership and interest income on certain capital lease
transactions with the Partnership for the period prior to June 1, 1994.
(4) Operating income (loss) presented herein for 1994 represents pro forma
amounts that reflect the consolidation of the Partnership with the Company
for all of such year. Operating statistics for the Natural Gas Business
segment for 1994 represent pro forma statistics that reflect such
consolidation.
(5) Restated for 1994 to reflect the effects of a prior period adjustment
resulting in a charge to income for an acquisition expense accrual
originally charged to property, plant and equipment. See "Restatement of
Financial Information" in Note 1 of Valero Energy Corporation and
Subsidiaries Notes to Consolidated Financial Statements.
1996 COMPARED TO 1995
CONSOLIDATED RESULTS
The Company reported net income of $72.7 million, or $1.40 per share, for
the year ended December 31, 1996 compared to $59.8 million, or $1.10 per
share, for the year ended December 31, 1995. For the fourth quarter of 1996,
net income was $18.8 million, or $.37 per share, compared to $12.9 million, or
$.23 per share, for the fourth quarter of 1995. Net income and earnings per
share increased during the 1996 fourth quarter and total year compared to the
same periods in 1995 due primarily to a significant increase in operating
income from the Company's Natural Gas Business, partially offset by a decrease
in Refining Business operating income and an increase in corporate expenses.
Lower net interest expense also contributed to the increase in net income and
earnings per share, partially offset by higher income taxes.
Operating revenues increased $1.8 billion, or 56%, to $5 billion during 1996
compared to 1995 due to an approximate $1 billion, or 75% increase in Natural
Gas Business revenues and an approximate $800 million, or 41% increase in
Refining Business revenues. Operating income increased $12.1 million, or 6%,
to $200.9 million during 1996 compared to 1995 due to a $49 million, or 59%
increase in Natural Gas Business operating income, partially offset by a $31.5
million, or 22% decrease in Refining Business operating income and a $5.4
million increase in corporate expenses resulting primarily from higher
employee-related and other costs. Changes in operating revenues and operating
income by business segment are explained below under "--Segment Results."
During the fourth quarter of 1996, the Company wrote off its investment in
its joint venture project to design, construct and operate a plant in Mexico
to produce methyl tertiary butyl ether ("MTBE") and accrued an estimate of
additional liabilities associated with such investment resulting in a loss of
$19.5 million (see Note 7 of Valero Energy Corporation and Subsidiaries Notes
to Consolidated Financial Statements). Also in the fourth quarter of 1996, the
Company recorded $16.6 million of income representing the reversal of the
excess portion of an accrual established in May 1994 to cover expected costs
related to the Company's acquisition of the publicly held units of VNGP, L.P.
Net interest and debt expense decreased $6 million to $95.2 million during
1996 compared to 1995 due primarily to a decrease in bank borrowings and
paydowns of certain outstanding nonbank debt, partially offset by the issuance
of medium-term notes ("Medium-Term Notes") in the first half of 1995. See "--
Liquidity and Capital Resources." Income tax expense increased $5.7 million in
1996 compared to 1995 due primarily to higher pre-tax income.
SEGMENT RESULTS
Refining Business
Operating revenues from the Company's Refining Business operations increased
$807.1 million, or 41%, to $2.8 billion during 1996 compared to 1995 due
primarily to a 26% increase in sales volumes and a 12% increase in the average
sales price per barrel. The increase in sales volumes was due primarily to
increased volumes from trading and rack marketing activities, and a 6%
increase in average daily throughput volumes resulting from various unit
improvements and enhancements made during 1995 and a reduced impact on
production due to unit
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<PAGE>
turnarounds which occurred in 1996 compared to 1995, partially offset by the
effects of two second quarter 1996 power outages at the Company's petroleum
refinery in Corpus Christi, Texas (the "Refinery"). The average sales price
per barrel increased due primarily to higher gasoline and distillate prices
which generally followed an increase in crude oil prices during 1996.
Operating income from Refining Business operations decreased $31.5 million,
or 22%, to $110 million during 1996 compared to 1995 due primarily to a
decrease in total throughput margins and higher operating expenses. The
decrease in total throughput margins was due primarily to lower oxygenate
margins resulting from higher butane feedstock costs, particularly in the
fourth quarter, lower margins on sales of petrochemical feedstocks, and
decreased results from price risk management activities. These decreases in
throughput margins were partially offset by the increase in throughput volumes
noted above, higher distillate margins, and an improvement in discounts on
purchases of resid feedstocks. Operating expenses increased due primarily to
costs associated with the Company's joint venture methanol plant which was
placed in service in late August 1995 and higher variable costs resulting from
increased throughput at the Refinery.
The Company has entered into various term feedstock supply agreements for
approximately 58,000 barrels per day of resid which are based on market prices
and extend through 1997, including an agreement with the Saudi Arabian Oil
Company for approximately 36,000 barrels per day which extends through mid-
1998. These agreements provide approximately 70% of the Refinery's estimated
daily resid feedstock requirements for 1997. The Company believes that if any
of its existing resid feedstock arrangements were interrupted or terminated,
supplies of resid could be obtained from other sources or on the open market.
However, because the demand for the type of resid feedstock now processed at
the Refinery has increased in relation to the availability of supply over the
past few years, if any such interruptions or terminations did occur, the
Company could be required to incur higher resid feedstock costs or substitute
other types of resid, thereby producing less favorable operating results. The
Company also has two agreements to supply feedstock for the Refinery's crude
unit; one with the Chinese state-owned oil company for approximately 22,000
barrels per day of sweet crude oil extending through June 1997, and one with a
domestic refiner for approximately 8,000 barrels per day of crude oil
extending through the end of 1997. The remainder of the Refinery's resid and
crude feedstocks are purchased at market-based prices under short-term
contracts. Production from the Company's joint venture methanol plant normally
provides all of the methanol feedstock presently required for the Refinery's
production of oxygenates (as defined herein) used in reformulated gasoline
("RFG").
In 1996, a maintenance turnaround and a catalyst change for the Refinery's
hydrodesulfurization unit (the "HDS Unit") were completed in July, a
turnaround of the Refinery's MTBE plant (the "MTBE Plant") was completed in
September during which its capacity was increased by approximately 1,500
barrels per day, and turnarounds of the Refinery's Hydrocracker (as defined
herein) and naphtha Reformer (as defined herein) units were completed in
December. In early December, an explosion occurred at the methanol plant as it
was being shut down for repairs. The Company's share of repair costs is
estimated to be $2.5 million, and the plant resumed operations in late
February 1997. In 1995, a maintenance turnaround and a catalyst change for the
HDS Unit and turnarounds of the Hydrocracker and naphtha Reformer units were
all completed in April of that year. The MTBE Plant was down for nine days in
January 1997 to replace a catalyst and the HOC unit was down for approximately
two weeks in the second quarter of 1997 for unscheduled maintenance. During
1997, the crude unit is scheduled for a maintenance turnaround in the second
quarter, and the HDS Unit is scheduled for a maintenance turnaround and
catalyst change in the fourth quarter.
The Company enters into various exchange-traded and over-the-counter
financial instrument contracts with third parties to manage price risk
associated with refining feedstock and fuel purchases, refined product
inventories and refining operating margins. Although such activities are
intended to limit the Company's exposure to loss during periods of declining
margins, such activities could tend to reduce the Company's participation in
rising margins. In 1996, refining throughput margins were reduced by $1.2
million as a result of hedging activities compared to a $12.8 million benefit
in 1995. The 1995 benefit resulted primarily from favorable price swap
contracts on methanol, since methanol prices dropped by over 70% during that
year. In 1996 and 1995, the Company was also able to reduce its operating
costs by $2.8 million and $1 million, respectively, as a result of hedges on
refining natural gas fuel requirements. See Note 1 under "Price Risk
Management Activities" and Note 6 of Valero Energy Corporation and
Subsidiaries Notes to Consolidated Financial Statements.
34
<PAGE>
Natural Gas Business
Operating revenues from the Company's Natural Gas Business operations
increased $1 billion, or 75%, to $2.4 billion during 1996 compared to 1995 due
primarily to a 47% increase in average natural gas sales prices, an 18%
increase in natural gas sales volumes, primarily off-system sales, a 37%
increase in average NGL market prices, and a 28% increase in NGL sales
volumes. Natural gas sales prices and volumes were higher due to increased
demand for natural gas to replenish low industry-wide natural gas storage
inventories drawn down by extreme cold winter weather during the 1996 first
quarter and which remained below 1995 levels during all of 1996. Natural gas
demand also increased due to early cold weather during the 1996 fourth
quarter. NGL market prices increased as a result of historically low NGL
inventory levels, firm petrochemical and refining demand, and strong crude oil
and refined product prices. NGL sales volumes were higher due primarily to an
increase in NGL marketing activities.
Operating income from Natural Gas Business operations increased $49 million,
or 59%, to $132.2 million during 1996 compared to 1995 due primarily to higher
margins on NGL production, and, to a lesser extent, to increases in total gas
sales margins, natural gas transportation revenues and income from NGL trading
activities. Total margins on NGL production were higher due to the substantial
increase in average NGL market prices noted above and to an approximate $16
million increase in benefits from price risk management activities which
limited the increase in natural gas fuel and shrinkage costs. Total gas sales
margins increased due primarily to the increase in off-system sales volumes
noted above and to increased benefits from price risk management activities,
partially offset by an increase in fuel costs. Natural gas transportation
revenues were higher due to a 16% increase in transportation volumes resulting
from increased marketing activities, partially offset by a 5% decrease in
average transportation fees. NGL trading income increased due primarily to the
increase in NGL marketing activities noted above. NGL production volumes
increased slightly in 1996 compared to 1995 as production increases at various
plants resulting from the completion in 1995 and 1996 of certain operational
improvements and production enhancements generally offset the effects of the
sale of two of the Natural Gas Business's West Texas processing plants in
August 1995.
Demand for natural gas continues to be affected by the operation of various
nuclear and coal power plants in the Natural Gas Business's core service area.
At full operation, the South Texas Project nuclear plant in Bay City, Texas
and the Comanche Peak nuclear plant near Ft. Worth, Texas displace
approximately 650 MMcf per day and 600 MMcf per day of natural gas demand,
respectively. In addition, coal-fired electrical generation facilities owned
and operated by San Antonio City Public Service displace a portion of natural
gas demand.
The Natural Gas Business's gas sales and transportation businesses are based
primarily on competitive market conditions and contracts negotiated with
individual customers. The Natural Gas Business has been able to mitigate, to
some extent, the effect of competitive industry conditions by aggressive
marketing efforts to increase gas sales and transportation volumes,
particularly in its off-system marketing business with local distribution and
industrial companies throughout the United States, and by the flexible use of
its strategically located pipeline system. However, gas sales and
transportation margins remain under intense pressure as the natural gas
industry continues to adjust to deregulation and the customer-driven market
that has developed since FERC Order 636 was enacted.
Gas sales are also made, to a significantly lesser extent, to intrastate
customers under contracts with 20- to 30-year terms which originated in the
1960s and 1970s. These contracts provide for the sale of gas at its weighted
average cost ("WACOG"), plus a margin. In addition to the cost of gas
purchases, WACOG has included storage, gathering and other fixed costs,
including the amortization of deferred gas costs related to the settlement of
take-or-pay and related claims. As a result of contracts expiring in 1998, the
majority of storage costs previously included in WACOG (see Note 14 of Valero
Energy Corporation and Subsidiaries Notes to Consolidated Financial
Statements), will no longer be recovered through these gas sales rates.
The Natural Gas Business's NGL operations benefit from the strategic
location of its facilities in relation to natural gas supplies and markets,
particularly in South Texas which is a core supply area for the Natural Gas
35
<PAGE>
Business's natural gas and NGL operations. Currently, approximately 93% of the
Natural Gas Business's NGL production comes from plants in South Texas and the
Texas Gulf Coast. The Natural Gas Business's NGL operations should benefit in
the longer term from the expected continued growth in demand for NGLs as
petrochemical feedstocks and in the production of MTBE. The demand for NGLs,
particularly natural gasoline, will continue to be affected seasonally,
however, by Environmental Protection Agency ("EPA") regulations limiting
gasoline volatility during the summer months.
The Natural Gas Business enters into various exchange-traded and over-the-
counter financial instrument contracts with third parties to manage price risk
associated with its natural gas storage, natural gas marketing and NGL
operations. Such activities are intended to manage price risk but may result
in gas, fuel and shrinkage costs either higher or lower than those that would
have been incurred absent such activities. In 1996 and 1995, total gas sales
margins benefitted from gas cost reductions of $23.4 million and $12 million,
respectively, resulting from price risk management activities. Of these
amounts, $12.6 million and $5.6 million, respectively, were recognized in the
1996 and 1995 fourth quarters. In addition, in 1996 and 1995, total margins on
NGL production benefitted from fuel and shrinkage cost reductions of $19.7
million and $4.1 million, respectively, resulting from price risk management
activities. For all such activities, an additional $16.6 million and
$3.8 million was deferred at December 31, 1996 and 1995, respectively, which
is recognized as a reduction to cost of sales in the subsequent year. See Note
1 under "Price Risk Management Activities" and Note 6 of Valero Energy
Corporation and Subsidiaries Notes to Consolidated Financial Statements.
1995 COMPARED TO 1994
CONSOLIDATED RESULTS
The Company reported net income of $59.8 million, or $1.10 per share, for
the year ended December 31, 1995 compared to $17.3 million, or $.18 per share,
for the year ended December 31, 1994. For the fourth quarter of 1995, net
income was $12.9 million, or $.23 per share, compared to net income of $3.9
million, or $.02 per share, for the fourth quarter of 1994. Net income and
earnings per share increased during 1995 compared to 1994 due primarily to a
significant increase in operating income from the Refining Business, improved
operating results from the Natural Gas Business, including the effect of the
VNGP Merger, and the nonrecurring recognition in expense in 1994 of an accrual
for loss contingencies recorded in connection with the VNGP Merger. The
increases in net income and earnings per share resulting from these factors
were partially offset by increases in corporate expenses, net interest expense
and income tax expense and the nonrecurring recognition in income in 1994 of
deferred management fees resulting from the VNGP Merger. The increase in
earnings per share was also partially offset by an increase in preferred stock
dividend requirements resulting from the issuance in March 1994 of 3.45
million shares of the Convertible Preferred Stock. See Note 9 of Valero Energy
Corporation and Subsidiaries Notes to Consolidated Financial Statements.
Operating revenues increased $1.4 billion, or 74%, to $3.2 billion during
1995 compared to 1994 due primarily to an increase in operating revenues from
Refining Business operations which is explained under "--Segment Results" and
the inclusion of operating revenues attributable to Partnership operations in
all of 1995 versus only the months of June through December in 1994. Other
operating revenues decreased $42.5 million due to the elimination of
management fee revenues received by the Company from the Partnership as a
result of the VNGP Merger.
Operating income increased $62.9 million, or 50%, to $188.8 million during
1995 compared to 1994 due primarily to an increase in operating income from
Refining Business operations and to the inclusion of Partnership operating
income in all of 1995 versus only the months of June through December in 1994.
Partially offsetting these increases in operating income was an increase in
corporate expenses, net, resulting primarily from the nonrecurring recognition
in income in 1994 of deferred management fees resulting from the VNGP Merger,
the allocation of corporate expenses to the Partnership in 1994 for the
periods prior to the VNGP Merger and an increase in compensation expense.
36
<PAGE>
As a result of the VNGP Merger and the Company's change in the method of
accounting for its investment in the Partnership from the equity method to the
consolidation method, the Company did not report equity in earnings (losses) of
and income from the Partnership for 1995 and the months of June through
December 1994. See "--Segment Results" for a discussion of the Natural Gas
Business's operations, including 100% of the operations of the Partnership on a
pro forma basis for 1994. Equity in earnings of joint ventures increased
$2.4 million to $4.8 million for 1995 compared to 1994 due to an increase in
the Company's equity in earnings of Javelina Company ("Javelina"), a general
partnership that owns a refinery off-gas processing plant in Corpus Christi,
Texas. Javelina's earnings increased due primarily to higher product prices as
a result of strong product demand from the petrochemical industry, as well as
from lower feedstock costs.
Net interest and debt expense increased $24.3 million to $101.2 million
during 1995 compared to 1994 due primarily to the inclusion of Partnership
interest expense in all of 1995 versus only the months of June through December
in 1994, and to a lesser extent to the issuance of Medium-Term Notes in
December 1994 and the first half of 1995. Income tax expense increased $24.6
million to $35.3 million in 1995 compared to 1994 due primarily to higher pre-
tax income.
SEGMENT RESULTS
Refining Business
Operating revenues from Refining Business operations increased $860.3
million, or 79%, to $2 billion during 1995 compared to 1994 due primarily to a
65% increase in sales volumes and a 9% increase in the average sales price per
barrel. The increase in sales volumes was due primarily to higher purchases for
resale of conventional gasoline to supply rack customers as a result of the
Company's conversion of its Refinery operations to produce primarily RFG
beginning in the fourth quarter of 1994, a 10% increase in throughput volumes
resulting from various unit improvements completed during the latter part of
1994 and first half of 1995, and additional sales volumes in 1995 related to
increased fuel oil trading activities. The average sales price per barrel
increased due to higher refined product prices, including higher prices
received on sales of RFG and other higher-value products.
Operating income from Refining Business operations increased $62.8 million,
or 80%, to $141.5 million during 1995 compared to 1994 due primarily to an
increase in total throughput margins partially offset by an increase in
operating and other expenses. Total throughput margins increased due to higher
margins on sales of RFG, oxygenates and petrochemical feedstocks, the effects
of the unit improvements noted above, and the nonrecurrence of a turnaround of
the Refinery's heavy oil cracking complex completed during the latter part of
1994, net of the effect of unit turnarounds which occurred in 1995. The
increase in total throughput margins resulting from these factors was partially
offset by a decrease in conventional refined product margins ("crack spread")
resulting primarily from depressed gasoline markets in early 1995 attributable
to uncertainties pertaining to the general acceptance of RFG and oxygenates.
Costs for the Company's resid feedstocks increased in 1995 compared to 1994 due
to a continuing worldwide decrease in resid supplies resulting from the
addition of new refinery upgrading capacity and increased production of light
sweet crude oil in relation to heavy crude oil. However, the effect of such
increased resid costs on throughput margins was more than offset by a decrease
in other feedstock costs, including a $7.5 million increase in benefits from
price risk management activities, approximately $7 million of which was
attributable to fourth quarter operations. Although operating expenses
increased approximately 4% due primarily to higher costs resulting from
increased throughput, operating expenses per barrel decreased by approximately
5%. Selling and administrative expenses increased due to higher compensation
and other expenses, while depreciation expense increased approximately 4% due
to capital expenditures incurred during the latter part of 1994 and in 1995.
In 1995 and 1994, refining feedstock costs were reduced by $12.8 million and
$5.3 million, respectively, as a result of price risk management activities. In
addition, in 1995, the Company was able to reduce its operating costs by $1
million as a result of such activities. In 1994, the effect of such activities
on operating costs was not significant.
37
<PAGE>
Natural Gas Business
Operating income from Natural Gas Business operations was $83.2 million for
1995 compared to pro forma operating income of $69.8 million for 1994. The
$13.4 million, or 19%, increase was due primarily to an increase in total gas
sales margins and other operating revenues, higher margins on NGL production,
a decrease in NGL transportation and fractionation costs, and a decrease in
operating, selling and administrative expenses. The increase in operating
income resulting from these factors was partially offset by decreases in
natural gas transportation revenues and NGL revenues from transportation and
fractionation of third-party plant production. Total gas sales margins
increased due to a 25% increase in gas sales volumes, reductions in gas costs
resulting from price risk management activities, and the nonrecurrence of
certain settlements relating to measurement and customer billing differences
which adversely affected 1994. The increase in total gas sales margins
resulting from these factors was partially offset by reduced volumetric gains
and lower unit margins due primarily to an increase in lower-margin spot and
off-system sales. Total margins on NGL production were higher due to a
decrease in fuel and shrinkage costs resulting from a 20% decrease in the
average cost of natural gas, which more than offset a 3% decrease in the
average NGL market price. Average natural gas costs decreased due to surplus
industry capacity and benefits from price risk management activities, while
average NGL prices decreased due to weak ethane prices resulting from above-
normal inventory levels. The decrease in operating, selling and administrative
expenses was due primarily to the nonrecurrence of certain adverse settlements
in 1994, including $6.8 million related to a settlement with the City of
Houston regarding a franchise fee dispute, partially offset by higher ad
valorem tax, maintenance and compensation expenses. The decrease in
transportation revenues was due primarily to an 8% decrease in average
transportation fees. NGL production volumes increased slightly in 1995
compared to 1994 as volume increases in 1995 resulting from the addition of
new natural gas supplies under processing agreements with natural gas
producers and operational improvements and production enhancements at certain
of the Natural Gas Business's NGL plants were mostly offset by volume
decreases resulting primarily from the sale of two of the Natural Gas
Business's West Texas processing plants in August 1995.
In 1995, total gas sales margins benefitted from gas cost reductions of $12
million resulting from price risk management activities, $5.6 million of which
was recognized in the fourth quarter, compared to $2.1 million in 1994 on a
pro forma basis. In addition, in 1995, total margins on NGL production
benefitted from fuel and shrinkage cost reductions of $4.1 million resulting
from price risk management activities. In 1994, the effect of such activities
on fuel and shrinkage costs was not significant. For all such activities, an
additional $3.8 million and $6.8 million was deferred at December 31, 1995 and
1994, respectively, which is recognized as a reduction to cost of sales in the
subsequent year.
Other
Pro forma corporate general and administrative expenses and other, net,
increased $13.4 million during 1995 compared to 1994 due primarily to the
nonrecurring recognition in income in 1994 of deferred management fees
resulting from the VNGP Merger, as noted above, and an increase in
compensation expense.
BASIS PETROLEUM
Valero has acquired (and will transfer to New Valero) Basis. Basis owns and
operates three petroleum refineries located in Texas and Louisiana and markets
refined products. New Valero believes that Salomon has invested approximately
$660 million in the Basis refineries for upgrading facilities and other
improvements since 1992. Most of these improvements were made at the two Texas
refineries. Although Basis recorded a small profit in 1994, Basis's audited
financial statements reflect that Basis incurred pre-tax losses of
approximately $91 million in 1995 and $100 million in 1996. However, New
Valero believes that the Basis refineries can be operated profitably due to
recently completed refinery upgrading projects, a reduction in depreciation
and amortization expense due to the acquisition cost of Basis being less than
its net book value, and a projected reduction in operating and overhead costs
expected to be achieved through certain changes to be implemented by New
Valero, as described below. New Valero believes that, assuming the realization
of the assumptions described below, the Basis refineries will be accretive to
New Valero's consolidated cash flow and earnings beginning in 1997.
38
<PAGE>
The following table shows certain selected pro forma projected income
statement, balance sheet and cash flow information for New Valero, Basis, and
New Valero and Basis combined for the years ended December 31, 1997 and 1998.
Such selected pro forma projected financial information (i) assumes the
completion of certain refinery turnarounds, as described below, (ii) reflects
cash proceeds of approximately $150 million from an inventory purchase
agreement currently being negotiated, (iii) excludes certain marketing
operations of Basis which are expected to be discontinued, and (iv) includes a
preliminary allocation of the purchase price of Basis to the assets acquired
and liabilities assumed. The 1998 cash flow of Basis and New Valero and Basis
combined was reduced by $3.2 million representing a projected earn-out payment
for the period from May 1, 1997 through April 30, 1998. Operating income and
net income for 1998 were each reduced by approximately $.1 million
representing the effect of increased depreciation expense resulting from the
treatment of the earn-out payment as an additional cost of the acquisition.
The purchase accounting adjustments necessary to allocate the purchase price
of Basis remain subject to change and the depreciation and amortization
expense ultimately reflected in New Valero's financial statements may vary,
perhaps significantly, from the information presented herein.
NEW VALERO AND BASIS COMBINED
SELECTED PRO FORMA PROJECTED FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1998
------------------------- -------------------------
NEW VALERO BASIS COMBINED NEW VALERO BASIS COMBINED
---------- ----- -------- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
INFORMATION:
Operating Income......... $ 133 $47 $ 180 $ 138 $88 $ 226
Interest expense, net.... 13 11 24 8 15 23
Income taxes............. 42 13 55 47 25 72
Income from continuing
operations.............. 78 24 102 86 47 133
Earnings per share of
common stock from
continuing operations... 1.53 -- 1.90 1.69 -- 2.44
BALANCE SHEET INFORMATION:
Working capital.......... 149 50 199 149 50 199
Property, plant and
equipment, net.......... 1,259 300 1,559 1,343 327 1,670
Deferred charges and
other assets............ 113 27 140 117 29 146
Long-term debt........... 251 229 480 245 197 442
Deferred income taxes and
other deferred credits
and other liabilities... 276 5 281 293 20 313
Stockholders' equity..... 994 143 1,137 1,070 190 1,260
CASH FLOW INFORMATION:
Depreciation expense..... 56 9 65 56 17 73
Amortization expense..... 36 3 39 30 13 43
Capital expenditures..... 85 36 121 60 80 140
Deferred turnaround and
catalyst costs.......... 18 12 30 29 16 45
</TABLE>
39
<PAGE>
The following table includes historical and projected operating statistics
for Basis, reflecting the feedstocks utilized and products produced by Basis
for 1995 and for the first nine months of 1996, and as projected following the
Basis Acquisition after giving effect to the operational improvements which
New Valero expects to implement. The information shown in the column
"Historical January-September 1996" reflects charges and yields prior to
completion of the Residfiner and ROSE units at the Texas City refinery.
BASIS REFINERY SYSTEM CHARGE AND YIELD SUMMARY (IN THOUSAND BARRELS PER
CALENDAR DAY)
<TABLE>
<CAPTION>
HISTORICAL
JANUARY-
HISTORICAL SEPTEMBER
1995 1996 PROJECTED
---------- ---------- ---------
<S> <C> <C> <C>
FEEDSTOCKS:
Crude oil:
Medium sour................................... 94 146 159
Heavy sweet................................... 75 38 80
Light sweet................................... 66 78 61
--- --- ---
Total crude oil............................... 235 262 300
Vacuum gas oil.................................. 18 21 15
Other feedstocks................................ 4 10 14
--- --- ---
Total refinery feedstocks....................... 257 293 329
=== === ===
PRODUCTS:
Gasoline and components......................... 113 118 132
Distillates..................................... 91 98 129
Naphtha......................................... 4 16 36
Propylene/LPG................................... 16 14 20
Low-sulfur resid................................ 15 13 15
High-sulfur resid............................... 18 27 0
Other........................................... 0 8 1
--- --- ---
Total products.................................. 257 294 333
=== === ===
</TABLE>
In preparing such projections, New Valero has made certain assumptions, both
with respect to general refining industry conditions and with respect to the
future operations of Basis in particular. Such projections and underlying
assumptions have been made in good faith and reflect New Valero's current
judgment regarding such matters. However, there can be no assurance that
actual results will not vary, perhaps significantly, from the future
performance suggested herein. See "Forward-Looking Statements." The following
principal assumptions have been made by New Valero in preparing the foregoing
projections:
Improved Refining Economics. If refining industry economics improve, New
Valero believes that the operating results of the Basis refineries should also
improve. New Valero has assumed that during 1997-1998, as well as subsequent
periods, there will be some improvement from depressed 1996 levels in general
refining economics and, accordingly, in the margins or "spreads" obtainable in
the market between key refined products, on the one hand, and high-quality
West Texas Intermediate crude oil ("WTI"), a key pricing benchmark, on the
other hand, as well as some improvement in the discounts to WTI obtainable for
key refinery feedstocks.
One nominal indicator of refining profitability is the "2-1-1 crack spread,"
which indicates profitability based upon the Gulf Coast prices received for
one barrel of conventional 87 octane unleaded gasoline and one barrel of No. 2
fuel oil, less the cost of two barrels of WTI. Since 1991, the average annual
2-1-1 crack spread
40
<PAGE>
per barrel has varied from $2.19 to $3.91, and averaged $2.88 per barrel for
such six-year period. For 1996, the average 2-1-1 crack spread per barrel was
approximately $2.65. New Valero has assumed that for 1997-1998, the 2-1-1
crack spread will average about $2.68 per barrel in 1997 and about $2.73 per
barrel in 1998.
New Valero expects that medium sour crude oil and heavy sweet crude oil will
be the principal feedstocks utilized for the Basis refineries, and that
gasoline, gasoline blendstocks and distillates will constitute the principal
refined products to be produced at these refineries.
New Valero expects that, as a result of the increasing availability of
heavier and higher sulfur crude oils, the discounts between the Basis
refineries' principal feedstocks and WTI will improve. The table below
specifies (in per barrel amounts), for each of the two principal feedstocks
for the Basis refineries, the range of such discount over the past six years,
the average discount in 1996 and the average discount that New Valero has
assumed for 1997 and 1998.
FEEDSTOCK DIFFERENTIALS TO WTI (PER BARREL)*
<TABLE>
<CAPTION>
DISCOUNT TO WTI
---------------------------------------------
ASSUMED
RANGE OF DISCOUNT
DISCOUNT FOR THE AVERAGE DISCOUNT -----------
FEEDSTOCK PERIOD 1991-1996 IN 1996 1997 1998
--------- ---------------- ---------------- ----- -----
<S> <C> <C> <C> <C>
Medium sour crude....... $1.03-$2.04 $1.17 $1.42 $1.42
Heavy sweet crude....... $0.06-$1.09 $0.18 $0.29 $0.29
--------
* based on feedstocks delivered to the refinery, including duties.
New Valero also expects that the margins or "spreads" between the Basis
refineries' principal refined products and WTI will improve in the period
1997-1998. The following table sets forth (in per barrel amounts) the range of
the high and low spread (based on Platt's mean) over the past six years, the
average spread in 1996 and the assumed average spread for 1997-1998, for the
spread between regular unleaded 87 octane conventional gasoline, and No. 2
fuel oil, respectively, and WTI.
REFINED PRODUCT DIFFERENTIALS TO WTI (PER BARREL)
<CAPTION>
SPREAD BETWEEN REFINED PRODUCTS AND WTI
---------------------------------------------
ASSUMED
RANGE OF SPREAD SPREAD
FOR THE PERIOD AVERAGE SPREAD -----------
REFINED PRODUCT 1991-1996 IN 1996 1997 1998
--------------- ---------------- ---------------- ----- -----
<S> <C> <C> <C> <C>
Regular unleaded 87 oc-
tane conventional gaso-
line................... $2.87-$5.01 $2.87 $3.18 $3.20
No. 2 fuel oil.......... $1.40-$2.81 $2.43 $2.18 $2.25
</TABLE>
Reduction of Operating Costs. The 1997 budget prepared by Basis reflects
approximately $140 million of refinery variable costs, approximately $177
million of refinery fixed costs and approximately $42 million of refinery
secondary costs and corporate overhead and selling, general and administrative
costs. Both New Valero and Basis have extensive refined product marketing
operations and market substantially more refined products than they produce.
New Valero has estimated that consolidation of Basis's corporate and refinery
support staff, including its selling, marketing, trading, transportation,
accounting and other functions, will result in net savings in personnel
related costs (including salaries, wages and employee benefit expense; rental
expenses; allocated overhead expense; and other employee-related costs) of
approximately $25 million annually.
41
<PAGE>
Reconfiguration of Operations. Although Basis recently upgraded its
facilities through the addition of, among other things, a 75,000 barrel per
day ("BPD") resid hydrodesulfurization unit ("Residfiner") and a 40,000 BPD
solvent deasphalter ("ROSE Unit") at the Texas City, Texas refinery, such new
facilities were not placed in service until October 1996, and did not achieve
planned operating levels during 1996. New Valero believes that use of these
facilities has not yet been fully optimized. New Valero intends to modify the
slate of feedstocks processed at Basis's Texas refineries principally by
increasing the use of medium sour and heavy sweet crudes; New Valero believes
that this change in the feedstock slate will more efficiently utilize the
Residfiner and ROSE Units and produce a lesser amount of low-value resid and a
greater proportion of higher value gasoline and other premium products. New
Valero believes that it can also achieve more reliable and efficient operation
of other of Basis's refinery units, and intends to shut down certain marginal
and inefficient units. New Valero also believes that it can reduce offsite
storage and working capital requirements, and that it can achieve various
other efficiencies by coordinating the operation of the Basis refineries with
its existing refinery in Corpus Christi, Texas. In its projections, New Valero
has assumed that there would be a turnaround for the Texas City Residfiner and
cogeneration units in 1997 and for the Houston refinery in 1998.
Allocation of Purchase Price. The amounts shown above in the "New Valero and
Basis Combined Selected Pro Forma Projected Financial Information" table
include preliminary allocations of the purchase price of Basis to the assets
acquired and liabilities assumed based on estimated fair value. Further
allocations will be made based upon appraisal of such assets and liabilities.
Contingent Liabilities. Basis is a party to a substantial number of claims
and legal proceedings arising in the ordinary course of business, many of
which allege injuries resulting from exposures to asbestos, benzene and other
allegedly toxic and/or carcinogenic compounds. The stock purchase agreement
provides that Salomon will indemnify Valero, New Valero and Basis from loss,
cost, damage or expense attributable to all obligations, liabilities and
expenses related to suits, actions, claims and investigations pending as of
the closing date, and for additional indemnification, subject to certain
terms, conditions and limitations, with respect to other matters. The
foregoing projections assume that all losses, costs, damages and expenses
incurred by New Valero and Basis following the acquisition will not materially
exceed the amount of such indemnification and that all applicable
indemnification will be provided in accordance with such indemnification
agreement. See "Business and Properties--Litigation--Basis Litigation." The
foregoing projections also assume that capital expenditures and other costs of
environmental compliance at the Basis refineries will not materially exceed
certain amounts which New Valero has budgeted therefor and which it has
factored into its purchase offer for Basis. See "Business and Properties--
Environmental Matters."
OUTLOOK
Refining Business
Over the next few years, light product demand is expected to grow moderately
and refining capacity in the United States is expected to remain tight.
However, the ongoing restructuring of the refining industry to improve
performance as a result of poor margins experienced in recent years will
create an extremely competitive business environment. The Company entered into
several new feedstock arrangements in 1996 and will continue to explore
various opportunities, both domestically and abroad, to diversify its sources
of feedstock supply. The Company expects resid to continue to sell at a
discount to crude oil, but is unable to predict the amount of such discount or
future relationships between the supply of and demand for resid. Domestic
gasoline demand, which increased by 1%, 1.5% and 1.7% in 1996, 1995 and 1994,
respectively, is expected to continue to grow over the next several years due
to slowing gains in fuel efficiency for passenger cars, higher sales of light
trucks and sport-utility vehicles which average fewer miles per gallon than
passenger cars, higher speed limits and an increasing number of miles driven.
The demand for RFG increased in 1996 to over 30% of the total demand for
gasoline in the United States following the implementation of the California
Air Resources Board's "CARB II" gasoline program (gasoline that contains
between zero and 2.7% oxygen by weight is sometimes known as
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"CARB II" gasoline), and may continue to increase if areas of the country
whose ozone emissions exceed permitted levels are permitted and elect to "opt
in" to the RFG program to reduce their emission levels. The demand for
oxygenates, including MTBE, is expected to increase due to the future need to
replace the octane displaced by the worldwide movement to reduce the use of
lead in gasoline, and to growing demand for oxygenated gasolines. Refinery
throughput volumes are expected to benefit from the full year effect of
various unit improvements and enhancements made during 1996 and no significant
unit turnarounds being scheduled in 1997. On January 31, 1997, the Company
announced that its Refining Business would be spun off to stockholders. See
"--The Proposed Transactions" and Note 2 of Valero Energy Corporation and
Subsidiaries Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
As described above, the Refining Business is expected to be spun off as a
separate company to the Company's stockholders. The Refining Business
currently obtains working capital financing from the Company pursuant to the
Company's new $835 million revolving bank credit and letter of credit facility
(which replaces a prior $300 million facility) and certain uncommitted short-
term bank credit lines and uncommitted bank letter of credit facilities
obtained by the Company as described under "--Current Structure." Such new
credit facility has been used to provide financing for the Basis Acquisition
and credit support for the reissue and refunding of the IRBs. At the Time of
Distribution the new credit facility will be assumed by New Valero and will
also be used for other general corporate purposes, including the issuance of
letters of credit and the funding of a dividend payable to Valero pursuant to
the terms of the Distribution Agreement. In addition, a $150 million inventory
purchase agreement is being arranged that is expected to be used to monetize a
portion of the Basis and/or New Valero inventories. Closing of the inventory
purchase agreement is expected to occur during the third quarter of 1997.
On April 16, 1997, the Industrial Development Corporation of the Port of
Corpus Christi issued $98.5 million principal amount of tax-exempt refunding
revenue bonds (the "Refunding Bonds"), in four series, the proceeds of which
were loaned to New Valero and deposited with a trustee so as to defease $90
million principal amount of 10 1/4% refunding revenue bonds and $8.5 million
principal amount of 10 5/8% revenue bonds issued on behalf of New Valero in
1987. The Series 1997A Refunding Bonds have a principal amount of $24.4
million and are due in 2027. The Series 1997B and 1997C Refunding Bonds each
have a principal amount of $32.8 million and mature in 2018. The Series 1997D
Refunding Bonds have a principal amount of $8.5 million and are due in 2009.
The Series 1997A, 1997B and 1997C Refunding Bonds are each subject to a
mandatory sinking fund beginning in 2010. The Refunding Bonds are supported by
an irrevocable, direct-pay letter of credit issued by Bank of Montreal under
the new credit facility described above. The letter of credit is scheduled to
expire April 15, 1998, but is expected to be renewed or replaced. In the event
that the Refunding Bonds were not supported by a qualifying letter of credit
or other qualifying credit enhancement, the Refunding Bonds would be subject
to mandatory tender or acceleration. The Refunding Bonds will initially accrue
interest at a floating rate determined weekly and initially set at 3.85% per
annum with respect to the Series 1997A, 1997B, 1997C Refunding Bonds and 3.95%
with respect to the Series 1997D Refunding Bonds, but such rate may be
converted from time to time at the election of New Valero to a daily, weekly
or commercial paper rate, or to a fixed rate.
The Company believes that New Valero, after the Time of Distribution, will
have sufficient funds from operations, and to the extent necessary, from the
public and private capital markets and bank markets, to fund its ongoing
operating requirements.
Current Structure
Net cash provided by the Company's operating activities increased $120
million to $275.8 million in 1996 compared to 1995 due primarily to the
increase in income described under "--Results of Operations" and to the
changes in current assets and current liabilities detailed in Note 1 of Valero
Energy Corporation and Subsidiaries Notes to Consolidated Financial Statements
under "Statements of Cash Flows." Included in such changes was a substantial
increase in accounts payable in 1996 offset to a large extent by increases in
accounts
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receivable and inventories. Accounts payable and accounts receivable increased
in 1996 due to higher commodity prices and increased purchase and sales
volumes of refined products, natural gas and NGLs. Refining inventories
increased in 1996 due to increased rack and wholesale marketing activities,
while Refining inventories decreased in 1995 resulting from a decrease in
volumes available under crude feedstock contracts, above-normal low-sulphur
heavy oil cracking complex (the "HOC") feedstock inventories at the end of
1994 in anticipation of a turnaround of the HDS Unit in the first quarter of
1995, and above-normal refined product inventories at the end of 1994
attributable to uncertainties related to the implementation of the new RFG
regulations. Prepaid and other expenses decreased in 1996 compared to an
increase in 1995 due to lower commodity deposits and deferrals, while accrued
interest decreased in 1996 compared to an increase in 1995 as a result of
timing differences on interest payments for certain nonbank debt. During 1996,
the Company utilized the cash provided by its operating activities, a portion
of its existing cash balances, proceeds from issuances of Valero Common Stock
related to the Company's employee benefit plans, and proceeds from
dispositions of various nonessential properties to fund capital expenditures
and deferred turnaround and catalyst costs, reduce bank debt, repay principal
on certain outstanding nonbank debt, pay common and preferred stock dividends,
and redeem a portion of its outstanding Cumulative Preferred Stock, $8.50
Series A.
The Company currently maintains an unsecured $835 million revolving bank
credit and letter of credit facility (which replaces a prior $300 million
facility) that is available for general corporate purposes including working
capital needs and letters of credit. Borrowings under this facility bear
interest at either LIBOR plus a margin (inclusive of a facility fee), a Base
Rate or a competitive bid money market rate. The Company is also charged
various fees, including various letter of credit fees. As of December 31,
1996, the Company had approximately $273 million available under the prior
committed bank credit facility for additional borrowings and letters of
credit. The Company also has $190 million of uncommitted short-term bank
credit lines and $170 million of uncommitted bank letter of credit facilities,
of which $108 million and $129 million, respectively, were available as of
December 31, 1996 for additional borrowings and letters of credit. The Company
was in compliance with all covenants contained in its various debt facilities
as of December 31, 1996. See Notes 4 and 5 of Valero Energy Corporation and
Subsidiaries Notes to Consolidated Financial Statements.
In the first quarter of 1995, the SEC declared effective the Company's shelf
registration statement to offer up to $250 million principal amount of
additional debt securities, including Medium-Term Notes, $96.5 million of
which were issued in 1995. The net proceeds were used for general corporate
purposes, including the repayment of existing indebtedness, financing of
capital projects and additions to working capital. See Note 5 of Valero Energy
Corporation and Subsidiaries Notes to Consolidated Financial Statements. No
additional Medium-Term Notes have been issued since June 1995 and none are
expected to be issued in the future. The Company's ratio of earnings to fixed
charges, as computed based on rules promulgated by the SEC, was 1.98 for the
year ended December 31, 1996.
During 1996, the Company expended approximately $165 million for capital
investments, including capital expenditures and deferred turnaround and
catalyst costs. Of this amount, $93 million related to Refining Business
operations while $66 million related to Natural Gas Business operations.
Included in the Refining Business amount was $36 million for turnarounds of
the Refinery's HDS Unit, MTBE Plant, and Hydrocracker and naphtha Reformer
units. For 1997, the Company currently expects to incur approximately $175
million for capital expenditures and deferred turnaround and catalyst costs.
During 1996, the Company entered into a sublease agreement for unused space
in its corporate headquarters office complex. The sublease has a primary term
of 20 years, with the sublessee having an option to terminate the lease after
10 years. The sublessee is scheduled to occupy the premises in phases, with
full occupancy currently expected in 1997. The sublease reduced the Company's
rent expense in 1996 by $.5 million and is expected to reduce future rent
expense by approximately $2.1 million per year once fully occupied.
Dividends on Valero Common Stock are considered quarterly by the Valero
Board and may be paid only when approved by the Valero Board. The current
quarterly dividend rate on Valero Common Stock of $.13 per share has remained
unchanged since the fourth quarter of 1993. Because appropriate levels of
dividends are
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determined by the Valero Board on the basis of earnings and cash flows, the
Company cannot assure the continuation of Valero Common Stock dividends at any
particular level. For information regarding dividends on New Valero Common
Stock, see "Risk Factors--New Valero Dividend Policy."
The Company believes it has sufficient funds from operations, and to the
extent necessary, from the public and private capital markets and bank
markets, to fund its ongoing operating requirements. The Company expects that
to the extent necessary, it can raise additional funds from time to time
through equity or debt financings; however, except for borrowings under bank
credit agreements and as otherwise described herein, the Company has no
specific financing plans as of the date hereof.
The Refining Business has a concentration of customers in the oil refining
industry and spot and retail gasoline markets. The Natural Gas Business has a
concentration of customers in the natural gas transmission and distribution,
and refining and petrochemical industries. These concentrations of customers
may impact the Company's overall exposure to credit risk, either positively or
negatively, since the customers in each specific industry segment may be
similarly affected by changes in economic or other conditions. However, the
Company believes that its portfolio of accounts receivable is sufficiently
diversified to the extent necessary to minimize potential credit risk.
Historically, the Company has not had any significant problems collecting its
accounts receivable. The Company's accounts receivable are not collateralized.
The Company is subject to environmental regulation at the federal, state and
local levels. The Company's capital expenditures for environmental control and
protection for Refining Business operations totalled approximately $5 million
in 1996 and are expected to be approximately $7 million in 1997 (excluding any
expenditures for Basis). These amounts are exclusive of any amounts related to
constructed facilities for which the portion of expenditures relating to
environmental requirements is not determinable. Capital expenditures for
environmental control and protection for Natural Gas Business operations have
not been material to date and are not expected to be material in 1997. The
Refinery was completed in 1984 under more stringent environmental requirements
than many existing United States refineries, which are older and were built
before such environmental regulations were enacted. As a result, the Company
believes that it may be able to more easily comply with present and future
environmental legislation. Within the next several years, all United States
refineries must obtain federal operating permits under provisions of the Clean
Air Act Amendments of 1990 (the "Clean Air Act"). In addition, Clean Air Act
provisions will require many of the Natural Gas Business's gas processing
plants and gas pipeline facilities to obtain new operating permits. However,
the Clean Air Act is not expected to have any significant adverse impact on
the Company's operations and the Company does not anticipate that it will be
necessary to expend any material amounts in addition to those mentioned above
to comply with such legislation. The Company is not aware of any material
environmental remediation costs related to its operations. Accordingly, no
amount has been accrued for any contingent environmental liability.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes new accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The statement is
effective for transactions occurring after December 31, 1996. Based on
information currently known by the Company, this statement will not have a
material effect on the Company's consolidated financial statements.
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<PAGE>
BUSINESS AND PROPERTIES
Except for historical information, the matters discussed in this section are
forward-looking statements that involve risks and uncertainties, including
general economic, business and market conditions, costs or difficulties
related to the establishment of New Valero as an independent entity, increased
competitive pressure in the refining and marketing business and other risks
detailed throughout this Prospectus. These forward-looking statements
represent New Valero's judgment as of the filing date of the New Valero
Registration Statement of which this Prospectus is a part. New Valero
disclaims, however, any intent or obligation to update such statements.
OVERVIEW
New Valero was incorporated in Delaware in 1981. New Valero's principal
business is specialized refining; it owns the Refinery in Corpus Christi ,
Texas, and refines high-sulfur atmospheric resid oil and other refinery
feedstocks into refined products, primarily RFG and petrochemical feedstocks.
New Valero markets refined products principally in Texas and also in the
midwestern, northeastern and southeastern United States.
STRATEGY
Following the Distribution, New Valero expects that its ratio of debt-to-
total capitalization will be substantially reduced from Valero's current 49%
debt. New Valero's objective is to utilize this enhanced financial flexibility
to pursue acquisitions and strategic alliances, and to become a multi-facility
refiner. See "--Acquisition of Basis Petroleum."
New Valero also plans to continue to produce a high percentage of its
refined products as RFG, to focus significant marketing efforts on the RFG and
oxygenates markets and to further expand its product slate to pursue higher
margin products.
New Valero will seek to diversify further its feedstock supply position to
reduce reliance on any single supplier and to benefit from changing feedstock
supply patterns and pricing differentials. New Valero will also seek to
strengthen its marketing and trading operations, and to reduce its per-barrel
operating costs to further enhance operating results.
REFINING OPERATIONS
The Refinery processes high-sulphur atmospheric tower bottoms, a type of
resid, and other feedstocks into a product slate of higher value products,
principally RFG and middle distillates. The Refinery can produce approximately
171,500 barrels per day of refined products, with gasoline and gasoline-
related products comprising approximately 85% of the Refinery's production,
and middle distillates comprising the remainder. The Refinery can produce all
of its gasoline as RFG and all of its diesel fuel as low-sulfur diesel. The
Refinery has substantial flexibility to vary its mix of gasoline products to
meet changing market conditions. For additional information regarding the
Refining Business operating results for the three years ended December 31,
1996, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Refinery's principal operating units include the HDS Unit and the HOC.
The HDS Unit removes sulfur and metals from resid to improve the resid's
subsequent cracking characteristics. The HDS Unit has a capacity of
approximately 70,000 barrels per day. The HOC processes feedstock primarily
from the HDS Unit and has a capacity of approximately 74,000 barrels per day.
The Refinery's other significant units include a 36,000 barrel-per-day
"Hydrocracker" (which produces reformer feed naphtha from the Refinery's gas
oil and distillate streams), a 36,000 barrel-per-day continuous catalyst
regeneration "Reformer" (which produces "reformate," a low vapor pressure
high-octane gasoline blendstock, from the Refinery's naphtha streams), a
31,000 barrel-per-day reformate splitter (which separates a benzene
concentrate stream from reformate produced at the Reformer), a 30,000 barrel-
per-day crude unit, and a 24,000 barrel-per-day vacuum unit.
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Also located at the Refinery are New Valero's MTBE Plant and MTBE/TAME Unit
(the "MTBE/TAME Unit"). The MTBE Plant can produce approximately 17,000
barrels per day of MTBE from butane and methanol feedstocks. MTBE is an
oxygen-rich, high-octane gasoline blendstock produced by reacting methanol and
isobutylene, and is used to manufacture oxygenated and reformulated gasolines.
New Valero can blend the MTBE produced at the Refinery into its own gasoline
production or sell the MTBE separately. The Refinery's MTBE/TAME Unit converts
streams produced by the HOC into MTBE and tertiary amyl methyl ether ("TAME").
TAME, like MTBE, is an oxygen-rich, high-octane gasoline blendstock. The MTBE
Plant and MTBE/TAME Unit enable New Valero to produce approximately 22,500
barrels per day of total oxygenates. Substantially all of the methanol
feedstocks required for the production of oxygenates at the Refinery can
normally be provided by a methanol plant in Clear Lake, Texas owned by a joint
venture between New Valero and Hoechst Celanese Chemical Group, Inc. (the
"Methanol Plant"). The Methanol Plant can produce approximately 13,000 barrels
per day of methanol.
In January 1997, New Valero placed into service a xylene fractionation
facility ("Xylene Unit") which recovers xylene from the Reformer's reformate
stream. The fractionated xylene may be sold into the petrochemical feedstock
market for use in the production of paraxylene. The Xylene Unit is designed to
recover a mixed xylene stream of approximately 6,500 barrels per day. The MTBE
Plant, the MTBE/TAME Unit, the Xylene Unit and related facilities diversify
New Valero's refining operations, enabling the Refining Business to pursue the
higher margin product markets.
In 1996, New Valero completed scheduled turnarounds on its HDS Unit,
Hydrocracker, Reformer, and MTBE Plant. The capacity of the MTBE Plant was
increased by approximately 1,500 barrels per day. During the second quarter of
1996, New Valero experienced unscheduled down time at the Refinery because of
two power outages. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Refinery's other principal refining
units operated during 1996 without significant unscheduled down time. However,
the Methanol Plant suffered an explosion in early December 1996. There were no
injuries, but New Valero's share of repair costs is estimated to be $2.5
million. The Methanol Plant resumed operations in late February 1997. The MTBE
Plant was down for nine days in January 1997 to replace a catalyst and the HOC
Unit was down for approximately two weeks in the second quarter of 1997 for
unscheduled maintenance. During 1997, the HDS Unit is scheduled for a
maintenance turnaround and catalyst change in the fourth quarter. The crude
unit is scheduled to be down for approximately 14 days in the second quarter
of 1997 for a maintenance turnaround.
SALES
Set forth below is a summary of the Refining Business' refining and
marketing throughput volumes per day, average throughput margin per barrel and
sales volumes per day for the three years ended December 31, 1996. Average
throughput margin per barrel is computed by subtracting total direct product
cost of sales from product sales revenues and dividing the result by
throughput volumes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Throughput volumes (Mbbls per day)............... 170 160 146
Average throughput margin per barrel............. $ 5.29 $ 6.25 $ 5.36
Sales volumes (Mbbls per day).................... 291 231(1) 140
</TABLE>
- --------
(1) Revised for 1995 to include sales volumes related to certain refining and
marketing trading activities previously classified as a reduction of cost
of sales.
New Valero sells refined products under term contracts as well as on a spot
and truck rack basis. A "truck rack sale" is a sale to a customer that
provides trucks to take delivery at loading facilities. In 1996, term, spot
and truck rack sales volumes accounted for approximately 35%, 49% and 16%,
respectively, of total gasoline and distillate sales. Sales of New Valero's
refined products under term contracts are made principally to large oil
companies. Spot sales of New Valero's refined products are made to large oil
companies and gasoline distributors. The principal purchasers of New Valero's
products from truck racks have been wholesalers and
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jobbers in the eastern and midwestern United States. New Valero's products are
transported through common-carrier pipelines, barges and tankers.
Interconnects with common-carrier pipelines give the Refining Business the
flexibility to sell products to the northeastern, midwestern or southeastern
United States.
Approximately 50% of New Valero's RFG production is under contract to supply
wholesale gasoline marketers in Texas at market-related prices; another 17% of
New Valero's RFG production is under contract to gasoline marketers in the
northeast United States, which is currently the largest RFG market in the
United States. In 1996, New Valero also supplied approximately 1.5 million
barrels of CARB II gasoline in the West Coast markets in connection with the
commencement of the California Air Resources Board's gasoline program. See "--
Factors Affecting Operating Results."
FEEDSTOCK SUPPLY
The predominant feedstock for the Refinery is resid produced at refineries
outside the United States. Most of the large refineries in the United States
are able to convert internally produced resid into higher value end-products.
Many overseas refineries, however, are less sophisticated, process smaller
portion of resid internally, and, therefore, produce larger volumes of resid
for sale. As a result, New Valero acquires and expects to acquire most of its
resid in international markets. These supplies are loaded aboard chartered
vessels and are subject to the usual maritime hazards. New Valero maintains
insurance on its feedstock cargos.
The Refining Business has entered into several term agreements for the
supply of approximately 58,000 barrels per day of resid feedstocks at market-
related prices which provide for approximately 70% of New Valero's estimated
resid feedstock requirements for 1997. These supply agreements include an
agreement with the Saudi Arabian Oil Company to provide an average of 36,000
barrels per day of resid from its Ras Tanura refinery to New Valero through
mid-1998. New Valero believes that if any of its existing feedstock
arrangements were interrupted or terminated, supplies of resid could be
obtained from other sources or on the open market; however, the Refining
Business could be required to incur higher feedstock costs or substitute other
types of resid, thereby producing less favorable operating results. Over the
past few years, demand for the type of resid feedstock now processed at the
Refinery has increased in relation to the availability of supply. See "--
Factors Affecting Operating Results." New Valero also recently entered into
term contracts for the supply of crude oil feedstocks for the Refinery's crude
unit, including a contract for approximately 20,000 barrels per day of Daqing
sweet crude oil for the first six months of 1997, and a contract for
approximately 8,000 barrels per day of domestically produced crude extending
through 1997. The remainder of the Refinery's resid and crude feedstocks are
purchased at market-based prices under short-term contracts.
In connection with the Distribution, New Valero entered into several
contracts with its former affiliates, including a 10-year term contract under
which a former affiliate is to supply substantially all of the butane and
methanol feedstocks currently required to operate the MTBE Plant. New Valero
also entered into a 10-year term contract whereby another former affiliate
supplies at least one-half of the Methanol Plant's natural gas feedstock
requirements.
New Valero owns feedstock and product storage facilities with a capacity of
approximately 6.9 million barrels. Approximately 4.4 million barrels of
storage capacity are heated tanks for heavy feedstocks. New Valero also leases
fuel oil and refined product storage facilities in various locations,
including approximately 600,000 barrels of gasoline storage in the Houston,
Texas area. New Valero also owns dock facilities at the Refinery that can
unload simultaneously two 150,000 dead-weight ton capacity ships and can dock
larger crude carriers after partial unloading.
ACQUISITION OF BASIS PETROLEUM
On April 22, 1997 Valero and Salomon entered into a stock purchase agreement
pursuant to which Valero agreed, subject to certain terms and conditions, to
acquire the stock of Basis from Salomon for $285 million, plus approximately
$200 million for the value of inventories and other working capital. In
addition, the stock
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purchase agreement provides for the seller to receive up to 10 additional
payments following each anniversary date of the closing of the acquisition.
These annual earn-out payments would be based on the difference between a
stated base refining "crack spread" and the theoretical spread computed using
actual average quoted prices, and calculated using a nominal average annual
throughput of 100 million barrels. These payments are limited to $35 million
in any year and $200 million in the aggregate. Any such participation
payments, if made, will be accounted for as an additional cost of the
acquisition of Basis by Valero and will be depreciated over the remaining
lives of the assets to which the additional cost is allocated. The purchase
price was paid, in part, with 3,429,796 shares of Valero Common Stock having a
fair market value of $120 million, with the remainder paid in cash. Valero has
assumed that approximately $150 million of the cash consideration can be
financed through an inventory purchase agreement which is expected to be
implemented in the third quarter of 1997; the remaining portion of the cash
consideration was borrowed under credit facilities. Prior to the Distribution,
Valero will transfer the stock of Basis to New Valero.
Basis owns and operates three petroleum refineries with a total crude oil
processing capacity of about 310,000 BPD, including a 160,000 BPD facility at
Texas City, Texas; an 85,000 barrel per day facility in Houston, Texas; and a
65,000 barrel per day facility in Krotz Springs, Louisiana. The three
refineries currently are projected to produce approximately 330,000 BPD of
refined products, including about 130,000 BPD of gasoline, about 130,000 BPD
of distillates and jet fuel, and approximately 20,000 BPD of chemical grade
propylene and LPGs.
The Texas City and Houston refineries are fully integrated merchant refining
facilities capable of receiving feedstocks and shipping refined products via
ocean-going tankers. In addition to crude oil and vacuum units, the Texas City
facility includes, among other processing units, a 48,000 BPD fluid catalytic
cracking unit ("FCC Unit") (which further processes gas oil feedstock from the
crude and vacuum units), a 22,000 BPD naphtha Reformer, a ROSE Unit (which
recovers deasphalted oil for feed to the FCC Unit from vacuum tower bottoms)
and a Residfiner (which improves the cracking characteristics of the residual
oil feed for the FCC Unit). The Texas City refinery was upgraded in the third
quarter of 1996 through the addition of the Residfiner and ROSE Units, as well
as sour crude oil conversion capacity, tankage and various other improvements.
The Houston facility includes a 61,000 BPD FCC Unit and a 17,000 BPD ROSE
Unit. The Krotz Springs, Louisiana facility includes a 30,000 BPD FCC Unit and
a 12,000 BPD Reformer. The Krotz Springs facility has access to the Colonial
Pipeline, a major interstate refined product pipeline. Basis is a merchant
refiner and markets refined products in approximately 155 markets in 36
states. Basis currently employs approximately 1,275 persons; the workforce is
not unionized.
The stock purchase agreement contains provisions whereby Salomon will
indemnify Valero, New Valero and Basis with respect to suits, actions, claims
and investigations pending at the time of the acquisition. Subject to certain
terms, conditions and limitations, Salomon will also provide indemnification
for certain other matters arising prior to the closing and Valero and New
Valero will provide indemnification for certain matters arising subsequent to
the closing. The closing documentation contains, among other things,
standstill provisions limiting sales of Valero or New Valero stock acquired by
Salomon, provisions granting to Valero certain rights of first refusal with
respect to sales of Valero or New Valero stock by Salomon and provisions
granting certain registration rights to Salomon if the Merger is not
consummated.
For certain historical pro forma financial information with respect to
Basis, see "New Valero Unaudited Pro Forma Condensed Combined Financial
Statements."
For a presentation of certain forward-looking information, including certain
projections and related assumptions, with respect to the Basis Acquisition,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Basis Petroleum."
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FACTORS AFFECTING OPERATING RESULTS
The Refining Business' refining and marketing operating results are affected
by the relationship between refined product prices and resid prices, which in
turn are largely determined by market forces. The price of resid is affected
by the relationship between the growth in the demand for fuel oil and other
products (which increases crude oil demand, thereby increasing the supply of
resid when more crude oil is processed) and worldwide additions to resid
conversion capacity (which has the effect of reducing the available supply of
resid). The crude oil and refined products markets typically experience
periods of extreme price volatility. During such periods, disproportionate
changes in the prices of refined products and resid usually occur. The
potential impact of changing crude oil and refined product prices on New
Valero's results of operations is further affected by the fact that New Valero
generally buys its resid feedstock approximately 45 to 50 days prior to
processing it in the Refinery.
Because the Refinery is more complex than many conventional refineries and
is designed principally to process resid rather than crude oil, its operating
costs per barrel are generally higher than those of most conventional
refineries. But because resid usually sells at a large enough discount to
crude oil, New Valero has been generally able to recover its higher operating
costs and generate higher margins than many conventional refiners that use
crude oil as their principal feedstock. Moreover, through recent improvements
in technology, the Refinery has improved its ability to process different
types of feedstocks, including synthetic domestic heavy oil blends that have
been successfully processed in the HDS Unit.
The Saudi Arabian Oil Company has advised the Company that it plans to begin
operation of certain new resid conversion units in 1998 at the Ras Tanura
refining complex in Saudi Arabia. As a result, the production of resid at Ras
Tanura for export would be significantly reduced. The resid feedstock
purchased by New Valero from the Saudi Arabian Oil Company is produced at Ras
Tanura. Accordingly, a reduction in resid production at Ras Tanura could
adversely affect the price or availability of resid feedstocks in the future.
New Valero expects resid to continue to sell at a discount to crude oil, but
is unable to predict future relationships between the supply of and demand for
resid. Installation of additional refinery crude distillation and upgrading
facilities, price volatility, international political developments and other
factors beyond the control of New Valero are likely to continue to play an
important role in refining industry economics.
Because the Refinery is able to manufacture all of its gasoline as RFG and
can produce approximately 22,500 barrels per day of total oxygenates, certain
federal and state clean-fuels programs significantly affect the operations of
the Refining Business and the markets in which New Valero sells its refined
products. First, the EPA's oxygenated fuel program under the Clean Air Act
requires for certain winter months that areas designated nonattainment for
carbon monoxide use gasoline that contains a prescribed amount of clean
burning oxygenates./1/ Second, the EPA's RFG program under the Clean Air Act
is required in areas designated "extreme" or "severe" nonattainment for ozone.
In addition to these nonattainment areas, approximately 43 of the 87 areas
that were designated as "serious," "moderate," or "marginal" nonattainment for
ozone also "opted in" to the RFG program to decrease their emissions of
hydrocarbons and toxic pollutants./1/ In 1996, California adopted a statewide,
year-round program requiring the use of gasoline that meets more restrictive
emissions specifications than the federally mandated RFG. Under the California
gasoline program, areas not subject to either the federal oxygenated fuels
program or the federal RFG program may use CARB II gasoline so long as the
gasoline meets the California emissions standards.
- --------
(1) "Oxygenates" are liquid hydrocarbon compounds containing oxygen. Gasoline
that contains oxygenates usually has lower carbon monoxide emissions than
conventional gasoline. The Clean Air Act and certain state laws require
oxygenated gasoline to have a minimum oxygen content of 2.7% by weight. As
of September 1996, only 31 of the original 42 areas designated as
nonattainment for carbon monoxide remain designated as nonattainment. As
areas have come into "attainment," they generally have left the oxygenated
fuels program. However, Minnesota elected to use oxygenated gasoline
statewide and year-round beginning in 1997, and other states are
considering similar requirements.
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MTBE margins are affected by the price of the MTBE and its feedstocks,
methanol and butane, as well as the demand for RFG, oxygenated gasoline and
premium gasoline. The worldwide movement to reduce lead in gasoline is
expected to increase worldwide demand for oxygenates to replace the octane
provided by lead-based compounds. The general United States growth in gasoline
demand as well as additional "opt-ins" by certain areas into the EPA clean
fuels programs are expected to continue to grow the demand for MTBE.
COMPETITION
The refining industry is highly competitive with respect to both supply and
markets. New Valero competes with numerous other companies for available
supplies of resid and other feedstocks and for outlets for its refined
products. New Valero obtains all of its resid feedstock from unaffiliated
sources. Many of New Valero's competitors obtain a significant portion of
their feedstocks from company-owned production and are able to dispose of
refined products at their own retail outlets. New Valero does not have retail
gasoline operations. Competitors that have their own production or retail
outlets (and brand-name recognition) may be able to offset losses from
refining operations with profits from producing or retailing operations, and
may be better positioned than the Refining Business to withstand periods of
depressed refining margins or feedstock shortages.
Because the Refinery was completed in 1984, it was built under more
stringent environmental requirements than many existing refineries. The
Refinery currently meets EPA emissions standards requiring the use of "best
available control technology," and is located in an area currently designated
"attainment" for air quality. Accordingly, New Valero expects to be able to
comply with the Clean Air Act and future environmental legislation more easily
than older refineries, and will not be required to spend significant
additional capital for environmental compliance. In 1996, the Corpus Christi,
Texas, area was approved as a "flexible attainment region" ("FAR") by the EPA
and the Texas Natural Resource Conservation Commission ("TNRCC"). Under the
Clean Air Act, the FAR designation will allow local officials to design and
implement an ozone prevention strategy customized for the community. This
designation also prevents the EPA from designating the Corpus Christi area as
"nonattainment" for a five-year period while agreed-upon control strategies
are being initiated to reduce ozone formation. The FAR designation should
provide greater flexibility with respect to possible future expansion projects
at the Refinery.
New Valero produces enough oxygenates to blend all of its gasoline as RFG
and to sell additional quantities of oxygenates to third parties who require
oxygenates for blending. RFG generally sells at a premium over conventional
gasoline. Most of the United States refining industry uses the conventional
"3-2-1 crack spread" (which assumes the input of three parts of WTI and the
output of two parts gasoline and one part diesel) as an approximation for
gross margins; however, the Refinery produces predominately premium products
such as RFG and low-sulfur diesel and also produces a higher percentage of its
refined products as gasoline. Thus, New Valero's "85-15 clean fuels crack
spread" (85% RFG, 15% low-sulfur diesel) has provided a wider margin than the
typical crack spread experienced by a conventional refiner.
ENVIRONMENTAL MATTERS
New Valero's operations are subject to environmental regulation by federal,
state and local authorities, including the EPA and the TNRCC and the Texas
Railroad Commission. The regulatory requirements relate primarily to water and
storm water discharges, waste management and air pollution control measures.
In 1996, capital expenditures for the Refining Business attributable to
compliance with environmental regulations were approximately $5 million and
are currently estimated to be $7 million for 1997 (excluding any expenditures
for Basis). These amounts are exclusive of any amounts related to constructed
facilities for which the portion of expenditures relating to compliance with
environmental regulations is not determinable.
EMPLOYEES
As of the date of Distribution, New Valero is expected to have approximately
770 employees, not including employees of Basis.
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PROPERTIES
New Valero's properties include the Refinery and related facilities all
located in Texas. See "Refining Operations," which includes detailed
information regarding properties of the Refining Business. New Valero believes
that its facilities are generally adequate for their respective operations,
and that its facilities are maintained in a good state of repair. Valero is
the lessee under a number of cancelable and noncancelable leases for certain
real properties, including the Xylene Plant and certain storage facilities.
See Note 14 of Valero Energy Corporation and Subsidiaries Notes to
Consolidated Financial Statements. As a result of the Basis Acquisition, the
properties of New Valero will also include the three Basis refineries
described under "--Acquisition of Basis Petroleum."
LITIGATION
Javelina Company Litigation. Valero Javelina Company owns a 20% general
partner interest in Javelina. Javelina has been named as a defendant in 11
lawsuits filed since 1993 in state district courts in Nueces County, and Duval
County, Texas. Nine of the suits include as defendants other companies that
own refineries or other industrial facilities in Nueces County. These suits
were brought by a number of plaintiffs who reside in neighborhoods near the
facilities. The plaintiffs claim injuries relating to alleged exposure to
toxic chemicals, and generally claim that the defendants were negligent,
grossly negligent and committed trespass. The plaintiffs claim personal injury
and property damages resulting from soil and ground water contamination and
air pollution allegedly caused by the operations of the defendants. The
plaintiffs seek an unspecified amount of actual and punitive damages. The
remaining two suits were brought by plaintiffs who either live or have
businesses near the Javelina plant. The plaintiffs in these suits allege
claims similar to those described above and seek unspecified actual and
punitive damages.
Teco Pipeline Company v. Valero Energy Corporation, et al., 215th State
District Court, Harris County, Texas (filed April 24, 1996). New Valero's
former parent company, Valero, and certain Valero subsidiaries have been sued
by Teco Pipeline Company ("Teco") regarding the operation of the 340-mile West
Texas pipeline in which a subsidiary of Valero holds a 50% undivided interest.
In 1985, a subsidiary of Valero sold a 50% undivided interest in the pipeline
and entered into a joint venture through an ownership agreement and an
operating agreement, each dated February 28, 1985, with the purchaser of the
interest. In 1988, Teco succeeded to that purchaser's 50% interest. A
subsidiary of Valero has at all times been the operator of the pipeline.
Notwithstanding the written ownership and operating agreements, the plaintiff
alleges that a separate, unwritten partnership agreement exists, and that the
defendants have exercised improper dominion over such alleged partnership's
affairs. The plaintiff also alleges that the defendants acted in bad faith by
negatively affecting the economics of the joint venture in order to provide
financial advantages to facilities or entities owned by the defendants and by
allegedly usurping for the defendants own benefit certain opportunities
available to the joint venture. The plaintiff asserts causes of action for
breach of fiduciary duty, fraud, tortious interference with business
relationships, and other claims, and seeks unquantified actual and punitive
damages. Valero's motion to compel arbitration was denied, but has been
appealed. Valero has filed a counterclaim alleging that the plaintiff breached
its own obligations to the joint venture and jeopardized the economic and
operational viability of the pipeline by its actions; Valero is seeking
unquantified actual and punitive damages. Pursuant to the Distribution
Agreement, New Valero has agreed to indemnify and hold harmless Valero to the
extent of (i) 50% of the amount of any final judgment or settlement amount not
in excess of $30 million, and (ii) 100% of that part of any final judgment or
settlement amount in excess of $30 million.
Other. New Valero is also a party to additional claims and legal proceedings
arising in the ordinary course of business. Except as noted, many of the
foregoing matters are in preliminary stages, involve complex issues of law and
fact and may proceed for protracted periods of time. Based upon a review of
the petitions in the above matters, New Valero believes that many of such
petitions contain questionable allegations and that there are numerous
meritorious defenses. New Valero believes it is unlikely that the final
outcome of any of the claims or proceedings to which New Valero is a party,
including those described above, would have a material adverse effect on New
Valero's financial statements; however, due to the inherent uncertainty of
litigation, the range of
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<PAGE>
possible loss, if any, cannot be estimated with a reasonable degree of
precision and there can be no assurance that the resolution of any particular
claim or proceeding would not have an adverse effect on New Valero's results
of operations for the interim period in which such resolution occurred.
Basis Litigation. Basis is a defendant in numerous lawsuits brought by
present or former employees of Basis, by employees of Basis' customers or
contractors, or by other persons based on negligence, gross negligence,
products liability, strict liability, breach of warranty and other theories of
recovery and claiming injuries, including wrongful death, resulting from
exposure to asbestos, benzene and other allegedly toxic or carcinogenic
compounds allegedly processed, used, manufactured, distributed or sold by
Basis or its predecessors. Approximately ten of the lawsuits involve class or
other actions involving numerous plaintiffs and defendants, while the
remaining actions have individual plaintiffs and involve only Basis or a
limited group of defendants. In most such cases, discovery is underway and
trial dates have not been set.
In addition to the foregoing matters, Basis is a defendant in a lawsuit,
Friends of the Earth, Inc. v. Phibro Energy USA, Inc., filed in the United
States District Court for the Southern District of Texas (filed June 1994),
alleging, among other things, that Basis has violated the terms of its
National Pollutant Discharge Elimination System permit for wastewater
discharge at its Houston, Texas refinery. Although the District Court granted
Basis a summary judgment, the United States Court of Appeals for the Fifth
Circuit reversed the summary judgment and remanded the case to the trial court
for further discovery. The case is currently stayed by mutual agreement
pending the decision of the United States Court of Appeals for the Fifth
Circuit in a similar case (Friends of the Earth v. Chevron Chemical Co., Inc.)
in which the lower court granted summary judgment dismissing the case for lack
of standing by the plaintiffs.
Basis is also a defendant in a lawsuit, Amoco Chemical Company, et al. v.
United States of America, et al., pending in the United States District Court
for the Southern District of Texas (served May 1996), which is a CERCLA cost
recovery action related to the Tex-Tin "superfund" site. Such site is not
owned by Basis, and Basis has advised New Valero that Basis has not disposed
of any material at the site. However, Basis has been identified as a
"generator defendant" with respect to such site, as the successor to the
previous refinery owner. Basis may potentially be named as a defendant or
"potentially responsible party" in other similar pending or threatened
superfund-related actions. Basis is also a defendant in City of Houston v.
Phibro Energy, USA, Inc., filed in the 11th Judicial District Court, Harris
County, Texas (filed December 20, 1995) involving alleged Texas Clean Air Act
violations related to allegedly excessive SO2 emissions. Agreement among the
various parties has been reached to settle the City of Houston action on terms
and conditions not material to Basis; however, such settlement is not yet
final.
Basis has also received TNRCC notices of violation ("NOV") and/or federal
Environmental Protection Agency ("EPA") NOVs or administrative orders with
respect to environmental matters at each of its three refineries, including an
April 10, 1997 notice of intention to file civil suit for alleged violations
of the New Source Performance Standards under the Clean Air Act at the Texas
City, Texas refinery. Certain of such notices and orders may need to be
addressed through operational and capital improvements, and may involve the
assessment of substantial monetary penalties.
Basis is also a plaintiff in a lawsuit, Phibro Energy USA, Inc. v. Belmont
Contractors, Inc. et al., pending in the 190th Judicial District Court, Harris
County, Texas (filed March 26, 1996) and alleging generally that through a
bribery and kickback scheme, defendants destroyed plaintiff's independent
bargaining position with respect to construction work performed by defendants,
creating causes of action for fraud, tortious interference with contract,
breach of fiduciary duty, breach of contract and negligent misrepresentation.
Defendant Belmont has previously asserted in a separate action against Basis
causes of action for breach of contract and quantum meruit and various
construction claims aggregating approximately $25 million; while Belmont's
original suit has been abated, these claims are expected to be asserted in the
Harris County litigation.
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Basis is also a party to various other lawsuits arising in the ordinary
course of its business. The various lawsuits referred to herein seek actual
and punitive damages which, in many cases, are unspecified but which total
several hundreds of millions of dollars, together, in certain cases, with
demands for injunctive relief. In certain of the matters cited above,
including the cited TNRCC and EPA matters, Basis could potentially be
adversely affected through: required reductions in emissions or discharges;
required additions and improvements to refinery controls or other equipment;
required reductions in permit limits or refinery throughput; and/or fines and
penalties. Additionally, although Valero and New Valero have conducted a due
diligence investigation of Basis prior to the closing of the purchase, the
scope of such investigation, particularly in light of the volume of
environmental, litigation and other matters to be investigated, has
necessarily been limited. The stock purchase agreement provides for
indemnification from the seller with respect to suits, actions, claims and
investigations pending at the time of the acquisition and for additional
indemnification, subject to certain terms, conditions and limitations, with
respect to other matters. However, there can be no assurance that other
material matters, not identified or fully investigated in due diligence, will
not subsequently be identified or that the matters heretofore identified will
not prove to be more significant than currently expected.
Many of the lawsuits in which Basis is involved, including certain of those
mentioned above, are in preliminary stages, involve complex issues of law and
fact and may proceed for a protracted period of time. Based upon a preliminary
review of Basis' files in connection with its due diligence investigation of
Basis, and Basis' representations and warranties in the Basis purchase
agreement, New Valero believes that many of such petitions contain
questionable allegations and that there are numerous meritorious defenses
which Basis can raise. As noted above, Valero and New Valero have considered
the possible need for capital expenditures related to environmental matters in
developing their offer to purchase Basis. Particularly in light of the
indemnification provided to Valero, New Valero and Basis by Salomon pursuant
to the stock purchase agreement, New Valero believes it is unlikely that the
final outcome of any of the claims or proceedings to which Basis is a party at
the time of the closing of the purchase of Basis, including those described
above, would have a material adverse effect on New Valero's financial
statements; however, due to the inherent uncertainty of litigation, the range
of possible loss, if any, that may be sustained by Basis cannot be estimated
with a reasonable degree of precision and there can be no assurance that the
resolution of any particular claim or proceeding could not have an adverse
effect on Basis' and New Valero's results of operations for the interim period
in which such resolution occurred.
DESCRIPTION OF CERTAIN NEW VALERO INDEBTEDNESS
New Valero currently obtains working capital financing from Valero pursuant
to Valero's committed revolving credit and letter of credit facility and
certain short-term uncommitted bank lines and letter of credit facilities
maintained by Valero. Valero and New Valero have arranged an $835 million
committed revolving credit and letter of credit facility, which became
effective May 1, 1997. The new facility has provided financing for the Basis
Acquisition, credit support for the reissue and refunding of the Refunding
Bonds (hereafter defined), credit support for a planned issuance of $25
million of tax-exempt industrial revenue bonds for Basis, and will provide
financing for other general corporate purposes, including the issuance of
letters of credit, the funding of a $210 million dividend (as such amount may
be increased or decreased in connection with the repayment of the intercompany
note, see "Agreements Between Valero and New Valero") payable to Valero
immediately prior to the Distribution pursuant to the terms of the
Distribution Agreement, and, if necessary, up to $175 million for the
redemption of the Convertible Preferred Stock. Under the new $835 million
revolving credit and letter of credit facility, availability is limited to
$600 million ($775 million if necessary to fund redemption of the Convertible
Preferred Stock) prior to the Distribution. At the time of the Distribution,
the new credit facility will be assumed by New Valero and Valero would be
released from any obligations thereunder. In addition, a $150 million
inventory purchase agreement is being arranged that is expected to be used to
monetize a portion of the Basis and/or New Valero inventories. The bank credit
facility has (and inventory purchase agreement is expected to have) a term of
five years. The bank credit facility reduces by $150 million at the end of
each of the third and fourth years. In addition, the amount of the facility
would be reduced by the amount of cash proceeds realized from certain assets
sales and issuances of debt, and by 75% of the cash proceeds from certain
issuances of equity
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securities. Borrowings under the new revolving bank credit facility will bear
interest annually at the rate of (i) LIBOR plus a margin, or (ii) a Base Rate,
or (iii) a money market rate determined by auction. In addition, various fees
and expenses, including a facility fee, a letter of credit issuance fee and a
fee based on letters of credit outstanding are payable under the facility. The
interest margins and fees described in this paragraph will fluctuate based
upon the credit ratings assigned from time to time to New Valero's long-term
debt. The credit facility contains various covenants that relate to or limit,
among other things, and subject to certain exceptions, liens, subsidiary debt,
investments, loans and advances, consolidations, mergers and transfers of
assets, transactions with affiliates and lease payments. The credit facility
also contains certain financial covenants, including a minimum fixed charge
coverage ratio, a maximum permitted debt-to-capitalization ratio, a minimum
net worth test and a requirement that the Company maintain certain interest
cap hedging facilities. The credit facility also limits the amount of certain
restricted payments, including dividends on, or repurchases of, common stock
of New Valero, to $22 million (or, under certain circumstances, $15 million)
during the period prior to April 30, 1998, and, during any 12-month period
ending April 30 in any subsequent year, to the sum of 25% (15% under certain
circumstances) of consolidated net income of New Valero for the four
consecutive fiscal quarters ending with the preceding March 31, plus such
portion of such $22 million (or, if applicable, $15 million) amount not
utilized in any prior period. Except for any unused portion of such $22
million (or $15 million) amount, amounts available to be paid but not paid in
any 12-month period may not be carried forward to the subsequent 12-month
period. The new credit facility is unsecured; however, following the
Distribution, each of the principal subsidiaries of New Valero will guaranty
the obligations of New Valero under the new credit facility. New Valero may
also obtain short-term uncommitted revolving credit or letter of credit
facilities, the lenders or issuers, amounts, terms and conditions of which
cannot currently be determined.
On April 16, 1997, the Industrial Development Corporation of the Port of
Corpus Christi issued $98.5 million principal amount of tax-exempt refunding
revenue bonds (the "Refunding Bonds"), in four series, the proceeds of which
were loaned to New Valero and deposited with a trustee so as to defease $90
million principal amount of 10 1/4% refunding revenue bonds and $8.5 million
principal amount of 10 5/8% revenue bonds issued on behalf of New Valero in
1987. The Series 1997A Refunding Bonds have a principal amount of $24.4
million and are due in 2027. The Series 1997B and 1997C Refunding Bonds each
have a principal amount of $32.8 million and mature in 2018. The Series 1997D
Refunding Bonds have a principal amount of $8.5 million and are due in 2009.
The Series 1997A, 1997B and 1997C Refunding Bonds are each subject to a
mandatory sinking fund beginning in 2010. The Refunding Bonds are supported by
an irrevocable, direct-pay letter of credit issued by Bank of Montreal under
the new credit facility described above. The letter of credit is scheduled to
expire April 15, 1998, but is expected to be renewed or replaced. In the event
that the Refunding Bonds were not supported by a qualifying letter of credit
or other qualifying credit enhancement, the Refunding Bonds would be subject
to mandatory tender or acceleration. The Refunding Bonds will initially accrue
interest at a floating rate determined weekly and initially set at 3.85% per
annum with respect to the Series 1997A, 1997B, 1997C Refunding Bonds and 3.95%
with respect to the Series 1997D Refunding Bonds, but such rate may be
converted from time to time at the election of New Valero to a daily, weekly
or commercial paper rate, or to a fixed rate.
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MANAGEMENT
DIRECTORS OF NEW VALERO
Pursuant to the New Valero Certificate and the New Valero By-laws as
expected to be adopted prior to the Distribution, the business of New Valero
will be managed by or under the direction of the New Valero Board. The New
Valero Board will conduct its business through meetings of the New Valero
Board and its committees. Pursuant to the New Valero Certificate, the New
Valero Board has standing Audit, Compensation and Executive Committees. When
deemed necessary or advisable, the New Valero Board may also form from its
members a Nominating Committee to consider and recommend candidates for
election to the New Valero Board. The standing committees of the New Valero
Board are described below. The New Valero Certificate requires the New Valero
Board to be divided into Class I, Class II and Class III directors, with each
class serving a staggered three-year term. At the Time of Distribution, the
size of the New Valero Board is expected to be set at eight members and is
expected to be divided into two Class I, three Class II and three Class III
directors.
The following table sets forth information as to the individuals who will
serve as directors of New Valero following the Distribution, their class
membership and their original terms (the directors' ages are as of December
31, 1996). Initially, following the Distribution, the New Valero Board will
consist of the individuals who currently serve as directors of Valero (other
than Mr. Dudley, who will retire as of the annual meeting of stockholders as
described in the Proxy Statement-Prospectus). Mr. Greehey will serve as the
initial Chairman of the New Valero Board. All of the individuals that
currently serve as directors of Valero will cease to be directors of Valero as
of or prior to the Effective Time.
The New Valero By-laws provide that no individual may stand for election or
re-election as a director after having attained the age of 70 (except that, in
the case of individuals who served as directors of Valero prior to February
25, 1993, such age is 72).
<TABLE>
<CAPTION>
AGE
EXECUTIVE AS OF
OFFICER OR DECEMBER INITIAL
POSITION(S) HELD DIRECTOR OF 31, TERM DIRECTOR
NAME WITH VALERO VALERO SINCE 1996 EXPIRES CLASS
---- ----------------------------------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
Edward C. Benninger..... Director, President 1979 54 2000 III
Ronald K. Calgaard...... Director 1996 59 1999 II
Robert G. Dettmer....... Director 1991 65 2000 III
Ruben M. Escobedo....... Director 1994 59 1998 I
William E. Greehey...... Director, Chairman of the Board and 1979 60 1998 I
Chief Executive Officer
James L. Johnson........ Director 1991 69 2000 III
Lowell H. Lebermann..... Director 1986 57 1998 I
Susan Kaufman Purcell... Director 1994 54 1999 II
</TABLE>
Mr. Benninger has served as a director of Valero since 1990. He was elected
President and Chief Financial Officer of Valero in 1996. He had served as
Executive Vice President of Valero since 1989, and previously served as Chief
Operating Officer of Valero Natural Gas Company from 1992 to 1995. He has
served in various other capacities with Valero since 1975. Mr. Benninger will
cease to be an officer of Valero as of or prior to the Effective Time.
Dr. Calgaard has been a director of Valero since 1996. He has served as
President of Trinity University, San Antonio, Texas since 1979. Dr. Calgaard
previously served as a director of Valero Natural Gas Company from 1987 until
1994.
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Mr. Dettmer was elected as a director of Valero in 1991. He retired from
PepsiCo, Inc. in 1996 after serving as Executive Vice President and Chief
Financial Officer since 1986.
Mr. Escobedo was elected as a director of Valero in 1994. He has been with
his own accounting firm, Ruben Escobedo & Company, CPAs, in San Antonio, Texas
since its formation in 1977. Mr. Escobedo also serves as a director of
Cullen/Frost Bankers, Inc. and previously served as a director of Valero
Natural Gas Company from 1989 to 1994.
Mr. Greehey has served as Chief Executive Officer and as a director of
Valero since 1979 and as Chairman of the Board since 1983. He retired from his
positions as President and Chief Executive Officer in June 1996 but resumed
his duties as Chief Executive Officer following the resignation of his
successor in November 1996. Mr. Greehey is also a director of Weatherford
Enterra, Inc. and Santa Fe Energy Resources, Inc. Mr. Greehey will cease to be
an officer of Valero as of or prior to the Effective Time.
Mr. Johnson has been a director of Valero since 1991. He previously served
as Chairman and Chief Executive Officer of GTE Corporation from 1988 to 1992,
and since 1992 has served as Chairman Emeritus. Mr. Johnson also serves as a
director of CellStar Corporation, FINOVA Group, Inc., Harte-Hanks
Communications, Inc., The Mutual Life Insurance Company of New York and Walter
Industries, Inc.
Mr. Lebermann was elected as a director of Valero in 1986, and previously
served on Valero's Board from 1979 to 1993. Mr. Lebermann has been President
of Centex Beverage, Inc., a beverage distributor in Austin, Texas, since 1981.
Mr. Lebermann is also a director of Station Casinos, Inc. and of Franklin
Federal Bankcorp, a Federal Savings Bank, Austin, Texas.
Dr. Purcell was elected as a director of Valero in 1994. She has served as
Vice President of the Americas Society in New York, New York since 1989 and is
also Vice President of the Council of the Americas. Dr. Purcell is a
consultant for several international and national firms and serves on the
boards of several mutual funds, including The Argentina Fund, The Latin
America Dollar Income Fund and Scudder World Income Opportunities Fund.
AUDIT COMMITTEE
The Audit Committee reviews and reports to the New Valero Board on various
auditing and accounting matters, including the quality and performance of New
Valero's internal and external accountants and auditors, the adequacy of its
financial controls, and the reliability of financial information reported to
the public. The Audit Committee also monitors New Valero's efforts to comply
with environmental laws and regulations. The initial members of the Audit
Committee are expected to be James L. Johnson (Chairman), Ruben M. Escobedo,
and Susan Kaufman Purcell.
COMPENSATION COMMITTEE
The Compensation Committee reviews and reports to the New Valero Board on
matters related to compensation strategies, policies and programs, including
certain personnel policies and policy controls; management development;
management succession; and benefit programs. The Compensation Committee also
approves and administers New Valero's stock option, executive stock incentive,
incentive bonus and other stock plans. The initial members of the Compensation
Committee are expected to be Lowell H. Lebermann (Chairman), Robert G. Dettmer
and James L. Johnson, none of whom is a current or former employee or officer
of Valero or New Valero.
There are no Compensation Committee interlocks. For the previous three
fiscal years, except for compensation arrangements disclosed herein, New
Valero has not participated in any contracts, loans, fees, awards or financial
interests, direct or indirect, with any committee member, nor is New Valero
aware of any means, directly or indirectly, by which a committee member could
receive a material benefit from New Valero or from its predecessor, Valero.
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EXECUTIVE COMMITTEE
The Executive Committee exercises the power and authority of the New Valero
Board between meetings of the New Valero Board. Actions taken by the Executive
Committee do not require ratification by the New Valero Board. In the absence
of a Nominating Committee, the Executive Committee may also review possible
director candidates and recommend individuals for election as a director. The
initial members of the Executive Committee are expected to be Robert G.
Dettmer (Chairman), Ronald K. Calgaard, William E. Greehey and Lowell H.
Lebermann.
COMPENSATION OF DIRECTORS
Effective at the date of Distribution, non-employee directors will receive a
retainer fee of $18,000 per year, plus $1,000 for each New Valero Board and
committee meeting attended. Each director will also be reimbursed for expenses
of meeting attendance. Directors who are employees of New Valero will receive
no compensation (other than reimbursement of expenses) for serving as
directors.
New Valero has adopted a Restricted Stock Plan for Non-Employee Directors
("Director Plan") and a Non-Employee Director Stock Option Plan ("Director
Option Plan") to supplement the compensation paid to non-employee directors
and increase their identification with the interests of New Valero's
stockholders through ownership of New Valero Common Stock ("Director Stock").
Under the Director Plan, non-employee directors receive grants of Director
Stock that vest (become nonforfeitable) in three equal annual installments.
Such annual installments will usually vest on or about the date of New
Valero's annual meeting of stockholders. When all of the Director Stock
previously granted to a director is fully vested and the director is reelected
for an additional term, or his or her term of office otherwise continues after
such Director Stock is fully vested, another similar grant will be made. The
value of such subsequent grants will be equal to the value of the original
grant, adjusted to reflect subsequent changes in the consumer price index.
However, if a director is not eligible for reelection due to New Valero's
mandatory retirement policy or if a director does not intend to stand for
reelection, the grant would be reduced pro rata based on the number of years
remaining to the end of that director's term.
The Director Option Plan provides non-employee directors of New Valero
automatic annual grants of stock options for New Valero Common Stock. To the
extent necessary, the Director Option Plan is administered by the Compensation
Committee of the New Valero Board. The Director Option Plan provides that,
after the Time of Distribution, each new non-employee director joining the New
Valero Board will receive an initial grant of 5,000 options. On the date of
each New Valero annual meeting, each non-employee director (other than any new
non-employee directors receiving their initial grant of 5,000 options)
automatically receives a grant of 1,000 additional options. Options awarded
under the Director Option Plan will have an exercise price equal to the market
price of the New Valero Common Stock on the date of grant. The initial grant
of options to each non-employee director will vest in three equal annual
installments. Such annual installments will usually vest on or about the date
of New Valero's annual meeting of stockholders. The subsequent annual grants
of 1,000 options will vest fully six months following the date of grant. All
options will expire 10 years following the date of grant. Options vest and
remain exercisable in accordance with their original terms in the case of a
director retiring from the New Valero Board. In the event of a "Change of
Control" of New Valero, as defined in the Director Option Plan, all options
previously granted under the plan immediately become vested or exercisable
upon the date of the Change of Control. The Director Option Plan also provides
for adjustment in the number of options to prevent dilution or enlargement of
the benefits or potential benefits intended under the plan in the event the
Compensation Committee determines that any dividend or other distribution,
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
shares of New Valero or other similar corporate transaction or event affects
New Valero Common Stock.
The Director Plan and Director Option Plan will be approved by Valero, as
the sole stockholder of New Valero, prior to the Distribution.
58
<PAGE>
Under the Retirement Plan for Non-Employee Directors ("Retirement Plan"),
non-employee directors become entitled to a retirement benefit upon completion
of five years of service (including prior service with Valero). The annual
benefit at retirement is equal to 10% of the highest annual cash retainer paid
to the director during his or her service on the New Valero Board (or Valero
Board), multiplied by the number of full and partial years of service (not to
exceed 10 years). Such benefit is then paid for a period equal to the shorter
of the director's number of years of service or the director's lifetime, but
in no event for longer than 10 years. The Retirement Plan provides no survivor
benefits and is an unfunded plan paid from the general assets of New Valero.
EXECUTIVE OFFICERS OF NEW VALERO
New Valero's senior management team (the "Executive Officers") consists
primarily of individuals currently responsible for the management of the
Refining Business as conducted by Valero. No family relationship exists among
any of the Executive Officers or directors of New Valero. There is no
arrangement or understanding between any Executive Officer and any other
person pursuant to which he was or is to be selected as an officer. All of
such individuals will resign from any positions they may hold with Valero and
its subsidiaries (other than New Valero and its subsidiaries) effective as of
the Time of Distribution.
<TABLE>
<CAPTION>
YEAR FIRST ELECTED
NEW VALERO OR APPOINTED AS AGE AS OF
POSITION AND OFFICER OR DIRECTOR DECEMBER 31,
NAME OFFICE HELD OF NEW VALERO 1996
---- ------------ ------------------- ------------
<S> <C> <C> <C>
William E. Greehey...... Director, Chairman of the Board 1982 60
and Chief Executive Officer
Edward C. Benninger..... Director, President and Chief Financial Officer 1984 54
Stan L. McLelland....... Executive Vice President and General Counsel 1984 51
E. Baines Manning....... Executive Vice President 1986 56
George E. Kain.......... Senior Vice President 1994 60
John R. Gibbons......... Vice President Finance and Treasurer 1992 43
Gregory C. King......... Vice President 1997 36
</TABLE>
Mr. Greehey: for biography, see "--Directors of New Valero."
Mr. Benninger: for biography, see "--Directors of New Valero."
Mr. McLelland was elected Executive Vice President and General Counsel of
Valero in 1989 and had served as Senior Vice President and General Counsel of
Valero since 1981.
Mr. Manning has served as Executive Vice President of New Valero since 1995
and has served in various other capacities with the Refining Business since
1986.
Mr. Kain has served as Senior Vice President of New Valero since 1994 and
has served in various other capacities with the Refining Business since 1982.
Mr. Gibbons was elected Vice President Finance of Valero in 1997; he had
served as Treasurer of Valero since 1992 and in various other capacities with
Valero since 1981.
Mr. King was elected Vice President of Valero in 1997 and has served as
Associate General Counsel since joining Valero in 1993. Prior to joining
Valero, Mr. King was a partner at the law firm of Bracewell & Patterson,
L.L.P., Houston, Texas, where he had been employed since 1985.
59
<PAGE>
EXECUTIVE COMPENSATION
All direct and indirect remuneration of all Executive Officers and certain
other executives will be approved by the Compensation Committee and, in the
case of the Chief Executive Officer and President, by the New Valero Board. It
is anticipated that compensation for the Executive Officers and for other
executives will consist principally of base salary, an annual incentive bonus
opportunity and long-term stock-based incentive awards. The following tables
and narrative text discuss the compensation paid by Valero in 1996 to New
Valero's Chief Executive Officer and to the four other most highly compensated
executive officers of New Valero (the "Named Executive Officers") for services
rendered in all capacities to Valero for the last three years. Benefits under
health care, disability, term life insurance, vacation and other plans
available to employees generally are not included herein.
SUMMARY COMPENSATION TABLE (1994--1996)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- --------------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
BONUS AWARDS OPTIONS/ LTIP COMPENSATION
NAME AND POSITION(S) YEAR SALARY($) ($)(1) ($)(2) SARS(#) PAYOUTS(3) ($)(4)
-------------------- ---- --------- -------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Greehey(5)... 1996 $497,337 $670,739 $1,545,362 5,000 $325,000 $928,949
Director, Chairman of 1995 684,540 560,000 431,250 0 0 73,007
the Board and Chief 1994 622,020 0 0 355,300 0 71,664
Executive Officer of
New Valero
F. Joseph Becraft(5).... 1996 $450,030 $ 0 $ 276,250 40,000 $271,138 $ 4,252
Director, President and 1995 266,680 180,000 421,875 120,000 0 4,252
Chief Executive Officer
of New Valero
Edward C. Benninger(5).. 1996 $357,180 $335,370 $ 497,500 25,000 $ 93,698 $ 28,541
Director and President 1995 342,600 210,000 189,750 0 0 27,016
of New Valero 1994 335,040 0 0 125,500 0 27,598
Stan L. McLelland....... 1996 $300,930 $111,812 $ 0 25,000 $ 70,200 $ 25,631
Executive Vice 1995 278,700 162,000 138,000 0 0 23,313
President and General 1994 262,380 0 0 82,600 0 23,836
Counsel of New Valero
E. Baines Manning....... 1996 $253,230 $122,989 $ 0 18,000 $ 58,500 $ 18,758
Executive Vice 1995 231,420 120,000 51,750 0 0 12,468
President of New Valero 1994 216,420 0 0 63,500 0 15,524
George E. Kain.......... 1996 $178,530 $ 55,922 $ 0 5,500 $ 0 $ 11,282
Director, Senior Vice 1995 175,020 72,011 34,250 0 0 9,974
President of New Valero 1994 161,020 0 0 20,911 0 11,002
</TABLE>
- --------
(1) In 1994, the Named Executive Officers received no bonuses. For 1995, the
Named Executive Officers received bonuses payable 70% in cash and 30% in
Valero Common Stock. For 1996, the Named Executive Officers received
bonuses payable 25% in cash and 75% in Valero Common Stock.
(2) For each Named Executive Officer, the number of restricted shares of
Valero Common Stock ("Restricted Stock") held at December 31, 1996, and
the value thereof, based on the closing market price of the Common Stock
at December 31, 1996, was as follows: Mr. Greehey: 62,073 shares--
$1,776,840; Mr. Benninger: 27,333 shares--$782,407; Mr. McLelland: 5,333
shares--$152,667; Mr. Manning: 2,000 shares--$57,250; and Mr. Kain: 1,333
shares--$38,157.13. Dividends are paid on the Restricted Stock at the same
rate as on unrestricted Valero Common Stock. The 1996 grants of Restricted
Stock to Messrs. Greehey and Benninger will vest upon completion of the
transaction contemplated by the Merger Agreement or, if such
60
<PAGE>
transaction is not consummated, would vest in annual increments of 33 1/3%
beginning on the first anniversary of the grant date. Mr. Becraft did not
hold Restricted Stock at December 31, 1996.
(3) Long-Term Incentive Plan ("LTIP") payouts are the number of performance
share awards vested for 1996 multiplied by the market price per share on
the vesting date. For more information see the notes following the table
entitled "Long Term Incentive Plans--Awards in Last Fiscal Year."
(4) Amounts include Valero contributions pursuant to employee stock plans, and
that portion of interest accrued under Valero's Executive Deferred
Compensation Plan which is deemed to be at "above-market" rates under
applicable SEC rules. Messrs. Greehey, Becraft, Benninger, McLelland,
Manning and Kain were allocated $31,460, $10,973, $25,574, $21,074,
$18,758 and $11,282, respectively, as a result of Company contributions to
employee stock plans for 1996, and $9,066, $0, $2,967, $4,557, $0 and $0,
respectively, as a result of "above-market" allocations to the Valero
Executive Deferred Compensation Plan for 1996. Messrs. Becraft, Manning
and Kain do not participate in the Valero Executive Deferred Compensation
Plan. Amounts for Mr. Greehey also include executive insurance policy
premiums with respect to cash value life insurance (not split-dollar life
insurance) in the amount of $13,000 for 1994 and 1995 and $7,583 for 1996;
such amounts for 1996 also include (i) consulting fees ($141,667), Valero
Board fees ($29,833), SERP payments ($278,862) and the interest component
of deferred compensation plan payments ($27,648) made during the period
following his retirement and prior to his reemployment, and (ii) payments
made following his retirement for Valero Excess Thrift Plan balances
($339,617) and unused vacation ($63,213). Payments received during Mr.
Greehey's retirement directly from the Pension Plan (as defined herein)
are excluded.
(5) Mr. Becraft was employed by Valero beginning May 1, 1995, and was elected
President of Valero on January 1, 1996 and Chief Executive Officer of
Valero on June 30, 1996. Mr. Greehey resigned from his position as Chief
Executive Officer of Valero on June 30, 1996. Mr. Becraft resigned from
his positions as President and Chief Executive Officer of Valero on
November 20, 1996, whereupon Mr. Greehey was reappointed Chief Executive
Officer of Valero. At that time, the Board also elected Mr. Benninger
President of Valero.
STOCK OPTION GRANTS AND RELATED INFORMATION
The following table provides further information regarding the grants of
stock options with respect to Valero Common Stock to the Named Executive
Officers.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/
OPTIONS/ SARS GRANTED MARKET
SARS TO EMPLOYEES EXERCISE OR PRICE AT GRANT DATE
GRANTED IN FISCAL BASE PRICE GRANT DATE EXPIRATION PRESENT VALUE
NAME (#)(1) YEAR ($/SH) ($/SH) DATE $ (2)
---- ---------- ------------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey...... 5,000 0.69% $25.3125 $25.3125 07/01/2006 $29,580
F. Joseph Becraft....... 40,000 5.56% 27.5625 27.5625 05/30/2006 259,440
Edward C. Benninger..... 25,000 3.47% 27.5625 27.5625 05/30/2006 162,150
Stan L. McLelland....... 25,000 3.47% 27.5625 27.5625 05/30/2006 162,150
E. Baines Manning....... 18,000 2.50% 27.5625 27.5625 05/30/2006 116,748
George E. Kain.......... 5,500 0.77% 27.5625 27.5625 05/30/2006 35,673
</TABLE>
- --------
(1) Options granted in 1996 vest (become exercisable and nonforfeitable) in
equal increments over a three-year period from the date of grant. In the
event of a change of control of Valero (including stockholder approval of
the Merger Agreement), such options would also become immediately
exercisable pursuant to provisions
61
<PAGE>
of the Valero Executive Stock Incentive Plan (the "Valero ESIP") or of an
executive severance agreement. Under the terms of the Valero ESIP, the
exercise price and tax withholding obligations related to exercise may be
paid by delivery of already owned shares or by offset of the underlying
shares, subject to certain conditions.
(2) A variation of the Black-Scholes option pricing model was used to
determine grant date present value. This model is designed to value
publicly traded options. Options issued under Valero's option plans are
not freely traded, and the exercise of such options is subject to
substantial restrictions. Moreover, the Black-Scholes model does not give
effect to either risk of forfeiture or lack of transferability. The
estimated values under the Black-Scholes model are based on assumptions as
to variables such as interest rates, stock price volatility and future
dividend yield. The estimated grant date present values presented in this
table were calculated using an expected average option term of 3.32 years,
a risk-free rate of return of 6.41%, an average volatility rate of 25.4%
for the options expiring May 30, 2006 and of 25.17% for the options
expiring July 1, 2006 and a dividend yield of 1.88% for the options
expiring May 30, 2006 and 2.04% for the options expiring July 1, 2006. The
actual value of stock options could be zero; realization of any positive
value depends upon the actual future performance of the Valero Common
Stock, the continued employment of the option holder throughout the
vesting period and the timing of the exercise of the option. Accordingly,
the values set forth in this table may not be achieved.
The following table provides information regarding securities underlying
options exercisable with respect to Valero Common Stock at December 31, 1996,
and options exercised during 1996, for the Named Executive Officers:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS/SARS AT
ACQUIRED VALUE OPTIONS/SARS AT FY-END(#) FY-END($)(1)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey...... -- -- 510,184 5,000 $4,522,154 $ 15,625
F. Joseph Becraft....... -- -- 160,000 -- 1,167,500 --
Edward C. Benninger..... -- -- 62,472 133,833 364,587 1,031,800
Stan L. McLelland....... -- -- 47,857 96,266 328,157 682,762
E. Baines Manning....... -- -- 38,217 72,833 270,792 524,300
George E. Kain.......... -- -- 19,635 21,500 108,345 151,687
</TABLE>
- --------
(1) Represents the dollar value obtained by multiplying the number of
unexercised options/SARs by the difference between the stated exercise
price per share of the options/SARs and the average market price per share
of Valero Common Stock on December 31, 1996.
62
<PAGE>
The following table provides information regarding long-term incentive
awards made to the Named Executive Officers during 1996:
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR (1)
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-
BASED PLANS
--------------------------------
PERFORMANCE
NUMBER OF OR OTHER PERIOD
SHARES, UNITS UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OR OTHER RIGHTS OR PAYOUT (# SHARES) (# SHARES) (# SHARES)
---- --------------- ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
William E. Greehey...... 10,000 12/31/96 0 10,000 20,000
10,000 12/31/97 0 10,000 20,000
10,000 12/31/98 0 10,000 20,000
F. Joseph Becraft....... 3,634 12/31/96 0 3,634 7,268
3,633 12/31/97 0 3,633 7,266
3,633 12/31/98 0 3,633 7,266
Edward C. Benninger..... 2,884 12/31/96 0 2,884 5,768
2,883 12/31/97 0 2,883 5,766
2,883 12/31/98 0 2,883 5,766
Stan L. McLelland....... 2,160 12/31/96 0 2,160 4,320
2,160 12/31/97 0 2,160 4,320
2,160 12/31/98 0 2,160 4,320
E. Baines Manning....... 1,800 12/31/96 0 1,800 3,600
1,800 12/31/97 0 1,800 3,600
1,800 12/31/98 0 1,800 3,600
</TABLE>
- --------
(1) LTIP awards are grants of performance shares ("Performance Shares") made
under the Valero ESIP. Mr. Kain did not receive a LTIP award.
(2) Total shareholder return ("TSR") during a specified "performance period"
was established as the performance measure for determining what portion of
the 1996 Performance Share awards will vest. For purposes of the
Performance Share awards, TSR is measured by dividing the sum of (i) the
net change in the price of a share of Valero's Common Stock between the
beginning of the performance period and the end of the performance period,
and (ii) the total dividends paid on the Valero Common Stock during the
performance period, by (iii) the price of a share of Valero's Common Stock
at the beginning of the performance period. Each 1996 Performance Share
award is subject to vesting in three increments, based upon Valero's TSR
during overlapping three-year periods, with the first such three-year
period for the 1996 grants beginning January 1, 1994 and ending December
31, 1996. At the end of the three-year performance period, Valero's TSR is
compared to the TSR for each company in a target group of approximately 16
companies. Valero and the companies in the target group are then ranked by
quartile. At the end of each performance period, participants earn 0%,
50%, 100% or 150% of the initial grant amount for such period depending
upon whether Valero's TSR is in the last, 3rd, 2nd or 1st quartile of the
target group; 200% will be earned if Valero ranks highest in the group.
Amounts not earned in a given three-year period can be carried forward for
one additional three-year period and up to 100% of the carried amount can
still be earned, depending upon the quartile achieved for such subsequent
period.
RETIREMENT BENEFITS
At or prior to the Time of Distribution, New Valero will become the sponsor
of the Valero Pension Plan ("Pension Plan") and assume all obligations of
Valero with respect to (i) individuals who are retirees at the
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<PAGE>
time of Distribution and (ii) individuals who are or become employees of the
Refining Business. Substantially all employees of New Valero having one year
or more of service with New Valero and/or Valero will be eligible to
participate in the Pension Plan, which is a noncontributory, defined benefit
plan. Prior service with Valero will be fully credited in determining
retirement benefits payable under the Pension Plan upon retirement from New
Valero. The following table shows the estimated annual gross benefits payable
under the Pension Plan, the Valero Supplemental Pension Plan (the
"Supplemental Pension Plan") and SERP upon retirement at age 65, based upon
the assumed compensation levels and years of service indicated and assuming an
election to have payments continue for the benefit of the life of the
participant only.
ESTIMATED ANNUAL PENSION BENEFITS AT AGE 65
<TABLE>
<CAPTION>
YEARS OF SERVICE
COVERED --------------------------------------------
COMPENSATION 15 20 25 30 35
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 200,000................... $ 55,000 $ 73,000 $ 92,000 $110,000 $128,000
300,000................... 84,000 112,000 141,000 169,000 197,000
400,000................... 114,000 151,000 189,000 227,000 265,000
500,000................... 143,000 190,000 238,000 286,000 333,000
600,000................... 172,000 229,000 287,000 344,000 401,000
700,000................... 201,000 268,000 336,000 403,000 470,000
800,000................... 231,000 307,000 384,000 461,000 538,000
900,000................... 260,000 346,000 433,000 520,000 606,000
1,000,000................... 289,000 385,000 482,000 578,000 674,000
1,100,000................... 289,000 385,000 482,000 578,000 674,000
1,200,000................... 348,000 463,000 579,000 695,000 811,000
1,300,000................... 377,000 502,000 628,000 754,000 879,000
</TABLE>
In addition to the Pension Plan, Valero also maintains (and New Valero will
assume and become the sponsor of) a noncontributory, nonqualified Supplemental
Pension Plan which provides supplemental pension benefits to certain highly
compensated employees to the extent that the pension benefits otherwise
payable to such employees from the Pension Plan would exceed benefits
permitted under applicable regulations to be paid from a tax-qualified defined
benefits plan. Accrued contributions for the 1996 Pension Plan year were
approximately 5.5% of total covered compensation. No contributions were made
to the Supplemental Pension Plan. The Pension Plan (supplemented, as
necessary, by the Supplemental Pension Plan) provides a monthly pension at
normal retirement equal to 1.6% of the participant's average monthly
compensation (based upon the participant's base earnings during the 60
consecutive months of the participant's credited service affording the highest
such average) times the participant's years of credited service, plus .35%
times the product of the participant's years of credited service (maximum 35
years) multiplied by the excess of the participant's average monthly
compensation over the lesser of 1.25 times the monthly average (without
indexing) of the social security wage bases for the 35-year period ending with
the year the participant attains social security retirement age, or the
monthly average of the social security wage base in effect for the year that
the participant retires.
Valero also maintains (and New Valero will assume and become the sponsor of)
the SERP, a non-qualified plan providing additional pension benefits to
certain executive officers and employees. The obligations which will be
assumed by New Valero under the SERP are substantially fully funded through
investments held in the SERP Trust under which Frost National Bank of San
Antonio, N.A., serves as trustee. During 1996 contributions aggregating $9.2
million were made to the SERP Trust.
Compensation for purposes of the Valero Pension Plan and Supplemental
Pension Plan includes only salary as reported in the Summary Compensation
Table and excludes cash bonuses. For purposes of the SERP, the participant's
most highly compensated consecutive 36 months of service during the
participant's last 10 years of employment (rather than 60 months) are
considered, and bonuses are included. Accordingly, the amounts reported in the
Summary Compensation Table under the headings "Salary" and "Bonus" constitute
covered
64
<PAGE>
compensation for purposes of the SERP. Pension benefits are not subject to any
deduction for social security or other offset amounts.
Credited years of service for the period ended December 31, 1996 for the
Named Executive Officers in the Summary Compensation Table are as follows: Mr.
Greehey--33 years; Mr. Becraft--6 years; Mr. Benninger--22 years; Mr.
McLelland--18 years; Mr. Manning--10 years; and Mr. Kain--17 years. The
credited service for Mr. Becraft and Mr. McLelland includes five years and two
years service, respectively, credited pursuant to the terms of his employment
by Valero and for which benefits are payable only from the SERP. See "--
Arrangements with Certain Officers and Directors."
DESCRIPTION OF EXECUTIVE BONUS, STOCK INCENTIVE AND STOCK OPTION PLANS
New Valero has adopted an executive incentive bonus plan (the "New Valero
Bonus Plan") under which Executive Officers will have the opportunity to earn
an annual incentive bonus based upon the position of the Executive Officer,
realization by New Valero of financial performance targets approved by the
Compensation Committee and a qualitative evaluation of the individual's
performance. Bonus targets for each eligible executive are expected to be
established based upon compensation levels for similar positions at a
comparator group of companies with which New Valero competes for executive
talent. However, the composition of such comparator group, individual bonus
targets, the quantitative performance factors upon which awards will be based,
individuals eligible to receive awards, evaluations of individual performance
and other matters relating to incentive bonus awards, including any
determination as to whether to pay such awards in cash, in New Valero Common
Stock, or in a combination of cash and stock, will be made by the Compensation
Committee in its discretion. No fixed number of shares of New Valero Common
Stock has been designated for awards under the Bonus Plan.
New Valero has adopted an executive stock incentive plan (the "New Valero
ESIP") authorizing the grant of various stock and stock-related awards to
Executive Officers and other key employees. Awards available under the New
Valero ESIP will include options to purchase shares of New Valero Common
Stock, stock appreciation rights ("SARs"), restricted stock, performance
awards and other stock-based awards. A total of 2,500,000 shares may be issued
under the New Valero ESIP, of which no more than 500,000 shares may be awarded
to any one individual in any year. In addition, New Valero has adopted a stock
option plan (the "New Valero Option Plan") under which an aggregate of
2,000,000 options to purchase New Valero Common Stock can be granted to all
employees and prospective employees of New Valero. In connection with the
Merger, New Valero has agreed that stock options previously granted by Valero
to Valero directors who became directors of New Valero, or to active or former
employees of New Valero, and which are outstanding at the time of Distribution
shall be converted into New Valero options having an initial value equal to
the value of such Valero options. New Valero expects that any such options
outstanding under Valero's Director Option Plan will be converted into options
under the New Valero Director Plan, that options outstanding under Valero's
ESIP will be converted into options under the New Valero ESIP, and that
options outstanding under Valero's other stock option plans would be converted
into options under the New Valero Option Plan. Any such option which, under
the Valero plans, is accompanied by an SAR would be accompanied by an SAR
under the New Valero plan.
Under the terms of the New Valero ESIP and the New Valero Option Plan, the
exercise price of the options granted will not be less than 100% of the fair
market value of the New Valero Common Stock at the date of grant. The exact
terms and conditions of stock options and other awards, including the vesting
provisions and expiration date of any option, would be determined by the
Compensation Committee.
The New Valero Bonus Plan, New Valero ESIP and New Valero Option Plan will
be approved by Valero, as sole stockholder of New Valero, prior to the
Distribution.
DESCRIPTION OF THRIFT PLAN
New Valero will assume and become the sponsor of the Valero Thrift Plan
which is an employee profit sharing plan. Participation in the New Valero
Thrift Plan will be voluntary and will be open to employees of
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<PAGE>
New Valero who were eligible to participate in Valero's Thrift Plan or who
become eligible to participate following the completion of three months of
continuous employment. Participating employees may make a base contribution
from 2% up to 8% of their annual base salary, depending upon months of
contributions by a participant. New Valero intends to make matching
contributions to the New Valero Thrift Plan, with New Valero's contribution
initially expected to aggregate 75% of employee base contributions.
Participants may also make a supplemental contribution to the New Valero
Thrift Plan of up to an additional 10% of their annual base salary which is
not matched by New Valero. In 1989, Valero established the VESOP which was a
leveraged employee stock ownership plan. The VESOP was terminated, debt
associated with the VESOP will be paid prior to the Distribution, and share
balances in employee accounts (excepting employees electing to receive a
distribution or transfer their balances into an individual retirement account)
were transferred to the Valero Thrift Plan.
DESCRIPTION OF OTHER BENEFIT PLANS
New Valero intends to assume and become the sponsor of two deferred
compensation plans previously established by Valero. Under the plans,
employees previously deferred receipt of a portion of their salaries, and are
entitled to receive such deferred amounts, plus interest credited in
accordance with such plans, upon retirement. Valero has previously obtained,
and will assign to New Valero or a trustee, life insurance policies covering
the plan participants, the proceeds of which fund a portion of the plan
obligations. In addition, New Valero intends to establish a non-qualified
trust to which it will further assign such policies in order to fund such
obligations.
New Valero also intends to adopt a flexible benefit plan (including
comprehensive health care, dental and vision care, life, dependent life,
survivor income and long-term disability coverages) which will be available on
the same terms and conditions to employees generally.
ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
Valero entered into an employment agreement with Mr. Greehey dated May 16,
1990 which expired on June 9, 1995. The agreement provided that Mr. Greehey
would be entitled to receive certain post-retirement benefits, including
office facilities and secretarial support until age 69, transfer of certain
club memberships, the vesting of previously granted stock option and
restricted stock grants, certain medical and life insurance benefits and the
right to certain supplemental amounts under the SERP. In November 1994, the
Valero Board approved resolutions continuing such post-retirement benefits,
notwithstanding the termination of such agreement. Effective upon Mr.
Greehey's retirement from his positions as President and Chief Executive
Officer in June 1996, the specified post-retirement, benefits were provided to
Mr. Greehey and he was requested to continue to serve as Chairman of the
Board. Valero and Mr. Greehey also entered into a consulting agreement
pursuant to which Mr. Greehey received compensation at the rate of $340,000
per annum for providing general advice and consulting services, as well as
management services for particular projects. Mr. Greehey was reemployed by
Valero on November 21, 1996, and the consulting agreement terminated at that
time. In order to clarify Mr. Greehey's continuing benefit arrangements, the
Valero Board determined that, following Mr. Greehey's ultimate retirement from
active employment, he will continue to be eligible to receive substantially
the same office and secretarial support, medical and life insurance benefits
and supplemental SERP benefits as were provided following his earlier
retirement.
Valero entered into agreements (the "Severance Agreements") with Messrs.
Greehey, Benninger, McLelland and Manning which provide certain payments and
other benefits in the event of their termination of employment under certain
circumstances. The Severance Agreements provide that if the executive leaves
Valero for any reason (other than death, disability or normal retirement)
within two years after a "change of control," the executive will receive a
lump sum cash payment equal to three times, in the cases of Messrs. Greehey
and McLelland, and two times, in the cases of Messrs. Benninger and Manning,
his highest compensation during any consecutive 12-month period in the prior
three years. The executive will also be entitled to accelerated exercise
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of stock options and SARs and accelerated vesting of restricted stock
previously granted. The Severance Agreements also provide for special
retirement benefits if the executive would have qualified for benefits under
the Pension Plan had he remained with Valero for the three-year period
following such termination, for continuance of life and health insurance
coverages and other fringe benefits for such three-year period and for
relocation assistance. Messrs. Greehey, Benninger, McLelland and Manning have
each executed a waiver and agreement with New Valero providing that (i) the
consummation of the transactions contemplated by the Merger Agreement will not
constitute a "change of control" for purposes of such Severance Agreements,
and (ii) New Valero will be deemed a successor of Valero for all purposes of
the Severance Agreements.
In connection with pursuing various strategic alternatives, including the
transactions contemplated by the Merger Agreement, Valero entered into
Management Stability Agreements ("Stability Agreements") and Incentive Bonus
Agreements ("Incentive Agreements") with various key executives, including
Messrs. Gibbons and King. These agreements were intended to assure the
continued availability of such executives in the event of certain transactions
culminating in a "change of control" of Valero and/or a divestiture of one of
Valero's principal businesses. Under the Stability Agreements, in the event an
executive's employment is terminated within two years after a change of
control or divestiture transaction has occurred, and termination is not
voluntary or the result of death, permanent disability, retirement or certain
other defined circumstances, the executive would be entitled to receive a lump
sum cash payment equal to the sum of (i) up to two times the highest annual
compensation paid to such executive during the prior three year period, plus
(ii) in certain cases an amount equal to the executive's average annual
incentive bonus over the prior three years; the continuation of life,
disability and health insurance coverages for two years; and, in certain
cases, relocation assistance. The executives would also be entitled to
accelerated vesting of all previously granted stock options, SARs and
restricted stock. Under the Incentive Agreements, if the executive continues
to be employed by Valero or New Valero and a merger or another qualifying
transaction is accomplished, the executive will be entitled to receive a cash
incentive bonus payment equal to up to one times the executive's highest
annual base salary during the prior three year period. In certain cases, all
of such incentive payment is payable at the closing of the transaction, and,
in certain cases, 60% of such payment is payable at closing and 40% is payable
six months following closing or, under certain circumstances, upon earlier
termination of employment. New Valero intends to assume the continuing
obligations of Valero under the Incentive Agreements to executives who are or
become employees of New Valero. New Valero also intends to enter into
management stability agreements with the same executive officers in
substantially the form of the Stability Agreements.
In connection with Mr. Greehey's then-pending retirement from Valero, in May
1996 the Compensation Committee of the Valero Board approved special
retirement arrangements applicable to Messrs. Benninger and McLelland. Under
these arrangements, upon their ultimate retirement, Messrs. Benninger and
McLelland would each receive eight supplemental retirement "points," to be
divided between age and credited service in such proportions as each shall
elect at the time of retirement. In addition, for the year in which he retires
each such executive will be entitled to a prorated executive incentive bonus
and tax preparation services. Each such executive would also be entitled to
accelerated vesting of all previously granted stock options and Restricted
Stock, and Mr. Benninger's existing club membership would be transferred to
him without cost.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Compensation Committee of the Valero Board is, and the Compensation
Committee of the New Valero Board will be, comprised exclusively of directors
who are not and have never been Valero or New Valero employees. No Valero or
New Valero Executive Officer serves on the Valero Compensation Committee, or
will serve on the New Valero Compensation Committee, or serves as a director
of another company for which any member of either Compensation Committee
serves as a director or executive officer.
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TRANSACTIONS WITH MANAGEMENT
Valero invested, through its wholly owned subsidiary Valero Coal Company
("Coal"), approximately $9.7 million in a program to drill coal seam gas wells
in New Mexico. In order to share the drilling and other risks inherent in this
project, various officers and employees of Valero and/or New Valero were
permitted to invest as general partners in a partnership to which Coal's
interest was assigned. The Valero Board determined in 1992 that this
transaction was fair to Valero. During 1992 and 1993, Messrs. Greehey,
Benninger, McLelland and Manning invested approximately $207,000, $52,000,
$156,000 and $104,000, respectively, to acquire interests of 2.0%, .50%, 1.5%
and 1.0%, respectively, in the project. No additional investments were made by
these executive officers during 1994 or 1996. During 1995, a company owned by
Mr. Manning purchased an additional .25% interest in the project from another
investor. During 1996, Messrs. Greehey, Benninger, McLelland and Manning
(including the company owned by Mr. Manning) received cash distributions of
$45,680, $11,420, $34,260 and $28,550, respectively, attributable to their
investments. Additionally, all investors in the project may be eligible to
utilize certain federal income tax credits applicable to the project. In
connection with the Distribution, Coal will become a wholly owned subsidiary
of New Valero.
Except as disclosed herein, no Executive Officer or director of New Valero
has been indebted to Valero or New Valero, or has acquired a material interest
in any transaction to which Valero or New Valero is a party, during the last
fiscal year.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding New Valero Common Stock is currently held by Valero.
To the best knowledge of New Valero, the following table sets forth projected
New Valero Common Stock ownership information with respect to each of the New
Valero directors, Named Executive Officers and all New Valero directors and
Executive Officers as a group and with respect to each person who is projected
to own 5% or more of the New Valero Common Stock immediately after the
Distribution. Such projections are based on the anticipated distribution of
one share of New Valero Common Stock for every one share of Valero Common
Stock beneficially owned by such parties as of the Distribution Record Date
(including shares of New Valero Common Stock held in the New Valero Thrift
Plan for accounts of the Executive Officers). Except with respect to Salomon,
ownership information of 5% holders is as of December 31, 1996 and is based
solely upon statements on Schedule 13G filed by such entity with the SEC with
respect to their ownership of Valero Common Stock as of such date. Ownership
information with respect to Salomon is based solely upon the shares of Valero
Common Stock issued in the Basis Acquisition. Ownership information for the
New Valero directors, Executive Officers and all New Valero directors and
Executive Officers as a group is based on each individual's estimated
ownership of Valero Common Stock as of March 30, 1997. Such information has
been furnished to New Valero by such persons and cannot be independently
verified by New Valero.
<TABLE>
<CAPTION>
SHARES
SHARES UNDER PROJECTED
NAME AND ADDRESS BENEFICIALLY EXERCISABLE PERCENT
OF BENEFICIAL OWNER (1)(2)(3) OWNED(4) OPTIONS(5) OF CLASS(2)
----------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Franklin Resources, Inc.(6)............ 6,366,167 11.4%
777 Mariners Island Blvd.
San Mateo, CA 94404
Merrill Lynch & Co., Inc.(7)........... 4,160,610 7.4%
World Financial Center, North Tower
250 Vessey Street
New York, NY 10281
Frost National Bank of................. 4,027,492 7.2%
San Antonio, N.A.(8)
100 West Houston Street
San Antonio, TX 78205
Salomon Inc(9)......................... 3,429,796 6.1%
Seven World Trade Center
New York, NY 10048
The Capital Group Companies, Inc.(10).. 3,292,700 5.9%
75 State Street
Boston, MA 02109
Wellington Management Company(11)...... 2,841,946 5.1%
75 State Street
Boston, MA 02109
F. Joseph Becraft...................... 0 0 *
Edward C. Benninger.................... 114,247 75,139 *
Ronald K. Calgaard..................... 2,142 1,667 *
Robert G. Dettmer(12).................. 5,877 3,000 *
Ruben M. Escobedo(13).................. 3,094 3,000 *
William E. Greehey..................... 369,861 478,184 1.5%
James L. Johnson....................... 3,852 3,000 *
George E. Kain......................... 33,893 20,569 *
Lowell H. Lebermann.................... 2,244 3,000 *
E. Baines Manning...................... 47,959 43,750 *
Stan L. McLelland...................... 93,596 56,524 *
Susan Kaufman Purcell.................. 2,289 3,000 *
All Executive Officers and directors as
a group, including the persons named
above (14 persons)(14)................ 688,602 720,456 2.5%
</TABLE>
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- --------
* Indicates that the percentage of beneficial ownership does not exceed 1%
of the class.
(1) The business address for all beneficial owners listed above who are
directors or Executive Officers of New Valero is 530 McCullough Avenue,
San Antonio, Texas 78215.
(2) For directors and Executive Officers, the calculation for Percent of
Class includes shares listed under the captions "Shares Beneficially
Owned" and "Shares Under Exercisable Options."
(3) For directors and Executive Officers includes shares allocated pursuant
to various Valero employee stock plans available to Valero employees
generally (collectively, the "Employee Stock Plans"), as well as shares
granted under Valero's Restricted Stock Bonus and Incentive Stock Plan
(the "Restricted Stock Plan"), the Valero ESIP and Valero's Non-employee
Director Restricted Stock Plan. Except as otherwise noted, each person
named in the table, and each other executive officer, has sole power to
vote or direct the vote of all such shares beneficially owned by him or
her. Except as otherwise noted, each person named in the table, and each
other executive officer, has sole power to dispose or direct the
disposition of shares beneficially owned by him or her.
(4) Does not include shares that could be acquired under options, which
information is set forth in the second column.
(5) Includes shares subject to options that are exercisable within 60 days
from February 1, 1997. Such shares may not be voted unless the options
are exercised. Options that may become exercisable within such 60 day
period only in the event of a change of control of Valero are excluded.
None of the current directors or Executive Officers of New Valero holds
any right to acquire New Valero Common Stock except through exercise of
stock options or vesting of Performance Shares.
(6) Franklin Resources, Inc. has reported that it and certain of its
shareholders and subsidiaries have sole voting power with respect to
5,960,170 shares, shared voting power with respect to 459,997 shares and
shared dispositive power with respect to 6,366,167 shares.
(7) Merrill Lynch & Co., Inc. has reported that it has shared voting power
with respect to 4,160,610 shares while certain of its subsidiaries have
shared voting power and shared dispositive power with respect to up to
4,160,610 shares.
(8) Frost National Bank of San Antonio, N.A. has reported that it has shared
voting and dispositive power with respect to 4,027,492 shares in its
capacity as Trustee for the Valero Thrift Plan, ESOP, VESOP, Valero
Benefits Trust and SERP Trust.
(9) Salomon Inc acquired 3,429,796 shares on May 1, 1997, in connection with
the Basis Acquisition.
(10) The Capital Group Companies, Inc. has reported that it and certain
investment management subsidiaries have sole voting power with respect to
600 shares and sole dispositive power with respect to 3,292,700 shares.
One such subsidiary, Capital Research and Management Company, has also
reported that it has sole dispositive power with respect to 2,823,180 of
such shares.
(11) Wellington Management Company, LLP has reported that it has shared
dispositive power with respect to 2,841,946 shares and shared voting
power with respect to 126,099 shares. Its affiliate, Vanguard/Windsor
Fund, Inc., has reported shared dispositive power with respect to
2,688,100 of such shares.
(12) Includes shares held by spouse.
(13) Includes shares held by spouse and shares held in a trust.
(14) Certain officers of New Valero not designated as Executive Officers by
the New Valero Board do not perform the duties of Executive Officers and
are not classified as "Executive Officers" for purposes of this
Prospectus.
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DESCRIPTION OF NEW VALERO CAPITAL STOCK
The following description of certain material terms of New Valero capital
stock does not purport to be complete and is qualified in its entirety by
reference to the New Valero Certificate, the New Valero By-laws and the Rights
Agreement to be entered into by New Valero and Harris Trust and Savings Bank,
as rights agent (the "New Valero Rights Agreement"), as well as by applicable
statutory or other law.
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that New Valero will have
authority to issue under the New Valero Certificate will be 170 million, of
which 150 million will be shares of New Valero Common Stock and 20 million
will be shares of $0.01 par value preferred stock ("New Valero Preferred
Stock"). No shares of New Valero Preferred Stock will be issued in connection
with the Distribution. All of the shares of New Valero Common Stock issued in
the Distribution will be validly issued, fully paid and nonassessable.
NEW VALERO COMMON STOCK
The holders of New Valero Common Stock will be entitled to one vote for each
share held of record on the applicable record date on all matters voted on by
stockholders, except with regard to the election of directors and except as
otherwise required by law or provided in any resolution adopted by the New
Valero Board with respect to any shares of New Valero Preferred Stock. The New
Valero Certificate does not provide for cumulative voting in the election of
directors or any preemptive rights to purchase or subscribe to any securities
of New Valero of any kind or class except as the New Valero Board in its
discretion may determine. Subject to any preferential rights of any
outstanding series of New Valero Preferred Stock created by the New Valero
Board from time to time, the holders of New Valero Common Stock on the
applicable record date will be entitled to such dividends as may be declared
from time to time by the New Valero Board from funds available therefor, and
upon liquidation will be entitled to receive pro rata all assets of New Valero
available for distribution to such holders. See "Risk Factors--New Valero
Dividend Policy" and "The Distribution--Manner of Effecting the Distribution."
The New Valero Certificate, New Valero By-laws and Rights Agreement contain
certain provisions which may have the effect of discouraging certain types of
transactions that involve an actual or threatened change of control of New
Valero. See "--New Valero Purchase Rights" and "Anti-Takeover Effects of
Certain Provisions."
NEW VALERO PREFERRED STOCK
The New Valero Board has the authority to issue shares of New Valero
preferred stock in one or more series and to fix, by resolution, the voting
powers, which may be full or limited or no voting powers, designations,
preferreds and relative, participating, optional or other special rights and
the qualifications, limitations or restrictions thereof, including liquidation
preferreds, dividend rates, conversion rights and redemption provisions of the
shares constituting any series, without any further vote or action by the
stockholders. Any shares of New Valero Preferred Stock so authorized and
issued could have priority over the New Valero Common Stock with respect to
dividend and/or liquidation rights.
NEW VALERO PURCHASE RIGHTS
The New Valero Board will declare a dividend distribution of one Right for
each outstanding share of New Valero Common Stock to be distributed to Valero
stockholders pursuant to the Distribution. Except as set forth below, each
Right will entitle the registered holder to purchase from New Valero one one-
hundredth of a share of New Valero Junior Participating Preferred Stock,
Series I, ("Junior Preferred Stock") at a price of $100 per one one-hundredth
of a share, subject to adjustment (the "Purchase Price"). The description and
terms of the Rights will be set forth in the New Valero Rights Agreement.
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Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the outstanding
shares of New Valero Common Stock or (ii) 10 business days (or such later date
as may be determined by action of the New Valero Board prior to such time as
any person or group becomes an Acquiring Person) following the commencement
of, or announcement of an intention to make, a tender offer or exchange offer
the consummation of which would result in the beneficial ownership by a person
or group of 15% or more of such outstanding New Valero Common Stock (the
earlier of such dates being called the "Rights Separation Date").
The New Valero Rights Agreement provides that, until the Rights Separation
Date (or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the New Valero Common Stock. As soon as
practicable following the Rights Separation Date, separate certificates
evidencing the Rights (the "Right Certificates") will be mailed to holders of
record of the New Valero Common Stock as of the close of business on the
Rights Separation Date and such separate Right Certificates alone will
evidence the Rights.
The Rights are not exercisable until the Rights Separation Date. The Rights
will expire on June 30, 2007 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by New Valero, in each case, as described below.
The Purchase Price payable, and the number of shares of Junior Preferred
Stock or other securities or property issuable, upon exercise of the Rights
will be subject to adjustment from time to time to prevent dilution (i) in the
event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of Junior Preferred Stock, (ii) upon the grant
to holders of shares of Junior Preferred Stock of certain rights or warrants
to subscribe for or purchase shares of Junior Preferred Stock at a price, or
securities convertible into shares of Junior Preferred Stock with a conversion
price, less than the then current market price of shares of Junior Preferred
Stock or (iii) upon the distribution to holders of shares of Junior Preferred
Stock of evidences of indebtedness or assets (excluding regular periodic cash
dividends paid out of earnings or retained earnings or dividends payable in
shares of Junior Preferred Stock or of subscription rights or warrants (other
than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
share of Junior Preferred Stock issuable upon exercise of each Right are also
subject to adjustment in the event of a stock split of the New Valero Common
Stock or a stock dividend on the New Valero Common Stock payable in New Valero
Common Stock or subdivisions, consolidations or combinations of the New Valero
Common Stock occurring, in any such case, prior to the Rights Separation Date.
Shares of Junior Preferred Stock purchasable upon exercise of the Rights
will not be redeemable. Each share of Junior Preferred Stock will be entitled
to a minimum preferential quarterly dividend payment of $1 per share but will
be entitled to an aggregate dividend of 100 times the dividend declared per
share of New Valero Common Stock. In the event of liquidation, the holders of
shares of Junior Preferred Stock will be entitled to a minimum preferential
liquidation payment of $100 per share but will be entitled to an aggregate
payment of 100 times the payment made per share of New Valero Common Stock.
Each share of Junior Preferred Stock will have 100 votes, voting together with
the New Valero Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which New Valero Common Stock is
exchanged, each share of Junior Preferred Stock will be entitled to receive
100 times the amount received per share of New Valero Common Stock. These
rights will be protected by customary antidilution provisions.
Because of the nature of the Junior Preferred Stock's dividend, liquidation
and voting rights, the value of the one one-hundredth interest in a share of
Junior Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of New Valero Common Stock.
In the event that after the Rights Separation Date, New Valero is acquired
in a merger or other business combination transaction, or if 50% or more of
its consolidated assets or earning power are sold, proper provision will be
made so that each holder of a Right will thereafter have the right to receive,
upon the exercise thereof at
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the then current exercise price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have
a market value of two times the exercise price of the Right. In the event that
any person or group of affiliated or associated persons becomes the beneficial
owner of 15% or more of the outstanding New Valero Common Stock, proper
provision shall be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void),
will thereafter have the right to receive upon exercise that number of shares
of New Valero Common Stock having a market value of two times the exercise
price of the Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
New Valero Common Stock and prior to the acquisition by such person or group
of 50% or more of the outstanding New Valero Common Stock, the New Valero
Board may exchange the Rights (other than Rights owned by such person or group
which have become void), in whole or in part, at an exchange ratio of one
share of New Valero Common Stock, or one one-hundredth of a share of Junior
Preferred Stock (or of a share of a class or series of New Valero Preferred
Stock having equivalent rights, preferreds and privileges), per Right (subject
to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Junior Preferred Stock will be
issued (other than fractions which are integral multiples of one one-hundredth
of a share of Junior Preferred Stock, which may, at the election of New
Valero, be evidenced by depositary receipts) and in lieu thereof, an
adjustment in cash will be made based on the market price of shares of Junior
Preferred Stock on the last trading day prior to the date of exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
New Valero Common Stock, the New Valero Board may redeem the Rights in whole,
but not in part, at a price of $.01 per Right (the "Redemption Price"). The
redemption of the Rights may be made effective at such time on such basis and
with such conditions as the New Valero Board, in its sole discretion, may
establish. Immediately upon any redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price.
The terms of the Rights may be amended by the New Valero Board without the
consent of the holders of the Rights, including an amendment to lower certain
thresholds described above to not less than the greater of (i) the sum of
.001% and the largest percentage of the outstanding New Valero Common Stock
then known to New Valero to be beneficially owned by any person or group of
affiliated or associated persons and (ii) 10%, except that from and after such
time as any person becomes an Acquiring Person no such amendment may adversely
affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of New Valero, including, without limitation, the right to
vote or to receive dividends.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire New Valero
on terms not approved by the New Valero Board, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights
should not interfere with any merger or other business combination approved by
the New Valero Board since the Rights may be redeemed by New Valero at the
Redemption Price prior to the time that a person or group has acquired
beneficial ownership of 15% or more of the New Valero Common Stock.
The foregoing summary of certain terms of the Rights is qualified in its
entirety by reference to the New Valero Rights Agreement, a form of which is
filed as an exhibit to the New Valero Registration Statement.
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ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS
The New Valero Certificate, the New Valero By-laws, the New Valero Rights
Agreement and the DGCL contain certain provisions that could have the effect
of delaying, deferring or preventing a change in control of New Valero by
various means such as a tender offer or merger not approved by the New Valero
Board. These provisions are designed to enable the New Valero Board,
particularly in the initial years of New Valero's existence as an independent,
publicly owned company, to develop New Valero's business in a manner that will
foster its long-term growth without the potential disruption that might be
entailed by the threat of a takeover not deemed by the New Valero Board to be
in the best interests of New Valero and its stockholders.
The description set forth below is intended as a summary of these provisions
only and is qualified in its entirety by reference to such provisions. Copies
of the New Valero Certificate and the New Valero By-laws are filed as exhibits
to the New Valero Registration Statement, of which this Prospectus is a part.
LIMITATIONS ON CHANGES IN BOARD COMPOSITION AND OTHER ACTIONS BY STOCKHOLDERS
The New Valero By-laws provide that, except as otherwise fixed pursuant to
the provisions of the New Valero Certificate relating to the rights of the
holders of any class or series of stock having a preference over the New
Valero Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, the number of directors will be fixed
by the New Valero Board, but will consist of no less than five and no more
than 13 directors (initially the New Valero Board will be comprised of eight
directors). The New Valero Certificate requires the New Valero Board to be
divided into Class I, Class II and Class III directors, with each class
serving a staggered three-year term. At the Time of Distribution, the size of
the New Valero Board is expected to be set at eight members and is expected to
be divided into two Class I, three Class II and three Class III directors. As
a result, at least two annual meetings of stockholders may be required for
stockholders to change a majority of the directors, whether or not a majority
of New Valero's stockholders believes that such a change would be desirable.
See "Management--Directors of New Valero."
The New Valero Certificate provides that, subject to the rights of holders
of any series of New Valero Preferred Stock to elect additional directors
under specific circumstances, any director may be removed from office at any
time, but only for cause and only by the affirmative vote of the holders of at
least 60% of the voting power of the then outstanding voting stock of New
Valero. Consistent with the provisions of the DGCL, the New Valero By-laws
provide that any vacancy in the New Valero Board, including any vacancies
resulting from an increase in the number of directors, will be filled by a
majority of the directors then in office, although less than a quorum.
Under the New Valero By-laws, only individuals who are nominated by or at
the direction of the New Valero Board, or by a stockholder who has given
notice in accordance therewith, which requires notice not later than the close
of business on the 60th day nor earlier than the close of business on the 90th
day prior to the first anniversary of the preceding year's annual meeting
(provided, however, that in the event that the date of the annual meeting is
more than 30 days before or more than 60 days after such anniversary date,
notice by the stockholder to be timely must be delivered not earlier than the
close of business on the 90th day prior to such annual meeting and not later
than the close of business on the later of the 60th day prior to such annual
meeting or the 10th day following the day on which public announcement of the
date of such meeting is first made by New Valero), will be eligible for
election as directors at that meeting. The New Valero By-laws also establish
such advance notice procedure with regard to other matters which any
stockholder may desire to be brought before any meeting of stockholders. See
"Stockholder Proposals."
The DGCL provides that special meetings of stockholders may be called by the
board of directors or by such person or persons as may be authorized by a
corporation's certificate of incorporation or by-laws. The New Valero By-laws
provide that special meetings of New Valero's stockholders may be called only
by the Chief Executive Officer of New Valero or by a majority of the directors
which New Valero would have if there were no vacancies. The New Valero By-laws
provide that the notice of special meeting will include a statement of the
purpose or purposes for which the special meeting is called and that only such
business will be conducted at a special meeting as was brought before the
meeting pursuant to the notice of meeting.
74
<PAGE>
Under the DGCL, unless otherwise provided in the corporation's certificate
of incorporation, stockholders may take action without a meeting without prior
notice and without a vote, upon the written consent of stockholders having not
less than the minimum number of votes that would be necessary to authorize the
proposed action at a meeting at which all shares entitled to vote were present
and voted. The New Valero Certificate provides that action can be taken by
stockholders only at a meeting of stockholders and that stockholder action by
written consent is prohibited.
The provisions of the New Valero Certificate and the New Valero By-laws with
respect to the classification of directors, the advance notice requirements
for director nominations or other proposals of stockholders and the
limitations on the ability of stockholders to increase the size of the board,
remove directors, fill vacancies, and act by written consent, will have the
effect of making it more difficult for stockholders to change the composition
of the New Valero Board or otherwise to bring a matter before stockholders
without the New Valero Board's consent, and thus will reduce the vulnerability
of New Valero to an unsolicited takeover proposal.
PREFERRED AND COMMON STOCK
The New Valero Certificate authorizes the New Valero Board to establish one
or more series of New Valero Preferred Stock and to determine, with respect to
any series of New Valero Preferred Stock, the voting powers, full or limited,
or no voting powers, and such designations, preferreds and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as are stated in the resolutions of the
New Valero Board providing for such series. In addition, the New Valero
Certificate authorizes the New Valero Board to issue up to approximately 89
million additional shares of New Valero Common Stock after the Distribution
(in addition to shares reserved for outstanding options or other benefit
plans). The number of authorized but unissued shares will provide New Valero
with the ability to meet future capital needs and to provide shares for
possible acquisitions and stock dividends or stock splits.
New Valero believes that the New Valero Preferred Stock will provide New
Valero with increased flexibility in structuring possible future financings
and acquisitions, and in meeting other corporate needs that might arise.
Having such authorized shares available for issuance will allow New Valero to
issue shares of New Valero Preferred Stock without the expense and delay of a
special stockholders' meeting. The authorized and unissued shares of preferred
stock, as well as the authorized and unissued shares of New Valero Common
Stock, will be available for issuance without further action by stockholders,
unless such action is otherwise required by applicable law. Although the New
Valero Board has no intention at the present time of doing so, it could issue
a series of New Valero Preferred Stock that could, subject to certain
limitations imposed by the law, depending on the terms of such series, impede
the completion of a merger, tender offer or other takeover attempt. The New
Valero Board will make any determination to issue such shares based on its
judgment as to the best interests of New Valero and its then-existing
stockholders at the time of the issuance. The New Valero Board, in so acting,
could issue preferred stock having terms which could discourage an acquisition
attempt or other transaction that some, or a majority, of the stockholders
might believe to be in their best interests or in which stockholders might
receive a premium for their stock over the then market price of such stock.
AMENDMENT OF CERTAIN PROVISIONS OF THE NEW VALERO CERTIFICATE AND NEW VALERO
BY-LAWS
The DGCL provides that a Delaware corporation's certificate of incorporation
may be amended by the affirmative vote of a majority of the outstanding stock
entitled to vote thereon and a majority of the outstanding stock of each class
entitled to vote thereon as a class. Amendment of the provisions of the New
Valero Certificate relating to the inability of stockholders to act by written
consent, the removal of directors, the classification of the New Valero Board
and the ability of stockholders to amend the New Valero By-laws requires 80%
of the voting power of the then outstanding voting stock, voting together as a
single class. The New Valero Certificate and the New Valero By-laws provide
that the New Valero By-laws may be amended by the New Valero Board by a
majority vote of the New Valero Board or by the stockholders by a vote of at
least 80% of the voting stock of New Valero.
75
<PAGE>
RIGHTS
The New Valero Rights Agreement to be adopted by the New Valero Board, as
described above, will permit disinterested stockholders to acquire shares of
New Valero Common Stock or common stock of an acquiring company at a
substantial discount in the event of certain described changes in control. See
"Description of New Valero Capital Stock--New Valero Purchase Rights."
MANAGEMENT STABILITY AGREEMENTS; OTHER SEVERANCE ARRANGEMENTS
New Valero has entered into certain Severance Agreements, Stability
Agreements and Incentive Agreements with its Executive Officers and other key
management employees providing severance compensation and continuation of
benefits in the event of termination following a change in control of New
Valero, with the amount of payments to be received being dependent upon the
voluntary or involuntary nature of such termination. See "Executive
Compensation--Arrangements With Certain Officers and Directors."
BUSINESS COMBINATIONS
The New Valero Certificate provides that certain "business combinations" (as
defined in the New Valero Certificate) must be approved by the holders of at
least 66 2/3% of the voting power of the shares of New Valero Common Stock not
owned by an "interested stockholder" (as defined in the New Valero Certificate,
the beneficial owner of 15% of the outstanding voting stock), unless the
business combination is approved by the "Continuing Directors" (as defined in
the New Valero Certificate) or meet certain requirements regarding price and
procedure.
STATUTORY PROVISIONS
New Valero is subject to Section 203 of the DGCL ("Section 203"), which may
make it more difficult for there to be a change in control of New Valero or for
New Valero to enter into certain business combinations than if New Valero were
not subject to such section.
Section 203 provides that, subject to certain exceptions specified therein, a
corporation shall not engage in any "business combination" with any "interested
stockholder" for a three-year period following the time that such stockholder
becomes an interested stockholder unless (i) prior to such time, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding certain shares) or (iii) on or
subsequent to such time, the business combination is approved by the board of
directors of the corporation and by the affirmative vote of at least 66 2/3% of
the outstanding voting stock which is not owned by the interested stockholder.
Section 203 generally defines an "interested stockholder" to include (x) any
person that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person. Section 203 generally defines a
"business combination" to include (i) mergers and sales or other dispositions
of 10% or more of the assets of the corporation with or to an interested
stockholder, (ii) certain transactions resulting in the issuance or transfer to
the interested stockholder of any stock of the corporation or its subsidiaries,
(iii) certain transactions which would result in increasing the proportionate
share of the stock of the corporation or its subsidiaries owned by the
interested stockholder and (iv) receipt by the interested stockholder of the
benefit (except proportionately as a stockholder) of any loans, advances,
guarantees, pledges, or other financial benefits.
Under certain circumstances, Section 203 makes it more difficult for a person
who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
certificate of incorporation or stockholder-adopted by-laws may exclude a
corporation from the restrictions imposed thereunder. Neither the New Valero
Certificate nor the New Valero By-laws exclude New Valero from the restrictions
imposed under Section 203. It is anticipated that the provisions of Section 203
may encourage
76
<PAGE>
companies interested in acquiring New Valero to negotiate in advance with the
New Valero Board since the stockholder approval requirement would be avoided
if the New Valero Board approves, prior to the time the stockholder becomes an
interested stockholder, either the business combination or the transaction
which results in the stockholder becoming an interested stockholder.
VALIDITY OF SECURITIES
The validity of the shares of New Valero Common Stock and Rights to be
issued in connection with the Distribution will be passed upon for New Valero
by Morris, Nichols, Arsht & Tunnell.
EXPERTS
The consolidated financial statements of Valero as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
The financial statements of Basis as of December 31, 1996 and 1995, and for
each of the years in the three-year period ended December 31, 1996, included
in this Prospectus, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto which is
included herein. The financial statements audited by Arthur Andersen LLP have
been included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The New Valero Board expects to appoint Arthur Andersen LLP as New Valero's
independent public accountants to audit New Valero's financial statements as
of and for the year ended December 31, 1997.
STOCKHOLDER PROPOSALS
Section 9 of the New Valero By-laws, filed as an exhibit to the New Valero
Registration Statement of which this Prospectus is a part, sets forth advance
notice requirements applicable to stockholders desiring to nominate candidates
for directors or to present a proposal or bring other business before an
annual meeting of stockholders of New Valero. In each case, the notice must be
given to the Corporate Secretary of New Valero whose address is 530
McCullough, San Antonio, Texas 78215. The New Valero 1998 Annual Meeting of
Stockholders is expected to be held on or around April 30, 1998. To be
considered, notice of any such nomination or proposal must be received between
January 30, 1998 and March 1, 1998. To be included in New Valero's proxy
statement and form of proxy for that meeting, any such nomination or proposal
must also comply in all respects with the rules and regulations of the SEC and
must be received by the Corporate Secretary of New Valero within the time
period specified therein.
77
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
2-1-1 crack spread....................................................... 40
3-2-1 crack spread....................................................... 51
85-15 clean fuels crack spread........................................... 51
Acquiring Person......................................................... 72
Ancillary Agreements..................................................... 15
Average Price............................................................ 27
Basis.................................................................... 1, 14
Basis Acquisition........................................................ 4, 14
BPD...................................................................... 42
CARB II.................................................................. 42
Cash Dividend............................................................ 23
Clean Air Act............................................................ 45
Coal..................................................................... 68
Code..................................................................... 17
Company.................................................................. 30
Competitive Business..................................................... 24
Consent.................................................................. 25
Conversion Ratio......................................................... 26
Convertible Preferred Stock.............................................. 21
crack spread............................................................. 37
DGCL..................................................................... 17
Director Option Plan..................................................... 58
Director Plan............................................................ 58
Director Stock........................................................... 58
Distribution............................................................. 14
Distribution Agent....................................................... 21
Distribution Agreement................................................... 15
Distribution Record Date................................................. 14
Effective Time........................................................... 18
Employee Benefits Agreement.............................................. 15
Employee Stock Plans..................................................... 70
EPA...................................................................... 36, 53
ESOP..................................................................... 28
Executive Officers....................................................... 59
FAR...................................................................... 51
FCC Unit................................................................. 49
FERC..................................................................... 30
Final Expiration Date.................................................... 72
HDS Unit................................................................. 34
HOC...................................................................... 44
Hydrocracker............................................................. 46
Incentive Agreements..................................................... 67
Indemnifiable Losses..................................................... 25
Intercorporate Reorganization............................................ 14
Interim Services Agreement............................................... 15
IRBs..................................................................... 8, 25
Javelina................................................................. 37
Junior Preferred Stock................................................... 71
</TABLE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
LTIP..................................................................... 61
Medium-Term Notes........................................................ 33
Merger................................................................... 14
Merger Agreement......................................................... 14
Merger Sub............................................................... 14
Methanol Plant........................................................... 47
Mbbls.................................................................... 32
MMcf..................................................................... 32
Mcf...................................................................... 32
MTBE..................................................................... 33
MTBE Plant............................................................... 34
MTBE/TAME Unit........................................................... 47
Named Executive Officers................................................. 60
Natural Gas Business..................................................... 2, 15
New Credit Facility...................................................... 23
New Valero............................................................... i, 14
New Valero Board......................................................... 17
New Valero Bonus Plan.................................................... 65
New Valero By-laws....................................................... 17
New Valero Certificate................................................... 17
New Valero Common Stock.................................................. 14
New Valero ESIP.......................................................... 65
New Valero Group......................................................... 23
New Valero Option Plan................................................... 65
New Valero Pension Plan.................................................. 27
New Valero Preferred Stock............................................... 71
New Valero Registration Statement........................................ 13, 22
New Valero Rights Agreement.............................................. 71
New Valero Thrift Plan................................................... 27
NGL...................................................................... 30
NOV...................................................................... 53
NYSE..................................................................... 14
oxygenates............................................................... 50
Partnership.............................................................. 31
Pension Plan............................................................. 63
Performance Shares....................................................... 63
Performing Party......................................................... 29
PG&E Corp................................................................ 14
PG&E Corp. Common Stock.................................................. 14
Pro Forma Financial Statements........................................... 4
Prospectus............................................................... 14
Proxy Statement-Prospectus............................................... 14
Purchase Price........................................................... 71
Recapitalization......................................................... 4
Receiving Party.......................................................... 29
Redemption Price......................................................... 73
Refinery................................................................. 34
Refining Business........................................................ 2, 15
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
reformate................................................................ 46
Reformer................................................................. 46
Refunding Bonds.......................................................... 43
Reorganization Tax....................................................... 26
resid.................................................................... 19
Residfiner............................................................... 42
Restricted Stock......................................................... 60
Restricted Stock Plan.................................................... 70
Retained Subsidiary...................................................... 23
Retirement Plan.......................................................... 59
RFG...................................................................... 34
Right.................................................................... 14
Right Certificates....................................................... 72
Rights Separation Date................................................... 72
ROSE Unit................................................................ 42
Salomon.................................................................. 4, 14
SARs..................................................................... 26, 65
SEC...................................................................... 13
Section 203.............................................................. 76
Securities Act........................................................... 22
SERP..................................................................... 27
SERP Trust............................................................... 27
Severance Agreements..................................................... 66
Stability Agreements..................................................... 67
Supplemental Pension Plan................................................ 64
TAME..................................................................... 47
Tax Opinions............................................................. 14
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Tax Sharing Agreement..................................................... 15
Teco...................................................................... 52
Thrift Plan Transfers..................................................... 27
Time of Distribution...................................................... 14
TNRCC..................................................................... 51
Transactions.............................................................. 14
truck rack sale........................................................... 47
TSR....................................................................... 63
Valero.................................................................... i, 14
Valero Board.............................................................. 14
Valero Common Stock....................................................... 14
Valero Excess Thrift Plan................................................. 27
Valero ESIP............................................................... 62
Valero Group.............................................................. 23
Valero Guarantees......................................................... 23
Valero Option............................................................. 26
Valero Supplemental Retirement Plan....................................... 27
Valero Thrift Plan........................................................ 27
VESOP..................................................................... 28
VNGP, L.P. ............................................................... 31
VNGP Merger............................................................... 31
WACOG..................................................................... 35
WTI....................................................................... 40
when-issued............................................................... 27
Xylene Unit............................................................... 47
</TABLE>
79
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<S> <C>
Consolidated Financial Statements--Valero Energy Corporation:*
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Common Stock and Other Stockholders' Equity... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Consolidated Financial Statements--Basis Petroleum, Inc.:
Report of Independent Public Accountants................................. F-33
Consolidated Balance Sheets.............................................. F-34
Consolidated Statements of Operations.................................... F-35
Consolidated Statements of Stockholders' Equity.......................... F-36
Consolidated Statements of Cash Flows.................................... F-37
Notes to Consolidated Financial Statements............................... F-38
</TABLE>
- --------
* For financial reporting purposes under the federal securities laws, New
Valero is a "successor registrant" to Valero. As a result, the historical
financial information included herein is the historical financial information
of Valero.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Valero Energy Corporation:
We have audited the accompanying consolidated balance sheets of Valero
Energy Corporation (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income, common
stock and other stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As explained in Note 1 to the financial statements, the Company has restated
its consolidated balance sheets as of December 31, 1996 and 1995, its
consolidated statements of common stock and other stockholders' equity for
each of the three years in the period ended December 31, 1996, and its
consolidated statements of income and cash flows for the year ended December
31, 1994, to change the accounting for a contingency which was recorded in
conjunction with the acquisition of Valero Natural Gas Partners, L.P. in May
of 1994.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valero Energy Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
San Antonio, Texas
February 14, 1997 (except with
respect to the matters discussed
in Notes 1, 2 and 3, as to which
the date is May 9, 1997)
F-2
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments.......................................... $ 19,847 $ 28,054
Cash held in debt service escrow............................................. 37,746 36,627
Receivables, less allowance for doubtful accounts of $1,624 (1996) and $1,193
(1995)...................................................................... 566,088 339,189
Inventories.................................................................. 212,134 140,822
Current deferred income tax assets........................................... 22,408 29,530
Prepaid expenses and other................................................... 29,946 47,321
---------- ----------
888,169 621,543
---------- ----------
PROPERTY, PLANT AND EQUIPMENT--including construction in progress of $45,824
(1996) and $37,472 (1995), at cost............................................ 2,787,431 2,682,694
Less: Accumulated depreciation............................................... 708,352 622,123
---------- ----------
2,079,079 2,060,571
---------- ----------
INVESTMENT IN AND ADVANCES TO JOINT VENTURES................................... 29,192 41,890
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS.............................................. 138,334 137,876
---------- ----------
$3,134,774 $2,861,880
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.............................................................. $ 82,000 $ --
Current maturities of long-term debt......................................... 72,341 81,964
Accounts payable............................................................. 661,273 312,672
Accrued interest............................................................. 20,082 31,104
Other accrued expenses....................................................... 39,458 42,542
---------- ----------
875,154 468,282
---------- ----------
LONG-TERM DEBT, less current maturities........................................ 868,300 1,035,641
---------- ----------
DEFERRED INCOME TAXES.......................................................... 279,938 270,813
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES......................................... 34,407 56,031
---------- ----------
REDEEMABLE PREFERRED STOCK, SERIES A, issued 1,150,000 shares, outstanding
11,500 (1996) and 69,000 (1995) shares........................................ 1,150 6,900
---------- ----------
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value--20,000,000 shares authorized including
redeemable preferred shares:
$3.125 Convertible Preferred Stock, issued and outstanding 3,450,000
(1996 and 1995) shares ($172,500 aggregate involuntary liquidation value).. 3,450 3,450
Common stock, $1 par value--75,000,000 shares authorized; issued 44,185,513
(1996) and 43,739,380 (1995) shares......................................... 44,186 43,739
Additional paid-in capital................................................... 540,133 530,177
Unearned Valero Employees' Stock Ownership Plan Compensation................. (8,783) (11,318)
Retained earnings............................................................ 496,839 458,343
Treasury stock, -0- (1996) and 6,904 (1995) common shares, at cost........... -- (178)
---------- ----------
1,075,825 1,024,213
---------- ----------
$3,134,774 $2,861,880
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES........................ $4,990,681 $3,197,872 $1,837,440
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales and operating expenses.... 4,606,320 2,830,636 1,561,225
Selling and administrative expenses..... 81,665 78,120 66,258
Depreciation expense.................... 101,787 100,325 84,032
---------- ---------- ----------
Total................................. 4,789,772 3,009,081 1,711,515
---------- ---------- ----------
OPERATING INCOME.......................... 200,909 188,791 125,925
EQUITY IN EARNINGS (LOSSES) OF AND INCOME
FROM:
Valero Natural Gas Partners, L.P........ -- -- (10,698)
Joint ventures.......................... 3,899 4,827 2,437
LOSS ON INVESTMENT IN PROESA JOINT
VENTURE.................................. (19,549) -- --
(PROVISION FOR) REVERSAL OF ACQUISITION
EXPENSE ACCRUAL.......................... 18,698 (2,506) (16,192)
OTHER INCOME, NET......................... 4,921 5,248 3,431
INTEREST AND DEBT EXPENSE:
Incurred................................ (99,505) (105,921) (79,286)
Capitalized............................. 4,328 4,699 2,365
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................ 113,701 95,138 27,982
INCOME TAX EXPENSE........................ 41,000 35,300 10,700
---------- ---------- ----------
NET INCOME................................ 72,701 59,838 17,282
Less: Preferred stock dividend
requirements........................... 11,327 11,818 9,490
---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK..... $ 61,374 $ 48,020 $ 7,792
========== ========== ==========
EARNINGS PER SHARE OF COMMON STOCK........ $ 1.40 $ 1.10 $ .18
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(in thousands)........................... 43,926 43,652 43,370
DIVIDENDS PER SHARE OF COMMON STOCK....... $ .52 $ .52 $ .52
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED NUMBER OF COMMON ADDITIONAL UNEARNED
STOCK COMMON STOCK PAID-IN VESOP RETAINED TREASURY
$1 PAR SHARES $1 PAR CAPITAL COMPENSATION EARNINGS STOCK
----------- ---------- ------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993................... $ -- 43,391,685 $43,392 $371,303 $(15,958) $446,931 $(3,371)
Net income.............. -- -- -- -- -- 17,282 --
Dividends on Series A
Preferred Stock........ -- -- -- -- -- (1,173) --
Dividends on Convertible
Preferred Stock........ -- -- -- -- -- (7,427) --
Dividends on Common
Stock.................. -- -- -- -- -- (22,554) --
Issuance of Convertible
Preferred Stock, net... 3,450 -- -- 164,428 -- -- --
Unearned Valero
Employees' Stock
Ownership Plan
compensation........... -- -- -- -- 2,252 -- --
Shares repurchased and
shares issued pursuant
to employee stock plans
and other.............. -- 72,184 72 882 -- -- 3,371
------ ---------- ------- -------- -------- -------- -------
BALANCE, December 31,
1994................... 3,450 43,463,869 43,464 536,613 (13,706) 433,059 --
Net income.............. -- -- -- -- -- 59,838 --
Dividends on Series A
Preferred Stock........ -- -- -- -- -- (1,075) --
Dividends on Convertible
Preferred Stock........ -- -- -- -- -- (10,781) --
Dividends on Common
Stock.................. -- -- -- -- -- (22,698) --
Unearned Valero
Employees' Stock
Ownership Plan
compensation........... -- -- -- -- 2,388 -- --
Deficiency payment tax
effect................. -- -- -- (9,106) -- -- --
Shares repurchased and
shares issued pursuant
to employee stock plans
and other.............. -- 275,511 275 2,670 -- -- (178)
------ ---------- ------- -------- -------- -------- -------
BALANCE, December 31,
1995................... 3,450 43,739,380 43,739 530,177 (11,318) 458,343 (178)
Net income.............. -- -- -- -- -- 72,701 --
Dividends on Series A
Preferred Stock........ -- -- -- -- -- (587) --
Dividends on Convertible
Preferred Stock........ -- -- -- -- -- (10,781) --
Dividends on Common
Stock.................. -- -- -- -- -- (22,837) --
Unearned Valero
Employees' Stock
Ownership Plan
compensation........... -- -- -- -- 2,535 -- --
Shares repurchased and
shares issued pursuant
to employee stock plans
and other.............. -- 446,133 447 9,956 -- -- 178
------ ---------- ------- -------- -------- -------- -------
BALANCE, December 31,
1996................... $3,450 44,185,513 $44,186 $540,133 $ (8,783) $496,839 $ --
====== ========== ======= ======== ======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 72,701 $ 59,838 $ 17,282
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense...................... 101,787 100,325 84,032
Loss on investment in Proesa joint
venture.................................. 19,549 -- --
Provision for (reversal of) acquisition
expense accrual.......................... (18,698) 2,506 16,192
Amortization of deferred charges and
other, net............................... 32,458 32,352 19,452
Changes in current assets and current
liabilities.............................. 50,232 (31,636) (95,597)
Deferred income tax expense............... 20,000 4,700 7,000
Equity in (earnings) losses in excess of
distributions:
Valero Natural Gas Partners, L.P. ...... -- -- 16,179
Joint ventures.......................... (3,899) (4,304) (2,437)
Changes in deferred items and other, net.. 1,671 (7,959) 6,008
--------- --------- ---------
Net cash provided by operating
activities............................. 275,801 155,822 68,111
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................ (128,453) (124,619) (80,738)
Deferred turnaround and catalyst costs...... (36,389) (35,590) (21,999)
Investment in and advances to joint
ventures, net.............................. 1,197 (2,018) (9,229)
Investment in Valero Natural Gas Partners,
L.P. ...................................... -- -- (124,264)
Assets leased to Valero Natural Gas
Partners, L.P. ............................ -- -- (1,886)
Distributions from Valero Natural Gas
Partners, L.P. ............................ -- -- 2,789
Dispositions of property, plant and
equipment.................................. 6,834 13,531 4,504
Other, net.................................. 637 70 898
--------- --------- ---------
Net cash used in investing activities..... (156,174) (148,626) (229,925)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net............ 82,000 -- --
Long-term borrowings........................ 65,000 508,500 574,100
Long-term debt reduction.................... (240,229) (473,357) (509,385)
Increase in cash held in debt service escrow
for principal.............................. (1,875) (1,875) (22,768)
Common stock dividends...................... (22,837) (22,698) (22,554)
Preferred stock dividends................... (11,368) (11,856) (8,600)
Issuance of Convertible Preferred Stock,
net........................................ -- -- 167,878
Issuance of common stock.................... 11,225 6,129 4,178
Purchases of treasury stock................. (4,000) (4,445) (927)
Repurchase of Series A Preferred Stock...... (5,750) (5,750) (1,150)
--------- --------- ---------
Net cash provided by (used in) financing
activities............................... (127,834) (5,352) 180,772
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS............................. (8,207) 1,844 18,958
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD.......................... 28,054 26,210 7,252
--------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF
PERIOD....................................... $ 19,847 $ 28,054 $ 26,210
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Valero Energy Corporation ("Energy") and subsidiaries (collectively referred
to herein as the "Company"). All significant intercompany transactions have
been eliminated in consolidation. Certain prior period amounts have been
reclassified for comparative purposes.
Energy conducts its refining and marketing operations through its wholly
owned subsidiary, Valero Refining and Marketing Company ("VRMC"), and VRMC's
operating subsidiaries (collectively referred to herein as "Refining"). Prior
to and including May 31, 1994, the Company accounted for its effective equity
interest of approximately 49% in Valero Natural Gas Partners, L.P. ("VNGP,
L.P.") and VNGP, L.P.'s consolidated subsidiaries, including Valero Management
Partnership, L.P. (the "Management Partnership") and various subsidiary
operating partnerships ("Subsidiary Operating Partnerships") (collectively
referred to herein as the "Partnership") using the equity method of
accounting. Effective May 31, 1994, the Company acquired through a merger the
remaining effective equity interest of approximately 51% in the Partnership
and changed the method of accounting for its investment in the Partnership to
the consolidation method (see Note 3).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues generally are recorded when services have been provided or products
have been delivered. Changes in the fair value of financial instruments
related to trading activities are recognized in income currently. See "Price
Risk Management Activities" below.
Price Risk Management Activities
The Company enters into various exchange-traded and over-the-counter
financial instrument contracts with third parties to hedge the purchase costs
and sales prices of inventories, operating margins and certain anticipated
transactions. Such contracts are designated at inception as a hedge where
there is a direct relationship to the price risk associated with the Company's
inventories or future purchases and sales of commodities used in the Company's
operations. Hedges of inventories are accounted for under the deferral method
with gains and losses included in the carrying amounts of inventories and
ultimately recognized in cost of sales as those inventories are sold. Hedges
of anticipated transactions are also accounted for under the deferral method
with gains and losses on these transactions recognized in cost of sales when
the hedged transaction occurs. Gains and losses on early terminations of
financial instrument contracts designated as hedges are deferred and included
in cost of sales in the measurement of the hedged transaction. Certain of the
Company's hedging activities could tend to reduce the Company's participation
in rising margins but are intended to limit the Company's exposure to loss
during periods of declining margins.
The Company also enters into various exchange-traded and over-the-counter
financial instrument contracts with third parties for trading purposes.
Contracts entered into for trading purposes are accounted for under the fair
value method. Changes in the fair value of these contracts are recognized as
gains or losses in cost of sales currently and are recorded in the
Consolidated Balance Sheets in "Prepaid expenses and other" and "Accounts
payable" at fair value at the reporting date. The Company determines the fair
value of its exchange-traded contracts based on the settlement prices for open
contracts, which are established by the exchange on which the
F-7
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
instruments are traded. The fair value of the Company's over-the-counter
contracts is determined based on market-related indexes or by obtaining quotes
from brokers. See Note 6.
Inventories
The Company owns a specialized petroleum refinery (the "Refinery") in Corpus
Christi, Texas. Refinery feedstocks and refined products and blendstocks are
carried at the lower of cost or market, with the cost of feedstocks and
produced products determined primarily under the last-in, first-out ("LIFO")
method of inventory pricing and the cost of products purchased for resale
determined under the weighted average cost method. The excess of the
replacement cost of the Company's LIFO inventories over their LIFO values was
approximately $51 million at December 31, 1996. Natural gas in underground
storage, natural gas liquids ("NGLs") and materials and supplies are carried
principally at weighted average cost not in excess of market. Inventories as
of December 31, 1996 and 1995 were as follows (in thousands) (see Note 6):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Refinery feedstocks..................................... $ 42,744 $ 48,295
Refined products and blendstocks........................ 99,398 41,967
Natural gas in underground storage...................... 40,609 31,156
NGLs.................................................... 5,190 3,280
Materials and supplies.................................. 24,193 16,124
-------- --------
$212,134 $140,822
======== ========
</TABLE>
Refinery feedstock and refined product and blendstock inventory volumes
totalled 7.4 million barrels ("MMbbls") and 6.2 MMbbls as of December 31, 1996
and 1995, respectively. Natural gas inventory volumes totalled approximately
10 billion cubic feet ("Bcf") and 11.7 Bcf as of December 31, 1996 and 1995,
respectively.
Prepaid Expenses and Other
Prepaid expenses and other as of December 31, 1996 and 1995 were as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Commodity deposits and deferrals (see Note 6)............. $18,914 $34,553
Prepaid insurance......................................... 6,737 8,663
Prepaid benefits expense.................................. 2,794 2,187
Other..................................................... 1,501 1,918
------- -------
$29,946 $47,321
======= =======
</TABLE>
Property, Plant and Equipment
Property additions and betterments include capitalized interest, and
acquisition and administrative costs allocable to construction and property
purchases.
The costs of minor property units (or components of property units), net of
salvage, retired or abandoned are charged or credited to accumulated
depreciation under the composite method of depreciation. Gains or losses on
sales or other dispositions of major units of property are credited or charged
to income.
F-8
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Major classes of property, plant and equipment as of December 31, 1996 and
1995 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Refining and marketing--processing facilities...... $1,634,430 $1,596,832
Natural gas related services--transmission,
gathering, processing and storage facilities...... 988,234 945,408
Other.............................................. 118,943 102,982
Construction in progress........................... 45,824 37,472
---------- ----------
$2,787,431 $2,682,694
========== ==========
</TABLE>
Provision for depreciation of property, plant and equipment is made
primarily on a straight-line basis over the estimated useful lives of the
depreciable facilities. During early 1996, a detailed study of the Company's
fixed asset lives was completed by a third-party consultant for the majority
of the Company's refining and marketing and natural gas related services
assets. As a result of such study, effective January 1, 1996, the Company
adjusted the weighted-average remaining lives of the assets subject to the
study, utilizing the composite method of depreciation, to better reflect the
estimated periods during which such assets are expected to remain in service.
The effect of this change in accounting estimate on depreciation expense for
1996 was insignificant. A summary of the principal rates used in computing the
annual provision for depreciation, primarily utilizing the composite method
and including estimated salvage values, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE AVERAGE
--------- --------
<S> <C> <C>
Refining and marketing--processing facilities......... 3.6%-4.9% 4.4%
Natural gas related services--transmission, gathering,
processing and storage facilities.................... 4.3%-5.3% 4.7%
Other................................................. 6%-45% 25.3%
</TABLE>
Deferred Charges
Deferred Gas Costs
Payments made or agreed to be made in connection with the settlement of
certain disputed contractual issues with natural gas suppliers are initially
deferred. The balance of deferred gas costs included in noncurrent other
assets was $26 million as of December 31, 1996. Such amount is expected to be
recovered over the next five years through natural gas sales rates charged to
certain customers.
Catalyst and Refinery Turnaround Costs
Catalyst costs are deferred when incurred and amortized over the estimated
useful life of that catalyst, normally one to three years. Refinery turnaround
costs are deferred when incurred and amortized over that period of time
estimated to lapse until the next turnaround occurs.
Other Deferred Charges
Other deferred charges consist of technological royalties and licenses,
contract costs, debt issuance costs, and certain other costs. Technological
royalties and licenses are amortized over the estimated useful life of each
particular related asset. Contract costs are amortized over the term of the
related contract. Debt issuance costs are amortized by the effective interest
method over the estimated life of each instrument or facility.
F-9
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Accrued Expenses
Other accrued expenses as of December 31, 1996 and 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Accrued taxes............................................. $19,633 $16,433
Other accrued employee benefit costs (see Note 13)........ 8,688 11,047
Current portion of accrued pension cost (see Note 13)..... 4,265 4,695
Accrued lease expense..................................... 3,006 4,566
Other..................................................... 3,866 5,801
------- -------
$39,458 $42,542
======= =======
</TABLE>
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments approximate fair
value, except for long-term debt and certain financial instruments used in
price risk management activities. See Notes 5 and 6.
Earnings Per Share
Earnings per share of common stock were computed, after recognition of
preferred stock dividend requirements, based on the weighted average number of
common shares outstanding during each year. For the years ended December 31,
1996, 1995 and 1994, the conversion of the Convertible Preferred Stock (see
Note 9) is not assumed since its effect would be antidilutive. Potentially
dilutive common stock equivalents were not material and therefore were also
not included in the computation. The weighted average number of common shares
outstanding for the years ended December 31, 1996, 1995 and 1994 was
43,926,026, 43,651,914 and 43,369,836, respectively.
Statements of Cash Flows
In order to determine net cash provided by operating activities, net income
has been adjusted by, among other things, changes in current assets and
current liabilities, excluding changes in cash and temporary cash investments,
cash held in debt service escrow for principal, current deferred income tax
assets, short-term debt and current maturities of long-term debt. Also
excluded are the Partnership's current assets and liabilities as of the
acquisition date (see Note 3). The changes in the Company's current assets and
current liabilities, excluding the items noted above, are shown in the
following table as an (increase) decrease in current assets and an increase
(decrease) in current liabilities. The Company's temporary cash investments
are highly liquid, low-risk debt instruments which have a maturity of three
months or less when acquired. (Dollars in thousands.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Cash held in debt service escrow for
interest................................. $ 756 $ 689 $(12,673)
Receivables, net.......................... (226,899) (106,916) (64,150)
Inventories............................... (71,312) 41,267 (21,785)
Prepaid expenses and other................ 17,375 (22,304) 142
Accounts payable.......................... 344,418 38,825 (4,295)
Accrued interest.......................... (11,022) 11,411 3,901
Other accrued expenses.................... (3,084) 5,392 3,263
--------- --------- --------
Total................................. $ 50,232 $ (31,636) $(95,597)
========= ========= ========
</TABLE>
F-10
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table provides information related to cash interest and income
taxes paid by the Company for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Interest--net of amount capitalized of $4,328
(1996), $4,699 (1995) and $2,365 (1994)......... $105,519 $86,553 $72,023
Income taxes..................................... 19,043 23,935 3,931
</TABLE>
Noncash investing activities for 1995 included the reclassification to
"Deferred charges and other assets" of $12.1 million of contract costs,
previously included in "Property, plant and equipment" on the Consolidated
Balance Sheets. Noncash investing activities for 1994 included the accrual of
the remaining $60 million payment made in 1995 for the Company's interest in a
methanol plant renovation project.
Accounting Changes
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which establishes new accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. The statement is effective for transactions occurring after
December 31, 1996. Based on information currently known by the Company, this
statement will not have a material effect on the Company's consolidated
financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," issued by the FASB
in October 1995, encourages, but does not require companies to measure and
recognize in their financial statements a compensation cost for stock-based
employee compensation plans based on the "fair value" method of accounting set
forth in the statement. The Company has chosen to continue to account for its
employee stock compensation plans using the "intrinsic value" method of
accounting set forth in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's common stock at the date of
the grant over the amount an employee must pay to acquire the stock. See Note
13 for the pro forma effects on net income and earnings per share had
compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
assets to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. This statement is required to be applied
prospectively for assets to be held and used, while its initial application to
assets held for disposal is required to be reported as the cumulative effect
of a change in accounting principle. Since adoption, no impairment losses have
been recognized in the Company's consolidated financial statements. However,
see Note 7 for a discussion of the Company's write-off in the fourth quarter
of 1996 of its equity method investment in its Mexico joint venture project.
Restatement of Financial Information
The Company has restated its financial statements for the years ended
December 31, 1996, 1995 and 1994. This action was taken to change the
accounting for a contingency which was recorded in conjunction with the
acquisition of VNGP, L.P. in May of 1994. For a further discussion of the
nature of the contingency, see Note 3, "Acquisition of Valero Natural Gas
Partners, L.P."
As of the date of the acquisition of VNGP, L.P., the Company's management
believed that it was probable that a liability had been incurred resulting
from the acquisition. Although the specific amount of the contingency
F-11
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
could not be determined as of the date of the acquisition, the Company
believed that the liability would be within a range of amounts that could be
reasonably estimated as of that date. Accordingly, the Company recorded a
liability in the amount of $14.8 million, representing the minimum amount of
the range determined by management. The liability was originally recorded as a
cost of the acquisition. Since the contingency arose as a result of the
acquisition and represented an obligation of the Company rather than an
obligation of VNGP, L.P., the income statement for 1994 has been restated to
charge the acquisition contingency to expense, rather than property, plant,
and equipment, as of the date of the acquisition. As a result of this change,
the balances of property, plant, and equipment, deferred income taxes, and
retained earnings have been restated in the Consolidated Balance Sheets as of
December 31, 1996 and 1995. The impact of this change on the Consolidated
Statement of Income for the year ended December 31, 1994, is summarized below
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
AS AS
REPORTED RESTATED
-------- --------
<S> <C> <C>
Income before income taxes................................. $42,782 $27,982
Income tax expense......................................... 15,900 10,700
Net income................................................. 26,882 17,282
Net income applicable to common stock...................... 17,392 7,792
Earnings per share of common stock......................... .40 .18
</TABLE>
2. SUBSEQUENT EVENTS
Acquisition of Basis Petroleum, Inc.
The Company and Salomon Inc ("Salomon") have entered into a stock purchase
agreement pursuant to which Valero has acquired the stock of Basis Petroleum,
Inc. ("Basis") from Salomon for $285 million, plus approximately $200 million
for inventories and other working capital. Basis owns and operates three
petroleum refineries located in Texas and Louisiana and markets refined
products. The three refineries have a total crude oil processing capacity of
about 310,000 barrels per day. The acquisition will be accounted for using the
purchase method of accounting. Therefore, the results of operations of Basis
will be included in the consolidated financial statements of the Company
commencing on May 1, 1997. The stock purchase agreement provides for Salomon
to receive up to 10 additional payments following each anniversary date of the
closing of the acquisition. These annual earn-out payments would be based on
the difference between a stated base refining "crack spread" and the
theoretical spread computed using actual average quoted prices, and calculated
using a nominal average annual throughput of 100 million barrels. These
payments are limited to $35 million in any year and $200 million in the
aggregate. Any such participation payments, if made, will be accounted for as
an additional cost of the acquisition of Basis by the Company and will be
depreciated over the remaining lives of the assets to which the additional
cost is allocated. The purchase price was paid, in part, with 3,429,796 shares
of Valero Common Stock having a fair market value of approximately $120
million, with the remainder paid in cash.
Proposed Restructuring
In November 1996, the Company publicly announced that its Board of Directors
had approved a management recommendation to pursue strategic alternatives
involving the Company's principal business activities. Such alternatives
included seeking a strategic alliance for the Company's natural gas related
services business and a spin-off of its petroleum refining and marketing
operations. In response to the Company's solicitation for indications of
interest, a number of companies submitted written proposals to engage in a
strategic alliance with the Company, and the Company invited a final group of
five companies to participate in a more extensive due diligence review. On
January 31, 1997, the Company announced that its Board of Directors had
approved an agreement and plan of merger with PG&E Corporation ("PG&E") to
combine the Company's
F-12
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
natural gas related services business with PG&E following the spin-off of the
Company's refining and marketing business to the Company's shareholders (the
"Restructuring"). Under the terms of the merger agreement, the Company's
natural gas related services business will be merged with a wholly owned
subsidiary of PG&E. PG&E will acquire the Company's natural gas related
services business for approximately $1.5 billion, plus adjustments for working
capital and other considerations. PG&E will issue $722.5 million of common
stock, subject to certain closing adjustments, in exchange for outstanding
shares of Energy's common stock, and will assume approximately $777.5 million
of net debt and other liabilities. Each Energy shareholder will receive a
fractional share of PG&E common stock (trading on the New York Stock Exchange
under the symbol "PCG") for each Energy share; the amount of PG&E stock to be
received will be based on the average price of the PG&E common stock during a
period preceding the closing of the transaction and the number of Energy shares
issued and outstanding at the time of the closing. Energy's shareholders will
also receive one share of the spun-off refining and marketing company for each
share of Energy common stock. The refining and marketing company will retain
the Valero Energy Corporation name and will apply to be listed on the New York
Stock Exchange. The refining and marketing company expects to aggressively
pursue acquisitions and strategic alliances in the refining and marketing
industry. The spin-off of the refining and marketing business and the merger
with PG&E are expected to be tax-free transactions. However, on February 6,
1997, President Clinton's budget recommendations to Congress called for new
legislation that, if enacted, may require Energy to pay federal income tax upon
the consummation of the Restructuring on the amount of gain equal to the excess
of the value of the refining and marketing company stock distributed to
Energy's stockholders over Energy's basis in such stock. The President's
proposal, which has not yet been introduced in Congress, would be effective for
distributions after the date of first committee action. On April 17, 1997, the
Chairs of the House Ways and Means Committee and Senate Finance Committee and
the ranking Democrat on the Finance Committee introduced similar legislation
which, however, would not apply to distributions made pursuant to a written
agreement which was binding on April 16, 1997 and at all times thereafter nor
to distributions announced publicly by that date. It is uncertain whether any
such legislation ultimately will be enacted or what the effective date may be.
PG&E Corp. and Valero believe it is likely that any legislation ultimately
enacted will provide an exemption for transactions like the Distribution and
the Merger for which definitive agreements were executed prior to February 6,
1997. However, if the proposal is enacted or pending prior to the Merger with
an effective date provision that could cause Valero to be so subject to tax,
the Tax Opinions described in the Proxy Statement-Prospectus may not be
available and as a result the Distribution and the Merger may not be
consummated. The Restructuring transactions are subject to approval by the
Company's shareholders, the Securities and Exchange Commission, and certain
regulatory agencies, and receipt of favorable tax opinions. The Company expects
to hold an annual meeting in June 1997 to consider the Restructuring
transactions; such transactions are expected to be completed by mid-1997.
However, there can be no assurance that the various approvals or opinions will
be given or that the conditions to consummating the transactions will be met.
3. ACQUISITION OF VALERO NATURAL GAS PARTNERS, L.P.
In March 1994, Energy issued Convertible Preferred Stock (see Note 9) to fund
the merger of VNGP, L.P. with a wholly owned subsidiary of Energy. On May 31,
1994, the holders of common units of limited partner interests ("Common Units")
of VNGP, L.P. approved the merger. Upon consummation of the merger, VNGP, L.P.
became a wholly owned subsidiary of Energy and the publicly traded Common Units
(the "Public Units") were converted into the right to receive cash in the
amount of $12.10 per Common Unit. The Company utilized $117.5 million of the
net proceeds from the Convertible Preferred Stock issuance to fund the
acquisition of the Public Units. The remaining net proceeds of $50.4 million
were used to reduce outstanding indebtedness under bank credit lines and to pay
expenses of the acquisition. As a result of the merger, all of the outstanding
Common Units are held by the Company.
The merger was accounted for as a purchase and the purchase price was
allocated to the assets acquired and liabilities assumed based on estimated
fair values resulting in part from an independent appraisal of the property,
F-13
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
plant and equipment of the Partnership. The consolidated statements of income
of the Company reflect the Company's effective equity interest of
approximately 49% in the Partnership's operations for periods prior to and
including May 31, 1994, and reflect 100% of the Partnership's operations for
all periods thereafter.
In conjunction with the acquisition of the Partnership by the Company, the
Company recorded in 1994 a $14.8 million loss representing the Company's
estimate of certain costs resulting from the acquisition of the Public Units
of VNGP, L.P. See Note 1 "--Restatement of Financial Information". The reserve
was established as a result of various claims and lawsuits filed against the
Company to block the merger or to increase the price offered by the Company
for the purchase of the outstanding Public Units, and the Company's
determination that it was probable that losses were expected from successful
assertion of claims relative to the acquisition. In late 1996, upon receipt by
the Company of a favorable ruling by the magistrate hearing the sole remaining
lawsuit related to the acquisition (as described in Note 15), the Company
reversed all remaining reserves pertaining to the acquisition.
The following unaudited pro forma financial information of Valero Energy
Corporation and subsidiaries assumes that the above described transactions
occurred for all of 1994. Such pro forma information is not necessarily
indicative of the results of future operations.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-------------------------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C>
Operating revenues............................. $2,333,982
Operating income............................... 125,943
Net income..................................... 9,789
Net loss applicable to common stock............ (2,158)
Loss per share of common stock................. (.05)
</TABLE>
Prior to the merger, the Company entered into transactions with the
Partnership commensurate with its status as the General Partner. The Company
charged the Partnership a management fee equal to the direct and indirect
costs incurred by it on behalf of the Partnership. In addition, the Company
purchased natural gas and NGLs from the Partnership and sold NGLs to the
Partnership. The Company paid the Partnership a fee for operating certain of
the Company's assets. Also, the Company and the Partnership entered into other
transactions, including certain leasing transactions.
The following table summarizes transactions between the Company and the
Partnership for the five months ended May 31, 1994 (in thousands):
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
MAY 31, 1994
------------
<S> <C>
NGL purchases and services from the Partnership............... $36,536
Natural gas purchases from the Partnership.................... 9,672
Sales of NGLs and natural gas, and transportation and other
charges to the Partnership................................... 11,385
Management fees billed to the Partnership for direct and
indirect costs............................................... 34,299
Interest income from capital lease transactions............... 5,481
</TABLE>
4. SHORT-TERM DEBT
Energy currently maintains nine separate short-term bank lines of credit
totalling $190 million, $82 million of which was outstanding at December 31,
1996 at a weighted average interest rate of 6.81%. Five of these lines are
cancellable on demand, and the others expire at various times in 1997. These
short-term lines bear interest at each respective bank's quoted money market
rate, have no commitment or other fees or compensating balance requirements
and are unsecured and unrestricted as to use.
F-14
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT AND BANK CREDIT FACILITIES
Long-term debt balances as of December 31, 1996 and 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- ----------
<S> <C> <C>
Valero Refining and Marketing Company:
Industrial revenue bonds:
Marine terminal and pollution control revenue bonds,
Series 1987A bonds, 10 1/4%, due June 1, 2017.......... $ 90,000 $ 90,000
Marine terminal revenue bonds, Series 1987B bonds, 10
5/8%, due June 1, 2008................................. 8,500 8,500
Valero Energy Corporation:
$300 million revolving bank credit and letter of credit
facility, 6% at December 31, 1996, due November 1, 2000.. 25,000 120,000
10.58% Senior Notes, due December 30, 2000................ 140,343 187,714
9.14% VESOP Notes, due February 15, 1999 (see Note 13).... 5,083 6,819
Medium-Term Notes......................................... 228,500 228,500
Valero Management Partnership, L.P. First Mortgage Notes.... 443,215 476,072
-------- ----------
Total long-term debt...................................... 940,641 1,117,605
Less current maturities................................... 72,341 81,964
-------- ----------
$868,300 $1,035,641
======== ==========
</TABLE>
Energy currently maintains an unsecured $835 million revolving bank credit
and letter of credit facility (which has replaced a prior $300 million
facility) that is available for general corporate purposes including working
capital needs and letters of credit. Borrowings under this facility bear
interest at either LIBOR plus a margin (inclusive of a facility fee), base
rate or a competitive bid money market rate. The Company is also charged
various fees, including various letter of credit fees. As of December 31,
1996, Energy had approximately $273 million available under the prior bank
credit facility for additional borrowings and letters of credit. Energy also
has $170 million of uncommitted bank letter of credit facilities,
approximately $129 million of which were available as of December 31, 1996 for
additional letters of credit.
In 1992, Energy filed with the Securities and Exchange Commission (the
"Commission") a shelf registration statement which was used to offer $150
million principal amount of Medium-Term Notes, $132 million of which were
outstanding at December 31, 1996. In 1994, Energy filed another shelf
registration statement with the Commission to offer up to $250 million
principal amount of additional debt securities, including Medium-Term Notes,
$96.5 million of which were issued and outstanding at December 31, 1996. As of
December 31, 1996, Energy's outstanding Medium-Term Notes had a remaining
weighted average life of approximately 7.5 years and a weighted average
interest rate of approximately 8.3%. No Medium-Term Notes have been issued
since June 1995 and none are expected to be issued in the future.
The Management Partnership's First Mortgage Notes are currently comprised of
five remaining series due serially from 1997 through 2009, and are secured by
mortgages on and security interests in substantially all of the currently
existing and after-acquired property, plant and equipment of the Management
Partnership and each Subsidiary Operating Partnership and by the Management
Partnership's limited partner interest in each Subsidiary Operating
Partnership (the "Mortgaged Property"). As of December 31, 1996, the First
Mortgage Notes had a remaining weighted average life of approximately 5.5
years and a weighted average interest rate of 10.13% per annum. Interest on
the First Mortgage Notes is payable semiannually, but one-half of each
interest
F-15
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payment and one-fourth of each annual principal payment are escrowed quarterly
in advance. At December 31, 1996, $37.7 million had been deposited with the
Mortgage Note Indenture trustee ("Trustee") in an escrow account. The amount
on deposit is classified as a current asset (cash held in debt service escrow)
and the liability to be paid off when the cash is released by the Trustee from
escrow is classified as a current liability.
The indenture of mortgage and deed of trust pursuant to which the First
Mortgage Notes were issued (the "Mortgage Note Indenture") contains covenants
prohibiting the Management Partnership and the Subsidiary Operating
Partnerships (collectively referred to herein as the "Operating Partnerships")
from incurring additional indebtedness, including any additional First
Mortgage Notes, other than (i) up to $50 million of indebtedness to be
incurred for working capital purposes (provided that for a period of 45
consecutive days during each 16 consecutive calendar month period no such
indebtedness will be permitted to be outstanding) and (ii) up to the amount of
any future capital improvements financed through the issuance of debt or
equity by VNGP, L.P. and the contribution of such amounts as additional equity
to the Management Partnership. The Mortgage Note Indenture also prohibits the
Operating Partnerships from (a) creating new indebtedness unless certain cash
flow to debt service requirements are met; (b) creating certain liens; or (c)
making cash distributions in any quarter in excess of the cash generated in
the prior quarter, less (i) capital expenditures during such prior quarter
(other than capital expenditures financed with certain permitted
indebtedness), (ii) an amount equal to one-half of the interest to be paid on
the First Mortgage Notes on the interest payment date occurring in or next
following such prior quarter and (iii) an amount equal to one-quarter of the
principal required to be paid on the First Mortgage Notes on the principal
payment date occurring in or next following such prior quarter, plus cash
which could have been distributed in any prior quarter but which was not
distributed. The Operating Partnerships are further prohibited from purchasing
or owning any securities of any person or making loans or capital
contributions to any person other than investments in the Subsidiary Operating
Partnerships, advances and contributions of up to $20 million per year and
$100 million in the aggregate to entities engaged in substantially similar
business activities as the Operating Partnerships, temporary investments in
certain marketable securities and certain other exceptions. The Mortgage Note
Indenture also prohibits the Operating Partnerships from consolidating with or
conveying, selling, leasing or otherwise disposing of all or any material
portion of their property, assets or business as an entirety to any other
person unless the surviving entity meets certain net worth requirements and
certain other conditions are met, or from selling or otherwise disposing of
any part of the Mortgaged Property, subject to certain exceptions.
The Company was in compliance with all covenants contained in its various
debt facilities as of December 31, 1996.
Based on long-term debt outstanding at December 31, 1996, maturities of
long-term debt, including sinking fund requirements and excluding borrowings
under bank credit facilities, for the years ending December 31, 1998 through
2001 are approximately $75 million, $73.2 million, $85.6 million and $94.5
million, respectively. Maturities of long-term debt under Energy's revolving
bank credit and letter of credit facility for the year ended December 31, 2000
are $25 million.
Based on the borrowing rates currently available to the Company for long-
term debt with similar terms and average maturities, the fair value of the
Company's long-term debt, including current maturities, was $1,039 million and
$1,275 million at December 31, 1996 and 1995, respectively.
6. PRICE RISK MANAGEMENT ACTIVITIES
Refining and Marketing Hedging Activities
The Company uses over-the-counter price swaps, options and futures to hedge
refinery feedstock purchases and refined product inventories in order to
reduce the impact of adverse price changes on these inventories before
F-16
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the conversion of the feedstock to finished products and ultimate sale. Swaps,
options and futures contracts at the end of 1996 and 1995 had remaining terms
of less than one year. As of December 31, 1996 and 1995, 13% and 19%,
respectively, of the Company's refining inventory position was hedged. The
amount of deferred hedge losses included as an increase to refinery
inventories was $.8 million and $1 million as of December 31, 1996 and 1995,
respectively. The following is a summary of the contract amounts and range of
prices of the Company's contracts held or issued to hedge refining inventories
as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
PAYOR RECEIVER PAYOR RECEIVER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SWAPS:
Volumes (Mbbls)... 497 497 -- --
Price (per bbl)... $17.50-$17.57 $17.31-$17.38 -- --
OPTIONS:
Volumes (Mbbls)... -- -- -- 150
Price (per bbl)... -- -- -- $24.36-$24.78
FUTURES:
Volumes (Mbbls)... -- 981 250 1,327
Price (per bbl)... -- $24.87-$29.65 $22.71-$23.83 $17.57-$24.55
</TABLE>
The Company also hedges anticipated transactions. Over-the-counter price
swaps, options and futures are used to hedge refining operating margins for
periods up to 12 months by locking in components of the margins, including the
resid discount, the conventional crack spread and the premium product
differentials. As of December 31, 1996 and 1995, less than 2% of the Company's
anticipated 1997 and 1996 refining margin, respectively, were hedged. There
were no significant explicit deferrals of hedging gains or losses related to
these anticipated transactions as of either year end. The following table is a
summary of the contract or notional amounts and range of prices of the
Company's contracts held or issued to hedge refining margins as of December
31, 1996 and 1995. Volumes shown for swaps represent notional volumes which
are used to calculate amounts due under the agreements and do not represent
volumes exchanged.
<TABLE>
<CAPTION>
1996 1995
--------------------------- -------------
PAYOR RECEIVER RECEIVER
------------- ------------- -------------
<S> <C> <C> <C>
SWAPS:
Volumes (Mbbls).................. 6,000 28,300 525
Price (per bbl).................. $.53 -$4.90 $.74-$3.55 $34.23-$35.81
OPTIONS:
Volumes (Mbbls).................. 750 -- --
Price (per bbl).................. $25.00-$32.76 -- --
FUTURES:
Volumes (Mbbls).................. 1,312 1,410 14
Price (per bbl).................. $26.46-$30.87 $21.74-$30.39 $18.95-$19.50
</TABLE>
Natural Gas Related Services Hedging Activities
The Company uses futures, price swaps and over-the-counter and exchange-
traded options to hedge gas storage. These financial instrument contracts run
for periods of up to three months. The Company also enters into basis swaps
for location differentials at fixed prices which generally extend for periods
up to three months. As of December 31, 1996 and 1995, 59% and 26%,
respectively, of the Company's natural gas inventory position was hedged. The
amount of deferred hedge gains (losses) included as a reduction (increase) of
natural gas inventories was $(7.8) million and $.9 million as of December 31,
1996 and 1995, respectively. The following is
F-17
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
a summary of the contract or notional amounts and range of prices of the
Company's contracts held or issued to hedge natural gas inventories as of
December 31, 1996 and 1995. Volumes shown for swaps and basis swaps represent
notional volumes which are used to calculate amounts due under the agreements
and do not represent volumes exchanged.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
PAYOR RECEIVER PAYOR RECEIVER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SWAPS:
Volumes (MMcf)............. 8,155 9,155 1,000 1,000
Price (per Mcf)............ $3.20-$4.37 $2.72-$4.25 $1.91 $2.87-$3.45
OPTIONS:
Volumes (MMcf)............. 33,290 33,850 12,000 23,000
Price (per Mcf)............ $2.20-$2.60 $2.50-$3.30 $1.90-$2.50 $1.90-$2.50
FUTURES:
Volumes (MMcf)............. 31,710 36,970 17,480 15,430
Price (per Mcf)............ $2.12-$4.57 $2.08-$4.37 $1.77-$3.45 $1.75-$3.45
BASIS SWAPS:
Volumes (MMcf)............. 2,000 4,096 500 2,120
Price (per Mcf)............ $(.16)-$.32 $(.60)-$.19 $.63 $.13-$.85
</TABLE>
The Company also uses futures, price swaps and over-the-counter and
exchange-traded options to hedge certain anticipated transactions, including
anticipated natural gas purchase requirements for NGL plant shrinkage and
refining operations, natural gas liquids sales, and commitments to buy and
sell natural gas at fixed prices. These financial instrument contracts extend
through the year 2001. The Company also enters into basis swaps for location
differentials at fixed prices which extend through the year 2001. As of
December 31, 1996 and 1995, 12% and 29%, respectively, of the Company's
anticipated annual NGL plant shrinkage requirements, and 11% and 29%,
respectively, of Refining's anticipated annual natural gas requirements, were
hedged. Explicitly deferred gains from hedges of these anticipated
transactions of $24.4 million and $3.9 million, as of December 31, 1996 and
1995, respectively, will be recognized when the hedged transaction occurs. The
following table is a summary of the contract or notional amounts and range of
prices of the Company's contracts held or issued to hedge anticipated natural
gas purchase requirements for NGL plant shrinkage and refining operations,
natural gas purchase and sales commitments, and anticipated NGL production
volumes as of December 31, 1996 and 1995. Volumes shown for swaps and basis
swaps represent notional volumes which are used to calculate amounts due under
the agreements and do not represent volumes exchanged.
F-18
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
TOTAL TOTAL
1996 1995
EXPECTED MATURITY DATE BALANCE BALANCE
------------------------------------------------------- --------------------------- -----------------------
1997 1998-2001
--------------------------- ---------------------------
PAYOR RECEIVER PAYOR RECEIVER PAYOR RECEIVER PAYOR RECEIVER
------------- ------------- ------------- ------------ ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SWAPS:
Volumes (MMcf).. 28,353 13,327 14,422 -- 42,775 13,327 55,277 26,111
Price (per
Mcf)........... $1.54-$4.55 $1.65-$4.25 $2.06 -- $1.54-$4.55 $1.65-$4.25 $1.31-$3.45 $1.71-$4.34
Volumes
(Mbbls)........ 3,080 980 -- -- 3,080 980 -- --
Price (per
bbl)........... $9.35-$28.77 $10.71-$20.37 -- -- $9.35-$28.77 $10.71-$20.37 -- --
OPTIONS:
Volumes (MMcf).. 26,565 21,195 -- -- 26,565 21,195 10,340 9,073
Price (per
Mcf)........... $1.66-$3.50 $1.61-$4.00 -- -- $1.66-$3.50 $1.61 -$4.00 $1.66-$3.25 $1.50-$2.45
Volumes
(Mbbls)........ 75 975 -- -- 75 975 -- --
Price (per
bbl)........... $17.43 $14.07-$16.80 -- -- $17.43 $14.07-$16.80 -- --
FUTURES:
Volumes (MMcf).. 90,810 82,200 740 -- 91,550 82,200 105,020 52,680
Price (per
Mcf)........... $1.72-$4.57 $1.75 -$4.56 $2.35 -$2.51 -- $1.72-$4.57 $1.75-$4.56 $1.50-$3.45 $1.50-$3.61
Volumes
(Mbbls)........ 1,223 1,803 -- -- 1,223 1,803 -- --
Price (per
bbl)........... $14.99-$28.81 $15.33-$27.62 -- -- $14.99-$28.81 $15.33-$27.62 -- --
BASIS SWAPS:
Volumes (MMcf).. 32,296 36,961 11,224 40,470 43,520 77,431 16,787 98,541
Price (per
Mcf)........... $(.66)-$.24 $(.32)-$.35 $(.52) -$(.06) $(.30)-$(.26) $(.66)-$.24 $(.32)-$.35 $.06-$1.06 $.03-$.85
</TABLE>
The following table discloses the carrying amount and fair value of the
Company's refining, natural gas and NGL contracts held or issued for non-
trading purposes as of December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ------------------------
ASSETS (LIABILITIES) ASSETS (LIABILITIES)
---------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Swaps...................... $ 7,184 $ 13,853 $ 98 $ 1,557
Options.................... 1,101 (2,638) (91) 429
Futures.................... 21,116 21,116 217 217
Basis Swaps................ -- 2,809 -- 5,823
---------- ---------- --------- -----------
Total.................... $ 29,401 $ 35,140 $ 224 $ 8,026
========== ========== ========= ===========
</TABLE>
Trading Activities
The Company enters into transactions for trading purposes using its
fundamental and technical analysis of market conditions to earn additional
revenues. The types of instruments used include futures, price swaps, basis
swaps and over-the-counter and exchange-traded options. Except in limited
circumstances, these contracts run for periods of up to 12 months, with the
exception of basis swaps which extend through the year 2000. The following
table is a summary of the contract amounts and range of prices of the
Company's contracts held or issued for trading purposes as of December 31,
1996 and 1995:
F-19
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
TOTAL TOTAL
1996 1995
EXPECTED MATURITY DATE BALANCE BALANCE
--------------------------------------------- ----------------------- ---------------------------
1997 1998-2000
------------------------ --------------------
PAYOR RECEIVER PAYOR RECEIVER PAYOR RECEIVER PAYOR RECEIVER
----------- ------------ ------- ------------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SWAPS:
Volumes (MMcf)....... 4,520 4,160 -- -- 4,520 4,160 23,430 24,950
Price (per Mcf)...... $3.25-$4.25 $3.15 -$4.25 -- -- $3.25-$4.25 $3.15-$4.25 $1.79-$3.44 $1.71-$3.44
Volumes (Mbbls)...... 400 400 -- -- 400 400 2,925 2,250
Price (per bbl)...... $4.25-$4.55 $4.20-$4.72 -- -- $4.25-$4.55 $4.20-$4.72 $1.80-$4.14 $2.40-$4.18
OPTIONS:
Volumes (MMcf)....... 15,000 15,310 -- -- 15,000 15,310 36,100 18,000
Price (per Mcf)...... $2.10-$5.20 $1.65-$5.20 -- -- $2.10-$5.20 $1.65-$5.20 $1.60-$3.25 $1.60-$2.40
Volumes (Mbbls)...... -- 275 -- -- -- 275 -- 150
Price (per bbl)...... -- $25.20 -- -- -- $25.20 -- $17.50-$19.00
FUTURES:
Volumes (MMcf)....... 39,420 41,390 -- -- 39,420 41,390 63,650 59,280
Price (per Mcf)...... $1.87-$4.50 $2.09-$4.58 -- -- $1.87-$4.50 $2.09-$4.58 $1.64-$3.44 $1.67-$3.67
Volumes (Mbbls)...... -- -- -- -- -- -- 100 450
Price (per bbl)...... -- -- -- -- -- -- $23.42-$23.44 $18.24-$19.00
BASIS SWAPS:
Volumes (MMcf)....... 27,000 30,460 11,850 27,275 38,850 57,735 11,620 42,000
Price (per Mcf)...... $(.32)-$.38 $(.32)-$.40 $(.10) $(.08)-$(.05) $(.32)-$.38 $(.32)-$.40 $.07-$.47 $.03-$.22
</TABLE>
The following table discloses the fair values of contracts held or issued
for trading purposes and net gains (losses) from trading activities as of or
for the periods ended December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
FAIR VALUE OF ASSETS (LIABILITIES)
---------------------------------------
AVERAGE ENDING NET GAINS (LOSSES)
------------------ ------------------- -------------------
1996 1995 1996 1995 1996 1995
-------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Swaps.......... $ (102) $ (329) $ (560) $ 245 $ 613 $ (2,143)
Options........ (93) 1,026 (1,047) 297 8,270 (3,273)
Futures........ 1,951 2,030 926 6,739 4,016 8,822
Basis Swaps.... 1,705 487 1,072 1,266 277 2,706
-------- -------- --------- -------- --------- ---------
Total........ $ 3,461 $ 3,214 $ 391 $ 8,547 $ 13,176 $ 6,112
======== ======== ========= ======== ========= =========
</TABLE>
Market and Credit Risk
The Company's price risk management activities involve the receipt or
payment of fixed price commitments into the future. These transactions give
rise to market risk, the risk that future changes in market conditions may
make an instrument less valuable. The Company closely monitors and manages its
exposure to market risk on a daily basis in accordance with policies limiting
net open positions. Concentrations of customers in the refining and natural
gas industries may impact the Company's overall exposure to credit risk, in
that the customers in each specific industry may be similarly affected by
changes in economic or other conditions. The Company believes that its
counterparties will be able to satisfy their obligations under contracts.
7. INVESTMENTS
The Company currently owns a 35% interest in Productos Ecologicos, S.A. de
C.V. ("Proesa"), a Mexican corporation which is involved in a project (the
"Project") to design, construct and operate a plant in Mexico to produce
methyl tertiary butyl ether ("MTBE"). Proesa is also owned 10% by Dragados y
Construcciones, S.A., a Spanish construction company ("Dragados"), and 55% by
a corporation formed by a subsidiary of Banamex,
F-20
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mexico's largest bank ("Banamex"), and Infomin, S.A. de C.V., a privately
owned Mexican corporation ("Infomin"). Beginning in December 1994, the Mexican
peso experienced substantial devaluation, interest rates in Mexico increased
significantly and Mexican economic conditions deteriorated. Because of these
factors, in January 1995 the Board of Directors of Energy determined that the
Company would suspend further investment in the Project pending the resolution
of certain key issues. During 1995 and continuing in 1996, the Project
participants engaged in negotiations among themselves and with potential
additional participants in an attempt to restructure the participants'
ownership interests in Proesa and arrange funding for the Project. To date,
financing on terms satisfactory to the participants has not been available.
During the fourth quarter of 1996, the Company determined that it is unlikely
that the Project can go forward. Accordingly, the Company wrote off its $16.5
million investment in Proesa and accrued a provision for additional
liabilities associated with such investment of $3 million.
8. REDEEMABLE PREFERRED STOCK
In December of 1996, Energy redeemed 57,500 shares ($5,750,000) of its
Cumulative Preferred Stock, $8.50 Series A ("Series A Preferred Stock"), at
$100 per share. The redemption of the remaining balance (11,500 shares or
$1,150,000) is expected to occur prior to December 1, 1997.
9. CONVERTIBLE PREFERRED STOCK
In March 1994, Energy issued 3,450,000 shares of its $3.125 convertible
preferred stock ("Convertible Preferred Stock") with a stated value of $50 per
share and received cash proceeds, net of underwriting discounts, of
approximately $168 million. Each share of Convertible Preferred Stock is
convertible at the option of the holder into shares of Energy common stock
("Common Stock") at an initial conversion price of $27.03. The Convertible
Preferred Stock may not be redeemed prior to June 1, 1997. Thereafter, the
Convertible Preferred Stock may be redeemed, in whole or in part at the option
of Energy, at a redemption price of $52.188 per share through May 31, 1998,
and at ratably declining prices thereafter, plus dividends accrued to the
redemption date.
10. PREFERENCE SHARE PURCHASE RIGHTS
On November 25, 1995, Energy made a dividend distribution of one Preference
Share Purchase Right ("Right") for each outstanding share of Common Stock,
replacing similar expiring rights distributed on November 25, 1985. Until
exercisable, the Rights are not transferable apart from Common Stock. Each
Right will entitle shareholders to buy one-hundredth (1/100) of a share of a
newly issued series of Junior Participating Serial Preference Stock, Series
III, at an exercise price of $75 per Right.
F-21
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating revenues:
Refining and marketing................... $2,757,801 $1,950,657 $1,090,368
Natural gas related services............. 2,445,504 1,396,468 784,287
Other.................................... 123 126 42,639
Intersegment eliminations................ (212,747) (149,379) (79,854)
---------- ---------- ----------
Total.................................. $4,990,681 $3,197,872 $1,837,440
========== ========== ==========
Operating income (loss):
Refining and marketing................... $ 110,046 $ 141,512 $ 78,660
Natural gas related services............. 132,178 83,180 61,944
Corporate general and administrative
expenses and other, net................. (41,315) (35,901) (14,679)
---------- ---------- ----------
Total.................................. 200,909 188,791 125,925
Equity in earnings (losses) of and income
from:
Valero Natural Gas Partners, L.P......... -- -- (10,698)
Joint ventures........................... 3,899 4,827 2,437
Loss on investment in Proesa joint
venture................................... (19,549) -- --
(Provision for) reversal of acquisition
expense accrual........................... 18,698 (2,506) (16,192)
Other income, net.......................... 4,921 5,248 3,431
Interest and debt expense, net............. (95,177) (101,222) (76,921)
---------- ---------- ----------
Income before income taxes................. $ 113,701 $ 95,138 $ 27,982
========== ========== ==========
Identifiable assets:
Refining and marketing................... $1,621,998 $1,524,065 $1,528,621
Natural gas related services............. 1,366,050 1,162,724 1,119,347
Other.................................... 145,248 150,141 149,688
Investment in and advances to joint
ventures................................ 29,192 41,890 41,162
Intersegment eliminations and
reclassifications....................... (27,714) (16,940) (22,260)
---------- ---------- ----------
Total.................................. $3,134,774 $2,861,880 $2,816,558
========== ========== ==========
Depreciation expense:
Refining and marketing................... $ 52,680 $ 55,032 $ 52,956
Natural gas related services............. 44,211 40,881 26,636
Other.................................... 4,896 4,412 4,440
---------- ---------- ----------
Total.................................. $ 101,787 $ 100,325 $ 84,032
========== ========== ==========
Capital additions:
Refining and marketing................... $ 56,673 $ 29,039 $ 119,748
Natural gas related services............. 65,671 33,489 18,860
Other.................................... 6,109 2,091 2,130
---------- ---------- ----------
Total.................................. $ 128,453 $ 64,619 $ 140,738
========== ========== ==========
</TABLE>
The Company's core businesses are specialized refining and natural gas
related services. Effective January 1, 1996, the Company's natural gas and NGL
businesses were reported as one industry segment for financial
F-22
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reporting purposes (described herein as "natural gas related services") in
recognition of the Company's increasing integration of these business
activities due to the restructuring of the interstate natural gas pipeline
industry in 1993 through FERC Order 636 and the resulting transformation of the
U.S. natural gas industry into a more market and customer-oriented environment.
The Company's ability to gather, transport, market and process natural gas,
among other things, are value-added services offered to producers and attract
additional quantities of gas to the Company's pipeline system and processing
plants through integrated business arrangements. Prior to 1996, the Company's
natural gas and NGL businesses were reported as separate industry segments. The
primary effect of this change on the Company's segment disclosures was the
elimination of volume, revenue and income amounts related to natural gas fuel
and shrinkage volumes sold to and transported for the natural gas liquids
segment by the natural gas segment. Amounts for 1995 and 1994 shown above have
been restated to conform to the 1996 presentation.
At its refinery in Corpus Christi, Refining converts high-sulfur atmospheric
residual oil into premium products, primarily reformulated gasoline ("RFG"),
and sells those products principally on a spot, truck rack and term contract
basis. Spot and term sales of Refining's products are made principally to
larger oil companies and gasoline distributors in the northeastern, midwestern
and southeastern United States. In 1996, the Company also began sales of "CARB"
gasoline into the West Coast market in connection with the startup of the
California Air Resources Board's statewide CARB gasoline program. This program
requires the use of gasoline which meets more restrictive air quality
specifications than the federally mandated RFG. The principal purchasers of
Refining's products from truck racks have been wholesalers and jobbers in the
eastern and midwestern United States. The Company's natural gas related
services business consists of: purchasing, gathering, processing, storing,
transporting and selling natural gas, principally to gas distribution
companies, electric utilities, pipeline companies and industrial customers;
transporting natural gas for producers, other pipelines and end users in North
America; extracting natural gas liquids, principally from natural gas
throughput of the Company's pipeline operations; fractionating, transporting
and selling natural gas liquids, principally to petrochemical plants,
refineries and domestic fuel distributors in the Corpus Christi and Mont
Belvieu (Houston) areas; and marketing electric power throughout the United
States. Intersegment revenue eliminations relate primarily to the refining and
marketing segment's purchases of feedstocks and fuel gas from the natural gas
related services segment. In 1996, the Company had no significant amount of
export sales and no significant foreign operations, and no single customer
accounted for more than 10% of the Company's operating revenues. The foregoing
segment information reflects the Company's effective equity interest of
approximately 49% in the Partnership's operations for periods prior to and
including May 31, 1994, and reflects 100% of the Partnership's operations
thereafter (see Note 3). Capital additions in 1994 include the accrual of the
remaining $60 million payment made in 1995 for the Company's interest in a
methanol plant renovation project.
12. INCOME TAXES
Components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $20,996 $29,674 $ 3,535
State........................................... 4 926 165
------- ------- -------
Total current................................. 21,000 30,600 3,700
Deferred:
Federal......................................... 20,000 4,700 7,000
------- ------- -------
Total income tax expense...................... $41,000 $35,300 $10,700
======= ======= =======
</TABLE>
F-23
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total income tax expense differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes. The reasons
for these differences are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal income tax expense at the statutory rate... $39,800 $33,300 $ 9,800
State income taxes, net of federal income tax
benefit........................................... -- 600 100
Other--net......................................... 1,200 1,400 800
------- ------- -------
Total income tax expense....................... $41,000 $35,300 $10,700
======= ======= =======
</TABLE>
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Tax credit carryforwards............................ $ 21,835 $ 33,001
Other............................................... 43,214 25,570
--------- ---------
Total deferred income tax assets.................. $ 65,049 $ 58,571
========= =========
Deferred income tax liabilities:
Depreciation........................................ $(291,315) $(262,700)
Other............................................... (31,264) (37,154)
--------- ---------
Total deferred income tax liabilities............. $(322,579) $(299,854)
========= =========
</TABLE>
At December 31, 1996, the Company had an alternative minimum tax ("AMT")
credit carryforward of approximately $21.3 million which is available to
reduce future federal income tax liabilities. The AMT credit carryforward has
no expiration date. The Company has not recorded any valuation allowances
against deferred income tax assets as of December 31, 1996.
The Company's taxable years through 1992 are closed to adjustment by the
Internal Revenue Service. The Company believes that adequate provisions for
income taxes have been reflected in its consolidated financial statements.
F-24
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EMPLOYEE BENEFIT PLANS
Pension and Other Employee Benefit Plans
The following table sets forth for the pension plans of the Company, the
funded status and amounts recognized in the Company's consolidated financial
statements at December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $76,448 (1996) and $65,420 (1995).................... $78,441 $66,085
======= =======
Projected benefit obligation for services rendered to
date...................................................... $99,435 $87,609
Plan assets at fair value.................................. 92,486 68,619
------- -------
Projected benefit obligation in excess of plan assets...... 6,949 18,990
Unrecognized net gain from past experience different from
that assumed.............................................. 5,700 2,335
Prior service cost not yet recognized in net periodic
pension cost.............................................. (5,305) (5,033)
Unrecognized net asset at beginning of year................ 1,341 1,483
Additional minimum liability accrual....................... -- 1,948
------- -------
Accrued pension cost..................................... $ 8,685 $19,723
======= =======
</TABLE>
Net periodic pension cost for the years ended December 31, 1996, 1995 and
1994 included the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Service cost--benefits earned during the
period...................................... $ 4,622 $ 3,465 $ 3,981
Interest cost on projected benefit
obligation.................................. 6,309 5,455 4,990
Actual (return) loss on plan assets.......... (12,424) (14,376) 1,820
Net amortization and deferral................ 6,651 9,637 (6,135)
-------- -------- -------
Net periodic pension cost.................. $ 5,158 $ 4,181 $ 4,656
======== ======== =======
</TABLE>
Participation in the pension plan for employees of the Company commences
upon attaining age 21 and the completion of one year of continuous service. A
participant vests in plan benefits after 5 years of vesting service or upon
reaching normal retirement date. The pension plan provides a monthly pension
payable upon normal retirement of an amount equal to a set formula which is
based on the participant's 60 consecutive highest months of compensation
during the latest 10 years of credited service under the plan. The weighted-
average discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.25% as of December 31, 1996 and 1995. The
rate of increase in future compensation levels used in determining the
projected benefit obligation as of December 31, 1996 and 1995 was 4% for
nonexempt personnel and 3% for exempt personnel. The expected long-term rate
of return on plan assets was 9.25% as of December 31, 1996 and 1995.
Contributions, when permitted, are actuarially determined in an amount
sufficient to fund the currently accruing benefits and amortize any prior
service cost over the expected life of the then current work force. The
Company also maintains a nonqualified Supplemental Executive Retirement Plan
("SERP") which provides additional pension benefits to the executive officers
and certain other employees of the Company. The Company's contributions to the
pension plan and SERP in 1996, 1995 and 1994 were approximately $14.2 million,
$4.3 million and $5 million, respectively, and are currently estimated to be
$4.3 million in 1997. The tables at the beginning of this note include amounts
related to the SERP.
F-25
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is the sponsor of the Valero Energy Corporation Thrift Plan
("Thrift Plan") which is an employee profit sharing plan. Participation in the
Thrift Plan is voluntary and is open to employees of the Company who become
eligible to participate following the completion of three months of continuous
employment. Participating employees may make a base contribution from 2% up to
8% of their annual base salary, depending upon months of contributions by a
participant. Thrift Plan participants are automatically enrolled in the VESOP
(see below). The Company makes contributions to the Thrift Plan to the extent
employees' base contributions exceed the amount of the Company's contribution
to the VESOP for debt service. Prior to 1994, the Company matched 100% of the
employee contributions. In 1994, the Thrift Plan was amended to provide for a
total Company match in both the Thrift Plan and the VESOP aggregating 75% of
employee base contributions, with an additional contribution of up to 25%
subject to certain conditions. Participants may also make a supplemental
contribution to the Thrift Plan of up to an additional 10% of their annual
base salary which is not matched by the Company. There were no Company
contributions to the Thrift Plan in 1996 or 1995, while approximately $42,000
was contributed during 1994.
In 1989, the Company established the Valero Employees' Stock Ownership Plan
("VESOP") which is a leveraged employee stock ownership plan. Pursuant to a
private placement in 1989, the VESOP issued notes in the principal amount of
$15 million, maturing February 15, 1999 (the "VESOP Notes"). The net proceeds
from this private placement were used by the VESOP trustee to fund the
purchase of Common Stock. During 1991, the Company made an additional loan of
$8 million to the VESOP which was also used by the Trustee to purchase Common
Stock. This second VESOP loan matures on August 15, 2001. The number of shares
of Common Stock released at any semi-annual payment date is based on the
proportion of debt service paid during the year to remaining debt service for
that and all subsequent periods times the number of unreleased shares then
outstanding. As explained above, the Company's annual contribution to the
Thrift Plan is reduced by the Company's contribution to the VESOP for debt
service. During 1996, 1995 and 1994, the Company contributed $3,372,000,
$3,170,000 and $3,160,000, respectively, to the VESOP, comprised of $525,000,
$678,000 and $819,000, respectively, of interest on the VESOP Notes and
$3,072,000, $2,918,000 and $2,777,000, respectively, of compensation expense.
Compensation expense is based on the VESOP debt principal payments for the
portion of the VESOP established in 1989 and on the cost of the shares
allocated to participants for the portion of the VESOP established in 1991.
Dividends on VESOP shares of Common Stock are recorded as a reduction of
retained earnings. Dividends on allocated shares of Common Stock are paid to
participants. Dividends paid on unallocated shares were used to reduce the
Company's contributions to the VESOP during 1996, 1995 and 1994 by $225,000,
$426,000 and $436,000, respectively. VESOP shares of Common Stock are
considered outstanding for earnings per share computations. As of December 31,
1996 and 1995, the number of allocated shares were 1,052,454 and 940,470,
respectively, the number of committed-to-be-released shares were 62,918 and
62,918, respectively, and the number of suspense shares were 583,301 and
772,055, respectively.
The Company also provides certain health care and life insurance benefits
for retired employees, referred to herein as "postretirement benefits other
than pensions." Substantially all of the Company's employees may become
eligible for those benefits if, while still working for the Company, they
either reach normal retirement age or take early retirement. Health care
benefits are offered by the Company through a self-insured plan and a health
maintenance organization while life insurance benefits are provided through an
insurance company.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", which requires a
change in the Company's accounting for postretirement benefits other than
pensions from a pay-as-you-go basis to an accrual basis of accounting. The
Company is amortizing the transition obligation over 20 years, which is
greater than the average remaining service period until eligibility of active
plan participants. The Company continues to fund its postretirement benefits
other than pensions on a pay-as-you-go basis.
F-26
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth for the Company's postretirement benefits
other than pensions, the funded status and amounts recognized in the Company's
consolidated financial statements at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Accumulated benefit obligation:
Retirees............................................... $ 11,930 $ 10,295
Fully eligible active plan participants................ 390 331
Other active plan participants......................... 17,571 13,504
-------- --------
Total accumulated benefit obligation................. 29,891 24,130
Unrecognized loss........................................ (4,498) (4,586)
Unrecognized prior service cost.......................... (3,909) --
Unrecognized transition obligation....................... (10,334) (10,987)
-------- --------
Accrued postretirement benefit cost.................... $ 11,150 $ 8,557
======== ========
</TABLE>
Net periodic postretirement benefit cost for the years ended December 31,
1996, 1995 and 1994 included the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost--benefits attributed to service during
the period.......................................... $1,091 $ 860 $1,196
Interest cost on accumulated benefit obligation...... 1,716 1,769 1,686
Amortization of unrecognized transition obligation... 653 766 948
Amortization of prior service cost................... -- -- (84)
Amortization of unrecognized net loss................ 110 -- 75
------ ------ ------
Net periodic postretirement benefit cost........... $3,570 $3,395 $3,821
====== ====== ======
</TABLE>
For measurement purposes, the assumed health care cost trend rate was 7% in
1996, decreasing gradually to 5.5% in 1998 and remaining level thereafter. The
health care cost trend rate assumption has a significant effect on the amount
of the obligation and periodic cost reported. An increase in the assumed
health care cost trend rate by 1% in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $5.2 million and
the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year then ended by $.7 million. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation as of December 31, 1996 and 1995 was 7.25%.
Stock Option and Bonus Plans
As of December 31, 1996, the Company has various fixed and performance-based
stock compensation plans which are described below. The Company applies APB
Opinion No. 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
option plans. The compensation cost reflected in net income for its stock-
based compensation plans was $2.6 million and $1.7 million for 1996 and 1995,
respectively. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for 1996 and
1995 awards under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share for the years ended December 31,
1996 and 1995 would have been reduced to the pro forma amounts indicated
below:
F-27
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C> <C>
Net Income..................................... As Reported $72,701 $59,838
Pro Forma $70,427 $58,373
Earnings per share............................. As Reported $ 1.40 $ 1.10
Pro Forma $ 1.35 $ 1.07
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to awards
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The Company's Executive Stock Incentive Plan (the "ESIP") authorizes the
grant of various stock and stock-related awards to executive officers and
other key employees. Awards available under the ESIP include options to
purchase shares of Common Stock, stock appreciation rights ("SARs"),
restricted stock, performance awards and other stock-based awards. A total of
2,100,000 shares may be issued under the ESIP, of which no more than 750,000
shares may be issued as restricted stock. Under the ESIP, 110,500 options,
97,000 shares of restricted stock and 64,830 shares under performance awards
were granted during 1996, while 1,043,581 awards were available for grant as
of December 31, 1996. In addition to options available under the ESIP, the
Company also has three non-qualified stock option plans, Stock Option Plan No.
5, Stock Option Plan No. 4, and Stock Option Plan No. 3, collectively referred
to herein as the "Stock Option Plans," and a non-employee director stock
option plan. Awards under the Stock Option Plans are granted to key officers,
employees and prospective employees of the Company. As of December 31, 1996,
there were 46,705 and 48,000 shares available for grant under the Stock Option
Plans and non-employee director plan, respectively.
Under the terms of the ESIP, the Stock Option Plans and the non-employee
director plan, the exercise price of the options granted will not be less than
100%, 75%, or 100%, respectively, of the fair market value of Common Stock at
the date of grant. As of December 31, 1996, all outstanding options contain
exercise prices not less than fair market value at date of grant. Stock
options become exercisable pursuant to the individual written agreements
between the Company and the participants, generally either at the end of a
three-year period beginning on the date of grant or in three equal annual
installments beginning one year after the date of grant, with unexercised
options expiring ten years from the date of grant. A summary of the status of
the Company's stock option plans, including options granted under the ESIP,
the Stock Option Plans and the non-employee director plan, as of December 31,
1996, 1995, and 1994, and changes during the years then ended is presented in
the table below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 3,928,267 $20.69 2,575,902 $21.51 1,261,624 $23.69
Granted................. 757,920 27.44 1,599,463 18.99 1,343,919 19.43
Exercised............... (418,117) 19.28 (171,604) 17.08 (7,555) 14.53
Forfeited............... (38,978) 22.17 (74,428) 21.12 (22,086) 21.90
Expired................. -- -- (1,066) 18.36 -- --
--------- --------- ---------
Outstanding at end of
year................... 4,229,092 22.02 3,928,267 20.69 2,575,902 21.51
========= ========= =========
Exercisable at end of
year................... 2,525,957 21.71 1,531,718 22.30 708,055 23.13
Weighted-average fair
value of options
granted................ $ 6.25 $ 4.50 N/A
</TABLE>
F-28
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
under the ESIP, the Stock Option Plans and the non-employee director plan as
of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
RANGE NUMBER WEIGHTED-AVG. NUMBER
OF OUTSTANDING REMAINING WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$14.52-$21.88........... 2,460,074 7.5 years $19.02 1,499,074 $19.17
$22.13-$29.75........... 1,769,018 7.4 26.20 1,026,883 25.41
--------- ---------
$14.52-$29.75........... 4,229,092 7.5 22.02 2,525,957 21.71
========= =========
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.4 percent and 6.7 percent; expected dividend yields of 1.9 percent
and 2.8 percent; expected lives of 3.1 years and 3.2 years; and expected
volatility of 25.5 percent and 29.5 percent.
For each share of stock that can be purchased thereunder pursuant to a stock
option, Stock Option Plans No. 3 and 4 provide that a SAR may also be granted.
A SAR is a right to receive a cash payment equal to the difference between the
fair market value of Common Stock on the exercise date and the option price of
the stock to which the SAR is related. SARs under Stock Option Plans No. 3 and
4 are exercisable only upon the exercise of the related stock options. At the
end of each reporting period within the exercise period, the Company records
an adjustment to deferred compensation expense based on the difference between
the fair market value of Common Stock at the end of each reporting period and
the option price of the stock to which the SAR is related. As of December 31,
1996, 89,087 SARs were outstanding and exercisable, at a weighted-average
exercise price of $14.52 per share. During 1996, 21,316 SARs were exercised at
a weighted-average exercise price of $14.52 per share and 600 SARs were
forfeited.
The Company maintains a Restricted Stock Bonus and Incentive Stock Plan
("Bonus Plan") for certain key executives of the Company. Under the Bonus
Plan, 750,000 shares of Common Stock were reserved for issuance. As of
December 31, 1996, there were 6,927 shares available for award. No shares were
awarded under this plan in 1996, while 9,000 and 3,000 shares were awarded
under this plan during 1995 and 1994, respectively. The amount of Bonus Stock
and terms governing the removal of applicable restrictions, and the amount of
Incentive Stock and terms establishing predefined performance objectives and
periods, are established pursuant to individual written agreements between
Energy and each participant in the Bonus Plan.
14. LEASE AND OTHER COMMITMENTS
The Company has major long-term operating lease commitments in connection
with a gas storage facility, its corporate headquarters office complex and
various facilities and equipment used to store, transport and produce refinery
feedstocks and/or refined products. The gas storage facility lease has a
remaining primary term of three years, and, subject to certain conditions, one
eight-year optional renewal period during which the lease payments decrease by
one-half and one or more additional optional renewal periods of five years
each at fair market rentals. The corporate headquarters lease has a remaining
primary term of 15 years with five optional renewal periods of five years
each. In 1996, the Company entered into a sublease agreement for unused space
in its corporate headquarters office complex. The sublease has a primary term
of 20 years, with the sublessee having an option to terminate the lease after
10 years. The sublessee is occupying the premises in phases, with full
occupancy currently expected in 1997. The Company's long-term refinery
feedstock and refined product storage and transportation leases have remaining
primary terms of up to 5.3 years with optional renewal periods of up to 10
years and provide for various contingent payments based on throughput volumes
in excess of a base amount,
F-29
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
among other things. The Company also has other noncancelable operating leases
with remaining terms of up to 10 years for significant leases. The related
future minimum lease payments as of December 31, 1996, including amounts to be
received under the corporate headquarters office complex sublease, are as
follows (in thousands):
<TABLE>
<CAPTION>
OFFICE
COMPLEX
GAS ----------------
STORAGE PRIMARY
FACILITY LEASE SUBLEASE REFINING OTHER
-------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
1997............................. $ 9,832 $ 4,570 $ (2,088) $ 6,028 $1,502
1998............................. 10,156 4,570 (2,088) 7,886 1,490
1999............................. 10,438 4,570 (2,088) 7,761 966
2000............................. 5,221 4,570 (2,088) 4,977 292
2001............................. -- 4,570 (2,088) 4,075 134
Remainder........................ -- 40,771 (9,971) 1,359 616
------- ------- -------- ------- ------
Total minimum lease payments..... $35,647 $63,621 $(20,411) $32,086 $5,000
======= ======= ======== ======= ======
</TABLE>
The future minimum lease payments listed above exclude operating leases
having initial or remaining noncancelable lease terms of one year or less.
Consolidated rental expense under operating leases, excluding amounts paid in
connection with the gas storage facility and net of amounts related to the
office complex sublease, amounted to approximately $31,663,000, $29,313,000,
and $14,040,000 for 1996, 1995 and 1994 (including Partnership rents
commencing June 1, 1994), respectively, and includes various month-to-month
and other short-term rentals in addition to rents paid and accrued under long-
term lease commitments. For the period prior to the merger of VNGP, L.P. with
Energy, a portion of these amounts was charged to and reimbursed by the
Partnership for its proportionate use of the Company's corporate headquarters
office complex and for the use of certain other properties managed by the
Company for the period prior to such merger. Gas storage facility rentals paid
by the Partnership for the period prior to the VNGP, L.P. merger, and paid by
the Company for the period subsequent to the such merger, totalling
$10,438,000 per year for 1996, 1995 and 1994, were included in the cost of
gas.
The obligations of the Company under the gas storage facility lease include
its obligation to make scheduled lease payments and, in the event of a
declaration of default and acceleration of the lease obligation, to make
certain lump sum payments based on a stipulated loss value for the gas storage
facility less the fair market sales price or fair market rental value of the
gas storage facility. Under certain circumstances, a default by Energy or a
subsidiary of Energy under its credit facilities could result in a cross
default under the gas storage facility lease. The Company believes that it is
unlikely that such a default would result in actual acceleration of the gas
storage facility lease, and further believes that the occurrence of such event
would not have a material adverse effect on the Company.
15. LITIGATION AND CONTINGENCIES
City of Edinburg and Related Litigation. The Company and Southern Union
Company ("Southern Union") are defendants in a lawsuit brought by the City of
Edinburg, Texas (the "City") regarding certain ordinances of the City that
granted franchises to Rio Grande Valley Gas Company ("RGV") and its
predecessors allowing RGV to sell and distribute natural gas within the City.
RGV was formerly owned by Energy. On September 30, 1993, Energy sold the
common stock of RGV to Southern Union. The City alleges that the defendants
used RGV's facilities to sell or transport natural gas in Edinburg in
violation of the ordinances and franchises granted by the City, and that RGV
(now Southern Union) has not fully paid all franchise fees due the City. The
City also alleges that the defendants used the public property of the City
without compensating the City for such use, and alleges conspiracy and alter
ego claims involving all defendants. The City seeks alleged
F-30
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
actual damages of $50 million and unspecified punitive damages related to
amounts allegedly due under the RGV franchise, City ordinances and state law.
In addition, the City of Pharr, Texas, filed an intervention seeking
certification of a class, with itself as class representative, consisting of
all cities served by franchise by Southern Union. The court certified the
class and severed the claims of the City of Pharr and the class from the
original City of Edinburg lawsuit. The City of Pharr subsequently amended its
petition deleting all Valero entities as defendants. The original trial judge
was disqualified upon motion of the defendants (such disqualification was
upheld on appeal), and a new trial judge has been assigned to preside over
both the City of Edinburg and City of Pharr litigation. The City of Edinburg
lawsuit is scheduled for trial on August 11, 1997. In 1996, the South Texas
cities of Alton and Donna also independently intervened as plaintiffs in the
Edinburg lawsuit filed in the 92nd State District Court in Hidalgo County.
These lawsuits subsequently were severed from the Edinburg lawsuit. The claims
asserted by the cities of Alton and Donna are substantially similar to the
Edinburg litigation claims. Damages are not quantified. In connection with the
City of Edinburg lawsuit, Southern Union filed a cross-claim against Energy,
alleging, among other things, that Southern Union is entitled to
indemnification pursuant to the purchase agreement under which Energy sold RGV
to Southern Union. Southern Union also asserts claims related to a 1985
settlement among Energy, RGV and the Railroad Commission of Texas regarding
certain gas contract pricing terms. This pricing claim was recently severed
into a separate lawsuit. Southern Union's claims include, among other things,
damages for indemnification, breach of contract, negligent misrepresentation
and fraud. Three additional lawsuits were filed during December 1996 by
certain other municipalities in South Texas making allegations substantially
similar to those in the City of Edinburg litigation. In these three lawsuits,
the defendants are alleged to have excluded certain revenues from their
calculations of franchise taxes and are alleged to have provided unauthorized
gas transportation services to third parties. The plaintiffs seek actual and
exemplary, but as yet, unspecified, damages.
Teco Pipeline Company. Energy and certain of its subsidiaries have been sued
by Teco Pipeline Company ("Teco") regarding the operation of the Company's
340-mile West Texas pipeline. In 1985, a subsidiary of Energy sold a 50%
undivided interest in the pipeline and entered into a joint venture through an
ownership agreement and an operating agreement, each dated February 28, 1985,
with the purchaser of the interest. In 1988, Teco succeeded to that
purchaser's 50% interest. A subsidiary of Energy has at all times been the
operator of the pipeline. Notwithstanding the written ownership and operating
agreements, the plaintiff alleges that a separate, unwritten partnership
agreement exists, and that the defendants have exercised improper dominion
over such alleged partnership's affairs. The plaintiff also alleges that the
defendants acted in bad faith by negatively affecting the economics of the
joint venture in order to provide financial advantages to facilities or
entities owned by the defendants and by allegedly usurping for the defendants'
own benefit certain opportunities available to the joint venture. The
plaintiff asserts causes of action for breach of fiduciary duty, fraud,
tortious interference with business relationships, and other claims, and seeks
unquantified actual and punitive damages. The Company's motion to compel
arbitration was denied, but has been appealed. The Company has filed a
counterclaim alleging that the plaintiff breached its own obligations to the
joint venture and jeopardized the economic and operational viability of the
pipeline by its actions. The Company is seeking unquantified actual and
punitive damages.
Sinco Pipeline Rupture Litigation. Approximately 15 lawsuits have been filed
against various pipeline owners and other parties, including the Company,
arising from the rupture of several pipelines and fire as a result of severe
flooding of the San Jacinto River in Harris County, Texas on October 20, 1994.
The Company is a defendant in 10 of these lawsuits. The plaintiffs are
property owners in surrounding areas who allege that the defendant pipeline
owners were negligent and grossly negligent in failing to bury the pipelines
at a proper depth to avoid rupture or explosion and in allowing the pipelines
to leak chemicals and hydrocarbons into the flooded area. The plaintiffs
assert claims for property damage, costs for medical monitoring, personal
injury and nuisance, and seek an unspecified amount of actual and punitive
damages.
F-31
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
J.M. Davidson, Inc. Energy and certain of its subsidiaries are defendants in
a lawsuit originally filed in January 1993. The lawsuit is based upon
construction work performed by the plaintiff at one of the Company's gas
processing plants in 1991 and 1992. The plaintiff alleges that it performed
work for the defendants for which it was not compensated. The plaintiff
asserts claims for fraud, quantum meruit, and numerous other tort claims. The
plaintiff seeks actual damages, on each of its causes of action, of
approximately $1.25 million, plus retainage, interest and attorneys fees, and
punitive damages of at least four times the amount of actual damages. No trial
date has been set.
The Long Trusts. On April 15, 1994, certain trusts named certain
subsidiaries of the Company as additional defendants (the "Valero Defendants")
to a lawsuit filed in 1989 by the trusts against a supplier with whom the
Valero Defendants have contractual relationships under gas purchase contracts.
In order to resolve certain potential disputes with respect to the gas
purchase contracts, the Valero Defendants agreed to bear a substantial portion
of any settlement or any nonappealable final judgment rendered against the
supplier. In January 1993, the District Court ruled in favor of the trusts'
motion for summary judgment against the supplier. Damages, if any, were not
determined. The trusts seek $50 million in damages from the Valero Defendants
as a result of the Valero Defendants' alleged interference between the trusts
and the supplier, plus punitive damages in excess of treble the amount of
actual damages proven at trial. The trusts also seek approximately $56 million
in take-or-pay damages from the supplier and $70 million as damages for the
supplier's failure to take the trusts' gas ratably. The Company believes that
the claims brought by the trusts have been significantly overstated, and that
the supplier and the Valero Defendants have a number of meritorious defenses
to the claims. No trial date has been set.
Mizel. A federal securities fraud lawsuit was filed against Energy and
certain of its subsidiaries by a former owner of limited partnership interests
of VNGP, L.P. The plaintiff alleges that the proxy statement used in
connection with the solicitation of votes for approval of the Merger of the
Company and VNGP, L.P. contained fraudulent misrepresentations. The plaintiff
also alleges breach of fiduciary duty in connection with the merger
transaction. The subject matter of this lawsuit was the subject matter of a
prior Delaware class action lawsuit which was settled prior to consummation of
the Merger. The Company believes that the plaintiff's claims have been settled
and released by the prior class action settlement. Pending in the district
court is a memorandum issued by the magistrate assigned to the case which
recommends approval of the Company's motion for summary judgment.
Javelina. Valero Javelina Company, a wholly owned subsidiary of Energy, owns
a 20% general partner interest in Javelina Company ("Javelina"), a general
partnership that owns a refinery off-gas processing plant in Corpus Christi.
Javelina has been named as a defendant in ten lawsuits filed since 1993 in
state district courts in Nueces County and Duval County, Texas. Eight of the
suits include as defendants other companies that own refineries or other
industrial facilities in Nueces County. These suits were brought by a number
of plaintiffs who reside in neighborhoods near the facilities. The plaintiffs
claim injuries relating to an alleged exposure to toxic chemicals, and
generally claim that the defendants were negligent, grossly negligent and
committed trespass. The plaintiffs claim personal injury and property damages
resulting from soil and ground water contamination and air pollution allegedly
caused by the operations of the defendants. The plaintiffs seek an unspecified
amount of actual and punitive damages. The remaining two suits were brought by
plaintiffs who either live or have businesses near the Javelina plant. The
plaintiffs in these suits allege claims similar to those described above and
seek unspecified actual and punitive damages.
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is
unlikely that the final outcome of any of the claims or proceedings to which
the Company is a party, including those described above, would have a material
adverse effect on the Company's financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if any,
F-32
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
cannot be estimated with a reasonable degree of precision and there can be no
assurance that the resolution of any particular claim or proceeding would not
have an adverse effect on the Company's results of operations for the interim
period in which such resolution occurred.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The results of operations by quarter for the years ended December 31, 1996
and 1995 were as follows (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
OPERATING OPERATING NET EARNINGS PER SHARE
REVENUES INCOME INCOME OF COMMON STOCK
---------- --------- ------- ------------------
<S> <C> <C> <C> <C>
1996--Quarter Ended:
March 31............... $1,110,098(a) $ 52,238 $19,914 $ .39
June 30................ 1,152,737 54,433 20,841 .41
September 30........... 1,123,527 40,025 13,146 .23
December 31............ 1,604,319 54,213 18,800 .37
---------- -------- ------- -----
Total................ $4,990,681 $200,909 $72,701 $1.40
========== ======== ======= =====
1995--Quarter Ended:
March 31............... $ 690,535 $ 28,667 $ 3,759 $ .02
June 30................ 775,822(b) 54,953 20,522 .40
September 30........... 803,670(b) 57,781 22,630 .45
December 31............ 927,845(b) 47,390 12,927 .23
---------- -------- ------- -----
Total................ $3,197,872(b) $188,791 $59,838 $1.10
========== ======== ======= =====
</TABLE>
- --------
(a) Revised from the amount shown in the Company's Form 10-Q for the three
months ended March 31, 1996 to include revenues from certain NGL trading
activities previously classified as a reduction of cost of sales.
(b) Revised to include revenues from certain refining and marketing trading
activities previously classified as a reduction of cost of sales.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Basis Petroleum, Inc.:
We have audited the accompanying consolidated balance sheets of Basis
Petroleum, Inc. (the Company) (a Texas corporation), and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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.
As discussed in Note 15 to the accompanying consolidated financial
statements, Salomon Inc (the Company's parent) has executed a letter of intent
with Valero Energy Corporation for the sale of all of the Company's
outstanding common stock at a price substantially less than the book value of
the Company's assets.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Basis
Petroleum, Inc., and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Houston, Texas
January 31, 1997 (except with respect to the matter discussed in Note 15, as
to which date is March 17, 1997)
F-34
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 25,438 $ 11,518
Accounts receivable, unrelated parties, net
of allowance for doubtful accounts of
$1,566 in 1996 and 1995..................... 433,647 537,615
Accounts receivable, related parties......... 4,609 10,691
Market value of forward contracts............ 21,694 27,276
Inventories.................................. 357,283 347,355
Prepaid expenses and other current assets.... 5,181 5,119
Income tax benefit........................... 58,677 50,068
---------- ----------
Total current assets....................... 906,529 989,642
PROPERTY, PLANT AND EQUIPMENT, net............. 817,967 804,943
PARTNERSHIP INVESTMENTS........................ 7,448 --
OTHER ASSETS................................... 2,000 2,585
---------- ----------
Total assets............................... $1,733,944 $1,797,170
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable, unrelated parties.......... $ 446,298 $ 568,097
Accounts payable, related parties............ 66,004 6,827
Working capital advance due to Salomon....... 93,438 246,638
Market value of forward contracts............ 16,481 31,667
Accrued liabilities.......................... 144,362 64,275
---------- ----------
Total current liabilities.................. 766,583 917,504
LONG-TERM DEBT DUE TO SALOMON ................. 525,000 525,000
DEFERRED INCOME TAXES.......................... 69,171 55,810
---------- ----------
Total liabilities.......................... 1,360,754 1,498,314
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 2,000 shares
authorized, 1,000 shares
issued and outstanding...................... -- --
Additional paid-in capital................... 543,069 403,069
Retained deficit............................. (169,879) (104,213)
---------- ----------
Total stockholder's equity................. 373,190 298,856
---------- ----------
Total liabilities and stockholder's
equity.................................... $1,733,944 $1,797,170
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
REVENUES:
Unrelated parties....................... $9,163,205 $ 9,149,046 $7,223,599
Related parties......................... 341,639 882,747 572,706
---------- ----------- ----------
9,504,844 10,031,793 7,796,305
---------- ----------- ----------
COSTS AND EXPENSES:
Cost of sales, unrelated parties........ 9,127,451 9,167,502 6,910,158
Cost of sales, related parties.......... 416,048 848,776 770,112
General and administrative.............. 36,141 41,392 43,063
Depreciation and amortization........... 46,510 37,531 40,435
Provision for exiting petrochemicals
business............................... 22,000 -- --
---------- ----------- ----------
OPERATING INCOME (LOSS)................... (143,306) (63,408) 32,537
INTEREST EXPENSE, net..................... (39,172) (27,532) (18,560)
GAIN (LOSS) ON SALE OF ASSETS............. 82,030 (552) 6,617
---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................ (100,448) (91,492) 20,594
INCOME TAX (PROVISION) BENEFIT............ 34,782 33,894 (7,422)
---------- ----------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........... (65,666) (57,598) 13,172
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of income tax benefit of
$1,043................................... -- -- (1,936)
---------- ----------- ----------
NET INCOME (LOSS)......................... $ (65,666) $ (57,598) $ 11,236
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1994........... $ -- $403,069 $ (57,851) $345,218
NET INCOME......................... -- -- 11,236 11,236
----- -------- --------- --------
BALANCE, December 31, 1994......... -- 403,069 (46,615) 356,454
NET LOSS........................... -- -- (57,598) (57,598)
----- -------- --------- --------
BALANCE, December 31, 1995......... -- 403,069 (104,213) 298,856
CONVERSION OF DEBT TO EQUITY (Note
7)................................ -- 140,000 -- 140,000
NET LOSS........................... -- -- (65,666) (65,666)
----- -------- --------- --------
BALANCE, December 31, 1996......... $ -- $543,069 $(169,879) $373,190
===== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $(65,666) $(57,598) $ 11,236
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating ac-
tivities--
Depreciation and amortization............... 46,510 37,531 40,435
(Gain) loss on sale of assets............... (82,030) 147 (3,743)
Gain on termination of interest rate caps... -- (915) (2,902)
Provision for exiting petrochemical busi-
ness....................................... 22,000 -- --
Write-down of assets held for sale.......... -- 1,320 --
Deferred income taxes....................... 17,820 28,315 (13,420)
Market value of forward contracts, net...... (9,604) 5,818 13,957
Turnaround and other noncash charges........ 28,559 (19,693) 12,811
Base stock inventory reduction (Note 4)..... (23,940) -- --
Changes in operating assets and liabilities
(Note 3)................................... 96,095 (7,477) 1,346
-------- --------- --------
Net cash provided by (used in) operating
activities............................... 29,744 (12,552) 59,720
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of--
Assets held for sale........................ -- 9,680 14,520
St. Rose refinery........................... -- -- 9,962
Drilling assets............................. -- -- 4,500
Other fixed assets.......................... 290 507 2,227
Equity investments.......................... -- 2,500 --
Proceeds from sale of crude oil gathering
business..................................... 82,446 -- --
Insurance proceeds from involuntary conversion
of assets.................................... -- 1,610 3,619
(Increase) decrease in--
Property, plant and equipment............... (77,876) (247,285) (120,138)
Partnership investments and other........... (7,484) (291) 8,614
-------- --------- --------
Net cash used in investing activities..... (2,624) (233,279) (76,696)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt due to Salomon..... -- 175,000 25,000
Change in working capital advances due to
Salomon...................................... (13,200) 72,625 (12,965)
Interest rate caps and corridors, net......... -- 1,388 (722)
-------- --------- --------
Net cash provided by (used in) financing
activities............................... (13,200) 249,013 11,313
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 13,920 3,182 (5,663)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.. 11,518 8,336 13,999
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 25,438 $ 11,518 $ 8,336
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS:
Basis Petroleum, Inc. (the Company), with headquarters in Houston, Texas is
a wholly owned subsidiary of Salomon Inc (Salomon). Effective April 1, 1996,
the Company changed its name from Phibro Energy USA, Inc., to Basis Petroleum,
Inc. The Company owns and operates three oil refineries in the U.S. Gulf Coast
area, with a combined design crude oil distillation capacity of approximately
310,000 barrels per day and additional throughputs of purchased feedstock of
approximately 39,000 barrels per day.
During the fourth quarter of 1996, the Company exited its petrochemical
manufacturing business resulting in a $22,000,000 nonrecurring charge to
pretax income.
On May 9, 1995, the Company established PEUSA Clearing, Inc., a wholly owned
subsidiary, for the purpose of clearing the Company's commodity futures
transactions on the New York Mercantile Exchange (NYMEX). Effective April 1,
1996, PEUSA Clearing, Inc., changed its name to Basis Clearing, Inc.
The Company's continued focus on its core oil refining business resulted in
the divestiture of certain assets in 1994. The Company sold its St. Rose,
Louisiana refinery, certain excess equipment purchased but not required to
complete its Residfiner/ROSE unit complex, the assets of Questor Drilling
Corp. and certain assets related to its Louisiana marine fuels and lubricants
business (see Note 14).
During 1996, the Company and Howell Corporation (Howell) contributed their
respective crude oil gathering, marketing and transportation activities to
form Genesis Energy, L.P. (Genesis). The accompanying consolidated statements
of operations include results of the Company's crude oil gathering, marketing
and transportation division which had revenues of $3,598,107,000,
$3,440,065,000 and $1,830,721,000, gross margin of $18,277,000, $23,154,000
and $16,702,000 and net income of $8,609,000, $9,127,000 and $2,783,000 for
the eleven months ended November 30, 1996, and the years ended December 31,
1995 and 1994, respectively. In December 1996, units in Genesis were sold to
the public. The Company recorded a pretax gain of approximately $82,100,000 as
a result of this public offering. The Company retained a 10.58 percent
minority interest in Genesis. The Company holds a 54 percent majority
ownership interest in Genesis Energy, L.L.C. Genesis Energy L.L.C. is the
general partner holding a 2 percent ownership interest in Genesis. The
Company's investments (included in partnership investments) in Genesis are
accounted for under the equity method of accounting as the Company has the
ability to exercise significant influence over the operations of Genesis. At
December 31, 1996, Genesis' current assets, total assets and total equity is
$410,603,000, $510,132,000 and $111,338,000, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany balances and transactions have been
eliminated from the consolidated financial statements. The Company accounted
for certain partnership investments, which were less than majority-owned,
under the equity method of accounting. Certain prior-year amounts have been
reclassified to conform to the current-year presentation.
Use of Estimates
The preparation of these consolidated financial statements required the use
of certain estimates and assumptions by management in determining the
Company's assets, liabilities, revenues and expenses. Actual results could
differ from those estimates.
F-39
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Cash and Cash Equivalents
The Company considers investments purchased with an original maturity of
three months or less to be cash equivalents. At December 31, 1996 and 1995,
cash equivalents include U.S. Treasury bills that are pledged at banks for the
benefit of the NYMEX to support any open trading positions held by the Company
and to provide for the Company's Guaranty Fund deposit as required of all
NYMEX clearing members. These amounts were $13,500,000 and $2,300,000,
respectively, at December 31, 1996 and $5,300,000 and $2,300,000,
respectively, at December 31, 1995. The Company has no other requirements for
compensating balances or restrictions on cash.
Inventories
All physical inventories held for sale are carried at market value.
Due to the nature of the Company's refining and marketing activities,
significant levels of physical inventories are required, as determined by the
Company, to ensure efficient and uninterrupted operation of the Company's
refining and marketing facilities. These minimum refining and marketing
inventories are not marked-to-market as inventories held for sale but are
carried at the lower of cost or market using the weighted average cost method.
During 1996, the Company reduced its minimum refining and marketing
inventories (see Note 4).
Warehouse materials and supplies, including chemicals and catalysts, are
carried at the lower of cost or market.
Financial Instruments
The Company routinely utilizes forward contracts, swaps, options and futures
contracts. Gains and losses on forward contracts, swaps, options and futures
contracts used to hedge future anticipated refinery production or future
contract purchases of unpriced domestic crude oil where firm commitments to
sell are required prior to establishment of the purchase price, are deferred
until the margin from the underlying risk element is recognized in accordance
with Statement of Financial Accounting Standards (SFAS) No. 80, "Accounting
for Futures Contracts." Unrecognized losses of $2,803,000 and unrecognized
gains of $7,806,000 were deferred on these contracts at December 31, 1996 and
1995, respectively.
The Company accounts for all transactions, other than hedges of anticipated
refinery production and unpriced domestic crude oil discussed above, under the
mark-to-market method of accounting. Under this methodology, forward
contracts, swaps, options and futures contracts are reflected at market value
and the resulting unrealized gains and losses are recognized currently in the
consolidated statements of income. The net gains and losses are determined on
a counterparty-by-counterparty basis, netted when a contractual right of
offset exists, and are reflected as either an asset or liability on the
consolidated balance sheets.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation of property,
plant and equipment is provided using the straight-line method over the
respective estimated useful lives, which range from three to 30 years. Routine
maintenance, repairs and replacement costs are charged against current
operations. Expenditures which materially increase values, change capacities
or extend useful lives are capitalized.
F-40
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
In most cases, maintenance routines, known as turnarounds, are performed on
the major refinery units every two to four years. The Company accrues for
turnaround expenditures by charging cost of sales for amounts estimated to be
sufficient to fully fund the cost of the turnaround on the date it commences.
The accrued liability for future turnaround expenditures was $41,731,000 and
$14,865,000 at December 31, 1996 and 1995, respectively.
The Company capitalizes interest costs on major projects that require more
than one year to complete. Interest capitalized in 1996, 1995 and 1994 was
$5,410,000, $11,991,000 and $2,875,000, respectively.
During 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 provides accounting guidance with regard to the impairment of
long-lived assets when circumstances exist that indicate the carrying value of
an asset may not be recoverable. SFAS No. 121 requires an impairment
adjustment if expected future cash flows, undiscounted and excluding interest,
are less than the asset carrying value. Measurement of an impairment
adjustment is then based on the difference between the carrying value of the
asset and its fair value. Management has concluded that, pursuant to this
standard, no impairment adjustment is warranted.
Income Taxes
The Company is included in the consolidated federal income tax return of
Salomon. State income tax returns are filed separately for each entity except
where combined or consolidated returns are required or elected to be filed.
The Company's federal income taxes are provided as if the Company filed its
income tax return separately from Salomon. If there is federal taxable income,
taxes are provided at the federal statutory rate reduced by allowable tax
credits. If there is a taxable loss, a tax benefit is provided at the federal
statutory rate without limitation of any loss deduction. The tax benefit is
increased by tax credits to the extent the credits may be utilized by the
Salomon consolidated group.
State income taxes are provided on the basis that state income tax returns
are filed separately for each entity. Tax benefits from losses are provided
only if the entities are assured that the losses may be utilized in the filing
of state income tax returns.
The Company accounts for income taxes using the liability method,
recognizing deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are
determined based on differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements using
statutory tax rates.
Postemployment Benefits
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires employers to
accrue the cost of postemployment benefits during the service periods of
eligible employees. The Company recorded, as the cumulative effect of a change
in accounting principle, a net charge to income of $1,936,000 (net of an
income tax benefit of $1,043,000) to reflect the present value at January 1,
1994, of expected future benefits to be provided by the Company to former or
inactive employees after employment but before retirement attributed to
employees' services prior to the January 1, 1994, adoption date. For 1994, the
increase in expense, excluding the one-time cumulative adjustment, was
approximately $450,000.
F-41
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Accounting Pronouncements
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1, "Environmental Remediation
Liabilities," which establishes new accounting and reporting for the
recognition and disclosure of environmental remediation liabilities. The
provisions of the statement are effective for fiscal years beginning after
December 15, 1996. The impact of this new standard has not been fully
evaluated, although it is not expected to have a significant effect on the
Company's consolidated financial position or results of operations.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes new accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The statement is effective for transactions
occurring after December 31, 1996. The impact of the adoption of the new
standard is not expected to have a significant effect on the Company's
consolidated financial position or results of operations.
3. SUPPLEMENTAL CASH FLOW INFORMATION:
In order to determine net cash provided by operating activities, the
Company's net income (loss) has been adjusted by, among other things, changes
in operating assets and liabilities, excluding changes in cash and cash
equivalents. Those changes are shown as an (increase) decrease in operating
assets or an increase (decrease) in operating liabilities as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Accounts receivable...................... $110,050 $ 16,016 $(152,525)
Inventories.............................. 15,928 57,575 (77,454)
Prepaid expenses and other current
assets................................... (62) (1,339) --
Accounts payable......................... (62,622) 16,875 148,254
Accrued liabilities...................... 45,869 (38,755) 25,885
Income taxes............................. (13,068) (57,849) 57,186
-------- -------- ---------
Total................................ $ 96,095 $ (7,477) $ 1,346
======== ======== =========
</TABLE>
Interest payments, net of amounts capitalized, were $36,690,000, $27,913,000
and $17,602,000 during 1996, 1995 and 1994, respectively. The Company received
payments from Salomon in the fourth quarter of 1996 of $43,536,000 related to
1995 federal income tax net operating losses. The Company made payments to
Salomon in the fourth quarter of 1995 of $13,712,000 related to 1994 federal
income tax net operating income. The Company received $17,421,000 from Salomon
in the fourth quarter of 1995 in payment of 1992 and 1993 New York state and
city income tax benefits net of federal income taxes. The Company received a
$38,737,000 payment from Salomon in the fourth quarter of 1994 for utilization
of 1993 federal income tax net operating losses.
Noncash charges included in operating activities primarily relate to the
Company's method of accounting for turnaround expenditures and the adoption of
SFAS No. 112 in 1994. Other noncash items include the conversion of
$140,000,000 of the Company's working capital debt to additional paid-in
capital in 1996. (See Note 7).
F-42
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
4. INVENTORIES:
At December 31, 1996 and 1995, inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Refining and marketing inventories, at market......... $191,554 $140,339
Minimum refining and marketing inventories, at lower
of cost or market.................................... 126,252 172,154
Store warehouse inventories, at lower of cost or mar-
ket.................................................. 39,477 34,862
-------- --------
Total inventories................................. $357,283 $347,355
======== ========
</TABLE>
As of December 31, 1996 and 1995, the number of barrels included in minimum
refining and marketing inventories was 7,805,000 and 11,199,000, respectively,
with approximate market values of $212,384,000 and $233,396,000, respectively.
In April 1996, the Company reduced its estimate of required minimum refining
and marketing inventories by 3,034,000 barrels to more closely reflect current
operations. The reduction of minimum inventories contributed approximately
$24,000,000 to operating income.
5. PROPERTY, PLANT AND EQUIPMENT:
At December 31, 1996 and 1995, property, plant and equipment consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Land and buildings.................. $ 24,584 $ 22,932
Refining and processing facilities.. 980,513 946,493
Other............................... 12,297 9,002
--------- --------
1,017,394 978,427
Less: Accumulated depreciation...... (199,427) (173,484)
--------- --------
Property, plant and equipment
net............................. $ 817,967 $804,943
========= ========
</TABLE>
Depreciation expense was $46,501,000, $34,857,000 and $35,359,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
During 1994, the Company revised the estimated useful lives of certain fixed
assets to more closely reflect expected useful lives. The effect of this
change in accounting estimate resulted in an increase in the Company's income
before taxes and cumulative effect of change in accounting principle of
approximately $10,200,000 in 1994.
6. OTHER ASSETS:
At December 31, 1996 and 1995, other assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Interest rate cap and corridor premiums,
less
accumulated amortization................. $ 126 $ 732
Exchange seats, at cost................... 1,584 1,584
Long-term investments..................... 97 190
Other assets.............................. 193 79
------ ------
Total other assets................... $2,000 $2,585
====== ======
</TABLE>
Amortization of other assets at December 31, 1996, 1995 and 1994, was
$9,000, $2,637,000 and $5,058,000, respectively.
F-43
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
7. DEBT:
The Company and Salomon have a treasury management agreement whereby Salomon
provides a working capital facility on an unsecured basis. This agreement
expires on the earlier of August 31, 1997, or when the Company ceases to be a
wholly owned subsidiary of Salomon. Outstanding working capital borrowings
totaled $93,438,000 and $246,638,000 at December 31, 1996 and 1995,
respectively. The Company also has an unsecured subordinated term note with
Salomon that allows borrowings up to $525,000,000. The outstanding balances
under this note were $525,000,000 at December 31, 1996 and 1995. At December
31, 1996 and 1995, both the Company's working capital facility and unsecured
subordinated debt had fair values that approximated their carrying amounts.
At December 31, 1996 and 1995, the Company's working capital borrowings from
Salomon carried a variable interest rate based on the blended Salomon short-
term borrowing rate which tracked the daily federal funds rate. At December
31, 1996 and 1995, the Company's subordinated term note with Salomon carried
an interest rate based on, at the option of the Company, the daily federal
funds rate or LIBOR. At various times during 1996 and 1995, the Company
effectively converted its subordinated term note to fixed interest rate debt
using interest rate hedges.
Interest charged at rates in accordance with the working capital funding
agreement and subordinated term note with Salomon averaged 6.74 percent during
1996, 6.56 percent during 1995 and 4.32 percent during 1994. The Company, as a
net borrower from Salomon during 1996, 1995 and 1994, incurred interest
expense of $42,546,000, $37,850,000 and $20,199,000, respectively.
Effective January 3,1996, Salomon increased its equity investment in the
Company by converting $140,000,000 of the Company's working capital debt to
additional paid-in capital.
Interest on the unsecured subordinated term note with Salomon is due and
payable quarterly through December 31, 1997. Thereafter, the Company is
obligated to satisfy the outstanding balance with 20 equal quarterly principal
payments plus accrued interest commencing March 31,1998. Aggregate maturities
of long-term debt in the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
1997.............................................................. $ --
<S> <C>
1998.............................................................. 105,000
1999.............................................................. 105,000
2000.............................................................. 105,000
2001.............................................................. 105,000
Thereafter........................................................ 105,000
--------
Total......................................................... $525,000
========
</TABLE>
Should the Company cease to be a wholly owned subsidiary of Salomon, the
subordinated term note becomes due and payable within 30 days of such
occurrence.
F-44
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
8.EMPLOYEE BENEFIT PLANS:
401(k) Profit-Sharing Benefits
In order to encourage long-term savings and to provide additional funds for
retirement to its employees, the Company sponsors a profit-sharing and
retirement savings plan. Under this plan, the Company's matching contribution
is calculated as the lesser of 50 percent of each employee's annual pretax
contribution or 3 percent of each employee's total compensation. The Company
also makes a profit-sharing contribution of at least 3 percent of each
eligible employee's total compensation. The Company's costs relating to this
plan were $4,284,000, $4,142,000 and $3,822,000 in 1996, 1995 and 1994,
respectively.
Health Care Benefits
The Company also provides certain health care benefits for its active
employees. Such program is funded by a combination of Company and active
employee contributions. At December 31, 1996, there were 1,387 active
employees eligible for such benefits. Expenses recorded for these benefits
were $5,752,000, $5,581,000 and $8,935,000 in 1996, 1995 and 1994,
respectively.
Postretirement Benefits
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106
requires employers to accrue the cost of retiree health care and other
postretirement benefits during the service periods of eligible employees. The
Company's projected obligation with respect to these benefits is $6,802,000
and $7,160,000 as of December 31, 1996 and 1995, respectively, related to such
benefits. Expenses recorded for these benefits were $299,000, $264,000 and
$377,000 in 1996, 1995 and 1994, respectively.
Postemployment Benefits
As described in Note 2, effective January 1,1994, the Company adopted SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112
requires employers to accrue the cost of postemployment benefits during the
service periods of eligible employees. The Company's projected obligation with
respect to these benefits is $3,166,000 and $3,314,000 as of December 31, 1996
and 1995, respectively, related to such benefits. Expenses recorded for these
benefits were $420,000, $417,000 and $450,000 in 1996, 1995 and 1994,
respectively.
9. LEASES:
The Company leases certain land, dock facilities, storage tanks, office
space and other equipment. Land leases are for periods from one to 18 years.
Dock facility and tank storage leases are for periods from one to seven years.
The future minimum rental payments under all noncancelable operating leases as
of December 31, 1996, were as follows (in thousands):
<TABLE>
<S> <C>
1997............................................. $23,845
1998............................................. 15,279
1999............................................. 13,827
2000............................................. 8,313
2001............................................. 4,245
Thereafter....................................... 17,114
-------
Total..................................... $82,623
=======
</TABLE>
F-45
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Total operating lease expense for the years ended December 31, 1996, 1995
and 1994, was $47,870,000, $47,792,000 and $39,365,000, respectively.
10. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Current--
Federal........................................ $(48,831) $(43,220) $16,616
State and local................................ 439 356 271
-------- -------- -------
Total current............................... (48,392) (42,864) 16,887
-------- -------- -------
Deferred--
Federal, from operations ...................... 13,610 8,970 (9,465)
Federal, effect of accounting change........... -- -- (1,043)
-------- -------- -------
Total deferred.............................. 13,610 8,970 (10,508)
-------- -------- -------
Total provision (benefit)................... $(34,782) $(33,894) $ 6,379
======== ======== =======
</TABLE>
The components of deferred income tax assets and liabilities at December 31,
1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred income tax assets--
Inventories, principally due to different inventory
valuations for book and tax purposes..................... $ -- $ 16,077
Accounts receivable, principally due to allowance for
doubtful accounts........................................ 548 1,240
Accrued liabilities, primarily contingency reserves and
turnaround accrual....................................... 21,911 10,933
Capitalized interest on construction in progress.......... 232 413
Other assets (liabilities)................................ 2,358 954
Future lease deductions................................... 18,785 19,344
Less: valuation allowance................................. (18,785) (19,344)
-------- --------
Total deferred income tax assets, net.................. 25,049 29,617
-------- --------
Deferred income tax liabilities--
Property and equipment principally due to accelerated de-
preciation for tax purposes.............................. (69,428) (55,910)
Inventories, principally due to different inventory
valuations for book and tax purposes..................... (1,588) --
Other..................................................... -- (313)
-------- --------
Total deferred income tax liabilities.................. (71,016) (56,223)
-------- --------
Net deferred income tax liabilities....................... $(45,967) $(26,606)
======== ========
</TABLE>
The Company has determined that it is more likely than not that some of its
deferred tax assets will not be realized; therefore, a valuation allowance has
been provided in 1996 and 1995.
F-46
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
A reconciliation of income taxes computed at the federal statutory tax rate
to income taxes computed at the Company's effective tax rate is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- --------- ------
<S> <C> <C> <C>
Provision (benefit) for income taxes at the stat-
utory rate...................................... $(35,157) $ (32,022) $7,208
State and local taxes............................ 286 232 175
Reversal of overaccrual of federal income taxes.. -- (2,052) --
Other............................................ 89 (52) 39
-------- --------- ------
Provision (benefit) for income taxes......... (34,782) (33,894) 7,422
Tax effect of accounting change.................. -- -- (1,043)
-------- --------- ------
Provision (benefit) for income taxes after
tax
effect of accounting change................. $(34,782) $(33,894) $6,379
======== ========= ======
</TABLE>
11. RELATED-PARTY TRANSACTIONS:
During 1996, 1995 and 1994, the Company's working capital requirements were
funded through a working capital agreement between the Company and Salomon
(see Note 7). To the extent the Company has temporarily available excess
funds, these amounts are remitted to Salomon.
The Company has related-party sales and purchases of crude oil and refined
products with a wholly owned subsidiary of Salomon transacted at prevailing
market prices which amounted to approximately $340,558,000 and $364,257,000,
respectively, for 1996, approximately $882,747,000 and $848,776,000,
respectively, for 1995, and approximately $572,706,000 and $770,112,000,
respectively, for 1994.
The Company had sales and purchases of crude oil with Genesis during
December 1996 amounting to $1,081,000 and $51,791,000, respectively. Included
in these amounts are purchases made under a one-year term contract beginning
in 1996 for purchases of 11,000 barrels of crude oil per day into the
Company's Krotz Springs, Louisiana refinery at market-based prices. The
Company has agreed to provide certain administrative and NYMEX transaction
clearing services to Genesis, but may terminate this agreement upon 90 days'
notice. Such costs are allocated based upon the percentage of the Company's
resources applied to Genesis' operations. The Company allocated $119,000 to
Genesis for December 1996 related to such services. At December 31, 1996, the
Company had a receivable balance of $4,609,000 and payable balance of
$61,946,000 with Genesis.
In addition, pursuant to a credit support agreement (Master Credit Support
Agreement), Salomon will provide Genesis with credit support in the form of
guarantees, up to prescribed limits that will decline over a period of three
years, in connection with the purchase, sale or exchange of crude oil in
transactions with third parties in the ordinary course of Genesis' business.
The cost of such credit support by Salomon will increase over the three-year
period from a below-market rate to a rate that may be higher than rates paid
to independent financial institutions for similar credit. In addition,
pursuant to the Master Credit Support Agreement, the Company will use its
reasonable best efforts to provide Genesis with, for a period of six months
ending May 31, 1997, a line of credit of up to $50,000,000, which amount
includes direct cash advances not to exceed $35,000,000, outstanding at any
one time and letters of credit that may be required in the ordinary course of
Genesis' business. Salomon and the Company will receive a security interest in
all of Genesis' receivables, inventories, general intangibles and cash to
secure obligations under the Master Credit Support Agreement.
F-47
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Salomon agreed, subject to certain limitations, to contribute cash, if
necessary, to Genesis in return for subordinated partnership interests (APIs).
Solomon's obligation to purchase APIs may be assigned in certain circumstances
and is limited in any one quarter to an amount equal to the defined minimum
quarterly distribution payable to the unit holders of Genesis up to a maximum
amount outstanding at any one time equal to $17.6 million.
Sales, purchases and other transactions with affiliated companies, including
Genesis, in the opinion of management, are conducted under terms no more or
less favorable than those conducted with unaffiliated parties.
On September 12, 1995, the Company sold its equity investment in Patterson
Energy, Inc. (Patterson), to Salomon Brothers Inc (SBI) who, in turn, sold the
investment to a third party. As a result the Company transferred at market value
250,000 shares of Patterson stock to SBI for $2,500,000, resulting in a gain of
$625,000.
2. COMMITMENTS AND CONTINGENCIES:
The Company has contractual commitments (primarily forward contracts)
arising in the ordinary course of business. The consummation of these
commitments is not expected to have a material adverse effect on the Company's
financial position or results of operations.
The Company is subject to lawsuits in the normal course of business and
examination by tax and other regulatory authorities. Such matters presently
pending are not expected to have a material adverse effect on the Company's
financial position or results of operations.
As a result of the sale of certain tax benefits in 1983, the Company is
contingently liable at December 31, 1996, for up to $13,189,000 under a
standby letter of credit. This contingent liability would be payable only if
certain conditions were to exist with respect to property located at the Krotz
Springs, Louisiana refinery, which would result in a termination of the lease
underlying the tax benefit sale. The liability diminishes over time until the
year 2007 when it expires.
The Company is subject to various environmental laws and regulations.
Policies and procedures are in place to monitor compliance. The Company
continues to commit a significant portion of its capital budget to
environmental projects. The Company's management has made an assessment of its
potential environmental exposure and determined that such exposure is not
material to its financial position or results of operations.
The Company has several uncommitted lines of credit in place which are
provided by commercial banks on a stand-alone credit basis without support
from Salomon. Outstanding letters of credit under these lines totaled
$127,572,000, $19,175,000 and $74,415,000 at December 31, 1996, 1995 and 1994,
respectively.
The Company also is contingently liable for irrevocable letters of credit of
$5,000,000 available to satisfy margin and guarantee requirements of the
NYMEX.
In connection with the sale of the assets of Questor Drilling Corp. to
Patterson (see Note 14), the Company agreed to retain certain liabilities
relating to past, present or future controversy or litigation in connection
with the Company's ownership and/or operation of the assets acquired by
Patterson. The Company has agreed to indemnify Patterson against any losses,
liabilities and damages incurred by Patterson that may arise from any
liabilities retained by the Company. Management believes any such
indemnification will not have a material effect upon the financial position or
results of operations.
F-48
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
13. FINANCIAL INSTRUMENTS:
Market Risk
In order to hedge its exposure to market fluctuations, the Company enters
into various financial instruments with off-balance sheet risk, including
option contracts, swap agreements and interest rate caps and corridors. The
Company does not consider its commodity futures and forward contracts to be
financial instruments since these contracts either require or permit
settlement by the delivery of the underlying commodities.
The Company's objectives for entering into these financial instruments are
the following:
a. To hedge the rate risk of future increases in the Company's variable
interest rate obligations. The premiums paid for these instruments are
amortized over the life of the instrument.
b. To hedge the market risk of future anticipated refinery feedstock
charges and product yields. Any resulting gains and losses are deferred
until recognition of any gains or losses on the transactions being
hedged.
Gains and losses on financial instruments are recognized in cost of sales on
the accompanying consolidated statements of operations. Normally, any
contracts used to hedge market risk are relatively short-term in duration. As
of December 31, 1996, there were 11 contracts with terms beyond one year.
At December 31, 1996, the Company had written average price options on
24,000,000 barrels of crude oil with terms extending through December 31,
1997. These options obligate the Company to buy the committed barrels at
$18.50 per barrel. At December 31, 1996, the Company had purchased average
price options on 24,000,000 barrels of crude oil with terms extending through
December 31, 1997. These options obligate the Company to sell the first near
month committed barrels and buy the second near month barrels at market
prices.
Fair Value and Net Gains and Losses
Estimated fair values of financial instruments and the net gains and losses,
both recognized and deferred at December 31, 1996, 1995 and 1994, are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET NET NET
CARRYING FAIR GAINS CARRYING FAIR GAINS CARRYING FAIR GAINS
AMOUNT VALUE (LOSSES) AMOUNT VALUE (LOSSES) AMOUNT VALUE (LOSSES)
-------- ------- -------- -------- ------ -------- -------- ------- --------
Option contracts
written................ $-- $ -- $ -- $3,300 $5,983 $ (2,683) $2,433 $ 2,298 $ (135)
Swap agreements......... -- 10,417 10,417 -- 5,554 5,554 -- (2,717) (2,717)
Interest rate caps and
corridors.............. 127 127 -- 732 751 19 2,032 3,759 1,727
Loan guarantees......... -- -- -- -- -- -- -- 12,500 --
</TABLE>
Quoted market prices are used in determining the fair value of financial
instruments held or issued for trading purposes. If quoted prices are not
available, fair values are estimated on the basis of pricing models or quoted
prices for financial instruments with similar characteristics.
F-49
<PAGE>
BASIS PETROLEUM, INC.
(FORMERLY PHIBRO ENERGY USA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Credit Risk
Credit risk represents the accounting loss that the Company would record if
counterparties of its financial transactions failed to perform pursuant to
contractual terms. Management of credit risk involves a number of
considerations, such as the financial profile of the counterparty, the value
of collateral held, if any, specific terms and duration of the contractual
agreement and the counterparty's sensitivity to political and macroeconomic
developments.
The Company has established various procedures to manage credit exposure,
including initial credit approval, credit limits, collateral requirements and
rights of offset. Letters of credit prepayments and guarantees are also
utilized to limit credit risk to ensure that management's established credit
criteria are met.
14. SALE OF ASSETS:
In January 1994, the Company sold its St. Rose refinery located in
Louisiana, which was the Company's smallest and least sophisticated refinery.
The proceeds from the sale of the refinery, including inventory, were
$9,962,000, resulting in a gain of $1,704,000.
During 1994, substantially all the excess equipment purchased but not
required to complete the Company's Residfiner/ROSE unit complex construction
project was sold for approximately $24,200,000, resulting in a gain of
$1,830,000.
In July 1994, the Company sold substantially all of its physical assets of
Questor Drilling Corp. to Patterson for $4,500,000 in cash and 250,000 shares
of Patterson common stock (see Notes 11 and 12). The resulting gain was
immaterial to the Company's results of operations. The Patterson shares
acquired were subject to certain transfer restrictions. In addition, the
Company held certain rights to require Patterson to register the shares and
otherwise guarantee the sale price of the shares.
In July 1994, the Company sold the assets of its Louisiana-based marine
fuels and lubricants business for approximately $1,600,000. The resulting loss
was immaterial to the Company's results of operations.
In 1995 and 1994, the Company terminated various interest rate caps and
corridors. The amount realized on termination exceeded the unamortized cost of
these instruments, resulting in gains of $915,000 and $2,902,000,
respectively.
15. SUBSEQUENT EVENT:
On March 17, 1997, Salomon announced that its Board of Directors had
approved a letter of intent to sell all of the outstanding common stock of
Basis to Valero Energy Corporation (Valero). Closing is expected in May 1997.
Proceeds to Salomon from the sale will include cash of $365 million, Valero
common stock of $120 million and participation payments. The participation
payments are based on a fixed notional throughput and the difference, if any,
between an average market crackspread and a base crackspread over each of the
next ten years. The sale is subject to negotiation of a final agreement and to
the satisfaction of other customary conditions.
Such letter of intent reflects a sales price substantially less than the
Company's net book value. The sales price reflects the fair value of the
Company as perceived by a buyer.
Valero will be adjusting the historical carrying values of the Company's
assets and liabilities under purchase accounting to reflect fair values as
determined by the sales price.
F-50
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 453,581.81
NYSE Fees..................................................... 5,300
Transfer Agent and Registrar Fees............................. 20,000
Accounting Fees and Expenses.................................. 450,000
Legal Fees and Expenses....................................... 450,000
Printing, Engraving and Mailing Expenses...................... 225,000
Miscellaneous................................................. 5,000
-------------
Total....................................................... $1,608,881.81
=============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION OF LIABILITY
As permitted by Section 102(b)(7) of the DGCL, the New Valero Certificate
provides that a director of New Valero will not be personally liable to New
Valero or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to New Valero or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of Title 8 of the DGCL, which concerns
unlawful payments of dividends, stock purchases or redemptions, or (iv) for
any transaction from which the director derived an improper personal benefit.
While the New Valero Certificate provides directors with protection from
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the New Valero Certificate will have no
effect on the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his or her duty of care. The
provisions of the New Valero Certificate described above apply to an officer
of New Valero only if he or she is a director of New Valero and is acting in
his or her capacity as director, and do not apply to officers of New Valero
who are not directors.
INDEMNIFICATION AND INSURANCE
The New Valero Certificate provides that New Valero will indemnify its
directors, officers, employees, agents, or any person who is or was serving at
the request of New Valero as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, to the
full extent permitted by the law of the State of Delaware.
Section 145 of the DGCL provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of
II-1
<PAGE>
the corporation, and with respect to any criminal action or proceeding, had
not reasonable cause to believe his or her conduct was unlawful. Section 145
of the DGCL further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is
threatened to be made by a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor, against expenses actually and reasonably incurred in connection
with the defense or settlement of such action or suit if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such
other court in which such action or suit was brought shall determine upon
applications that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
The New Valero By-laws provide that each director or officer of New Valero
who was or is made a party or is threatened to be made a party to or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the
fact that he, or a person of whom he is the legal representative, is or was a
director or officer of New Valero or is or was serving at the request of New
Valero as a director, officer, employee or agent of another corporation or of
a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding
is alleged action in an official capacity while serving as a director,
officer, employee or agent, will be indemnified and held harmless by New
Valero to the fullest extent authorized by the DGCL (but, in the case of any
amendment thereto, only to the extent that such amendment permits New Valero
to provide broader indemnification rights than the DGCL permitted New Valero
to provide prior to such amendment), against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection therewith and such
indemnification will continue as to a person who has ceased to be a director,
officer, employee or agent and will inure to the benefit of his heirs,
executors and administrators. The right to indemnification conferred in the
New Valero By-laws is a contract right and includes the right to be paid by
New Valero the expenses incurred in defending any such proceeding in advance
of its final disposition; provided, however, that, if the DGCL requires, the
payment of such expenses incurred by a director or officer in his capacity as
a director or officer (but not in any other capacity in which service was or
is rendered by such person while a director or officer, including, without
limitation, service with respect to an employee benefit plan) in advance of
the final disposition of a proceeding will be made only upon delivery to New
Valero of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it will ultimately be determined that such
director or officer is not entitled to be indemnified under the applicable
provisions of the DGCL. New Valero may, by action of the New Valero Board or
as required pursuant to the New Valero Certificate, provide indemnification to
employees and agents of New Valero with the same scope and effect as the
foregoing indemnification of directors and officers.
As is permitted under Section 145 of the DGCL, New Valero also intends to
enter into individual indemnification agreements ("Indemnification
Agreements") with its officers and directors. Each Indemnification Agreement
will provide directors and officers with additional contractual assurance that
indemnification and advancement of expenses will be available to them
regardless of any amendments to or revocation of the indemnification
provisions of the New Valero By-laws. Each Indemnification Agreement provides
for indemnification of directors and officers against both stockholder
derivative claims and third-party claims. Sections 145(a) and 145(b) of the
DGCL, which grant corporations the power to indemnify directors and officers,
specifically authorize lesser indemnifications in connection with derivative
claims than in connection with third-party claims. The distinction is that
Section 145(a), concerning third-party claims, authorizes expenses and
judgments and amounts paid in settlement (as is provided in each
Indemnification Agreement), while Section 145(b), concerning derivative suits,
generally authorizes only indemnification of expenses. However, Section 145(f)
expressly provides that the indemnification and advancement of expenses
provided by or granted pursuant to the subsections of Section 145 shall not be
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any agreement.
II-2
<PAGE>
In connection with the Distribution, New Valero will assume all rights and
obligations of Valero with respect to an insurance policy that insures
directors and officers against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of January 31, 1997, as
amended, by and among Valero Energy Corporation, PG&E Corporation,
and PG&E Acquisition Corporation. Valero Refining and Marketing
Company agrees to furnish supplementally a copy of any omitted
exhibit or schedule to the Commission upon request.
2.2 Form of Agreement and Plan of Distribution between Valero Energy
Corporation and Valero Refining and Marketing Company. Valero
Refining and Marketing Company agrees to furnish supplementally a
copy of any omitted exhibit or schedule to the Commission upon
request.
2.3 Form of Tax Sharing Agreement among Valero Energy Corporation,
Valero Refining and Marketing Company and PG&E Corporation. New
Valero agrees to furnish supplementally a copy of any omitted
exhibit or schedule to the Commission upon request.
2.4 Form of Employee Benefits Agreement between Valero Energy
Corporation and Valero Refining and Marketing Company. Valero
Refining and Marketing Company agrees to furnish supplementally a
copy of any omitted exhibit or schedule to the Commission upon
request.
2.5 Form of Interim Services Agreement between Valero Energy Corporation
and Valero Refining and Marketing Company. Valero Refining and
Marketing Company agrees to furnish supplementally a copy of any
omitted exhibit or schedule to the Commission upon request.
3.1 Amended and Restated Certificate of Incorporation of Valero Refining
and Marketing Company.
3.2 By-Laws of Valero Refining and Marketing Company.
4.1 Form of Rights Agreement between Valero Refining and Marketing
Company and Harris Trust and Savings Bank, as Rights Agent.
4.2 Form of Credit Agreement among Valero Refining and Marketing
Company, Morgan Guaranty Trust Company of New York, Bank of Montreal
and the banks and co-agents party thereto.
5 Opinion of Morris, Nichols, Arsht & Tunnell with respect to the
validity of the securities being offered.
10.1 Valero Refining and Marketing Company Executive Incentive Bonus
Plan, dated as of April 23, 1997.
10.2 Valero Refining and Marketing Company Executive Stock Incentive
Plan, dated as of April 23, 1997.
10.3 Valero Refining and Marketing Company Stock Option Plan, dated as of
April 23, 1997.
10.4 Valero Refining and Marketing Company Restricted Stock Plan for Non-
Employee Directors, dated as of April 23, 1997.
10.5 Valero Refining and Marketing Company Non-Employee Director Stock
Option Plan, dated as of April 23, 1997.
10.6 Executive Severance Agreement between Valero Energy Corporation and
William E. Greehey, dated December 15, 1982, as adopted and ratified
by Valero Refining and Marketing Company.
10.7 Schedule of Executive Severance Agreements.
10.8 Form of Indemnity Agreement between Valero Refining and Marketing
Company and William E. Greehey.
10.9 Schedule of Indemnity Agreements.
10.10 Form of Incentive Bonus Agreement between Valero Refining and
Marketing Company and Gregory C. King.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.11 Schedule of Incentive Bonus Agreements.
10.12 Form of Management Stability Agreement between Valero Refining and
Marketing Company and Gregory C. King.
10.13 Schedule of Management Stability Agreements.
11.1 Computation of Earnings Per Share.
21.1 List of subsidiaries of Valero Refining and Marketing Company.
23.1 Consent of Arthur Andersen LLP with respect to Registrant.
23.2 Consent of Arthur Andersen LLP with respect to Basis Petroleum.
23.3 Consent of Morris, Nichols, Arsht & Tunnell (included in Exhibit 5).
24.1 Powers of Attorney (included with signature page).
</TABLE>
(b) All applicable required schedules are included in the Prospectus and
therefore are omitted from the following pages of this Registration Statement.
Copies of exhibits filed as a part of this Registration Statement may be
obtained by stockholders of record at a charge of $.15 per page, minimum $5.00
each request. Direct inquiries to Rand C. Schmidt, Corporate Secretary, Valero
Refining and Marketing Company, P.O. Box 500, San Antonio, Texas 78292.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the registrant
has omitted from the foregoing listing of exhibits, and hereby agrees to
furnish to the Securities and Exchange Commission, upon its request, copies of
certain instruments, each relating to long-term debt not exceeding 10% of the
total assets of the registrant and its subsidiaries on a consolidated basis.
ITEM 17. UNDERTAKING
The undersigned Registrant hereby undertakes:
(a)-(g) Not applicable.
(h) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation and By-Laws of the Registrant and the laws of the State of
Delaware, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(i) Not applicable.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of San Antonio, State of
Texas, on May 13, 1997.
Valero Refining and Marketing
Company
/s/ William E. Greehey
By: _________________________________
William E. Greehey Chairman of
the Board and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
William E. Greehey, Edward C. Benninger and Rand C. Schmidt, or either of
them, as his attorney-in-fact, with full power of substitution and
resubstitution, to sign and file on his behalf individually and in each such
capacity stated below any and all amendments and post-effective amendments to
this Registration Statement, as fully as such person could do in person,
hereby verifying and confirming all that said attorney-in-fact, or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ William E. Greehey Director, Chairman May 13, 1997
- ----------------------------------- of the Board and
William E. Greehey Chief Executive
Officer (Principal
Executive Officer)
/s/ Edward C. Benninger Director and May 13, 1997
- ----------------------------------- President
Edward C. Benninger (Principal
Accounting and
Financial Officer)
/s/ E. Baines Manning Director May 13, 1997
- -----------------------------------
E. Baines Manning
/s/ Stan L. McLelland Director May 13, 1997
- -----------------------------------
Stan L. McLelland
/s/ George E. Kain Director May 13, 1997
- -----------------------------------
George E. Kain
/s/ Wayne D. Smithers Director May 13, 1997
- -----------------------------------
Wayne D. Smithers
II-5
<PAGE>
EXHIBIT INDEX
Exhibits required by S-K item 601:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of January 31, 1997, as
amended, by and among Valero Energy Corporation, PG&E Corporation,
and PG&E Acquisition Corporation. Valero Refining and Marketing
Company agrees to furnish supplementally a copy of any omitted
exhibit or schedule to the Commission upon request.
2.2 Form of Agreement and Plan of Distribution between Valero Energy
Corporation and Valero Refining and Marketing Company. Valero
Refining and Marketing Company agrees to furnish supplementally a
copy of any omitted exhibit or schedule to the Commission upon
request.
2.3 Form of Tax Sharing Agreement among Valero Energy Corporation,
Valero Refining and Marketing Company and PG&E Corporation. New
Valero agrees to furnish supplementally a copy of any omitted
exhibit or schedule to the Commission upon request.
2.4 Form of Employee Benefits Agreement between Valero Energy
Corporation and Valero Refining and Marketing Company. Valero
Refining and Marketing Company agrees to furnish supplementally a
copy of any omitted exhibit or schedule to the Commission upon
request.
2.5 Form of Interim Services Agreement between Valero Energy Corporation
and Valero Refining and Marketing Company. Valero Refining and
Marketing Company agrees to furnish supplementally a copy of any
omitted exhibit or schedule to the Commission upon request.
3.1 Amended and Restated Certificate of Incorporation of Valero Refining
and Marketing Company.
3.2 By-Laws of Valero Refining and Marketing Company.
4.1 Form of Rights Agreement between Valero Refining and Marketing
Company and Harris Trust and Savings Bank, as Rights Agent.
4.2 Form of Credit Agreement among Valero Refining and Marketing
Company, Morgan Guaranty Trust Company of New York, Bank of Montreal
and the banks and co-agents party thereto.
5 Opinion of Morris, Nichols, Arsht & Tunnell with respect to the
validity of the securities being offered.
10.1 Valero Refining and Marketing Company Executive Incentive Bonus
Plan, dated as of April 23, 1997.
10.2 Valero Refining and Marketing Company Executive Stock Incentive
Plan, dated as of April 23, 1997.
10.3 Valero Refining and Marketing Company Stock Option Plan, dated as of
April 23, 1997.
10.4 Valero Refining and Marketing Company Restricted Stock Plan for Non-
Employee Directors, dated as of April 23, 1997.
10.5 Valero Refining and Marketing Company Non-Employee Director Stock
Option Plan, dated as of April 23, 1997.
10.6 Executive Severance Agreement between Valero Energy Corporation and
William E. Greehey, dated December 15, 1982, as adopted and ratified
by Valero Refining and Marketing Company.
10.7 Schedule of Executive Severance Agreements.
10.8 Form of Indemnity Agreement between Valero Refining and Marketing
Company and William E. Greehey.
10.9 Schedule of Indemnity Agreements.
10.10 Form of Incentive Bonus Agreement between Valero Refining and
Marketing Company and Gregory C. King.
10.11 Schedule of Incentive Bonus Agreements.
10.12 Form of Management Stability Agreement between Valero Refining and
Marketing Company and Gregory C. King.
10.13 Schedule of Management Stability Agreements.
11.1 Computation of Earnings Per Share.
21.1 List of subsidiaries of Valero Refining and Marketing Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Arthur Andersen LLP with respect to Registrant.
23.2 Consent of Arthur Andersen LLP with respect to Basis Petroleum.
23.3 Consent of Morris, Nichols, Arsht & Tunnell (included in Exhibit 5).
24.1 Powers of Attorney (included with signature page).
</TABLE>
(b) All applicable required schedules are included in the Prospectus and
therefore are omitted from the following pages of this Registration Statement.
Copies of exhibits filed as a part of this Registration Statement may be
obtained by stockholders of record at a charge of $.15 per page, minimum $5.00
each request. Direct inquiries to Rand C. Schmidt, Corporate Secretary, Valero
Refining and Marketing Company, P.O. Box 500, San Antonio, Texas 78292.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the registrant
has omitted from the foregoing listing of exhibits, and hereby agrees to
furnish to the Securities and Exchange Commission, upon its request, copies of
certain instruments, each relating to long-term debt not exceeding 10% of the
total assets of the registrant and its subsidiaries on a consolidated basis.
<PAGE>
EXHIBIT 2.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 31, 1997,
BETWEEN
VALERO ENERGY CORPORATION,
PG&E CORPORATION
AND
PG&E ACQUISITION CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I
DEFINITIONS.................................................... A-1
1.1. Definitions.................................................... A-1
ARTICLE II
THE MERGER..................................................... A-6
2.1. The Merger..................................................... A-6
2.2. Effective Time................................................. A-6
2.3. Closing........................................................ A-6
2.4. Certificate of Incorporation of the Surviving Corporation...... A-7
2.5. By-laws of the Surviving Corporation........................... A-7
2.6. Directors...................................................... A-7
2.7. Officers....................................................... A-7
ARTICLE III
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN
THE MERGER..................................................... A-7
3.1. Merger Consideration; Conversion or Cancellation of Shares..... A-7
3.2. Exchange of Certificates....................................... A-9
ARTICLE IV
CERTAIN PRE-MERGER TRANSACTIONS................................ A-11
4.1. Reorganization Agreements and Interim Services Agreement....... A-11
4.2. Intercorporate Reorganization of Company....................... A-11
4.3. Distribution................................................... A-11
4.4. Senior Notes................................................... A-11
4.5. VESOP Notes.................................................... A-11
ARTICLE V
REPRESENTATIONS AND WARRANTIES................................. A-11
5.1. Representations and Warranties of the Company.................. A-11
5.2. Representations and Warranties of Acquiror and Sub............. A-21
ARTICLE VI
COVENANTS...................................................... A-25
6.1. Covenants of the Company....................................... A-25
6.2. Covenants of Acquiror.......................................... A-28
ARTICLE VII
ADDITIONAL AGREEMENTS.......................................... A-28
7.1. Access......................................................... A-28
7.2. Other Actions.................................................. A-29
7.3. Acquisition Proposals; Board Recommendation.................... A-29
7.4. Tax Representation Letters..................................... A-30
7.5. Filings; Other Actions......................................... A-30
7.6. Accountants' Letters........................................... A-31
</TABLE>
i
<PAGE>
TABLE OF CONTENTS, CONTINUED
AGREEMENT AND PLAN OF MERGER, CONTINUED
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
7.7. Distribution Agreement........................................ A-32
7.8. Publicity..................................................... A-32
7.9. Employees and Employee Plans.................................. A-32
7.10. Expenses...................................................... A-33
7.11. Takeover Statutes............................................. A-33
7.12. Securities Act Compliance..................................... A-33
7.13. Stock Exchange Listing........................................ A-33
7.14. 1935 Act...................................................... A-33
7.15. Further Assurances............................................ A-33
ARTICLE VIII
CONDITIONS.................................................... A-34
8.1. Conditions to Each Party's Obligation to Effect the Merger.... A-34
8.2. Conditions to Obligation of the Company....................... A-34
8.3. Conditions to Obligations of Acquiror and Sub................. A-35
ARTICLE IX
TERMINATION................................................... A-36
9.1. Termination................................................... A-36
9.2. Effect of Termination and Abandonment......................... A-36
ARTICLE X
MISCELLANEOUS AND GENERAL..................................... A-37
10.1. Survival...................................................... A-37
10.2. Modification or Amendment..................................... A-37
10.3. Waiver; Remedies.............................................. A-37
10.4. Counterparts.................................................. A-37
10.5. Governing Law................................................. A-37
10.6. Notices....................................................... A-37
10.7. Entire Agreement.............................................. A-38
10.8. Certain Obligations........................................... A-38
10.9. Assignment.................................................... A-38
10.10. Captions...................................................... A-38
10.11. Severability.................................................. A-38
10.12. No Third Party Beneficiaries.................................. A-38
10.13. Annexes and Schedules......................................... A-38
10.14. No Representations or Warranties.............................. A-39
10.15. Tax Sharing Agreement......................................... A-39
10.16. Consent to Jurisdiction....................................... A-39
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of January 31, 1997 (this
"Agreement"), between VALERO ENERGY CORPORATION, a Delaware corporation (the
"Company"), PG&E Corporation, a California corporation ("Acquiror") and PG&E
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary
of Acquiror ("Sub") formed for the purpose of participating in the Merger
described herein.
W I T N E S S E T H:
WHEREAS, Acquiror desires to acquire the Retained Business (as herein
defined) but does not wish to acquire the other businesses conducted, or to be
conducted, by the Company;
WHEREAS, the Board of Directors of the Company has approved an agreement and
plan of distribution substantially in the form of Annex A attached hereto (the
"Distribution Agreement"), which will be entered into prior to the Effective
Time (as defined herein), pursuant to which and subject to the terms of which
among other things (a) the Company and Valero Refining and Marketing Company,
a Delaware corporation and wholly owned Subsidiary of the Company ("VRM"),
will consummate the transactions contemplated in Article II of the
Distribution Agreement and (b) all of the issued and outstanding shares of
common stock, par value $0.01 per share (the "VRM Common Stock") along with
the associated rights (the "VRM Rights") issued pursuant to the Rights
Agreement substantially in the form attached to the VRM Registration Statement
(as defined herein) between VRM and the rights agent named therein (the "VRM
Rights Agreement") of VRM will be distributed (the "Distribution") to the
holders of shares of common stock, par value $1.00 per share, of the Company.
Such common stock together with the rights issued pursuant to the Rights
Agreement dated as of October 26, 1995 between the Company and Harris Trust
and Savings Bank, as agent (the "Company Rights Agreement") being referred to
herein as "Company Common Stock";
WHEREAS, the respective Boards of Directors of the Company, Acquiror and Sub
have determined that, following the Distribution, a merger of Sub with and
into the Company (the "Merger"), with the Company as the surviving
corporation, would be in the best interests of their respective corporations
and stockholders; and
WHEREAS, it is the intention of the parties to this Agreement that for
Federal income tax purposes (a) the Distribution shall qualify as a
transaction described in Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code") and a "reorganization" within the meaning of Section
368(a)(1)(D) of the Code, and (b) the Merger shall qualify as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code;
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. (a) As used in this Agreement the following terms shall
have the following respective meanings:
"Acquiror Common Stock" shall have the meaning set forth in Section
3.1(a)(ii).
"Acquiror Form S-4" shall have the meaning set forth in Section 5.1(g)(iii).
"Acquiror Pension Plan" shall mean the Retirement Plan for Employees of
Pacific Gas Transmission Company, as in effect as of the date hereof.
"Acquiror Thrift Plan" shall mean a defined contribution plan with a cash or
deferred arrangement sponsored by the Acquiror or an Affiliate and intended to
qualify under Sections 401(a) and (k) of the Code.
"Acquisition Proposal" shall mean any inquiry, proposal or offer for, or any
indication of interest in, from any person, either (A) a merger, acquisition,
business combination, consolidation or similar transaction involving,
A-1
<PAGE>
or any purchase of, more than 50% of the voting securities of the Company or
any Subsidiary, or all or substantially all of the assets of the Company or
any Subsidiary (excluding any such transaction relating solely to the assets
or voting securities of VRM or any of its Subsidiaries) or (B) an acquisition,
or similar transaction involving the purchase, of a substantial portion of the
assets of or a substantial equity interest in the Retained Business, other
than, in each case, the transactions contemplated by this Agreement.
"Affiliate" shall mean, with respect to any specified Person, a Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person;
provided, however, that from and after the Time of Distribution, no member of
either Group shall be deemed to be an Affiliate of any member of the other
Group.
"Assignment and Assumption Agreements" shall mean any and all conveyance and
assumption instruments which may be entered into pursuant to any of the
Reorganization Agreements.
"Cash Dividend" shall have the meaning set forth in the Distribution
Agreement.
"Certificate of Merger" shall have the meaning set forth in Section 2.2.
"Closing" shall have the meaning set forth in Section 2.3.
"Closing Date" shall have the meaning set forth in Section 2.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Certificate" shall have the meaning set forth in Section 3.1(b).
"Company By-laws" shall mean the by-laws of the Company, as amended.
"Company Charter" shall mean the certificate of incorporation of the
Company, as amended.
"Company Common Stock" shall have the meaning set forth in the third
paragraph of this Agreement.
"Company Convertible Preferred Stock" shall have the meaning set forth in
Section 5.1(e).
"Company Disclosure Schedule" shall have the meaning set forth in Section
5.1.
"Company Meeting" shall have the meaning set forth in Section 5.1(g)(iii).
"Company Options" shall have the meaning set forth in Section 3.1(a)(iii).
"Company Preferred Stock" shall have the meaning set forth in Section
5.1(e).
"Company Restricted Stock Plans" shall mean the Company's Restricted Stock
Bonus and Incentive Stock Plan, effective as of April 30, 1981 and amended and
restated effective as of November 21, 1996, the Restricted Stock Plan for Non-
employee Directors, effective as of November 14, 1990 and amended and restated
effective as of August 22, 1996 and/or the Executive Stock Incentive Plan,
effective as of July 21, 1994 and amended and restated effective as of
November 21, 1996.
"Company Rights Agreement" shall have the meaning set forth in the third
paragraph of this Agreement.
"Company Series A Preferred Stock" shall have the meaning set forth in
Section 5.1(e).
"Company SAR" shall have the meaning assigned to such term by the Employee
Benefits Agreement.
"Company Stock Plans" shall mean the Company's Stock Option Plan No. 3,
Stock Option Plan No. 4, Stock Option Plan No. 5, Company Restricted Stock
Plans, Non-Employee Director Stock Option Plan, Executive Incentive Bonus
Plan, Employee Thrift Plan, Benefits Trust, ESOP and VESOP, each as amended
and/or restated.
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"Continuing Employee" shall have the meaning set forth in Section 7.9(b).
"Contract" shall have the meaning set forth in Section 5.1(d)(i).
"Credit Facilities" shall mean the $835 million Revolving Credit Agreement,
dated as of May 1, 1997, as amended, among the Company, VRM, Morgan Guaranty
Trust Company of New York, as Administrative Agent, Bank of Montreal, as
Syndication Agent, and the banks listed therein (the "New Credit Facility"), and
the Company's uncommitted short- term bank credit lines and uncommitted bank
letter of credit facilities (the "Uncommitted Facilities").
"Deferred Compensation Plans" shall mean the Company's Executive Deferred
Compensation Plan, effective as of November 26, 1984 and amended and restated
effective as of October 21, 1986 and the Company Key Employee Deferred
Compensation Plan, effective as of August 20, 1985, and amended and restated
effective as of October 21, 1986.
"Distribution" shall have the meaning set forth in the third paragraph of
this Agreement.
"Distribution Agreement" shall have the meaning set forth in the third
paragraph of this Agreement.
"DGCL" shall mean the Delaware General Corporation Law.
"Effective Time" shall have the meaning set forth in Section 2.2.
"Employee Benefits Agreement" shall mean an employee benefits agreement
substantially in the form of Annex B attached hereto.
"Employee Plan" shall mean each "employee benefit plan," within the meaning
of Section 3(3) of ERISA, each Company Stock Plan, and each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement providing for insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits or for deferred
compensation, profit-sharing, bonuses, or other forms of incentive
compensation or post-retirement insurance, compensation or benefits which is
maintained, administered or contributed to by the Company or any of its ERISA
Affiliates primarily for U.S. citizens or residents and which covers any
employee of the Company.
"Environmental Law" shall have the meaning set forth in the Distribution
Agreement.
"Environmental Permits" shall have the meaning set forth in Section 5.1(o).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall mean any entity (excluding any VRM Company) which,
together with the Company, would be treated as a single employer under Section
414(b) or (c) of the Code.
"ESOP" shall mean the Company's Employee Stock Ownership Plan.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall have the meaning set forth in Section 3.2(a).
"Expenses" shall mean documented out-of-pocket fees and expenses incurred by
the Company and its Subsidiaries in connection with efforts to consummate any
of the transactions contemplated by the Reorganization Agreements, including,
without limitation, financing fees (including, without limitation, financing
fees to refund or repay the IRBs), consent fees, printing costs and fees,
severance (including, without limitation severance payments to employees of
Valero Corporate Services Company or Valero Management Company incurred prior
to or after the Effective Time in connection with the transactions
contemplated by the Reorganization Agreements) and early retirement payments,
and payments pursuant to the Incentive Bonus
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Agreements, payments pursuant to the Shareholder Value Bonus Plan, expenses of
counsel, investment banking firms, accountants, experts and consultants and
the expenses incurred in connection with printing and mailing the Proxy
Statement-Prospectus, the Acquiror Form S-4 and the VRM Registration
Statement.
"Filed Acquiror SEC Documents" shall have the meaning set forth in Section
5.2(g).
"Filed Company SEC Documents" shall have the meaning set forth in Section
5.1(i).
"GAAP" shall mean United States generally accepted accounting principles.
"Group" shall have the meaning set forth in the Distribution Agreement.
"Governmental Entity" shall have the meaning set forth in Section
5.1(d)(ii).
"Hazardous Substance" shall have the meaning set forth in the Distribution
Agreement.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended.
"Interim Services Agreement" shall mean the interim services agreement,
entered into by the Company and VRM.
"Intellectual Property" shall mean all intellectual property rights,
including domestic and foreign patents, patent applications, invention
disclosures to be filed or awaiting filing determinations, trademark and
service mark applications, registered trademarks, registered service marks,
registered copyrights, trademarks, servicemarks, tradenames, trade secrets and
other proprietary rights, inventions, know-how, formulae, processes,
procedures, research records, records of inventions, test information, market
surveys and marketing know-how and unregistered copyrights, together with
associated goodwill.
"Joint Ventures" shall mean the joint ventures set forth in Schedule
5.1(f)(ii).
"Lien" shall have the meaning set forth in Section 5.1(d)(i).
"Material Adverse Effect" shall mean with respect to any entity, or group of
entities taken as a whole, such state of facts, event, change, or effect that
has had, or would reasonably be expected to have, a material adverse effect on
the assets, business, properties, results of operations, or financial
condition of such entity, or group of entities taken as a whole, or the
ability of such entity, or group of entities, to consummate the transactions
contemplated by this Agreement, including without limitation the Distribution
and the Merger or to perform its obligations under the Reorganization
Agreements to which it is or will be a party.
"Merger" shall have the meaning set forth in the fourth paragraph of this
Agreement.
"New Certificates" shall have the meaning set forth in Section 3.2(a).
"Notice of Superior Proposal" means a written notice advising Acquiror that
the Board of Directors of the Company has received a Superior Proposal.
"NYSE" shall have the meaning set forth in Section 3.1(a)(ii).
"Per Share Merger Consideration" shall have the meaning set forth in Section
3.1(a)(ii).
"Permit" shall have the meaning set forth in Section 5.1(d)(i).
"Permitted Liens" shall mean, collectively, those Liens (A) set forth in
Schedule 1.1(a), (B) for Taxes not yet due or payable or being contested in
good faith, (C) that constitute mechanics', carriers', workers' or like liens
or (D) that individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole.
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"Person" shall mean an individual, partnership, a joint venture, a
corporation, a limited liability entity, a trust, an unincorporated
organization or other entity or a government or any department or agency
thereof.
"Post-Signing Return" shall have the meaning set forth in Section 6.1(k).
"Proxy Statement-Prospectus" shall have the meaning set forth in Section
5.1(g)(iii).
"Registration Statements" shall mean, collectively, the Acquiror Form S-4
and the VRM Registration Statement.
"Regulatory Filings" shall have the meaning set forth in Section 5.1(d)(ii).
"Release" shall have the meaning set forth in the Distribution Agreement.
"Reorganization Agreements" shall mean, collectively, this Agreement, the
Distribution Agreement, the Tax Sharing Agreement and the Employee Benefits
Agreement.
"Representatives" shall mean directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives.
"Retained Assets" shall have the meaning set forth in the Distribution
Agreement.
"Retained Business" shall have the meaning set forth in the Distribution
Agreement.
"Retained Company" or "Retained Companies" shall have the meaning set forth
in Section 1.1(b).
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"SERP" shall mean the Company's Supplemental Executive Retirement Plan,
effective as of January 1, 1983 and amended and restated effective as of
January 1, 1996.
"Software" shall include all proprietary software programs, and the related
source code, system documentation, statements of principles of operation, and
schematics for all software programs, as well as any pertinent commentary or
explanation that may be necessary to render such materials understandable and
usable by a trained computer programmer.
"Subsidiary" shall mean any corporation or other organization (including
without limitation partnerships but as used in Section 5.1, excluding Joint
Ventures), whether incorporated or unincorporated, of which, directly or
indirectly, at least a majority of the securities or interests having by the
terms thereof ordinary voting power to elect at least a majority of the board
of directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries.
"Superior Proposal" shall mean any bona fide Acquisition Proposal made by a
third party on terms which the Board of Directors of the Company determines in
its good faith judgment to be more favorable to the Company's stockholders
than the Merger and the other transactions contemplated hereby.
"Surviving Corporation" shall have the meaning set forth in Section 2.1.
"Takeover Statute" shall have the meaning set forth in Section 5.1(p).
"Tax Authority" shall have the meaning set forth in the Tax Sharing
Agreement.
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"Taxes" shall have the meaning set forth in the Tax Sharing Agreement.
"Tax Return" shall have the meaning set forth in the Tax Sharing Agreement.
"Tax Sharing Agreement" shall mean the tax sharing agreement substantially
in the form of Annex C attached hereto.
"Time of Distribution" shall have the meaning set forth in the Distribution
Agreement.
"VESOP" shall mean the Valero Employees' Stock Ownership Plan.
"VNG" shall mean Valero Natural Gas Company, a Delaware corporation and a
wholly-owned Subsidiary of the Company and, with respect to the period prior
to June 30, 1996, shall be construed to include VNGC Holding Company, a
Delaware corporation and wholly owned subsidiary of the Company.
"VRM Common Stock" shall have the meaning set forth in the third paragraph
of this Agreement.
"VRM Registration Statement" shall have the meaning set forth in Section
5.1(g)(iii).
"VRM Rights" shall have the meaning set forth in the third paragraph of this
Agreement.
"VRM Rights Agreement" shall have the meaning set forth in the third
paragraph of this Agreement.
(b) As used in this Agreement, (i) any reference to the Company and its
Subsidiaries means the Company and each of its Subsidiaries, (ii) any
reference to the "Retained Company" and its Subsidiaries or the "Retained
Companies" means the Company (solely with respect to the Retained Business)
and those of its direct and indirect Subsidiaries included in the Retained
Business, (iii) any reference to the "Retained Subsidiaries" or "Retained
Subsidiary" means the direct and indirect Subsidiaries or Subsidiary of the
Company included in the Retained Business, (iv) any reference to VRM and its
Subsidiaries or the "VRM Companies" means VRM immediately after the Time of
Distribution and those entities that immediately after the Time of
Distribution will be direct or indirect Subsidiaries of VRM and (v) any
reference to Subsidiaries of VRM means those entities that immediately after
the Time of Distribution will be direct or indirect Subsidiaries of VRM. All
capitalized terms not otherwise defined herein shall have the meaning set
forth in the Distribution Agreement.
ARTICLE II
THE MERGER
2.1. The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time, Sub will be merged with and into the
Company, the separate corporate existence of Sub will thereupon cease and the
Company will be the surviving corporation (the "Surviving Corporation"). The
Merger will have the effects specified in the DGCL. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all
of the properties, rights, privileges, powers, franchises, debts, liabilities,
obligations and duties of the Company will continue in the Surviving
Corporation as provided for in the DGCL.
2.2. Effective Time. As soon as practicable following the satisfaction or
waiver of the conditions set forth in Article VIII, the parties will file a
certificate of merger (the "Certificate of Merger") executed in accordance
with the relevant provisions of the DGCL and will make all other filings or
recordings required under the DGCL to consummate the Merger. The Merger will
become effective upon the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware or at such other time as the
parties hereto may agree and as may be specified in the Certificate of Merger
in accordance with applicable law. The date and time when the Merger becomes
effective is herein referred to as the "Effective Time".
2.3. Closing. The closing of the Merger (the "Closing") will take place (i)
at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New
York, New York 10021 at 9:00 A.M. on the first business day
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on which all the conditions set forth in Article VIII (other than those that
are waived by the party or parties for whose benefit such conditions exist)
are fulfilled or (ii) at such other place, date and/or time as the parties
hereto may agree. The date upon which the Closing occurs is herein referred to
as the "Closing Date"; provided that the Closing shall not take place earlier
than 10 business days following the Company Meeting.
2.4. Certificate of Incorporation of the Surviving Corporation. At the
Effective Time, in accordance with the DGCL, the Certificate of Incorporation
of the Company in effect immediately prior to the Effective Time will be
amended as set forth in Annex G hereto and, as so amended, will be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with the terms thereof and applicable law (the "Surviving
Corporation's Certificate of Incorporation").
2.5. By-laws of the Surviving Corporation. The Company By-laws will be the
by-laws of the Surviving Corporation until amended in accordance with the
terms thereof, the Surviving Corporation's Certificate of Incorporation and
applicable law.
2.6. Directors. The directors of Sub at the Effective Time will be the
directors of the Surviving Corporation until the earlier of their resignation
or removal or until their respective successors are duly elected and
qualified, as the case may be.
2.7. Officers. The officers of Sub at the Effective Time will be the
officers of the Surviving Corporation until the earlier of their resignation
or removal or until their respective successors are duly elected and
qualified, as the case may be.
ARTICLE III
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER
3.1. Merger Consideration; Conversion or Cancellation of Shares. (a) At the
Effective Time, by virtue of the Merger and without any further action on the
part of the holders of any shares of capital stock of the Company or any
shares of capital stock of Sub:
(i) Each share of Company Common Stock (A) issued and outstanding
immediately prior to the Effective Time and (1) owned by Acquiror or any of
its wholly-owned Subsidiaries (but not by any employee benefit plan of, or
any nuclear decommissioning trust for the benefit of, Acquiror or any of
its Subsidiaries) or (2) owned by any Subsidiary of the Company (but not by
any Employee Plan of the Company or any of its Subsidiaries) or (B) held in
the treasury of the Company immediately prior to the Effective Time will
cease to be outstanding, will be canceled and retired without payment of
any consideration therefor and will cease to exist.
(ii) Subject to Section 3.2(c), each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time (other than shares
to be canceled in accordance with Section 3.1(a)(i)) will be converted into
the right to receive that number (the "Per Share Merger Consideration") of
duly authorized, validly issued, fully paid and nonassessable shares of
common stock, no par value, of Acquiror ("Acquiror Common Stock"), equal to
the quotient, rounded to the nearest thousandth, or if there shall not be a
nearest thousandth, the next higher thousandth, of (x) the quotient of (A)
$722.5 million (increased by the total amount of cash paid to the Company
between the execution of this Agreement and the Closing in order to
exercise the Company Options plus an amount equal to the total exercise price
of any unexercised Company Options and any unexercised Company SARs, but
reduced (I) by the total cash amount paid by the Retained Companies between
December 31, 1996 and the Closing in settlement of any stock appreciation
rights (including limited rights), Company Options or performance shares,
except to the extent such amounts have been recorded as accrued liabilities on
the 1996 balance sheet included in the Retained Companies' Financial
Statements, and (II) if applicable, in accordance with the last sentence of
this Section 3.1(a)(ii)
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divided by (B) the sum of the number of shares of Company Common Stock issued
and outstanding immediately prior to the Effective Time (including shares
issued pursuant to the conversion of Company Preferred Stock and other than
shares to be canceled in accordance with Section 3.1(a)(i)) plus the number of
performance shares (not otherwise reflected in the number of outstanding
shares of Company Common Stock), the number of shares subject to unexercised
Company Options and the number of any accompanying Company SARs at such time,
(each number to be determined immediately prior to the Effective Time with the
number of Company Options and Company SARs to be increased to take into
account the adjustment required by Sections 3.01(a), (b) and (c) of the
Employee Benefits Agreement) divided by (y) the Market Price (as defined
below) of Acquiror Common Stock on the Closing Date. The "Market Price" of
Acquiror Common Stock on any date means the average of the daily closing
prices per share of Acquiror Common Stock as reported on the New York Stock
Exchange ("NYSE") Composite Tape ("NYSE Tape") on each of the last 15
consecutive full NYSE trading days (the "Averaging Period") ending on and
including the second trading day prior to such date; provided that (A) if the
Board of Directors of Acquiror declares a dividend on the outstanding shares
of Acquiror Common Stock having a record date after the Effective Time but an
ex-dividend date (based on "regular way" trading on the NYSE of shares of
Acquiror Common Stock, the "Ex-Date") that occurs during the Averaging Period,
then for purposes of computing the Market Price, the closing price on the Ex-
Date and any trading day in the Averaging Period after the Ex-Date will be
adjusted by adding thereto the amount of such dividend and (B) if the Board of
Directors of Acquiror declares a dividend on the outstanding shares of
Acquiror Common Stock having a record date before the Effective Time and an
Ex-Date that occurs during the Averaging Period, then for purposes of
computing the Market Price, the closing price on any trading day before the
Ex-Date will be adjusted by subtracting therefrom the amount of such dividend.
Notwithstanding anything to the contrary contained herein, in the event that
the Market Price of Acquiror Common Stock on the Closing Date is less than
$19.125 (the "Minimum Price"), then solely for the purposes of calculating the
Per Share Merger Consideration, the Market Price of Acquiror Common Stock on
the Closing Date will be deemed to be the Minimum Price, and in the event that
the Market Price of Acquiror Common Stock on the Closing Date is greater than
$25.875 (the "Maximum Price"), then solely for the purposes of calculating the
Per Share Merger Consideration, the Market Price of Acquiror Common Stock on
the Closing Date will be deemed to be the Maximum Price. If prior to the
Effective Time Acquiror shall declare a stock dividend or make distributions
upon or subdivide, split up, reclassify or combine Acquiror Common Stock or
declare a dividend or make a distribution on Acquiror Common Stock in any
security convertible into Acquiror Common Stock, appropriate adjustment or
adjustments will be made to the Per Share Merger Consideration; provided,
however, that Acquiror not take any such action that would occur during the
Averaging Period. If the aggregate amount of any adverse impact referred to in
Section 9.1(d)(iii) (calculated as set forth therein) exceeds $50 million,
then the dollar amount set forth in subsection (A) of this Section 3.1(a)(ii)
shall be reduced by an amount equal to the amount by which the amount of such
adverse impact exceeds $50 million provided, however, that in no event shall
such reduction exceed $50 million in the aggregate.
(iii) Each option granted by the Company to purchase shares of Company
Common Stock (the "Company Options") which is outstanding and unexercised
immediately prior to the Effective Time and after the Time of Distribution
shall cease to represent a right to acquire shares of Company Common Stock
and shall be converted automatically into an option (not intended to
qualify under section 422 of the Code) to purchase shares of Acquiror
Common Stock in an amount and at an exercise price determined as provided
below:
(A) the number of shares of Acquiror Common Stock to be subject to
the new option shall be equal to the product of the number of shares of
Company Common Stock subject to the original option and the Per Share Merger
Consideration; provided that in the case of any Company Option which is
accompanied by Company SARs, such Company SARs shall automatically terminate
and cease to represent a right to receive a cash payment from the Company
and, in lieu thereof, the total number of shares of Acquiror Common Stock to
be subject to the new option shall be equal to the product of (I) the sum of
(x) the number of shares of Company Common Stock subject to the original
option (as adjusted pursuant to Sections 3.01(a), (b) and (c) of the
Employee Benefits Agreement) and (y) the number of Company SARs accompanying
the original option (as adjusted pursuant to Sections 3.01(a), (b) and (c)
of the Employee Benefits Agreement), and (II) the Per Share Merger
Consideration, and provided further that, in each case, any fractional
shares of Acquiror Common Stock resulting from such multiplication shall be
rounded up to the nearest share; and
(B) the exercise price per share of Acquiror Common Stock under the new
option shall be equal to the exercise price per share of Company Common
Stock or Company SAR, as the case may be, under the original option divided
by the Per Share Merger Consideration; provided that such exercise price
shall be rounded down to the nearest cent.
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(b) All shares of Company Common Stock referred to in Section 3.1(a)(ii)
will cease to be outstanding, will be canceled and retired and will cease to
exist, and each holder of a certificate (a "Certificate") formerly
representing such shares will thereafter cease to have any rights with respect
to such shares, except the right to receive, without interest, upon exchange
of such Certificate in accordance with Section 3.2, the shares of Acquiror
Common Stock and any payment to which such holder is entitled pursuant to this
Article III.
(c) At and after the Effective Time, by virtue of the Merger, each share of
capital stock of Sub issued and outstanding immediately prior to the Effective
Time will be converted into and become one fully paid and nonassessable share
of common stock, par value $0.01 per share, of the Surviving Corporation.
3.2. Exchange of Certificates. (a) Appointment of Exchange Agent. Prior to
the Effective Time, Acquiror shall appoint an exchange agent (the "Exchange
Agent") satisfactory to the Company for the purpose of exchanging all Company
Common Stock for Acquiror Common Stock in accordance with the terms of this
Agreement. As of the Effective Time, Acquiror will deposit with the Exchange
Agent, for the benefit of the holders of Certificates, for exchange in
accordance with this Article III, certificates ("New Certificates")
representing Acquiror Common Stock in amounts sufficient to allow the Exchange
Agent to make all deliveries of New Certificates that may be required in
exchange for Certificates pursuant to this Article III. Acquiror will provide
to the Exchange Agent on a timely basis funds necessary to pay any cash
payable in lieu of fractional shares of Acquiror Common Stock pursuant to
Section 3.2(c) and funds and other property necessary to pay or make any
dividends or distributions with respect to shares of Acquiror Common Stock
pursuant to Section 3.2(d).
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Acquiror will cause the Exchange Agent to mail or deliver to
each Person, who was at the Effective Time a holder of record of a
Certificate, a letter of transmittal (which will specify that delivery will be
effected, and risk of loss and title to the Certificates will pass, only upon
delivery of the Certificates to the Exchange Agent and will be in such form
and contain such other provisions as Acquiror and VRM may reasonably specify)
containing instructions for use in effecting the surrender of Certificates in
exchange for New Certificates and payments pursuant to this Article III. Upon
surrender to the Exchange Agent of a Certificate for cancellation together
with such letter of transmittal, duly executed and completed in accordance
with the instructions thereto, the holder of such Certificate will be entitled
to receive in exchange therefor a New Certificate representing that number of
whole shares of Acquiror Common Stock which such holder has the right to
receive pursuant to the provisions of this Article III, a check in the amount
of any cash which such holder has the right to receive in lieu of fractional
shares of Acquiror Common Stock pursuant to Section 3.2(c) and any cash
dividends with respect to Acquiror Common Stock pursuant to Section 3.2(d) and
any other dividends or distributions with respect to Acquiror Common Stock
pursuant to Section 3.2(d), and the Certificate so surrendered will forthwith
be canceled. No interest will be paid or will accrue on the amount payable
upon surrender of Certificates. Until surrendered as contemplated by this
Section 3.2, each Certificate will be deemed at any time after the Effective
Time to represent only the right to receive, upon surrender of such
Certificate, the applicable New Certificate, cash in lieu of fractional shares
of Acquiror Common Stock and any dividends or distributions with respect to
shares of Acquiror Common Stock as contemplated by this Section 3.2. In the
event of a transfer of ownership of Company Common Stock that is not
registered on the transfer records of the Company, New Certificates
representing the proper number of shares of Acquiror Common Stock and any cash
in lieu of fractional shares of Acquiror Common Stock and any dividends or
distributions as aforesaid may be issued to a Person other than the Person in
whose name the Certificate so surrendered is registered, if such Certificate
is properly endorsed or otherwise in proper form for transfer and the Person
requesting such issuance pays any transfer or other taxes required by reason
of the issuance of shares of Acquiror Common Stock or establishes to the
satisfaction of Acquiror that such tax has been paid or is not applicable. Six
months after the Effective Time, Acquiror will be entitled to cause the
Exchange Agent to deliver to Acquiror any New Certificates, cash or other
property (including any interest thereon) deposited with the Exchange Agent
that is unclaimed by the former holders of Company Common Stock. Any such
former holders of Company Common Stock who have not theretofore exchanged
their Certificates for New Certificates and cash, if applicable, and other
property pursuant to this Article III will thereafter be entitled to look
exclusively to Acquiror and only as general creditors thereof for the Acquiror
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Common Stock and cash and other property to which they become entitled upon
exchange of their Certificates pursuant to this Article III (including cash in
lieu of fractional shares of Acquiror Common Stock pursuant to Section 3.2(c)
and any dividends or distributions with respect to Acquiror Common Stock
pursuant to Section 3.2(d)). Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto will be liable to any former holder of
Company Common Stock for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws. Acquiror
will pay all charges and expenses, including those of the Exchange Agent, in
connection with the exchange of New Certificates and cash for Certificates as
contemplated hereby.
(c) Fractional Shares. Notwithstanding Section 3.1 or any other provision of
this Section 3.2, no fractional shares of Acquiror Common Stock will be issued
hereunder and any holder of Company Common Stock entitled hereunder to receive
a fraction of a share of Acquiror Common Stock but for this Section 3.2(c)
will be entitled hereunder to receive a cash payment in lieu thereof, without
interest, in an amount, less the amount of any withholding taxes which may be
required thereon, equal to the product of (i) the fraction of a share to which
such holder would otherwise have been entitled multiplied by (ii) the Market
Price of Acquiror Common Stock on the Closing Date determined in accordance
with Section 3.1(a)(ii), but without regard for the Minimum Price or the
Maximum Price. For purposes of paying such cash in lieu of fractional shares,
all Certificates representing shares of Company Common Stock surrendered for
exchange by a Company stockholder on the same letter of transmittal shall be
aggregated, and no such Company stockholder will receive cash in lieu of
fractional shares in an amount equal to or greater than the value of one full
share of Acquiror Common Stock with respect to such Certificates surrendered.
(d) Distributions with Respect to Unexchanged Shares. Notwithstanding any
other provisions of this Agreement, after the Effective Time no dividends or
other distributions with respect to Acquiror Common Stock with a record date
after the Effective Time will be paid to any Person holding a Certificate
until such Certificate is surrendered for exchange as provided herein. Subject
to the effect of applicable laws, following surrender of any such Certificate
by any holder thereof, there will be paid to the holder of the New Certificate
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore payable with respect to the Acquiror
Common Stock represented thereby, less the amount of any withholding taxes
which may be required thereon, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to the time of such surrender and a payment date
subsequent to the time of such surrender payable with respect to the Acquiror
Common Stock represented thereby, less the amount of any withholding taxes
which may be required thereon.
(e) No Further Ownership Rights in Company Common Stock. All shares of
Acquiror Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms of this Article III, any cash in lieu of
fractional shares of Acquiror Common Stock paid pursuant to Section 3.2(c) or
any dividend or distribution paid or made with respect to Acquiror Common
Stock pursuant to Section 3.2(d) will be deemed to have been issued, paid and
made in full satisfaction of all rights pertaining to the shares of Company
Common Stock theretofore represented by such Certificates, and there will be
no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation or the Exchange
Agent for any reason, they will be canceled and exchanged as provided in this
Article III.
(f) No Liability. In the event that any Certificate has been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such Person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Surviving
Corporation will, in exchange for such lost, stolen or destroyed Certificate,
issue or cause to be issued the number of shares of Acquiror Common Stock and
pay or cause to be paid the amounts deliverable in respect thereof pursuant to
this Article III.
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(g) Withholding Rights. The Surviving Corporation will be entitled to deduct
and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Company Common Stock such amounts as may be
required to be deducted and withheld with respect to the making of such
payment under the Code, or under any provision of state, local or foreign tax
law. To the extent that amounts are so withheld and paid over to the
appropriate taxing authority, such withheld amounts will be treated for all
purposes of this Agreement as having been paid to the holder of Company Common
Stock in respect of which such deduction and withholding was made.
ARTICLE IV
CERTAIN PRE-MERGER TRANSACTIONS
The following transactions shall occur prior to the Effective Time:
4.1. Reorganization Agreements and Interim Services Agreement. Prior to the
Distribution, the Company will (a) execute and deliver the other
Reorganization Agreements and the Interim Services Agreement and (b) cause VRM
to execute and deliver the other Reorganization Agreements and the Interim
Services Agreement, in each case to which it is a party. Prior to the
Distribution, Acquiror will execute the Tax Sharing Agreement and the Interim
Services Agreement. All the Reorganization Agreements and the Interim Services
Agreement shall be executed in substantially the form attached hereto, which
agreements shall not be altered without the consent of Acquiror.
4.2. Intercorporate Reorganization of Company. Prior to the Time of
Distribution and pursuant to the terms of the Distribution Agreement, the
Company and VRM will consummate the intercorporate transactions contemplated
by Article II of the Distribution Agreement.
4.3. Distribution. Prior to the Effective Time, subject to and pursuant to
the terms and conditions of the Distribution Agreement, the Company will
effect the Distribution and the other transactions contemplated by the
Distribution Agreement.
4.4. Senior Notes. Prior to the Time of Distribution, the Retained Company
will either (a) obtain the consents of the note purchasers under the Note
Purchase Agreement dated December 19, 1990 between the Company and the note
purchasers, in order to permit the Distribution and the Merger or (b) prepay
the notes in accordance with their terms.
4.5. VESOP Notes. Prior to the Effective Time, the Company will cause the
VESOP to prepay the VESOP Notes issued under the Note Purchase Agreement dated
as of March 17, 1989 and the VESOP Notes issued under the Note Purchase
Agreement dated as of August 15, 1991 in accordance with their terms and will
terminate the related guarantee of the Company.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1. Representations and Warranties of the Company. Except as set forth in
the disclosure schedule (the "Company Disclosure Schedule") delivered by the
Company to Acquiror simultaneously with the execution and delivery of this
Agreement, the Company hereby represents and warrants to Acquiror as follows:
(a) Corporate Organization. Each of the Company and VRM is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware. Each Retained Subsidiary is, or will be, a corporation or
limited partnership duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or formation, as
applicable, as set forth in the Company Disclosure Schedule. Each of the
Retained Companies and VRM is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the properties owned, leased or
operated, or the business conducted, by it require such
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qualification, except for any such failure so to qualify or be in good
standing which, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole, or a material
adverse effect on the ability of the VRM Companies to consummate the
transactions contemplated by, or to satisfy their obligations under, the
Reorganization Agreements. Each of the Retained Companies and VRM has the
requisite corporate or other power and authority to carry on its businesses as
it is now being or will be (immediately after the Time of Distribution)
conducted. The Company has heretofore made available to Acquiror complete and
correct copies of the Company Charter and the Company By-laws and the
certificate of incorporation and by-laws, or the comparable organizational
documents, of each Retained Subsidiary, each as amended to date and currently
in full force and effect.
(b) Corporate Authority. Each of the Company and VRM has the requisite
corporate power and authority to execute, deliver and perform each
Reorganization Agreement and the Interim Services Agreement, in each case, to
which it is a party and to consummate the transactions contemplated thereby
(assuming, (i) with respect to the Merger and the Distribution, the approval
and adoption of this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote
thereon and (ii) formal declaration of the Distribution by the Company's Board
of Directors). The execution, delivery and performance by the Company of each
Reorganization Agreement and the Interim Services Agreement, in each case, to
which it is a party and the consummation by the Company of the Distribution
and the Merger and of the other transactions contemplated thereby have been
duly authorized by the Company's Board of Directors, and no other corporate
proceedings on the part of the Company are or will be necessary to authorize
any Reorganization Agreement or the Interim Services Agreement, in each case,
to which it is a party or for the Company to consummate the transactions so
contemplated (other than, (i) with respect to the Merger and the Distribution,
the approval and adoption of this Agreement by the affirmative vote of the
holders of a majority of the outstanding shares of Company Common Stock
entitled to vote thereon and (ii) formal declaration of the Distribution by
the Company's Board of Directors). The execution, delivery and performance by
VRM of each Reorganization Agreement and the Interim Services Agreement to
which it is a party and the consummation by it of the transactions
contemplated thereby have been duly authorized by VRM's Board of Directors and
its stockholder, if required, and no other corporate proceedings on the part
of such entity will be necessary to authorize any Reorganization Agreement or
the Interim Services Agreement to which it is a party or for it to consummate
the transactions so contemplated. Each Reorganization Agreement or the Interim
Services Agreement, in each case, to which the Company or VRM is a party is,
or when executed and delivered will be, a valid and binding agreement of such
party, enforceable against such party in accordance with the terms thereof.
(c) The Company Charter Takeover Provisions. The Company's Board of
Directors has approved the execution, delivery and performance by the Company
of this Agreement and the other Reorganization Agreements and the consummation
of the transactions contemplated thereby, and, subject to the representation
of Acquiror contained in Section 5.2(o) being true and correct, such approval
is sufficient to render inapplicable to the Merger and the other transactions
contemplated by the Reorganization Agreements the provisions of Sections 1 and
2 of Article VI of the Company Charter.
(d) No Violations; Consents and Approvals.
(i) None of the execution, delivery or performance by each of the Company
and VRM of any Reorganization Agreement and the Interim Services Agreement,
in each case, to which it is a party or the consummation by each of the
Company and VRM of the transactions contemplated thereby (assuming, (i)
with respect to the Merger and the Distribution, the approval and adoption
of this Agreement by the affirmative vote of the holders of a majority of
the outstanding shares of Company Common Stock entitled to vote thereon and
(ii) formal declaration of the Distribution by the Company's Board of
Directors) (A) will conflict with, or result in a violation or breach of,
the Company Charter or the Company By-laws or the certificate of
incorporation or by-laws, or comparable organizational documents of VRM and
the Subsidiaries of the Company or (B) will conflict with, or result in a
violation or breach of, or constitute a default (with or without due notice
or lapse of time or both) under, or give rise to any right of termination,
amendment, cancellation or acceleration of any material obligation under,
or result in the creation of any
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adverse claim, restriction on voting or transfer or pledge, lien, charge,
encumbrance or security interest of any kind (a "Lien") upon any of the
properties or assets of the Company or VRM or any Subsidiary of either
under (1) any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract, agreement, obligation, understanding,
commitment or other arrangement (a "Contract") to which the Company or any
of its Subsidiaries is a party or by which any of their properties or
assets may be bound or of any license, franchise, permit, concession,
certificate of authority, order, approval, application or registration
form, of or with a Governmental Entity (a "Permit") or (2) to the knowledge
of the Company and subject to the Regulatory Filings, any judgment, order,
decree, statute, law, regulation or rule applicable to the Company or any
of its Subsidiaries, except, in the case of clause (B), as set forth in the
Company Disclosure Schedule and for conflicts, violations, breaches,
defaults, rights, losses or Liens that, individually or in the aggregate,
would not have a Material Adverse Effect on the Retained Companies, taken
as a whole, or a material adverse effect on the ability of the VRM
Companies to consummate the transactions contemplated by, or to satisfy
their obligations under, the Reorganization Agreements. Schedule 5.1(d)(i)
of the Company Disclosure Schedule attached hereto lists all material
Contracts and material Permits of the Company and its Subsidiaries which
require consent of, or prior notice to, a third party in order to
consummate the transactions contemplated by this Agreement or the
Distribution Agreement.
(ii) Except for consents, approvals, orders, authorizations,
registrations, declarations or filings as may be required under, and other
applicable requirements of, the Exchange Act, the Securities Act, the HSR
Act, applications or filings with the Federal Energy Regulatory Commission
under Section 203 of the Federal Power Act, filings and/or notifications
under the Investment Canada Act, Competition Act and other applicable
Canadian laws, filings under state securities or "blue sky" laws and the
filing of the Certificate of Merger (collectively, the "Regulatory
Filings"), other consents, approvals, orders, authorizations,
registrations, declarations, filings and agreements expressly provided for
in the Reorganization Agreements, and any notice or other filings to be
made following the Effective Time, no consent, approval, order or
authorization of, or registration, declaration or filing with, any
government or any court, arbitral tribunal, administrative agency or
commission or other governmental or other regulatory authority or agency,
Federal, state, local or foreign (a "Governmental Entity") is required with
respect to the Company, VRM or any Subsidiary of either, in connection with
the execution, delivery or performance by the Company and VRM of any
Reorganization Agreement, the Interim Services Agreement or the Assignment
and Assumption Agreements, in each case, to which it is a party or the
consummation by the Company and VRM, as the case may be, of the
transactions contemplated thereby (except where the failure to obtain such
consents, approvals, orders or authorizations, or to make such
registrations, declarations, filings or agreements, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, or a material adverse effect on the ability of
the VRM Companies to consummate the transactions contemplated by, or to
satisfy their obligations under, the Reorganization Agreements).
(e) Capital Stock. The authorized capital stock of the Company consists of
(i) 75,000,000 shares of Company Common Stock, of which 44,185,513 shares of
Company Common Stock were issued and outstanding as of the close of business
on December 31, 1996, (ii) 20,000,000 shares of preferred stock, par value
$1.00 per share ("Company Preferred Stock"), of which 11,500 of shares of
redeemable preferred stock, series A ("Company Series A Preferred Stock") and
3,450,000 shares of $3.125 convertible preferred stock ("Company Convertible
Preferred Stock") were issued and outstanding as of the close of business on
December 31, 1996 and (iii) 10,000,000 shares of serial preference stock, par
value $1.00 per share, none of which is issued and outstanding. As of the
close of business on December 31, 1996 there were outstanding under the
Company Stock Plans options to acquire an aggregate of 4,228,855 shares of
Company Common Stock (subject to adjustment on the terms set forth in the
Company Stock Plans). All of the outstanding shares of Company Common Stock
have been, and all shares of Company Common Stock which may be issued pursuant
to the terms of any options, securities or plans referred to above will be,
when issued, duly authorized and validly issued, and are or will be, when
issued, fully paid and nonassessable. The Company has outstanding no bonds,
debentures, notes or other obligations or securities (other than the Company
Common Stock and Company Preferred Stock) the holders of
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which have the right to vote (or are convertible or exchangeable into or
exercisable for securities having the right to vote) with the stockholders of
the Company on any matter. Except as set forth above, as of the date of this
Agreement, there are no securities convertible into or exchangeable for, or
options, warrants, calls, subscriptions, rights or Contracts of any kind to
which the Company or any of its Subsidiaries is a party or by which any of
them is bound obligating the Company or any of its Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares
of capital stock or other voting securities of the Company or of any of the
Retained Subsidiaries. There are no outstanding Contracts of the Company or
any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares
of Company Common Stock.
(f) Subsidiaries; Investments; Joint Ventures; Partnerships.
(i) The Company Disclosure Schedule lists each Retained Subsidiary.
Except as set forth in the Company Disclosure Schedule each of the
outstanding shares of capital stock or other ownership interests of each of
the Retained Subsidiaries has been duly authorized and validly issued, is
fully paid and nonassessable and, is owned, either directly or indirectly,
by the Company free and clear of all Liens. Except as set forth in the
Company Disclosure Schedule there are no Contracts obligating the Company,
or restricting the Company's rights, to transfer, sell or vote, the capital
stock of the Retained Subsidiaries owned by it, directly or indirectly.
(ii) Except as set forth in the Company Disclosure Schedule, the Company
does not, directly or indirectly, own any capital stock or other ownership
interest in any corporation, partnership, joint venture or other entity
included in the Retained Business or have any Contract relating to the
issuance, sale or purchase of any ownership interest in any such entity.
(g) SEC Filings.
(i) The Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC
under the Securities Act and the Exchange Act since January 1, 1994 (the
"Company SEC Documents"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (A) complied in all
material respects with the applicable requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations thereunder
and (B) did not, at the time it was filed (and at the effective date
thereof, in the case of a registration statement), contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(ii) The financial statements of the Company included in the Company SEC
Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto and have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC) applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto). Each of the consolidated balance
sheets of the Company and its Subsidiaries included in or incorporated by
reference into the Company SEC Documents (including any related notes and
schedules) fairly presents in all material respects the consolidated
financial position of the Company and its Subsidiaries as of its date and
each of the consolidated statements of income, cash flows and stockholders'
equity of the Company and its Subsidiaries included in or incorporated by
reference into the Company SEC Documents (including any related notes and
schedules) fairly presents in all material respects the consolidated
results of operations, cash flows and retained earnings, as the case may
be, of the Company and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal year-end
adjustments), in each case in accordance with GAAP.
(iii) None of the information supplied, or to be supplied, by the Company
or its representatives for inclusion or incorporation by reference in (A)
the registration statement on Form S-4 to be filed with the SEC by Acquiror
in connection with the issuance of shares of Acquiror Common Stock in the
Merger (the
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"Acquiror Form S-4") or the registration statement to be filed with the SEC
by VRM in connection with the distribution of shares of VRM Common Stock,
with the associated VRM Rights, in the Distribution (the "VRM Registration
Statement") will, at the time such Registration Statements are filed with
the SEC, at any time they are amended or supplemented or at the time they
become effective under the Securities Act and at the Effective Time, in the
case of the Acquiror Form S-4, and at the time of the annual meeting of
holders of Company Common Stock to be held in connection with the Merger
and the Distribution (the "Company Meeting"), and at the Time of
Distribution, in the case of the VRM Registration Statement, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
and (B) the proxy statement-prospectus relating to the Company Meeting (the
"Proxy Statement-Prospectus") will, at the date mailed to the Company's
stockholders or at the time of the Company Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
VRM Registration Statement will comply as to form in all material respects
with the provisions of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations thereunder, and the Proxy
Statement-Prospectus will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by the Company with
respect to statements made therein based on information supplied by
Acquiror or any of its Subsidiaries for inclusion in the VRM Registration
Statement or the Proxy Statement-Prospectus, respectively, or with respect
to information concerning Acquiror or any of its Subsidiaries incorporated
by reference therein.
(h) The Company and VNG Financial Statements.
(i) Included in the Company Disclosure Schedule are (A) audited
consolidated statements of assets and liabilities as of December 31, 1995
and 1994 (the "Year End Balance Sheets") and statements of consolidated
income and consolidated cash flows for the years ended December 31, 1995
and 1994, in each case, for the Company (such financial statements, the
"Company Financial Statements"), and (B) an unaudited consolidated
statement of assets and liabilities as of September 30, 1996 (the "Interim
Balance Sheet"), and unaudited statements of consolidated income and
consolidated cash flows for the nine months ended, September 30, 1996 for
the Company (such financial statements, the "Company Interim Financial
Statements"). Each of the Year End Balance Sheets and the Interim Balance
Sheet (including in the case of the Year End Balance Sheets any related
notes and schedules) fairly presents in all material respects the financial
position of the Company as of its date, and each of the statements of
consolidated income and consolidated cash flows included in the Company
Financial Statements and the Company Interim Financial Statements
(including in the case of the Company Financial Statements any related
notes and schedules) fairly presents in all material respects the
consolidated results of operations and consolidated cash flows, as the case
may be, of the Company for the periods set forth therein in each case in
accordance with GAAP (subject in the case of the Company Interim Financial
Statements to normal year-end adjustments).
(ii) Included in the Company Disclosure Schedule are unaudited
consolidated statements of assets and liabilities as of December 31, 1996,
1995 and 1994 (collectively, the "VNG Year End Balance Sheets" and such
statement as of December 31, 1996 being referred to herein as the "VNG
December 31, 1996 Balance Sheet") and statements of consolidated income and
consolidated cash flows for the years ended December 31, 1996, 1995 and
1994, in each case, for VNG and its Subsidiaries (such financial
statements, the "VNG Financial Statements"). Each of the VNG Year End
Balance Sheets fairly presents in all material respects the financial
position of VNG and its Subsidiaries as of its date, and each of the
statements of consolidated income and consolidated cash flows included in
the VNG Financial Statements fairly presents in all material respects the
consolidated results of operations and consolidated cash flows, as the case
may be, of VNG and its Subsidiaries for the periods set forth therein in
each case in accordance with GAAP. Each of the VNG Year End Balance Sheets
has been prepared on a basis substantially consistent with the preparation
of the corresponding Year End Balance Sheets of the Company (or for the
year ended
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December 31, 1996, the Interim Balance Sheet of the Company) and each of
the statements of consolidated income and consolidated cash flows included
in the VNG Financial Statements has been prepared on a basis substantially
consistent with the preparation of the corresponding Financial Statements
of the Company (or for the year ended December 31, 1996, the Company
Interim Financial Statements).
(iii) Schedule 5.1(h)(iii) set forth in the Company Disclosure Schedule
sets forth a consolidated balance sheet of the Retained Companies as at
December 31, 1996 on an historical basis and as adjusted to give effect to
the Distribution and the transactions contemplated by the Distribution
Agreement and Section 7.10(a) (but not as adjusted for the Merger); such
balance sheet fairly states in all material respects the consolidated
financial position of the Retained Companies in accordance with GAAP, and
has been prepared on a basis substantially consistent with the preparation
of the Interim Balance Sheet of the Company and other Company Interim
Financial Statements.
(i) Absence of Certain Events and Changes. Except as disclosed in the
Company SEC Documents filed with the SEC and publicly available prior to the
date hereof (the "Filed Company SEC Documents") or the Company Disclosure
Schedule or as otherwise contemplated by the Reorganization Agreements, since
December 31, 1996 the Company and its Subsidiaries have conducted the Retained
Business in the ordinary course, consistent with past practices, and there
have not been (i) any events, changes or developments which, individually or
in the aggregate, would have a Material Adverse Effect on the Retained
Companies or Retained Business, taken as a whole, or a material adverse effect
on the ability of the VRM Companies to consummate the transactions
contemplated by, or to satisfy their obligations under, the Reorganization
Agreements to which they are or will be a party, other than events, changes or
developments relating to the economy in general or resulting from industry-
wide developments affecting companies in similar businesses, (ii) any
declaration, setting aside or payment of any dividend or other distribution
with respect to the Company's capital stock (other than the regular quarterly
cash dividends consistent with amounts currently paid and at a rate no higher
than the last quarterly dividend prior to December 31, 1996) or any
redemption, purchase or other acquisition of any of the Company's capital
stock (excluding shares acquired in connection with employee tax withholding
elections, or elections to pay the exercise price of stock options with shares
of stock, under Company Stock Plans) or debt (except scheduled redemptions and
repayments under Credit Facilities), or (iii) (x) any granting by the Company
or any of its Subsidiaries to any officer of any Retained Company of any
increase in compensation, except in the ordinary course of business
(including, but not limited to, in connection with promotions) consistent with
past practice or as was required under employment agreements in effect as of
December 31, 1996, (y) any granting by the Company or any of its Subsidiaries
to any such officer of any increase in severance or termination pay, except as
was required under employment, severance or termination agreements in effect
as of December 31, 1996, or (z) any entry by the Company or any of its
Subsidiaries into any employment, consulting, severance, termination or
indemnification agreement with any officers of any Retained Company.
(j) Compliance with Applicable Laws. Except as disclosed in the Filed
Company SEC Documents, the Company and its Subsidiaries are in compliance with
all statutes, laws, regulations, rules, judgments, orders and decrees of all
Governmental Entities applicable to them that relate to the Retained Business,
except where the failure to be in compliance, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained Companies,
taken as a whole. Except as set forth on the Company Disclosure Schedule,
since December 31, 1995, neither the Company nor any Subsidiary has received
any written notice of any administrative, civil or criminal investigation or
audit (other than tax audits) by any Governmental Entity relating to the
Retained Business that, individually or in the aggregate, would have a
Material Adverse Effect on the Retained Companies, taken as a whole. Each of
the Retained Companies has all Permits that are required in order to permit it
to carry on its business as it is presently conducted, except as set forth in
the Company Disclosure Schedule or where the failure to have such Permits,
individually or in the aggregate, would not have a Material Adverse Effect on
the Retained Companies, taken as a whole. All such Permits are in full force
and effect, and the Retained Companies are in compliance with the terms of
such Permits, except where the failure to be in full force and effect or in
compliance, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole. This Section
5.1(j) does not relate to employee benefits matters (for
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which Section 5.1(n) is applicable), environmental matters (for which Section
5.1(o) is applicable) or tax matters (for which Section 5.1(m) is applicable).
(k) Title to Assets.
(i) Each of the Retained Companies has good title to its personal
properties and assets reflected on the VNG December 31, 1996 Balance Sheet,
except for properties and assets disposed of in the ordinary course of
business and except for such defects in title which, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, in each case, free and clear of any Liens
except for Permitted Liens.
(ii) The Retained Companies have (A) good, sufficient and legal title to
the real properties reflected on the VNG December 31, 1996 Balance Sheet
and (B) valid and subsisting leasehold interests in the leased properties
reflected on the VNG December 31, 1996 Balance Sheet or otherwise used in
connection with the Retained Business, and except for such defects in title
which, individually or in the aggregate, would not have a Material Adverse
Effect on the Retained Companies, taken as a whole, in each case, free and
clear of any Liens, except for (1) Permitted Liens, (2) easements,
covenants, rights-of-way, other matters of record and other matters subject
to which such leases are granted and (3) such state of facts as an accurate
survey would show.
(iii) Except as set forth in the Company Disclosure Schedule or
contemplated by the other Reorganization Agreements, the Retained Companies
will, at the Effective Time, include all the Company's right, title and
interest in and to (a) all assets of the Company or any of its
Subsidiaries, including the information systems, that are used primarily in
or that are being held primarily for use in or that are otherwise
sufficient for the operation, as currently conducted, of the Retained
Business, and (b) whether or not included within the assets set forth in
clause (a) above, all assets (including, without limitation, capital stock
and partnership interests) reflected on Schedule 5.1(h)(iii), as such
assets may have been added to, sold in the ordinary course of business or
otherwise changed since such date).
(l) Litigation. Except as disclosed in the Filed Company SEC Documents or as
set forth in the Company Disclosure Schedule, there are no civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending, or to the knowledge of the Company threatened, against any of the
Retained Companies that, individually or in the aggregate, would have a
Material Adverse Effect on the Retained Companies, taken as a whole or delay
the Distribution or Merger. Except as disclosed in the Filed Company SEC
Documents, there are no outstanding judgments, orders, decrees, stipulations
or awards against any of the Retained Companies or their respective properties
or businesses that, individually or in the aggregate, would have a Material
Adverse Effect on the Retained Companies, taken as a whole.
(m) Taxes.
(i) All Tax Returns required to be filed by or on behalf of the Company
and any of its Subsidiaries or any consolidated, combined, affiliated or
unitary group of which the Company or any of its Subsidiaries is or has
ever been a member before the date hereof have been timely filed or
appropriately extended, and all Taxes shown as due and payable on such Tax
Returns and all other Taxes for which the Company or any of its
Subsidiaries is or might otherwise be liable that are due and payable
(together, "Covered Taxes") have been timely paid in full or reflected on
the balance sheet set forth in Schedule 5.1(h)(iii), except to the extent
that (i) such Taxes are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and such reserve
or other appropriate provision, if any, as shall be required in conformity
with GAAP shall have been made therefor and (ii) the failure to so file
such Tax Returns or to pay such Taxes would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken
as a whole; provided, however, that no representation is made under this
Agreement with respect to any Tax or Tax Return which is (i) a subject of
the litigation set forth and described at Section I, paragraphs 3 through
6, of Schedule 5.1(l) (the "Existing Tax Claims"), or (ii) heretofore or
hereafter made
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a subject of any claim, demand or litigation involving claims substantially
similar to those asserted in the Existing Tax Claims. The information
contained in such Tax Returns is true, complete and accurate in all
material respects.
(ii) The Tax Returns of the Company and its Subsidiaries have been
audited and settled by the Internal Revenue Service for all periods ended
through December 31, 1992 or the period for assessment of taxes in respect
of such periods has expired.
(iii) Except as set forth in the Company Disclosure Schedule, to the
Company's knowledge, there are no material claims or investigations pending
or threatened against the Company or its Subsidiaries for past Taxes.
(iv) Except as set forth in the Tax Sharing Agreement, there is no Tax
sharing or allocation agreement under which the Company or any of its
Retained Subsidiaries will have any obligations after the Effective Time.
(v) The charges, accruals and reserves for Taxes with respect to the
Company and its Subsidiaries reflected on the Retained Business Financial
Statements are adequate to cover such Taxes relating to periods, or portion
thereof, ending on or prior to the date of such financial statements.
(vi) All material Taxes due with respect to any completed and settled
audit, examination, or deficiency litigation with any taxing authority have
been paid in full.
(vii) No material income or gain would be recognized under Treasury
Regulation Sections 1.1502-13 or 1.1502-19 (or any corresponding provisions
of other applicable Tax laws) as a result of the transactions contemplated
by the Reorganization Agreements, if such transactions were to occur on the
date hereof.
(viii) There is no agreement or other document extending, or having the
effect of extending, the period of assessment or collection of any material
amount of Covered Taxes.
(ix) The Federal consolidated minimum tax credit carryforward allocated
to the Retained Companies as of December 31, 1996 is not less than
$6,000,000.
(x) None of the Retained Companies shall be required to include in a
taxable period ending after the Closing Date, a material amount of taxable
income attributable to income that economically accrued in a prior taxable
period as a result of Section 481 of the Code or any comparable provision
of state or local Tax law.
(xi) No person has made with respect to any of the Retained Companies, or
with respect to any property held by any of the Retained Companies, any
consent under Section 341 of the Code.
(xii) None of the Retained Companies is a party to any lease made
pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954, as
amended and in effect prior to the date of enactment of the Tax Equity and
Fiscal Responsibility Act of 1982.
(xiii) Neither the Company nor any of its Subsidiaries, nor any member of
any controlled group (within the meaning of Section 993(a)(3) of the Code)
that includes the Company or any of its Subsidiaries, nor, to the knowledge
of the Company, any of their respective officers, directors, employees or
independent contractors acting on their behalf, has participated in or
cooperated with an international boycott (within the meaning of Section
999(b)(3) of the Code).
(xiv) No material Liens for Taxes exist with respect to any of the assets
or properties of any of the Retained Companies, except for statutory liens
for Taxes not yet due or payable or that are being contested in good faith.
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(xv) Neither the Company nor any of its Subsidiaries has taken any action
that would disqualify the Distribution from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(D) of the Code and
from being treated as a tax-free distribution within the meaning of Section
355 or 361(c) of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code.
(n) Employee Benefit Plans.
(i) The Company Disclosure Schedule lists each Employee Plan which
relates to employees of the Retained Business. With respect to each such
Employee Plan, the Company has provided to Acquiror, or will prior to the
Effective Time provide, a true and complete copy of such plan document and
such other documents relating thereto as Acquiror may reasonably request.
(ii) A favorable determination letter has been issued by the Internal
Revenue Service with respect to each such Employee Plan which is intended
to be qualified under Section 401(a) of the Code, and, to the knowledge of
the Company, no event has occurred since the date of such determination
letter to affect adversely the qualified status of such Employee Plan. Each
Employee Plan which relates to employees of the Retained Business has been
maintained in compliance in all material respects with its terms and with
the requirements prescribed by any and all statutes, orders, rules and
regulations, including but not limited to ERISA and the Code, which are
applicable to such Employee Plan, except where the failure to so comply
would not have a negative effect on the tax-qualified status of such Plan,
result in the imposition of any material (to the Plan) fine, penalty or
excise tax under ERISA or the Code, or require any increased employer
contributions or increased benefits in order to avoid any such negative
effect, fine, penalty or excise tax.
(iii) Neither the Company nor any of its ERISA Affiliates has incurred
any liability under Title IV of ERISA arising in connection with the
termination of, or complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA that will become, after the
Effective Time, an obligation of the Company, the Acquiror or any of their
ERISA Affiliates.
(iv) No employee of the Retained Companies will become entitled to any
retirement, severance or similar benefit or enhanced benefit solely as a
result of the transactions contemplated hereby except that (i) all
restrictions on stock is- sued pursuant to the Company Restricted Stock
Plans shall, pursuant to the terms of the Company Restricted Stock Plans or
individual restricted stock agreements, terminate prior to or as a result
of the Merger, (ii) all awards heretofore granted pursuant to the Company
Stock Plans shall vest, (iii) benefits accrued pursuant to the SERP shall
vest, (iv) the deferral accounts of participants in the Deferred
Compensation Plan who terminate employment with the company within 18
months following the Effective Time, unless such termination is the result
of fraud, defalcation, misappropriation or other criminal conduct committed
by the participant against the Company, shall be credited as of the date of
termination with an additional three percentage points of imputed annual
interest, (v) payments will be payable under the Shareholder Value Bonus
Plan, the Incentive Bonus Agreements and (vi) accelerated vesting in
performance shares will occur.
(o) Environmental Matters. Except as disclosed in the Filed Company SEC
Documents or set forth in the Company Disclosure Schedule and except for such
matters that, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole, (i) the Retained
Companies are in compliance with all applicable Environmental Laws, (ii) the
Retained Companies have all Permits required under Environmental Laws for the
operation of the Retained Business as presently conducted ("Environmental
Permits") and there are no violations, investigations or proceedings pending
with respect to such Environmental Permits, (iii) none of the Retained
Companies has received any written notices or demand letters from any
Governmental Entity or any other Person, or any requests for information from
any Governmental Entity which assert that any of the Retained Companies may be
in violation of, or liable under, any Environmental Law, (iv) no facts or
circumstances exist that impose or could reasonably be expected to impose
Environmental Liabilities
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on any of the Retained Companies, and (v) the Retained Companies will not be
required under existing Environmental Laws to install prior to December 31,
1997 additional environmental or pollution control equipment or make other
capital expenditures in order to comply with Environmental Laws, except to the
extent set forth in the 1997 strategic capital budget for the Company and the
Retained Business as adopted by the Board of Directors of the Company on
October 25, 1996 and heretofore furnished to Acquiror.
(p) Takeover Statutes. Section 203 of the DGCL is inapplicable to the Merger
and the other transactions contemplated by the Reorganization Agreements. To
the knowledge of the Company, no other "fair price", "moratorium", "control
share acquisition" or other similar antitakeover statute, law, regulation or
rule of any Governmental Entity (each a "Takeover Statute") is applicable to
the transactions contemplated by the Reorganization Agreements.
(q) Brokers and Finders. Neither the Company nor any of its directors,
officers or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby, except as set forth in the Company
Disclosure Schedule, the fees and expenses of which shall be paid in
accordance with Section 7.10(a).
(r) Employees. There is no labor strike or work stoppage pending or, to the
knowledge of the Company, threatened against any of the Retained Companies
which, in any case, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on the Retained Companies, taken as
a whole. None of the Retained Companies is as of the date hereof a party to
any collective bargaining agreement relating to its employees.
(s) Contracts. Except as set forth in the Company Disclosure Schedule, as of
the date hereof, neither the Company nor any Subsidiary is (with or without
the lapse of time or the giving of notice, or both) in breach or default in
any material respect under any Contract or Contracts that individually or in
the aggregate are material to the operation of the Retained Business. To the
Company's knowledge, as of the date of this Agreement, none of the other
parties to any Contract or Contracts that individually or in the aggregate are
material to the operation of the Retained Business is (with or without the
lapse of time or the giving of notice, or both) in breach or default in any
material respect thereunder.
(t) Opinions of Financial Advisors. The Company has received the opinion of
Lehman Brothers, Inc. to the effect that, as of the date hereof, the
consideration to be received by the Company's stockholders in the Distribution
and the Merger is fair to such stockholders from a financial point of view.
(u) Rights Agreement. The Company has taken all necessary action so that
entering into this Agreement and the other Reorganization Agreements, the
Merger and the other transactions contemplated by the Reorganization
Agreements will not result in the grant of any rights to any Person under the
Company Rights Agreement or enable or require the rights to be exercised,
distributed or triggered.
(v) Regulation as a Utility. Neither the Company nor any of its Subsidiaries
is a "holding company", a "subsidiary company" of a "holding company", an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company", or a "public utility", as each such term is defined in the Public
Utility Holding Company Act of 1935, as amended, and the rules and regulations
promulgated thereunder.
(w) Intellectual Property and Software. The Retained Company and its
Subsidiaries, after giving effect to the Merger and the Distribution, will own
or have the valid, legal right to use all Intellectual Property and Software
used in connection with the Retained Business as conducted on the date hereof
other than the Intellectual Property, Software, tradenames and related rights
to be distributed solely to VRM as provided in the Distribution Agreement. The
Company and its Subsidiaries have used commercially reasonable measures to
protect the secrecy, confidentiality and value of the Intellectual Property
used in connection with the Retained Business. To the Company's knowledge, no
material Intellectual Property (other than unregistered copyrights) or
material Software used in connection with the Retained Business has been
improperly used, divulged or
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appropriated for the benefit of any person other than the Company and its
Subsidiaries, except where such use, divulgence or appropriation would not,
individually or in the aggregate, have a Material Adverse Effect on the
Retained Companies, taken as a whole. As of the date hereof, neither the
Company nor any of its Subsidiaries has made any claim in writing of a
violation, infringement, misuse or misappropriation by others of rights of the
Company and its Subsidiaries to or in connection with any material
Intellectual Property used in connection with the Retained Business. There is
no pending or, to the knowledge of the Company, threatened claim by any third
person of a violation, infringement, misuse or misappropriation by any of the
Company or any of its Subsidiaries of any Intellectual Property or Software
owned by any third person, or of the invalidity of any patent used in
connection with the Retained Business, that would, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken as
a whole.
5.2. Representations and Warranties of Acquiror and Sub. Acquiror and Sub
hereby represent and warrant to the Company as follows:
(a) Corporate Organization and Qualification. Each of Acquiror and Sub is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the properties
owned, leased or operated, or the business conducted, by it require such
qualification, except for any such failure so to qualify or be in good
standing which, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole. Each of
Acquiror and Sub has the requisite corporate power and authority to carry on
its businesses as they are now being conducted. Acquiror has heretofore made
available to the Company complete and correct copies of the charter and bylaws
of Acquiror and Sub, each as amended to date and currently in full force and
effect.
(b) Corporate Authority. Each of Acquiror and Sub has the requisite
corporate power and authority to execute, deliver and perform each
Reorganization Agreement, and the Interim Services Agreement and the
Assignment and Assumption Agreements, in each case, to which it is a party and
to consummate the transactions contemplated thereby. The execution, delivery
and performance by each of Acquiror and Sub of each Reorganization Agreement,
the Interim Services Agreement and the Assignment and Assumption Agreements,
in each case, to which it is a party and the consummation by it of the
transactions contemplated hereby and thereby have been or will be duly
authorized by its Board of Directors, and no other corporate proceedings on
its part are or will be necessary to authorize any Reorganization Agreement or
the Assignment and Assumption Agreements to which it is a party or for it to
consummate the transactions so contemplated. Each of the Reorganization
Agreement, the Interim Services Agreement and the Assignment and Assumption
Agreements to which Acquiror or Sub is a party is, or when executed and
delivered will be, a valid and binding agreement of Acquiror or Sub, as the
case may be, enforceable against Acquiror or Sub, as the case may be, in
accordance with the terms thereof.
(c) No Violations; Consents and Approvals.
(i) None of the execution, delivery or performance by Acquiror and Sub of
any Reorganization Agreement or the Assignment and Assumption Agreements,
in each case, to which it is a party or the consummation by each of
Acquiror and Sub of the transactions contemplated thereby (A) will conflict
with, or result in a violation or breach of, the charter or by-laws of
Acquiror or Sub or (B) will conflict with, or result in a violation or
breach of, or constitute a default (with or without due notice or lapse of
time or both) under, or give rise to any right of termination, amendment,
cancellation or acceleration of any material obligation under, or result in
the creation of any Lien upon any of the properties or assets of Acquiror
or Sub under (1) any of the terms, conditions or provisions of any Contract
to which Acquiror or Sub is a party or by which any of their properties or
assets may be bound or of any Permit, or (2) to the knowledge of the
Acquiror subject to the Regulatory Filings, any judgment, order, decree,
statute, law, regulation or rule applicable to Acquiror or Sub, except, in
the case of clause (B), for conflicts, violations, breaches, defaults,
rights, losses or Liens that, individually or in the aggregate, would not
have a Material Adverse Effect on Acquiror and its Subsidiaries, taken as a
whole.
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(ii) Except for the Regulatory Filings, and other consents, approvals,
orders, authorizations, registrations, declarations, filings and agreements
expressly provided for in the Reorganization Agreements or set forth in
Section 5.1(d), and any notice or other filings to be made following the
Effective Time, no consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required with respect to Acquiror or Sub, in connection with the execution,
delivery or performance by each of Acquiror and Sub of any Reorganization
Agreement or the Assignment and Assumption Agreements, in each case, to
which it is a party or the consummation by Acquiror of the transactions
contemplated thereby (except where the failure to obtain such consents,
approvals, orders or authorizations, or to make such registrations,
declarations, filings or agreements, individually or in the aggregate,
would not have a Material Adverse Effect on Acquiror and its Subsidiaries,
taken as a whole).
(d) Capital Stock. The authorized capital stock of Acquiror consists of (i)
800,000,000 shares of Acquiror Common Stock, of which an aggregate of
409,120,387 shares were issued and outstanding as of the close of business on
January 1, 1997; and (ii) 85,000,000 shares of preferred stock, no par value,
of Acquiror, of which no shares were issued and outstanding as of the close of
business on January 1, 1997. As of the close of business on January 1, 1997,
there were outstanding under Acquiror's option plans options to purchase an
aggregate of 3,461,733 shares of Acquiror Common Stock (subject to adjustment
on the terms set forth in the Acquiror option plans). All of the outstanding
shares of Acquiror Common Stock have been, and all shares of Acquiror Common
Stock which may be issued pursuant to the terms of any options or plans
referred to above will be, when issued, duly authorized and validly issued,
and are, or will be, when issued, fully paid and non-assessable. Acquiror has
outstanding no bonds, debentures, notes or other obligations or securities
(other than Acquiror Common Stock) the holders of which have the right to vote
(or are convertible or exchangeable into or exercisable for securities having
the right to vote) with the stockholders of Acquiror on any matter. Except as
set forth above, as of the date of this Agreement, there are no securities
convertible into or exchangeable for, or options, warrants, calls,
subscriptions, rights or Contracts of any kind to which Acquiror or any of its
Subsidiaries is a party or by which any of them is bound obliging Acquiror or
its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other voting securities of
Acquiror or of any of its Subsidiaries.
(e) The shares of Acquiror Common Stock to be issued in the Merger are duly
authorized and, when issued in accordance with the terms of this Agreement,
will be duly and validly issued, fully paid, non-assessable and free of
preemptive rights.
(f) SEC Filings.
(i) Acquiror and its wholly-owned subsidiary, Pacific Gas and Electric
Company have timely filed all reports, schedules, forms, statements and
other documents required to be filed with the SEC under the Securities Act
and the Exchange Act since January 1, 1994 (the "Acquiror SEC Documents").
As of its filing date, each Acquiror SEC Document filed, as amended or
supplemented, if applicable, (A) complied in all material respects with the
applicable requirements of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations thereunder and (B) did not, at
the time it was filed (and at the effective date thereof, in the case of a
registration statement), contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(ii) The financial statements of Acquiror included in the Acquiror SEC
Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto and have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC) applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto). Each of the consolidated balance
sheets included in or incorporated by reference into the Acquiror SEC
Documents (including any related notes and schedules) fairly presents in
all material respects the consolidated financial position of Acquiror and
its Subsidiaries as of its date and each of the consolidated statements of
income, cash flows and stockholders'
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equity included in or incorporated by reference into the Acquiror SEC
Documents (including any related notes and schedules) fairly presents in
all material respects the consolidated results of operations, retained
earnings and cash flows, as the case may be, of Acquiror and its
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end adjustments), in each case in
accordance with GAAP.
(iii) None of the information supplied or to be supplied by Acquiror or
its representatives for inclusion or incorporation by reference in (A) the
Acquiror Form S-4 or the VRM Registration Statement will, at the time such
Registration Statements are filed with the SEC, at any time they are
amended or supplemented, at the time they become effective under the
Securities Act and at the Effective Time, in the case of the Acquiror Form
S-4, and at the time of the Company Meeting and at the Time of
Distribution, in the case of the VRM Registration Statement, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
and (B) the Proxy Statement-Prospectus will, at the date mailed to the
Company's stockholders or at the time of the Company Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Acquiror Form S-4 will comply as to form in all material
respects with the provisions of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations thereunder, and the Proxy
Statement-Prospectus will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by Acquiror with respect
to statements made therein based on information supplied by the Company or
any of its Subsidiaries for inclusion in the Acquiror Form S-4 or the Proxy
Statement-Prospectus, respectively, or with respect to information
concerning the Company or any of its Subsidiaries incorporated by reference
therein.
(g) Absence of Certain Events and Changes. Except as disclosed in the
Acquiror SEC Documents filed with the SEC and publicly available prior to the
date hereof (the "Filed Acquiror SEC Documents") or as otherwise contemplated
by the Reorganization Agreements, since September 30, 1996 Acquiror and its
Subsidiaries have conducted their respective businesses in the ordinary
course, consistent with past practices, and there have not been any events,
changes or developments which, individually or in the aggregate, would have a
Material Adverse Effect on Acquiror and its Subsidiaries, taken as a whole,
other than events, changes or developments relating to the economy in general
or resulting from industry-wide developments affecting companies in similar
businesses.
(h) Compliance with Applicable Laws. Except as disclosed in the Filed
Acquiror SEC Documents, Acquiror and its Subsidiaries are in compliance with
all statutes, laws, regulations, rules, judgments, orders and decrees of all
Governmental Entities applicable to them, except where the failure to be in
compliance, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole. Since
December 31, 1995 neither Acquiror nor any of its Subsidiaries has received
any written notice of any administrative, civil or criminal investigation or
audit (other than tax audits) by any Governmental Entity that, individually or
in the aggregate, would have a Material Adverse Effect on Acquiror and its
Subsidiaries, taken as a whole. Each of Acquiror and its Subsidiaries has all
Permits that are required in order to permit it to carry on its business as it
is presently conducted, except where the failure to have such Permits,
individually or in the aggregate, would not have a Material Adverse Effect on
Acquiror and its Subsidiaries, taken as a whole. All Permits are in full force
and effect and Acquiror and its Subsidiaries are in compliance with the terms
of the Permits, except where the failure to be in full force and effect or in
compliance, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole.
(i) Litigation. Except as disclosed in the Filed Acquiror SEC Documents,
there are no civil, criminal or administrative actions, suits, claims,
hearings, investigations or proceedings pending or, to the knowledge of
Acquiror, threatened, against Acquiror or any of its Subsidiaries that,
individually or in the aggregate, would have a Material Adverse Effect on
Acquiror and its Subsidiaries, taken as a whole or delay the Distribution or
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Merger. Except as disclosed in the Filed Acquiror SEC Documents, there are no
outstanding judgments, orders, decrees, stipulations or awards against
Acquiror or any of its Subsidiaries or their respective properties or
businesses that, individually or in the aggregate, would have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole.
(j) Takeover Statutes. No California Takeover Statute is applicable to the
transactions contemplated by the Reorganization Agreements, and to the
knowledge of Acquiror, no other Takeover Statute is applicable to such
transactions.
(k) Employee Benefit Plans.
(i) The disclosure schedule delivered to the Company by Acquiror prior to
the date hereof (the "Acquiror Disclosure Schedule") lists each Employee
Plan of Pacific Gas Transmission Company ("PGT") and, if applicable, each
Employee Plan of the Acquiror or a Subsidiary in which one or more
Continuing Employees will be eligible to participate following the Closing.
With respect to each such Employee Plan, Acquiror has provided to the
Company, or will prior to the Effective Time provide, a true and complete
copy of such plan document and such other documents relating thereto as the
Company may reasonably request.
(ii) A favorable determination letter has been issued by the Internal
Revenue Service with respect to each such Employee Plan which is intended
to be qualified under Section 401(a) of the Code, and, to the knowledge of
PGT, no event has occurred since the date of such determination letter to
affect adversely the qualified status of such Employee Plan. Each Employee
Plan has been maintained in compliance in all material respects with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations, including but not limited to ERISA and the Code,
which are applicable to such Plan, except where the failure to so comply
would not have a negative effect on the tax-qualified status of such Plan,
result in the imposition of any material (to the Plan) fine, penalty or
excise tax under ERISA or the Code, or require any increased employer
contributions or increased benefits in order to avoid any such negative
effect, fine, penalty or excise tax.
(iii) Neither Acquiror nor any of its ERISA Affiliates has incurred any
liability under Title IV of ERISA arising in connection with the
termination of, or complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA that will become, after the
Effective Time, an obligation of Acquiror or any of its ERISA Affiliates.
(l) Brokers and Finders. Neither Acquiror nor any of its directors, officers
or employees has employed any broker or finder or incurred any liability for
any brokerage fees, commissions or finders' fees in connection with the
transactions contemplated hereby, except that Acquiror has retained Merrill
Lynch & Co. as its financial advisor, the fees and expenses of which shall be
paid by Acquiror.
(m) Regulation as a Utility. Acquiror is a holding company within the
meaning of the Public Utility Holding Company Act of 1935 (the "1935 Act"),
but Acquiror and its Subsidiaries are exempt from the provisions thereof,
except Section 9(a)(2) thereof, by virtue of having filed with the Securities
and Exchange Commission an exemption statement on Form U-3A-2, and to the
Company's knowledge, no proceedings to revoke or modify such exemption have
been instituted or are pending.
(n) Required Vote of Acquiror Stockholders. No vote of the stockholders of
Acquiror is required in connection with this Agreement, the Merger or any
Reorganization Agreements.
(o) Acquiror Ownership of Company Common Stock. Acquiror does not own, and
has not owned, 5% or more of the outstanding shares any class or series of
voting stock of the Company.
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ARTICLE VI
COVENANTS
6.1. Covenants of the Company. During the period from December 31, 1996 and
continuing until the Effective Time, the Company agrees as to itself and its
Subsidiaries that, except as set forth in the Company Disclosure Schedule, and
except for the Distribution and as required or otherwise expressly
contemplated by the Reorganization Agreements, or to the extent that Acquiror
otherwise consents in writing, which consent shall not be unreasonably
withheld (it being agreed that the following forward looking statements are
deemed to apply to a period prior to the date hereof which commences on
December 31, 1996 and ending at the Effective Time):
(a) Ordinary Course. The Retained Business will be conducted in the usual,
regular and ordinary course, consistent with past practice, including, without
limitation, with respect to the payment and administration of accounts
receivable, inventory management and control policies and implementation of
capital programs for the Retained Business in a timely manner, and the Company
will use reasonable efforts to preserve intact the present business
organization, maintain insurance policies, keep available the services of
present officers and employees engaged primarily in the Retained Business and
to preserve the relationships with key customers, suppliers and others having
business dealings with the Retained Business.
(b) Dividends; Changes in Stock. The Company shall not (i) declare or pay
any dividends (including dividends in Company Common Stock) on or make other
distributions in respect of any of its capital stock (including such a
distribution or dividend made in connection with a recapitalization,
reclassification, merger, consolidation, reorganization or similar
transaction), except for regular quarterly cash dividends consistent with
amounts currently paid and at a rate not higher than the last quarterly
dividend paid prior to the date hereof and the Distribution, (ii) split
(including a reverse stock split), combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock, or
(iii) except as contemplated by the Reorganization Agreements, repurchase,
redeem or otherwise acquire, or permit any Subsidiary to repurchase, redeem or
otherwise acquire, any shares of capital stock (excluding shares acquired in
connection with employee tax withholding elections, or elections to pay the
exercise price of stock options with shares of stock, under Company Stock
Plans) or debt (except scheduled redemptions and repayments under Credit
Facilities) of the Company or any of its Subsidiaries.
(c) Issuance of Securities. The Company will not, nor will the Company
permit any of the Retained Subsidiaries to issue, transfer, sell or dispose
of, or authorize or agree to the issuance, transfer, sale or disposition by
any of the Retained Companies of (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise), any shares of capital stock or any voting securities of the
Company or any of the Retained Subsidiaries, or any options or other
securities convertible into or exchangeable for any such shares of capital
stock or any voting securities of the Company or amend any of the terms of any
such securities or agreements relating to such capital stock outstanding on
the date hereof, other than (i) the issuance, transfer, sale or disposition by
a wholly-owned Subsidiary of its capital stock to its parent, and (ii) the
issuance or transfer of shares of Company Common Stock (w) upon the exercise
of stock options or the vesting of performance shares pursuant to any Employee
Plan, (x) to make any payment under any Employee Plan that is required as of
the date of this Agreement or permitted under Section 6.1(h) to be made in the
form of shares of Company Common Stock, and (y) upon any conversion of shares
of Company Convertible Preferred Stock. Any income tax deduction with respect
to the delivery or vesting of shares pursuant to any Employee Plan, contract
or arrangement shall be allocated to the VRM Group or Company Group
corresponding to the business for which the employee (or former employee)
performed services or if the individual performed services for both the
Retained Business and the VRM Business, to such Groups in the same proportion
as the services were performed for such businesses, which determination shall
be made in good faith using a consistent and reasonable method.
(d) Indebtedness. The Company shall not, nor shall it permit any of its
Retained Subsidiaries to, incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
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warrants or rights to acquire any debt securities of the Company or any of its
Retained Subsidiaries or guarantee any obligations of others, other than
pursuant to the existing Credit Facilities provided, however, that the Company,
VRM and their respective Subsidiaries may enter into guarantees for money
borrowed or for obligations of Affiliates, if (i) such are entered into in the
ordinary course of business and in accordance and at levels consistent with past
practices and (ii) if such guarantees relate to VRM or any of its Subsidiaries,
then (x) any such guarantees entered into on or after 5 business days following
the date of this Agreement terminate on or prior to the Closing Date or become
the sole obligations of VRM or (y) the Retained Company and the Retained
Subsidiaries are expressly released therefrom on or prior to the Closing Date.
(e) Governing Documents. The Company will not amend in any material respect
the Company Charter or the Company By-laws, nor will the Company permit any
Retained Subsidiary to amend in any material respect the certificate of
incorporation or by-laws or comparable organizational documents of any
Retained Subsidiary.
(f) No Acquisitions, Etc. The Company will not, nor will it permit any of
the Retained Subsidiaries to, (i) acquire or agree to acquire, by merging or
consolidating with, or by purchasing a substantial equity interest in or
substantial portion of the assets of, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets (other than immaterial assets
or assets acquired from another Retained Subsidiary) that would be part of the
Retained Business, (ii) make or agree to make any other investment in any
Person (whether by means of loan, capital contribution, purchase of capital
stock or other securities or otherwise) that would be part of the Retained
Business, except for acquisitions or investments by the Company pursuant to
existing contractual obligations or investments in any entity that was a
Retained Subsidiary before giving effect to such investment, or (iii) make or
agree to make any capital expenditure that would be part of the Retained
Business, except, in each case, for acquisitions, investments and capital
expenditures contemplated in the 1997 strategic capital budget for the Company
and the Retained Business as adopted by the Board of Directors of the Company
on October 25, 1996 and heretofore furnished to Acquiror.
(g) No Dispositions. The Company will not, nor will it permit any of the
Retained Subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, or agree to sell, lease, license, encumber or otherwise dispose of (other
than to the Company or to another Retained Subsidiary), any of the assets of
the Retained Business other than in the ordinary course of business consistent
with past practice.
(h) Employee Plans and Compensation. Except as described in the Company
Disclosure Schedule, or except as required by law, or in the ordinary course
of business consistent with past practice, the Company will not, nor will it
permit any of the Retained Subsidiaries to, adopt any plan, arrangement or
policy (including individual arrangements or contracts) which would become an
Employee Plan or amend any Employee Plan to the extent such adoption or
amendment would create a liability or obligation or increase an existing
liability or obligation on the part of the Retained Companies that will not be
assumed by VRM or one of its Subsidiaries pursuant to the Employee Benefits
Agreement. Except for (i) grants of options or performance shares which, at
the Time of Distribution, shall be fully assumed by VRM, (ii) grants of stock
options, performance shares, restricted stock or other stock-based awards
under which, by their terms, all stock issuable pursuant thereto shall be
vested and outstanding prior to the Effective Time, or (iii) grants described
in the Company Disclosure Schedule, the Company shall not grant any stock
option, performance share, stock appreciation right, restricted stock,
unrestricted stock or any other award under any equity-based compensation plan
or individual arrangement. Except as set forth in the Company Disclosure
Schedule or as consistent with past practice, the Company shall not, increase
the compensation payable or to become payable to any officer or employee other
than for increases in the ordinary course of business in accordance with past
practices, or grant any severance or termination pay to, or enter into any
employment or severance agreement with, or amend the terms of any existing
employment or severance agreements with, any officer of employee of the
Company and its Subsidiaries.
(i) Accounting Policies and Procedures. The Company (with respect to the
conduct of the Retained Business) will not, and will not permit any of the
Retained Subsidiaries to, change any of its accounting
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principles, policies, practices or procedures, except as may be required by
GAAP or Regulation S-X of the SEC.
(j) Liens. The Company will not, and will not permit any of its Subsidiaries
to, create, incur, suffer to exist or assume any Lien on any assets of the
Retained Companies, except for Liens described in subclauses (A) through (C)
of the defined term Permitted Liens.
(k) Taxes. Except where a failure to do so would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken as
a whole, the Company will, and will cause each Subsidiary to, (i) prepare and
timely file with the relevant Taxing Authority all Tax Returns and reports
("Post-Signing Returns") required to be filed which include any of the
Retained Companies on a basis consistent with past practice, (ii) timely pay
all Taxes due and payable, or establish reserves therefor in the books and
records of the Company in accordance with GAAP and consistent with past
practice, (iii) promptly notify Acquiror of any action, suit, proceeding,
claim or audit pending against or with respect to the Company or any Retained
Subsidiary in respect of any Taxes where there is a reasonable possibility of
a determination or decision which would materially increase the Tax
liabilities, or materially decrease the Tax attributes, of any of the Retained
Companies (other than Taxes for which VRM will assume liability under the Tax
Sharing Agreement), (iv) not, without the prior written consent of Acquiror,
change any of the Tax elections, Tax accounting methods, Tax conventions or
Tax principles which relate to the Retained Companies, (v) not, without the
prior written consent of Acquiror, take any action (other than an action in
the ordinary course of business or an action contemplated by the
Reorganization Agreements) that would reasonably be expected to materially
increase the Tax liabilities, or materially decrease the Tax attributes, of
any of the Retained Companies, (vi) except as set forth in the Company
Disclosure Schedule, contemplated by the Reorganization Agreements or with the
prior written consent of Acquiror, not take any action that would increase the
amount of deferred tax liabilities, or decrease the amount of deferred tax
assets, of the Company and its Subsidiaries (as determined for financial
accounting purposes), other than an action (A) in the ordinary course of
business consistent with past practice or (B) as required by applicable law,
in each case which is either (x) based on events or circumstances occurring
after the date hereof or (y) a continuation of a course of action initiated
prior to the date of this Agreement, and (vii) except as set forth in the
Company Disclosure Schedule, contemplated by the Reorganization Agreements or
with the prior written consent of Acquiror, not take any action that would
increase the amount of income or gain that will be recognized under Treasury
Regulation Sections 1.1502-13 or 1.1502-19 (or any corresponding provisions of
other applicable Tax laws) as a result of the transactions contemplated by the
Reorganization Agreements.
(l) Maintenance of Properties. The Company will, and will cause the Retained
Subsidiaries to, continue to maintain and repair all property material to the
operation of the Retained Business in a manner consistent in all material
respects with past practice.
(m) Tax-Free Distribution and Merger. The Company will not, and will not
permit any of its Subsidiaries, including VRM and any of its Subsidiaries to,
take or cause or permit to be taken any action prior to the Effective Time
that would disqualify the Distribution from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(D) of the Code and
from being treated as a tax-free distribution within the meaning of Section
355 or 361(c) of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code with
respect to which no gain or loss is recognized by the Company or Acquiror. The
Company shall use reasonable best efforts to do everything reasonably
necessary to have the Distribution and the Merger qualify as aforesaid.
(n) Redemption of Company Preferred Stock. Prior to the Effective Time the
Company will redeem or convert all of the issued and outstanding shares of
Company Preferred Stock pursuant to the terms of the related certificate of
designation. The redemption of the Company Preferred Stock, if any, will be
funded by the Company with the proceeds of borrowings under the New Credit
Facility.
(o) Termination of the Uncommitted Facilities. The Company shall use the
proceeds of the Cash Dividend to repay the outstanding borrowings under the
Uncommitted Facilities and, if such borrowings are paid in full, terminate the
Uncommitted Facilities.
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(p) Operations of Business. The Company shall operate the Retained Business
and VRM Business separately. The Company shall account for all expenses and
liabilities for the Retained Business and VRM Business (including overhead
expenses), separately, and expenses and liabilities relating to overhead shall
be allocated to the VRM Business and Retained Business, based on services
provided, and in accordance with past practices.
6.2. Covenants of Acquiror. During the period from the date of this
Agreement and continuing until the Effective Time, Acquiror agrees as to
itself and its Subsidiaries that except as otherwise expressly contemplated by
the Reorganization Agreements or to the extent that the Company otherwise
consents in writing, which consent shall not be unreasonably withheld:
(a) Tax-Free Distribution and Merger. Acquiror will not, and will not permit
any of its Subsidiaries to, take or cause or permit to be taken any action
prior to the Effective Time that would disqualify the Distribution from being
treated as a "reorganization" within the meaning of Section 368(a)(1)(D) of
the Code and from being treated as a tax-free distribution within the meaning
of Section 355 of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code. Prior
to the Effective Time, the Acquiror shall use its reasonable best efforts to
do everything reasonably necessary to have the Distribution and the Merger
qualify as aforesaid.
(b) Company Names. Acquiror acknowledges that the trademarks, trade names
and service marks, the federal registrations and applications, the Internet
domain registration and exclusive use of the name "Valero", and any and all
other designs, logos and slogans, related to the names "Valero" and "Valero
Energy Corporation" and the "Walking Flame" service mark, all as more
particularly set forth on Schedule 6.2(b), attached hereto, and all other
rights (whether tangible or intangible, statutory, at common law or otherwise)
in connection therewith, whether alone or in combination with one or more
other words or marks in connection therewith, are assets of the Company being
transferred to VRM or a VRM Subsidiary in connection with the Distribution;
provided that Acquiror shall be permitted to use the "Valero" name and related
marks for six (6) months after the Effective Time as provided below. At or
before the Closing, Company and Acquiror shall execute, acknowledge,
authenticate and deliver all such instruments of assignment or transfer as may
be requested by VRM to effect the complete assignment and transfer of such
trademarks, trade names, service marks, registrations, applications and other
associated rights to VRM or a VRM Subsidiary. As promptly as practicable after
the Effective Time, but in any event no later than six (6) months after the
Effective Time, Acquiror shall cease using the "Valero" name and mark or
service mark and the "Walking Flame" service mark, including without
limitation, on any signs, badges, parking stickers, letterhead, business
cards, invoices and other business forms, telephone directory listings, and
advertising and promotional materials using the "Valero" name or service mark;
provided, however, that nothing herein shall be construed to prohibit either
the Company Group or the VRM Group from using after the Effective Time, the
blue-green color (PMS 315) now utilized by both the Company Group and VRM
Group on their respective facilities.
(c) San Antonio Commitment. Recognizing that the Company's corporate
presence in San Antonio, Texas, is a key factor in maintaining the Company's
important customer relationship with San Antonio-City of Public Service and
other customers in the San Antonio, Texas, area, Acquiror agrees that, for a
period of not less than five years following the Effective Time, Acquiror will
cause one or more of its Subsidiaries (including the Retained Companies or
Retained Business) to have a substantial corporate presence in San Antonio,
Texas, or its metropolitan area by maintaining offices, and employing not less
than 340 employees on average over such five-year period, in such metropolitan
area.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. Access. (a) Upon reasonable notice, and except as may otherwise be
required by applicable law, the Company agrees to (and will cause each of its
Subsidiaries to) afford Acquiror's Representatives reasonable
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access, during normal business hours throughout the period until the Closing
Date, to all its properties, books, contracts, commitments, Personnel and
records, to the extent related to the Retained Business, including access for
training and education of personnel and for environmental and other testing,
each as may reasonably be requested, and, during such period, will (and will
cause each of its Subsidiaries to) furnish promptly to Acquiror all information
concerning its business, properties and Personnel, to the extent related to the
Retained Business; provided, however, that such access will not unreasonably
interfere with the normal operations of the Company and the reasonable out-of-
pocket expenses of the Company incurred in connection therewith will be paid by
Acquiror. All such information as may be furnished by or on behalf of the
Company or any of its Subsidiaries to Acquiror or its Representatives, or which
is learned by any of Acquiror's Representatives in the course of any visit to
the Company or any of its locations or contacts with any of its employees,
pursuant to this Section 7.1 will be subject to the terms of the confidentiality
agreement dated November 26, 1996 between the Company and Acquiror (the
"Confidentiality Agreement") the terms of which are incorporated herein by
reference. The Confidentiality Agreement shall terminate as of the Time of
Distribution. Acquiror hereby agrees to defend, indemnify and hold the Company
and its Subsidiaries harmless for, from and against all loss, cost, liability
(including death or bodily injury) or expense due to personal injury or property
damage resulting solely from Acquiror's inspections in connection with this
Section 7.1(a).
(b) During the period prior to the Effective Time, the Company and Acquiror
will promptly furnish to the other a copy of each report, schedule,
registration statement and other documents filed by it with the SEC during
such period pursuant to the requirements of Section 13(a) or 15(d) of the
Exchange Act.
7.2. Other Actions. Subject to Section 7.3(a) and the respective rights of
the parties to terminate this Agreement under Article IX, the Company and
Acquiror will use reasonable best efforts not to, and will cause their
respective Subsidiaries to use reasonable best efforts not to, take any action
that would, or that could reasonably be expected to, result directly or
indirectly in any of the conditions to the Merger set forth in Article VIII
not being satisfied or that would, or that reasonably could be expected to,
materially impair the ability of the Company to consummate the Distribution in
accordance with the terms of the Reorganization Agreements or the ability of
the Company, Acquiror and Sub to consummate the Merger in accordance with the
terms hereof or that would, or that reasonably could be expected to,
materially delay such consummation.
7.3. Acquisition Proposals; Board Recommendation. (a) The Company will, and
will direct and use reasonable efforts to cause its directors, officers,
employees, representatives and agents to, immediately cease any discussions or
negotiations with any parties that may be ongoing with respect to an
Acquisition Proposal. The Company will not, nor will it permit any of its
Subsidiaries to, nor will it authorize or permit any of its directors,
officers, or employees or any investment banker, financial advisor, attorney,
accountant or other representative retained by it or any of its Subsidiaries
to, directly or indirectly, (i) solicit, initiate or knowingly encourage
(including by way of furnishing confidential information), or take any other
action knowingly to facilitate, any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any Acquisition
Proposal or (ii) participate in any discussions or negotiations regarding any
Acquisition Proposal; provided, however, that if, the Board of Directors of
the Company determines in good faith, after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
the Company's stockholders under applicable law, the Company may, in response
to an Acquisition Proposal that was not solicited subsequent to the date
hereof, and subject to compliance with Section 7.3(c), (x) furnish information
to any person pursuant to a customary confidentiality agreement (as determined
by the Company after consultation with its outside counsel) and (y)
participate in discussions or negotiations regarding such Acquisition
Proposal.
(b) Except as set forth in this Section 7.3, neither the Board of Directors
of the Company nor any committee thereof will (i) withdraw or modify, or
propose publicly to withdraw or modify, in a manner adverse to Acquiror, the
approval or recommendation by such Board of Directors or such committee of the
Merger or this Agreement, (ii) approve or recommend, or propose publicly to
approve or recommend, any Acquisition Proposal or (iii) cause the Company to
enter into any letter of intent, agreement in principle, acquisition agreement
or other similar agreement (each, an "Acquisition Agreement") related to any
Acquisition Proposal.
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Notwithstanding the foregoing, in the event that the Board of Directors of the
Company determines in good faith, after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
the Company stockholders under applicable law, the Board of Directors of the
Company may (x) withdraw or modify its approval or recommendation of the
Merger and this Agreement or (y) approve or recommend a Superior Proposal or
(z) terminate this Agreement (and concurrently with or after such termination,
if it so chooses, cause the Company to enter into any Acquisition Agreement
with respect to any Superior Proposal), but in each case only at a time that
is following Acquiror's receipt of written notice (a "Notice of Superior
Proposal") advising Acquiror that the Board of Directors of the Company has
received a Superior Proposal, specifying the material terms and conditions of
such Superior Proposal and identifying the person making such Superior
Proposal.
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 7.3, the Company will promptly advise Acquiror
orally and in writing of any request for confidential information in
connection with an Acquisition Proposal or of any Acquisition Proposal. The
Company will keep Acquiror reasonably informed of the status of and material
information concerning (including amendments or proposed amendments) any
Acquisition Proposal.
(d) Nothing contained in this Section 7.3 will prohibit the Company from
making any disclosure to the Company stockholders if, in the good faith
judgment of the Board of Directors of the Company, after consultation with
outside counsel, failure so to disclose would be inconsistent with applicable
law; provided, however, neither the Company nor its Board of Directors nor any
committee thereof shall, except as permit- ted by Section 7.3(b), withdraw or
modify, or propose publicly to withdraw or modify, its position with respect
to this Agreement or the Merger or approve or recommend, or propose publicly
to approve or recommend, an Acquisition Proposal.
7.4. Tax Representation Letters. For purposes of the tax opinions to be
delivered pursuant to Sections 8.2(c) and 8.3(c), respectively, (a) Acquiror
will deliver a representation letter substantially in the form of Annex D
attached hereto dated as of the Closing Date and (b) the Company will cause
VRM to deliver a representation letter substantially in the form of Annex E
attached hereto, dated as of the Closing Date, in each case, to Wachtell,
Lipton, Rosen & Katz, special counsel to the Company, and Orrick, Herrington &
Sutcliffe LLP, special counsel to Acquiror.
7.5. Filings; Other Actions. (a) The Company will use its reasonable best
efforts promptly to prepare and file with the SEC the Proxy Statement-
Prospectus.
(b) The Company will use its reasonable best efforts (i) promptly to prepare
and file with the SEC the VRM Registration Statement in connection with the
distribution of VRM Common Stock and associated VRM Rights in the
Distribution, and (ii) to cause the Proxy Statement-Prospectus to be mailed to
the Company's stockholders as promptly as practicable after the Proxy
Statement-Prospectus has been cleared by the SEC.
(c) Acquiror will use its reasonable best efforts promptly to prepare and
file with the SEC the Acquiror Form S-4.
(d) None of the Registration Statements or the Proxy Statement-Prospectus
shall be filed with the SEC, and, prior to termination of this Agreement, no
amendment or supplement thereto shall be filed with the SEC, by the Company or
Acquiror without giving the other and its counsel a reasonable opportunity to
review and comment on such filings prior to the filing thereof. Each of the
Company and Acquiror agrees to use its reasonable best efforts, after
consultation with the other party, to respond promptly to any comments made by
the SEC with respect to all of its filings referred to in clauses (a), (b) and
(c) above, including the preparation and filing of any amendments or
supplements thereto, and to have all such filings declared effective under the
Securities Act and the Exchange Act, as applicable, or cleared by the SEC, in
each case as promptly as practicable after the filing thereof. Each of the
Company and Acquiror will, and the Company will cause VRM to, use its
reasonable best efforts to obtain all necessary state securities law or "Blue
Sky" permits and approvals
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required to carry out the transactions contemplated by the Reorganization
Agreements and each of the Company and Acquiror agrees to furnish all
information as may be reasonably requested in connection with any such action;
provided, however, that Acquiror will not be required to qualify to do
business in any jurisdiction in which it is not now so qualified.
(e) Each of the Company and Acquiror will promptly cooperate with and
furnish information to each other in connection with any such requirements
imposed upon any of them or any of their respective Subsidiaries in connection
with the Distribution or the Merger.
(f) Subject to Section 7.3(a) and its right to terminate this Agreement
pursuant to Section 9.1, the Company agrees to take, in accordance with the
DGCL, the Company Charter and the Company By-laws, all action necessary to
convene the Company Meeting within 45 days after the later of the date the
Acquiror S-4 is declared effective, the VRM Registration Statement is declared
effective, and the Proxy Statement-Prospectus is cleared, by the SEC, to
consider and vote upon the Distribution and the Merger and the Company shall,
through its Board of Directors, recommend to its stockholders approval of the
Distribution and the Merger.
(g) Upon the terms and subject to the conditions set forth in this
Agreement, each of the Company, Acquiror and Sub shall use its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner possible, the transactions contemplated by the
Reorganization Agreements.
(h) Each of the Company and Acquiror will promptly, and in any event within
15 days after execution and delivery of this Agreement, make all filings or
submissions as are required under the HSR Act. Each of the Company and
Acquiror will promptly furnish to the other such necessary information and
reasonable assistance as the other may request in connection with its
preparation of any filing or submission which is necessary under the HSR Act.
Without limiting the generality of the foregoing, each of the Company and
Acquiror will promptly notify the other of the receipt and content of any
inquiries or requests for additional information made by any Governmental
Entity in connection therewith and will promptly (i) comply with any such
inquiry or request and (ii) provide the other with a description of the
information provided to any Governmental Entity with respect to any such
inquiry or request. In addition, each of the Company and Acquiror will keep
the other apprised of the status of any such inquiry or request. Subject to
Section 7.5(j), each of the Company and Acquiror will take such actions as are
necessary to obtain any clearance required under the HSR Act for the
consummation of the transactions contemplated hereby.
(i) Each of the Company and Acquiror will promptly make all applications or
filings with the Federal Energy Regulatory Commission under Section 203 of the
Federal Power Act and any applications or filings with appropriate Canadian
authorities required in connection with the Merger. Each of the Company and
Acquiror will take such actions as are necessary to obtain any clearance
required under the Federal Power Act or applicable Canadian law.
(j) Notwithstanding any other provision of this Agreement (including
Sections 7.5(h) and 7.5(i) above), nothing in this Agreement shall require
Acquiror in order to obtain any approval or authorization under any Regulatory
Filing (i) to make any dispositions of any of its assets or any of the assets
of the Retained Business having an aggregate book value in excess of $100
million or (ii) to incur any other burdens which would impair the value of its
investment in the Company or the Retained Business. In addition, the Company
shall not, in order to obtain any approval or authorization under any
Regulatory Filing, make any such dispositions or incur such burdens, without
the consent of Acquiror.
7.6. Accountants' Letters. Each party hereto agrees to use its reasonable
efforts to cause to be delivered to the other parties hereto and their
respective directors a letter of its independent accountants, dated the date
on which each Registration Statement becomes effective, in form and substance
customary for "comfort" letters delivered by independent accountants in
connection with registration statements similar to the Registration
Statements.
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7.7. Distribution Agreement. The Company agrees that prior to the Effective
Time it will not waive or amend the terms of the Distribution Agreement
without the consent of Acquiror.
7.8. Publicity. The initial press release relating hereto shall be a joint
press release and thereafter the Company and Acquiror will consult with each
other prior to issuing any press releases or otherwise making public
statements with respect to the Reorganization Agreements and the transactions
contemplated thereby.
7.9. Employees and Employee Plans. (a) Acquiror and the Company agree to
cooperate in making all appropriate filings and taking all appropriate actions
required to implement the provisions of this Section 7.9.
(b) Acquiror shall for a period of two (2) years after the Merger: (i) take
all action necessary to extend coverage under the Acquiror Pension Plan to
those individuals employed by the Company immediately after the Distribution
and immediately before the Merger (all such individuals, "Continuing
Employees") who were participants in the Company Pension Plan immediately
before the Distribution; (ii) provide Continuing Employees with welfare
benefits (including retiree medical benefits) no less favorable than those
provided by Pacific Gas Transmission ("PGT") prior to the Effective Time to
its other similarly situated employees; (iii) provide Continuing Employees
with severance pay and other employee benefits that are no less favorable in
the aggregate than those provided by the Company prior to the Distribution
(other than any equity-based benefits including, without limitation, stock
options); and (iv) waive any limitations regarding pre-existing conditions
under any welfare or other employee benefit plan maintained by the Acquiror or
PGT.
(c) From and after the Effective Time, with respect to Continuing Employees
who do not elect in connection with the Distribution to receive a distribution
of the balance of their Company Thrift Plan accounts or to transfer their
accounts to the VRM Thrift Plan, Acquiror shall take all actions necessary to
permit such Continuing Employees to transfer their account balances in the
Company Thrift Plan to the Acquiror Thrift Plan. Such transfers shall be in
cash, except that the Acquiror Thrift also will accept promissory notes
evidencing any outstanding participant loans.
(d) For all purposes under all compensation and benefit plans and policies
applicable to employees of Acquiror, including those referred to in this
Section, Acquiror shall treat all service by Continuing Employees with the
Company prior to the Merger as service with Acquiror, except to the extent
such treatment would result in duplication of benefits. For example, but not
by way of limitation, benefits payable to Continuing Employees pursuant to the
Acquiror Pension Plan (and any other qualified or non-qualified plan,
arrangement or contract providing retirement benefits) shall be reduced (on an
actuarially equivalent basis) by benefits paid under the VRM Pension Plan (and
any other qualified or non-qualified plan, arrangement or contract providing
retirement benefits). VRM shall not amend or terminate any such plan,
arrangement or contract so as to reduce the accrued benefit of any Continuing
Employee. For the purpose of avoiding any such benefit duplication, each of
VRM and the Acquiror shall provide to the other all such information in its
possession as the other may reasonably request concerning each other's Pension
Plan (and any other qualified or nonqualified plan, arrangement or contract
providing retirement benefits) to enable VRM and Acquiror to fulfill their
obligations under their respective plans, arrangements and contracts.
(e) VRM and Acquiror shall use their best efforts to permit all employees of
the Company, including but not limited to the Continuing Employees, to
participate in VRM's Flex Plan through December 31, 1997, provided that the
Company shall reimburse VRM for the costs of such participation.
(f) Prior to the Effective Time, the Company and Acquiror will use their
best efforts to collaborate with respect to the design, implementation and
administration of an early retirement program.
7.10. Expenses. (a) All Expenses incurred in connection with the
Reorganization Agreements and the transactions contemplated thereby, shall be
paid by the Company or the Surviving Corporation; provided that the amount so
paid by the Company or the Surviving Corporation shall not exceed the sum of
the expenses set forth on Schedule 5.1(h)(iii) under the caption Transaction
Costs Payable, plus the amount of any redemption or
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prepayment penalty to be paid with respect to the 10.58% Senior Notes due
2000, under the Note Purchase Agreement, dated as of December 19, 1990, as
amended, from the Company to the Note Purchasers named therein, and any amount
in excess of such aggregate amount shall be paid by VRM.
(b) The Company will pay Acquiror $37.5 million (the "Termination Fee") if
(i) this Agreement is terminated pursuant to Section 9.1(c)(ii) or Section
9.1(d)(ii), (ii) prior to the termination of this Agreement, a bona fide
Acquisition Proposal was commenced, publicly proposed, publicly disclosed or,
in the case of clause (iii)(x) below, communicated to the Board of Directors
of the Company (or the willingness of any person to make such an Acquisition
Proposal was publicly disclosed or, in the case of clause (iii)(x) below,
communicated to the Board of Directors of the Company), and (iii)(x) the Board
of Directors of the Company, in accordance with Section 7.3, withdrew or
modified its approval or recommendation of this Agreement or the Merger in a
manner materially adverse to Acquiror, approved or recommended such
Acquisition Proposal, caused the Company to enter into an Acquisition
Agreement with respect to an Acquisition Proposal or terminated this Agreement
or (y) the requisite approval of the Company's stockholders for the
Distribution or the Merger was not obtained at the Company Meeting and, within
twelve months following the date of the Company Meeting (or following the date
of termination of this Agreement, if the Company Meeting was not held prior to
such termination), an Acquisition Proposal shall have been consummated or the
Company shall enter into a definitive agreement with respect to any
Acquisition Proposal; provided, however, the Termination Fee will not be
payable if, at the time of any action referred to in clause (iii)(x) above or
the Company Meeting (or on the date of the termination of this Agreement, if
the Company Meeting was not held prior to such termination), Acquiror shall be
in material breach of its covenants or agreements contained in this Agreement.
The Termination Fee will be paid (in same-day funds), in the case of clause
(iii)(x) above, on the second business day following the termination of this
Agreement, or in the case of clause (y) above, on the second business day
following the earlier of execution of such agreement or the consummation of
such Acquisition Proposal.
7.11. Takeover Statutes. If any Takeover Statute is or may become applicable
to the transactions contemplated by the Reorganization Agreements, each of the
Company and Acquiror and their respective Boards of Directors will grant such
approvals and take such actions as are necessary so that the transactions
contemplated by the Reorganization Agreements may be consummated as promptly
as practicable on the terms contemplated thereby and otherwise act to
eliminate or minimize the effects of any Takeover Statute on any of the
transactions contemplated by the Reorganization Agreements.
7.12. Securities Act Compliance. As soon as practicable after the date of
the Company Meeting, the Company will identify to Acquiror all individuals who
were reasonably believed by the Company to be, at the time of the Company
Meeting, an "affiliate" of the Company as that term is used in paragraphs (c)
and (d) of Rule 145 under the Securities Act (the "Rule 145 Affiliates"). The
Company will use its reasonable best efforts to obtain a written agreement in
the form of Annex F hereto from each Person who is so identified as a Rule 145
Affiliate and will deliver such written agreements to Acquiror as soon as
practicable after the Company Meeting.
7.13. Stock Exchange Listing. Acquiror will use its reasonable best efforts
to list on the NYSE prior to the Closing Date, subject to official notice of
issuance, the Acquiror Common Stock to be issued pursuant to the Merger.
7.14. 1935 Act. (a) The Company shall not, nor shall the Company permit any
of its Subsidiaries to, engage in any activities which reasonably could cause
any of them to become a "holding company" under the 1935 Public Utility
Holding Company Act, as amended.
(b) Acquiror shall not, nor shall Acquiror permit any of its Subsidiaries
to, engage in any activities which reasonably could cause the Acquiror or any
of its Subsidiaries prior to the Effective Time to lose their exemption from
the 1935 Act (except Section 9(a)(2) thereof).
7.15. Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company, any deeds,
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bills of sale, assignments or assurance and to take and do, in the name and on
behalf of the Company, any other actions and things reasonably necessary to
vest, perfect or confirm of record or otherwise any and all right, title and
interest in, to and under any of the rights, properties or assets of the
Company acquired or to be acquired by the Surviving Corporation or VRM, as the
case may be, as a result of or in connection with any of the transactions
contemplated by the Reorganization Agreements, including without limitation
the Merger and the Distribution.
ARTICLE VIII
CONDITIONS
8.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party hereto to consummate the Merger are
subject to the satisfaction or waiver, on or prior to the Closing Date, of
each of the following conditions:
(a) Company Stockholder Approval. The Merger shall have been duly approved
by the affirmative vote of the holders of Company Common Stock representing at
least a majority of the outstanding shares thereof entitled to vote thereon.
(b) Acquiror Stockholder Approval. If required by applicable state laws or
the applicable rules of any securities exchange, the issuance of Acquiror
Common Stock in the Merger shall have been approved by the stockholders of the
Acquiror in accordance with such law or such rule.
(c) NYSE Listing. The shares of Acquiror Common Stock to be issued pursuant
to the Merger shall have been approved for listing on the NYSE prior to the
Closing Date, subject to official notice of issuance.
(d) HSR. The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(e) Litigation. No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition shall be in effect that prohibits
consummation of the transactions contemplated by the Reorganization
Agreements.
(f) Registration Statements. The Registration Statements shall have become
effective under the Securities Act or Exchange Act, as applicable, no stop
order suspending the effectiveness of the Registration Statements shall have
been issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(g) Pre-Merger Transactions. The transactions contemplated by Article IV
shall have been consummated in accordance with the terms of this Agreement and
the Distribution Agreement (which includes additional conditions to such
consummation).
(h) FERC. The Federal Energy Regulatory Commission and any applicable
Canadian authority shall have approved the Merger.
8.2. Conditions to Obligation of the Company. The obligation of the Company
to consummate the Merger is also subject to the satisfaction or waiver by the
Company on or prior to the Closing Date of each of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Acquiror and Sub set forth in the Reorganization Agreements (x) that are
qualified as to materiality shall be true and correct and (y) that are not so
qualified shall be true and correct in all material respects, in each case as
of the date of this Agreement and as of the Closing Date as though made on and
as of the Closing Date (except (i) that the accuracy of
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representations and warranties that by their terms speak as of the date of
this Agreement or some other date will be determined as of such date and (ii)
for the effect of any activities or transactions which are contemplated by the
Reorganization Agreements), and the Company will have received a certificate
signed on behalf of Acquiror by an executive officer of Acquiror to such
effect.
(b) Performance of Obligations of Acquiror and Sub. Acquiror and Sub shall
have performed in all material respects all obligations required to be
performed by them under the Reorganization Agreements at or prior to the
Closing Date, and the Company shall have received a certificate signed on
behalf of Acquiror by an executive officer of Acquiror to such effect.
(c) Tax Opinions. The Company shall have received the opinion of Wachtell,
Lipton, Rosen & Katz, special counsel to the Company, dated the Closing Date,
to the effect that the Distribution qualifies as a transaction described in
Sections 355(a), 355(c)(1) and 368(a)(1)(D) of the Code in which no gain or
loss shall be recognized to the Company and that the Merger qualifies as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code.
(d) Consents. All consents, approvals and authorizations required to be
obtained prior to the Closing Date from any Governmental Entity or third party
in connection with the execution, delivery and performance of the
Reorganization Agreements shall have been made or obtained, except where the
failure to make or obtain the same, individually or in the aggregate, would
not have a Material Averse Effect on the VRM Companies, taken as a whole.
8.3. Conditions to Obligations of Acquiror and Sub. The obligations of
Acquiror and Sub to consummate the Merger are also subject to the satisfaction
or waiver by Acquiror on or prior to the Closing Date of each of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Company and VRM set forth in the Reorganization Agreements (x) that are
qualified as to materiality shall be true and correct and (y) that are not so
qualified shall be true and correct in all material respects, in each case as
of the date of this Agreement and as of the Closing Date as though made on and
as of the Closing Date (except (i) that the accuracy of representations and
warranties that by their terms speak as of the date of this Agreement or some
other date will be determined as of such date and (ii) for the effect of any
activities or transactions which are contemplated by the Reorganization
Agreements) and Acquiror will have received a certificate signed on behalf of
the Company by an executive officer of the Company to such effect.
(b) Performance of Obligations. Each of the Company and VRM shall have
performed in all material respects all obligations required to be performed by
it under the Reorganization Agreements at or prior to the Closing Date, and
Acquiror shall have received a certificate signed on behalf of the Company by
an executive officer of the Company to such effect.
(c) Tax Opinion. Acquiror shall have received an opinion of Orrick,
Herrington & Sutcliffe LLP, special counsel to Acquiror, dated the Closing
Date, to the effect that the Merger qualifies as a "reorganization" within the
meaning of Section 368(a)(1)(B) of the Code and shall have received an opinion
of Wachtell, Lipton, Rosen & Katz, reasonably satisfactory to Acquiror in form
and substance, to the effect that the Distribution qualifies as a transaction
described in Sections 355(a), 355(c)(1) and 368(a)(1)(D) of the Code in which
no gain or loss shall be recognized to the Company.
(d) Consents. All consents, approvals and authorizations required to be
obtained prior to the Closing Date from any Governmental Entity or third party
in connection with the execution, delivery and performance of the
Reorganization Agreements shall have been made or obtained, except where the
failure to make or obtain the same, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on the Retained
Companies, taken as a whole, or on Acquiror and its Subsidiaries, taken as a
whole.
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(e) Redemption of Company Preferred Stock. The Company shall have redeemed
or converted all issued and outstanding shares of Company Preferred Stock
pursuant to the terms of the related certificate of designation.
ARTICLE IX
TERMINATION
9.1. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or after the
approval by the stockholders of the Company:
(a) by the mutual written consent of the Company and Acquiror;
(b) by either the Company or Acquiror if (i) the Merger shall not have been
consummated by July 31, 1997 unless HSR or Federal Energy Regulatory
Commission approval has not been received in which case such date shall be
postponed until 10 business days after receipt of such approval, but in no
event later than December 31, 1997, or (ii) at the Company Meeting or at any
adjournment thereof, the approval of the Company's stockholders referred to in
Section 8.1(a) shall not have been obtained; provided that in the case of a
termination pursuant to clause (i) above, the terminating party and its
Subsidiaries shall not have breached in any material respect their respective
obligations under the Reorganization Agreements in any manner that shall have
caused or resulted in the failure referred to above;
(c) by the Company (i) if Acquiror or Sub shall have breached in any
material respect any of their respective covenants, representations,
warranties or agreements contained in any Reorganization Agreement, which
breach shall not have been cured within 30 days following written notice of
such breach, or (ii) pursuant to Section 7.3(b) of this Agreement; or
(d) by Acquiror:
(i) if the Company or VRM shall have breached in any material respect any
of the covenants, representations, warranties or agreements contained in
any Reorganization Agreement, which breach shall not have been cured within
30 days following written notice of such breach; or
(ii) if the Board of Directors of the Company shall have exercised any of
its rights set forth in the second sentence of Section 7.3(b) of this
Agreement;
(iii) if (A)(x) there has occurred since the date of this Agreement any
event, change, effect or state of facts (collectively "Events"), other than
Events which result from any action by Acquiror or any of its Subsidiaries,
Affiliates, officers, employees, agents or representatives or changes in
general economic, financial, market or business conditions, or (y)
Acquiror, in its ongoing due diligence investigation, shall uncover
information (collectively "Information") that, as of the date of this
Agreement, has not been previously disclosed in a Filed Company SEC
Document or has not been disclosed by the Company to Acquiror on or prior
to the date of this Agreement (including in the Company Disclosure
Schedules) and (B) such Events and Information in the aggregate would
reasonably be expected to result in an adverse impact on the Retained
Business of more than $100 million, which amount shall be net of income tax
effects and shall include the present value of any reasonably projected
costs, expenses or liabilities or losses of projected business revenue
caused by the occurrence of such Events or attributable to such
Information.
9.2. Effect of Termination and Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article IX,
no party to the Reorganization Agreements (or any of its directors or
officers) shall have any liability or further obligation to any other party,
except as set forth in Sections 5.1(q), 5.2(l), 7.10 and 9.2, all of which
shall survive such termination, and except that nothing herein shall relieve
any party from liability for any material and willful breach of any of the
Reorganization Agreements.
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ARTICLE X
MISCELLANEOUS AND GENERAL
10.1. Survival. Except as set forth below in this Section 10.1, all
representations, warranties and agreements in this Agreement of Acquiror, Sub
and the Company or in any instrument delivered by Acquiror, Sub or the Company
pursuant to or in connection with this Agreement shall expire at the Effective
Time or upon termination of this Agreement in accordance with its terms or, in
the case of any other such instrument, in accordance with the terms of such
instrument. In the event of consummation of the Merger, the agreements
contained in or referred to in Article III, the last sentence of Section
6.1(c) and Sections 6.2(b), 6.2(c), 7.9, 7.15 and 10.1 shall survive the
Effective Time.
10.2. Modification or Amendment. Subject to the applicable provisions of the
DGCL, at any time prior to the Effective Time, the parties hereto may modify
or amend this Agreement by written agreement executed and delivered by duly
authorized officers of the respective parties.
10.3. Waiver; Remedies. The conditions to each party's obligation to
consummate the Merger are for the sole benefit of such party and may be waived
(in writing) by such party in whole or in part to the extent permitted by
applicable law. No delay on the part of either Acquiror or the Company in
exercising any right, power or privilege hereunder will operate as a waiver
thereof, nor will any waiver on the part of either Acquiror or the Company of
any right, power or privilege hereunder operate as a waiver of any other
right, power or privilege hereunder, nor will any single or partial exercise
of any right, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder. Unless otherwise provided, the rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies which the
parties may otherwise have at law or in equity.
10.4. Counterparts. For the convenience of the parties, this Agreement may
be executed in any number of separate counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
10.5. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware applicable to
contracts made and to be performed entirely within such State, without regard
to the conflicts of law principles of such State.
10.6. Notices. Any notice, request, instruction or other communication to be
given hereunder by any party to another shall be in writing and shall be
deemed to have been duly given (i) on the date of delivery if delivered
personally, or by telecopy or telefacsimile, upon confirmation of receipt,
(ii) on the first business day following the date of dispatch if delivered by
Federal Express or other nationally reputable next-day courier service, or
(iii) on the third business day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage prepaid. All
notices hereunder shall be delivered as set forth below, or pursuant to such
other instructions as may be designated in writing by the party to receive
such notice,
(a) If to the Company:
Valero Energy Corporation 530 McCullough Avenue San Antonio, Texas
78215
Attention: General Counsel Telecopy: (210) 246-2354
with copies to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street New York, New York 10019 Attention: Edward D.
Herlihy, Esq. Telecopy: (212) 403-2000
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(b) if to Acquiror or Sub:
PG&E Corporation
77 Beale Street
San Francisco, California 94105
Attention: General Counsel
Telecopy: (415) 973-8083
with copies to:
Orrick, Herrington & Sutcliffe LLP
400 Sansome Street
San Francisco, California 94111
Attention: Leslie P. Jay, Esq.
Telecopy: (415) 773-5759
10.7. Entire Agreement. The Reorganization Agreements including the Annexes
and Schedules thereto, the Interim Services Agreements including the Annexes
and Schedules thereto and the Confidentiality Agreement constitute the entire
agreement, and supersede all other prior agreements, understandings,
representations and warranties, both written and oral, among the parties, with
respect to the subject matter hereof and thereof. Any disclosure by the
Company, Acquiror or Sub in any portion of their respective disclosure
schedules shall be deemed disclosure in each other portion of such disclosure
schedule.
10.8. Certain Obligations. Whenever any Reorganization Agreement, the
Interim Services Agreement or the Assignment and Assumption Agreements
requires any of the Subsidiaries of any party to take any action, such
Agreement will be deemed to include an undertaking on the part of such party
to cause such Subsidiary to take such action.
10.9. Assignment. No party to this Agreement shall convey, assign or
otherwise transfer any of its rights or obligations under this Agreement
without the express written consent of each other party hereto in its sole and
absolute discretion.
10.10. Captions. The Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
10.11. Severability. If any provision of the Reorganization Agreements or
the application thereof to any Person or circumstance is determined by a court
of competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions thereof, or the application of such provision to Persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated thereby is not affected in any
manner adverse to any party. Upon any such determination, the parties shall
negotiate in good faith in an effort to agree upon a suitable and equitable
substitute provision to effect the original intent of the parties.
10.12. No Third Party Beneficiaries. Nothing contained in this Agreement or
any other Reorganization Agreement is intended to confer upon any Person or
entity other than the parties thereto and their respective successors and
permitted assigns, any benefit, right or remedies under or by reason of the
Reorganization Agreement; provided, however, that VRM is an intended third
party beneficiary of the obligations of Acquiror specified in Section 6.2(b),
and is entitled to enforce the same to the same extent as if a party hereto.
10.13. Annexes and Schedules. All Annexes hereto and the Company Disclosure
Schedule (collectively, the "Schedules") attached hereto or referred to herein
are hereby incorporated in and made a part of this
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Agreement as if set forth in full herein. Matters reflected on the Schedules
are not necessarily limited to matters required by this Agreement to be
reflected on such Schedules. Such additional matters are set forth for
informational purposes only and do not necessarily include other matters of a
similar nature. Capitalized terms used in any Schedule but not otherwise
defined therein shall have the respective meanings assigned to such terms in
this Agreement.
10.14. No Representations or Warranties Acquiror and Sub acknowledge that
none of the Company or any of its Subsidiaries, any of their affiliates
(including the Retained Companies) or any other Person has made any
representation or warranty, expressed or implied, as to the accuracy or
completeness of any information regarding any of the Company, VRM, VRM's
Subsidiaries, the Retained Companies, the Retained Business or the Retained
Assets not included in the Reorganization Agreements, and none of the Company,
any of its Subsidiaries or Affiliates or any other Person will have or be
subject to any liability to Acquiror or any of its Subsidiaries, any of their
affiliates or any other Person resulting from the distribution to Acquiror or
Sub, or Acquiror's or Sub's use of, any such information. Acquiror and Sub
further acknowledge that, except as expressly set forth in the Reorganization
Agreements, the Company and VRM have not made, and hereby expressly disclaim
any representation or warranty, and there are no representations or warranties
of any kind, expressed or implied, with respect to any of the Company, VRM,
VRM's Subsidiaries, the Retained Companies, the Retained Business or the
Retained Assets.
10.15. Tax Sharing Agreement. With respect to Tax matters, if there is a
conflict between this Agreement and the Tax Sharing Agreement the Tax Sharing
Agreement shall control.
10.16. Consent to Jurisdiction. Each of the parties hereto irrevocably
submits to the exclusive jurisdiction of (i) the state courts of the State of
New York, County of New York and (ii) the United States District Court for the
Southern District of New York for the purposes of any suit, action or other
proceeding arising out of this Agreement or any transaction contemplated
hereby (and agrees not to commence any action, suit, or proceeding relating
hereto except in such courts). Each of the parties hereto further agrees that
service of any process, summons, notice or document hand delivered or sent by
registered mail to such party's respective address set forth in Section 10.6
will be effective service of process for any action, suit or proceeding in New
York, County of New York with respect to any matters to which it has submitted
to jurisdiction as set forth in the immediately preceding sentence. Nothing in
this Section, however, shall affect the right of any party hereto to serve
legal process in any other manner permitted by law. Each of the parties hereto
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in (i) the state courts of the State of New
York, New York County or (ii) the United States District Court for the
Southern District of New York, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto on the date first
hereinabove written.
VALERO ENERGY CORPORATION
By______________________________________
/s/ Edward C. Benninger
Name: Edward C. Benninger
Title: President
PG&E CORPORATION
By______________________________________
/s/ Bruce R. Worthington
Name: Bruce R. Worthington
Title: General Counsel
PG&E ACQUISITION CORPORATION
By______________________________________
/s/ Bruce R. Worthington
Name: Bruce R. Worthington
Title: President
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<PAGE>
EXHIBIT 2.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF DISTRIBUTION
DATED AS OF , 1997
BETWEEN
VALERO ENERGY CORPORATION
AND
VALERO REFINING AND MARKETING COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE I
DEFINITIONS
1.1. Definitions................................................... B-1
ARTICLE II
TRANSACTIONS RELATING TO THE DISTRIBUTION..................... B-6
2.1. Intercorporate Reorganization................................. B-6
2.2. Assumption of Liabilities..................................... B-8
2.3. Repayment of Intercompany Indebtedness and Cash Dividend...... B-9
2.4. Resignations.................................................. B-10
VRM Certificate of Incorporation and By-Laws; Rights Plan;
2.5. Name Change................................................... B-10
2.6. Insurance..................................................... B-10
2.7. Nonassignable Contracts....................................... B-10
2.8. Interim Services Agreement.................................... B-11
2.9. Company Guarantees............................................ B-11
2.10. Conduct of Businesses......................................... B-11
ARTICLE III
MECHANICS OF DISTRIBUTION
3.1. Mechanics of Distribution..................................... B-11
3.2. Timing of Distribution........................................ B-12
ARTICLE IV
OTHER AGREEMENTS
4.1. Use of Names, Trademarks, etc................................. B-12
4.2. Intercompany Accounts as of the Time of Distribution.......... B-12
4.3. Hunting Lease................................................. B-12
4.4. Airplanes..................................................... B-12
4.5. Intercompany Arrangements..................................... B-12
4.6. Further Assurances............................................ B-13
ARTICLE V
TAX AND EMPLOYEE MATTERS
5.1. Tax Sharing; Exclusivity of Tax Sharing Agreement............. B-13
5.2. Employee Benefits............................................. B-13
5.3. Employees..................................................... B-13
5.4. Non-Competition Covenants..................................... B-13
ARTICLE VI
ACCESS TO INFORMATION
6.1. Provision of Records and Information.......................... B-15
6.2. Access to Information......................................... B-15
6.3. Production of Witnesses....................................... B-15
6.4. Retention of Records.......................................... B-15
6.5. Confidentiality............................................... B-15
</TABLE>
i
<PAGE>
TABLE OF CONTENTS, CONTINUED
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE VII
CONDITIONS
7.1. Conditions to Obligations of the Company........................ B-16
ARTICLE VIII
INDEMNIFICATION
8.1. Indemnification by VRM.......................................... B-17
8.2. Indemnification by Retained Company............................. B-17
8.3. Procedures Relating to Indemnification.......................... B-17
8.4. Certain Limitations............................................. B-19
8.5. Express Negligence.............................................. B-19
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1. Modification or Amendment....................................... B-19
9.2. Waiver; Remedies................................................ B-19
9.3. Counterparts.................................................... B-19
9.4. Governing Law................................................... B-19
9.5. Notices......................................................... B-20
9.6. Entire Agreement................................................ B-20
9.7. Certain Obligations............................................. B-20
9.8. Assignment...................................................... B-20
9.9. Captions........................................................ B-21
9.10. Specific Performance............................................ B-21
9.11. Severability.................................................... B-21
9.12. Third Party Beneficiaries....................................... B-21
9.13. Schedules....................................................... B-21
9.14. Tax Sharing Agreement........................................... B-21
</TABLE>
ii
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AGREEMENT AND PLAN OF DISTRIBUTION, dated as of , 1997 (this
"Agreement"), between VALERO ENERGY CORPORATION, a Delaware corporation (the
"Company") and VALERO REFINING AND MARKETING COMPANY, a Delaware corporation
and as of the date hereof a wholly-owned subsidiary of the Company ("VRM").
W I T N E S S E T H :
WHEREAS, the Company, PG&E Corporation, a California corporation
("Acquiror"), and PG&E Acquisition Corporation, a Delaware corporation
("Sub"), have entered into an Agreement and Plan of Merger dated as of January
31, 1997 (the "Merger Agreement"), providing for the Merger (as defined in the
Merger Agreement) of Sub with and into the Company;
WHEREAS, immediately prior to the Effective Time (as defined in the Merger
Agreement), the Company's Board of Directors, subject to the approval of the
Company's stockholders, expects to distribute to the holders of common stock,
par value $1.00 per share, of the Company ("Company Common Stock"), other than
shares held in the treasury of the Company, on a pro rata basis all of the
issued and outstanding shares of common stock, par value $0.01 per share, of
VRM ("VRM Common Stock"), along with the associated VRM Rights (as defined in
the Merger Agreement) (the "Distribution");
WHEREAS, the purpose of the Distribution is to make possible the Merger by
divesting the Company of the businesses and operations to be conducted by VRM,
which Acquiror is unwilling to acquire;
WHEREAS, it is the intention of the parties to this Agreement that for
federal income tax purposes the Distribution shall qualify as a transaction
described in Section 355 of the Internal Revenue Code of 1986, as amended (the
"Code") and a "reorganization" within the meaning of Section 368(a)(1)(D) of
the Code; and
WHEREAS, this Agreement sets forth or provides for certain agreements by and
between the Company and VRM in consideration of the separation of the
ownership of the Company and VRM;
NOW, THEREFORE, in consideration of the premises, and of the respective
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. Capitalized terms used in this Agreement and not
otherwise defined herein shall have the meanings assigned to such terms in the
Merger Agreement. As used in this Agreement, the following terms shall have
the following respective meanings:
"Acts or Omissions" shall mean negligence, gross negligence, breaches of
express or implied warranties, premises liability, violations of the Texas
Deceptive Trade Practices Act, breaches of duties under the law of strict
liability in tort (including defects in design, manufacturing, marketing,
warnings, and distribution), defamation, false imprisonment or arrest,
malicious prosecution, or any other misfeasance, malfeasance, non-feasance,
breaches of legal duties, tortious conduct, intentional torts, malicious
conduct, false or misleading or deceptive or unconscionable conduct, or any
combination thereof.
"Airplanes" shall mean the airplanes to be co-owned by Valero Corporate
Services and Valero Management Company described on Schedule 2.1(b)(ii)(J).
"By-Laws" shall mean VRM's by-laws substantially in the form filed as an
Exhibit to the VRM Registration Statement.
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"Cash Dividend" shall have the meaning set forth in Section 2.3(a).
"Certificate of Incorporation" shall mean VRM's amended and restated
certificate of incorporation substantially in the form filed as an Exhibit to
the VRM Registration Statement.
"Company Group" shall mean the Retained Company and the Retained
Subsidiaries, whether now or hereafter existing.
"Company Guarantees" shall mean, collectively, the guarantees of obligations
of the VRM Group by the Company or the Retained Subsidiaries, a complete and
accurate list of which is set forth on Schedule 1.1(a).
"Contract Rights" shall mean, as of any given date, any and all right, title
and interest of the Company and any of its Subsidiaries (other than VRM and
its Subsidiaries) in and to any and all of the Project Contracts and other
rights under, in and to contracts and agreements, written or oral, express or
implied, legal and equitable, of every kind or description, pertaining or
related in any way to the MTBE Project; and all estates, rights, privileges,
claims and causes of action, immunities, and other appurtenances and rights,
and all assets subject to liabilities connected to the above and which, in any
such case, is either (i) in force and effective at the date hereof, or (ii)
arises under or with respect to any document, paper, instrument or other
intangible interest of any of the types specified above, in force and effect
at the date hereof and pursuant to which any reversion, remainder, contingent
or other residual right, title, interest or liability remains in the Company,
and which in each case pertains or relates in any way to the MTBE Project;
together with all tolls, rents, revenues, issues, earnings, income, products
and profits thereof accruing on or after the date hereof.
"Distribution Date" shall mean the date determined by the Board of Directors
of the Company on which the Distribution is to be effected.
"Environmental Law" shall mean any and all applicable laws, statutes,
ordinances, rules, regulations, orders, or permits of any Governmental Entity
or agency regulating, relating to or pertaining to the protection of health,
or the environment, or the use, storage, treatment, generation,
transportation, handling, Release or disposal of Hazardous Substances, in
effect in any and all jurisdictions in which the Company is conducting or at
any time has conducted the business, including without limitation, the Oil
Pollution Act of 1990, the Clean Air Act, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1976, as amended, the Resource Conservation and Recovery Act of
1976, as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Emergency Planning and Community
Right-to-Know Act, the Hazardous Liquid Pipeline Safety Act, as amended, and
the Natural Gas Pipeline Safety Act of 1979, as amended, and regulations
adopted thereunder.
"Environmental Liabilities" shall mean all Liabilities relating to or
arising out of any Environmental Law or Environmental Permit or relating to
Hazardous Substances or environmental, health or safety matters (including
without limitation removal, remediation or cleanup costs, investigatory costs,
governmental response costs and administrative oversight costs, environmental
monitoring costs, natural resources damages, property damages, personal injury
damages, costs of compliance with any contractual obligation or settlement,
judgment or other determination of Liability and indemnity, contribution or
similar obligations).
"Filings" shall mean the Registration Statements, the Proxy Statement-
Prospectus, and any other document filed or required to be filed with the SEC
in connection with the transactions contemplated by the Reorganization
Agreements, or any preliminary or final form thereof or any amendment or
supplement thereto.
"Group" shall mean the Company Group or the VRM Group, as applicable.
"Hazardous Substance" shall mean any waste, substance, material, pollutant
or contaminant presently listed, defined, designated or classified as
hazardous or regulated, under any Environmental Law.
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"Hunting Lease" shall mean the hunting lease described on Schedule
2.1(b)(ii)(K) to be assigned to Valero Corporate Services.
"Indemnifiable Losses" shall mean, subject to Section 8.4, all losses,
Liabilities, damages, deficiencies, obligations, fines, expenses, claims,
demands, actions, suits, proceedings, judgments or settlements, whether or not
resulting from Third Party Claims, including interest and penalties recovered
by a third party with respect thereto and out-of-pocket expenses and
reasonable attorneys' experts' and accountants', fees and expenses incurred in
the investigation or defense of any of the same or in asserting, preserving or
enforcing any of the Indemnitee's rights hereunder, suffered by an Indemnitee.
"Indemnitee" shall mean any of the Retained Company Indemnitees or the VRM
Indemnitees, as applicable, who or which may seek indemnification under this
Agreement.
"Information" shall mean all records, books, subscriptions, contracts,
instruments, computer data and other data and information.
"Intercompany Arrangement" shall have the meaning set forth in Section 4.5.
"Intercompany Note" shall have the meaning set forth in Section 2.3(b).
"Intercompany Reorganization" shall mean the actions taken prior to the
Distribution to separate the VRM Business and the Retained Business, including
without limitation, the actions set forth in Article II.
"IRBs" shall mean the 10.25% Refunding Revenue Bonds Series 1987A and the
10.625% Revenue Bonds Series 1987B, issued by the Industrial Development
Corporation of Port Corpus Christi, with VRM as the borrower and the Company
as guarantor.
"Liabilities" shall mean with respect to any Person, any and all debts,
liabilities, commitments and obligations, whether fixed, contingent or
absolute, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever or however arising, including, without
limitation, all costs and expenses relating thereto, and including, without
limitation, those debts, liabilities and obligations arising under law, rule,
regulation, permits, action or proceeding before any court or regulatory
agency or administrative agency, order or consent decree or any award of any
arbitrator of any kind, and those arising under contract, commitment or
undertaking.
"MTBE Project" shall mean the installation of a plant in Mexico to produce
methyl tertiary butyl ether and transactions related thereto described on
Schedule 1.1(b).
"No-Action Letter" shall mean a letter from the staff of the SEC indicating,
among other things, that the Division of Corporation Finance will not
recommend enforcement action to the SEC if the VRM Common Stock is distributed
pursuant to the Distribution without registration under the Securities Act.
"Personal Property" shall mean, collectively, as of any given date, the
personal property owned by Valero Management Company including without
limitation computer hardware, communications equipment, auto, trucks, personal
computers, lamps, chairs, desks, artwork, office furniture, books and office
supplies.
"Project Contracts" shall mean, as of any given date, and include any con-
tract or agreement heretofore entered into for the provision of any money,
guarantee, debt, service, labor, materials or improvements, or any other good,
service, duty, obligation or thing of value pertaining or related to the MTBE
Project, including, without limitation, any and all contracts, agreements,
guarantees, letters, letters of intent, undertakings or understandings,
written or unwritten, in respect thereto, including, without limitation the
Letter of Intent, the Memorandum of Understanding, the PROESA-BANAMEX Letter,
the VEC-PEMEX Letter, the PIBSA Offer Letter, the GOLDMAN Letter, the
Association Agreement, the MTBE Sales Agreement, the Butane Supply Agreement,
the Construction Agreement, the Surety Agreement, the License Agreement, the
Technical Support
B-3
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Agreement, the PEMEX Option, the UOP Agreements and the Negotiation Services
Agreement (in each case, as defined on Schedule 1.1(b)).
"Record Date" shall have the meaning set forth in Section 3.1.
"Release" shall have the meaning given such term in the Comprehensive
Environmental Response, Compensation and Liability Act 42 U.S.C. (S) 9601(22).
"Retained Assets" shall mean, collectively, as of any given date, any and
all of the assets, properties and rights, whether tangible or intangible,
whether real, personal or mixed, whether fixed, contingent or otherwise, and
wherever located, of the Company and its Subsidiaries (other than the VRM
Assets).
"Retained Business" shall mean the business heretofore and currently engaged
in by the Company and its Subsidiaries and their respective predecessors of
purchasing, gathering, processing, storing, transporting, selling, trading and
marketing natural gas, the business of extracting, processing, fractionating,
transporting, selling, trading and marketing natural gas liquids, and related
risk management, and the business of purchasing, wheeling, selling, marketing
and trading electric power and related risk management, each as currently
engaged in by the Company through VNG and its Subsidiaries.
"Retained Company Assumed Liabilities" shall mean, collectively, all
Liabilities relating to or arising in connection with the Retained Assets or
the Retained Business (other than such Liabilities expressly assumed or
retained by the VRM Group pursuant to this Agreement), whether arising before,
at or after the Time of Distribution, which are to be assumed by the Retained
Company or any Retained Subsidiary pursuant to the transactions contemplated
by this Agreement, including without limitation the Liabilities relating to or
arising out of the items set forth on Schedule 1.1(c), but in the any event,
excluding VRM Assumed Liabilities.
"Retained Company Indemnitees" shall mean the Retained Company (including
after the Effective Time the Acquiror), each Affiliate of the Retained
Company, including any of its direct or indirect Subsidiaries, and each of
their respective Representatives and each of the heirs, executors, successors
and assigns of any of the foregoing.
"Retained Liabilities" shall mean, collectively, all of (i) the
Environmental Liabilities relating to or arising in connection with the
Retained Business, (ii) the Liabilities of any member of the Company Group
under this Agreement, any other Reorganization Agreement or the Interim
Services Agreement, in each case, to which the Company is a party or will be a
party, (iii) the Liabilities relating to or arising in connection with the
businesses, assets or operations of the Company Group (other than the VRM
Assumed Liabilities), as heretofore, currently or hereafter conducted, (iv)
the Retained Company Assumed Liabilities and (v) the Liabilities retained or
assumed by the Company or any member of the Company Group pursuant to the
Employee Benefits Agreement.
"Tax" or "Taxes" shall have the meaning set forth in the Tax Sharing
Agreement.
"Teco Litigation" shall mean Teco Pipeline Company v. Valero Energy
Corporation, Valero Transmission, L.P., Valero Management Company, Valero
Hydrocarbons, L.P., VMGA Company, Valero Marketing, L.P., VNGC Holding
Company, Valero Industrial Gas, L.P., Valero Natural Gas Company, Valero Gas
Marketing, L.P., Valero Eastex Pipeline Company, VLDC, L.P., Valero
Transmission Company, Reata Industrial Gas, L.P., Valero Gas Marketing
Company, Valero Nortex, L.P., Valero Gas Storage Company, Valero Northern
Texas Company, Valero Hydrocarbons Company, West Texas Transmission Co., VT
Company, Valero Natural Gas Partners, L.P., Valero Management Partnership,
L.P., William E. Greehey and Stan L. McLelland; In the 215th Judicial District
Court of Harris County, Texas (Cause No. 96-020628) and any other action,
claim, lawsuit, arbitration or appeal to obtain or recover damages or any
other economic benefit as a result of any action or omission by any member of
the Company Group or any of its Representatives in connection with the
performance or exercise of duties or obligations, including statutory and
common law fiduciary duties, arising out of or related to the ownership,
operation, management or maintenance of the Valero-Teco West Texas System at
any time from February 28, 1985 to January 27, 1997.
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"Third Party Claim" shall have the meaning set forth in Section 8.3(a).
"Time of Distribution" shall mean the time as of which the Distribution is
effective.
"Transfer Agent" shall mean Harris Trust and Savings Bank, the transfer
agent for the Company Common Stock.
"UOP Agreements" shall mean, collectively, (a) the Engineering Agreement,
dated as of July 1, 1993, between UOP and PROESA, (b) the Oleflex Process
License Agreement, dated November 21, 1994, between UOP and PROESA, (c) the
Merox Process Licenses Agreement, dated November 21, 1994, between UOP and
PROESA, (d) the UOP Oxygenate Removal Process License Agreement, dated
November 21, 1994, between UOP and PROESA, (e) the Huels Complete Saturation
Process License Agreement, dated November 21, 1994, between UOP and PROESA,
(f) the Ethermax Process License Agreement, dated November 21, 1994, between
UOP and PROESA, (g) the Butamer Process License Agreement, dated November 21,
1994, between UOP and PROESA, (h) the Guarantee Agreement, dated November 21,
1994, between UOP and PROESA, and (i) the Supply Agreement, dated November 21,
1994, between UOP Equitec Services, Inc. and PROESA, as each of the same may
be from time to time amended, restated, supplemented, superseded or replaced.
"Valero Coal Company" shall mean Valero Coal Company, a Delaware corporation
and, as of the date of this Agreement, a wholly-owned Subsidiary of the
Company.
"Valero Corporate Services" shall mean Valero Corporate Services Company, a
Delaware corporation and, as of the date of this Agreement, a wholly-owned
Subsidiary of the Company.
"Valero Management Company" shall mean Valero Management Company, a Delaware
corporation and, as of the date of this Agreement, a wholly-owned Subsidiary
of the Company.
"Valero Producing Company" shall mean Valero Producing Company, a Delaware
corporation and, as of the date of this Agreement, a wholly-owned Subsidiary
of the Company.
"VMGA Company" shall mean the VMGA Company, a Texas corporation and, as of
the date of this Agreement, a wholly-owned Subsidiary of Valero Management
Company.
"VRM Assets" shall mean, collectively, (i) all assets currently owned by VRM
and any of its Subsidiaries (other than any such assets which pursuant to, or
as a consequence of, this Agreement are to be transferred to, or retitled in
the name of the Company or one of the Retained Subsidiaries) and which, as of
and after the Time of Distribution are to be owned by the VRM Group and (ii)
all assets which are currently owned by the Company or one or more of the
Retained Subsidiaries and which pursuant to, or as a consequence of, this
Agreement are to be transferred to VRM or any of its Subsidiaries and which as
of and after the Time of Distribution are to be owned by a member of the VRM
Group.
"VRM Assumed Liabilities" shall mean, collectively, the Liabilities set
forth in Section 2.2(a).
"VRM Business" shall mean (i) the business of purchasing, transporting,
storing, processing, selling, trading, marketing and refining crude oils,
residual fuel oils and other refinery feedstocks, and of manufacturing,
transporting, storing, selling, trading and marketing gasolines, gasoline
blendstocks, butanes, liquefied petroleum gases, other refined products and
petrochemicals, as currently conducted by the Company through VRM and its
Subsidiaries, and related risk management (ii) certain insurance-related
operations as currently conducted through VMGA Company, (iii) certain coal-
seam gas and other coal-related operations as currently conducted through
Valero Coal Company, (iv) certain oil and gas exploration and production
operations as currently conducted through Valero Producing Company, (v)
certain real estate leasing operations as currently conducted through Valero
Management Company, and (vi) the business conducted with the Butane Splitter
and Debutanizer (but excluding any business conducted with the assets of the
VRM Business transferred or to be transferred to the Company Group pursuant to
this Agreement).
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"VRM Common Stock" shall have the meaning set forth in the third paragraph
of this Agreement.
"VRM Group" shall mean VRM, its Subsidiaries, and that portion of any
Person, whether now or hereafter existing, which conduct the VRM Business
(after giving effect to the transfers set forth in Article II).
"VRM Indemnitees" shall mean VRM, each Affiliate of VRM from and after the
Time of Distribution and each of their respective Representatives and each of
the heirs, executors, successors and assigns of any of the foregoing.
"VRM Liabilities" shall mean, collectively, all of (i) the Environmental
Liabilities relating to or arising in connection with the VRM Business, (ii)
the Liabilities of any member of the VRM Group under this Agreement, any other
Reorganization Agreement, or the Interim Services Agreement and of VRM under
Section 7.10 of the Merger Agreement, in each case, to which VRM is a party or
will be a party, (iii) the Liabilities relating to or arising in connection
with the businesses, assets or operations of the VRM Group (other than the
Retained Company Assumed Liabilities), as heretofore, currently or hereafter
conducted, (iv) the VRM Assumed Liabilities, and (v) the Liabilities retained
or assumed by VRM or any member of the VRM Group pursuant to the Employee
Benefits Agreement.
ARTICLE II
TRANSACTIONS RELATING TO THE DISTRIBUTION
2.1. Intercorporate Reorganization.
(a) Prior to or at the Time of Distribution, the Company and VRM hereby
undertake to complete the actions specified in this Section 2.1, to (i)
transfer, or cause to be transferred, to VRM or one of its Subsidiaries, as
appropriate, effective as of or prior to the Time of Distribution, all of the
right, title and interest of the Company or any Retained Subsidiary (a list of
which is set forth on Schedule 2.1(a)), as appropriate, in any VRM Assets and
have VRM or one of its Subsidiaries, as appropriate, assume and agree to pay,
perform and discharge in due course each of the VRM Assumed Liabilities, and
(ii) transfer, or cause to be transferred, to the Company or a Retained
Subsidiary, as appropriate, effective as of or prior to the Time of
Distribution, all the right, title and interest of VRM or any VRM Subsidiary,
as appropriate, in any Retained Assets and have the Company or a Retained
Subsidiary, as appropriate, assume and agree to pay, perform and discharge in
due course each of the Retained Company Assumed Liabilities.
(b) Prior to the Time of Distribution, the Company and VRM each agree to
take, or cause to be taken, the following actions in connection with the
Distribution:
(i) Transfers of Capital Stock and Partnership Interests
(A) the Company shall transfer all of its right, title and interest in
the outstanding shares of capital stock of Valero Corporate Services to VRM
or one of its Subsidiaries;
(B) the Company shall cause Valero Management Company to transfer all of
its right, title and interest in the outstanding shares of capital stock of
VMGA Company to VRM or one of its Subsidiaries;
(C) the Company shall transfer all of its right, title and interest in
the outstanding shares of capital stock of Valero Coal Company to VRM or
one of its Subsidiaries;
(D) the Company shall transfer all of its right, title and interest in
the outstanding shares of capital stock of Valero Producing Company to VRM
or one of its Subsidiaries;
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(ii) Other Transfers
(A) the Company shall transfer all of its right, title and interest in
the name "Valero" and the "Walking Flame" trademark each as described on
Schedule 4.1 to VRM;
(B) Valero Management Company shall transfer all of its right, title and
interest in the real estate set forth on Schedule 2.1(b)(ii)(B) to Valero
Corporate Services;
(C) Valero Management Company shall transfer all of its right, title and
interest in the promissory notes set forth on Schedule 2.1(b)(ii)(C) to
Valero Corporate Services;
(D) Valero Management Company shall transfer all of its right, title and
interest in the leases set forth on Schedule 2.1(b)(ii)(D) to Valero
Corporate Services;
(E) the Company shall transfer all of its right, title and interest in
its limited partnership interest in the San Antonio Spurs professional
basketball team to Valero Corporate Services;
(F) the Company shall transfer all of its right, title and interest in
season tickets to San Antonio Spurs and Houston Rockets professional
basketball games to Valero Corporate Services;
(G) Valero Management Company and the Company shall transfer all of their
right, title and interest in the computer software set forth in items A
through E on Schedule 2.1(b)(ii)(G) to Valero Corporate Services, and
Valero Corporate Services will also grant to Valero Management a
nonexclusive, freely transferable, fully paid, perpetual license to the
software set forth in item E on Schedule 2.1(b)(ii)(G) which includes, or
at the Time of Distribution such schedule shall be amended to include, all
material software developed by the Company and its Subsidiaries which is
used in the Retained Business;
(H) VNG shall transfer all of its right, title and interest in the Butane
Splitter and Debutanizer set forth on Schedule 2.1(b)(ii)(H) to Valero
Refining Company;
(I) Valero Management Company shall transfer all of its right, title and
interest in the Personal Property as reflected on Schedule 2.1(b)(ii)(I),
to Valero Corporate Services;
(J) Valero Management Company shall transfer a 50% interest in the
Airplanes to Valero Corporate Services so that each will be co-owners of
the Airplanes on the terms as set forth on Schedule 2.1(b)(ii)(J);
(K) Valero Management Company shall assign all of its right, title and
interest in the Hunting Lease to Valero Corporate Services;
(L) VNG shall transfer all of its right, title and interest in the
methanol pipeline segments set forth on Schedule 2.1(b)(ii)(L) to Valero
Refining Company;
(M) The Company shall assign all of its right, title and interest in the
Contract Rights to VRM;
(N) The Company will cause Valero Marketing and Supply to assign all
commodity swap contracts and similar contracts entered into by Valero
Marketing and Supply on behalf of the Retained Companies to the appropriate
members of the Company Group;
(O) The Company will cause Valero Marketing and Supply to transfer to
accounts designated by the Retained Company all commodities, commodity
futures, commodity options and other similar commodity contracts held by
Valero Marketing and Supply on behalf of any of the Retained Companies;
(P) The Company will transfer each of the Valero Charitable Trust, the
Valero Scholarship Trust, the Rulaine Pittman Memorial Scholarship Trust,
and the Valero Political Action Committee (VALPAC) to VRM;
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(Q) The Company will take all actions necessary (including, without
limitation, executing such documents as may be necessary to change the
beneficiary thereof) to transfer, and will cause Valero Management Company
to transfer, to VRM or its designated subsidiary, their respective rights
in and to all policies of life insurance covering participants in the
Company's Executive Deferred Compensation Plan and Key Employee Deferred
Compensation Plan; and
(R) The Company shall assign to VRM or its designated Subsidiary all of
its right, title and interest in and to that certain lease Agreement, dated
March 17, 1991, between The Manufacturers Life Insurance Company, as
landlord, and Valero Industrial Gas Company, as lessee, as amended by that
certain Lease Modification and Amendment Agreement, dated January 28, 1994,
as the same may heretofore have or hereafter be amended, restated, modified
or supplemented, relating to the lease of office space in Washington, D.C.
(c) In connection with the transfers of assets other than capital stock and
the assumptions of Liabilities contemplated by subsection (a) and subsection
(b) of this Section, the Company and VRM shall execute or cause to be executed
by the appropriate entities the conveyance and assumption instruments in such
forms as the Company, VRM and the Acquiror shall reasonably agree; provided
that, the transfer of the real property shall be by warranty deed. The
transfer of capital stock shall be effected by means of delivery of stock
certificates duly endorsed or accompanied by duly executed stock powers and
notation on the stock records books of the corporation or other legal entities
involved and, to the extent required by applicable law, by notation on
appropriate registries.
(d) Each of the parties hereto understands and agrees that no party hereto
is, in this Agreement or in any other agreement or document contemplated by
this Agreement or otherwise, representing and warranting in any way as to the
title, value or freedom from encumbrance of, or any other matter concerning,
any assets of such party, it being agreed and understood that all assets are
being transferred "as is, where is", and that the real estate on Schedule
2.1(b)(ii)(B) shall be transferred by warranty deed.
(e) Prior to the Time of Distribution, the Company and VRM shall take all
steps necessary to increase the outstanding shares of VRM Common Stock so that
immediately prior to the Distribution, the Company will hold a number of
shares of VRM Common Stock equal to the total number of shares of the Company
Common Stock outstanding on the Record Date.
(f) If any assets that are used primarily in the Retained Business
including, without limitation, information systems, intellectual property
(including software licenses), microwave and other communications systems and
trading and risk management operations, would otherwise be held in a
Subsidiary that would not be owned directly or indirectly by the Company after
the Time of Distribution, then, notwithstanding the foregoing allocation, VRM
shall cause each such Subsidiary to contribute such assets to the appropriate
Subsidiary of the Company or as the Company otherwise directs as part of the
Intercompany Reorganization; provided, however, that the Company shall be
responsible for establishing new commodity accounts to accommodate the
Retained Business, risk management activities and/or transferring the assets
described in Sections 2.1(b)(ii)(N) and (O) to Acquiror accounts. Neither any
existing commodities account, nor any New York Mercantile Exchange seat held
by Valero Marketing and Supply, shall be transferred so as to be a part of the
Retained Business.
(g) The Retained Companies will, at the Effective Time, include all the
Company's right, title and interest in and to (a) all assets of the Company or
any of its Subsidiaries, including the information systems, that are used
primarily in or that are being held primarily for use in or that are otherwise
sufficient (including for this purpose the services to be provided pursuant to
the Interim Services Agreement) for the operation, as currently conducted, of
the Retained Business.
2.2. Assumption of Liabilities. (a) Subject to Section 2.2(b), and effective
as of the time of the Intercompany Reorganization, VRM and the VRM Group, in
partial consideration for the transfers set forth in
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Section 2.1, hereby unconditionally assume and undertake to pay, satisfy and
discharge when due in accordance with their terms the VRM Assumed Liabilities,
including without limitation:
(i) all Liabilities relating to or arising from the VRM Assets or the VRM
Business (other than such Liabilities expressly assumed or retained by the
Company Group pursuant to this Agreement), whether arising before, at or
after the Time of Distribution;
(ii) all Liabilities (including, without limitation, indemnification
obligations) relating primarily to or arising primarily from (A) the
reports, registration statements and other documents filed by the Company
with the SEC prior to the Time of Distribution (including the Company's
consolidated financial statements for periods prior to the Time of
Distribution included or incorporated by reference therein) and (B) any
breach or alleged breach by any director or officer of the Company of his
fiduciary duties to the Company and its stockholders occurring at or prior
to the Effective Time;
(iii) any Liabilities to be assumed by VRM or any of its Subsidiaries
pursuant to the transactions contemplated by this Agreement, including
without limitation the Liabilities relating to or arising out of (A) the
MTBE Project, (B) the warranty deeds described in Sections 2.1(c) and
2.1(d) and (C) the VRM Assumed Liabilities set forth on Schedule 2.2(a);
(iv) the obligations of VRM pursuant to Section 2.2(c); and
(v) subject to Section 2.3(e) hereof, all Liabilities under the New Credit
Facility.
(b) Notwithstanding Section 2.2(a), the Company hereby retains, and the VRM
Group does not assume and will have no liability with respect to, the Retained
Liabilities.
(c) The provisions of Section 2.2(b) notwithstanding, within 45 days
following the entry of a final, nonappealable judgment in the TECO Litigation,
or execution of a settlement agreement with respect to the TECO Litigation
approved by VRM (such approval not to be unreasonably withheld or delayed),
VRM shall pay to Acquiror in immediately available funds an amount equal to
(i) 50% of the amount of such judgment or settlement with respect to that part
of any judgment or settlement amount not in excess of $30,000,000, and
(ii) 100% of that part of such judgment or settlement amount which is in
excess of $30,000,000, plus in each case interest thereon at the applicable
statutory rate from the date of such judgment until paid in full.
2.3. Repayment of Intercompany Indebtedness and Cash Dividend.
(a) Redemption Payment. Prior to the Time of Distribution, the Company will
redeem (or convert) the Company Convertible Preferred Stock in accordance with
Section 6.1(n) of the Merger Agreement. The redemption, if any of the Company
Convertible Preferred Stock will be funded by the Company with the proceeds of
borrowings under the New Credit Facility.
(b) Dividend Payment. Prior to the Time of Distribution, VRM shall pay a cash
dividend (the "Cash Dividend") to the Company in an amount equal to
$210,000,000.
(c) Intercompany Note. The Company and VRM shall (a) eliminate without payment
the $212,450,000 net amount of the intercompany note (the "Intercompany Note")
owing from the Company to VRM as of December 31, 1996 (which amount reflects
payment to VNG for the assets described in Section 2.1(b)(ii)(H); (b) refrain
from creating any obligations under the Intercompany Note after December 31,
1996, except in the ordinary course of business consistent with past practice or
as contemplated by the Reorganization Agreements and (c) satisfy by cash payment
at the Time of Distribution the full net amount of such note for the period from
January 1, 1997 to the Time of Distribution (which Intercompany Note, for
purposes of this Agreement, shall not reflect the assumption by VRM of
Liabilities related to the Company's acquisition of Basis Petroleum, Inc. and
redemption of the Company Convertible Preferred Stock).
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Prior to the Time of Distribution, the Company and VRM shall agree on the
estimate of the net amount so payable. The Company and VRM shall use their
reasonable efforts within 60 days after the Time of Distribution to agree on the
actual amount so payable. If the actual amount so payable is different from such
estimated amount, the Company or VRM will promptly pay the difference to the
other, plus interest thereon at a floating rate equal to the prime rate (as in
effect from time to time) as reported in the Wall Street Journal from the Time
of Distribution to the date of payment. If the parties are unable to so agree on
the actual amount, any disputes will be resolved by an independent accounting
firm selected by the Company and VRM, the fees and expenses of which will be
borne equally by the Company and VRM. Once the actual amount is so agreed or
resolved, such amount shall be final and non-appealable.
(d) Cash Management. Prior to the Time of Distribution, the Company and VRM
shall establish and maintain a separate cash management system with respect to
the VRM Businesses in accordance with the terms set forth on Schedule 2.2(c)
so that bank accounts are accurately allocated and distributed to VRM and the
Company at the Time of Distribution.
(e) Intercompany Note Adjustment. Prior to the assumption by VRM of
Liabilities under the New Credit Facility as set forth in Section 2.2(a) (v),
all Liabilities under the New Credit Facility that are unrelated to (i) the
Company's acquisition of Basis Petroleum, Inc. or (ii) the redemption of the
Company Convertible Preferred Stock shall be transferred to the Uncommitted
Facilities or, to the extent capacity is not available thereunder, be borne by
the Company by reducing amounts owed by VRM (or increasing amounts owed by the
Company) under the Intercompany Note. Payments made under the New Credit
Facility shall be charged to VRM under the Intercompany Note to the extent
related to borrowings for (i) the Company's acquisition of Basis Petroleum, Inc.
or (ii) the redemption of the Company Convertible Preferred Stock.
2.4. Resignations. The Company shall cause all of its, and all the Company
Group entities', employees and directors to resign, not later than the Time of
Distribution, from all boards of directors or similar governing bodies of VRM
or any member of the VRM Group on which they serve, and from all positions as
officers of VRM or any member of the VRM Group in which they serve. VRM shall
cause all of its, and all VRM Group entities', employees and directors to
resign, not later than the Time of Distribution, from all boards of directors
or similar governing bodies of the Company or any member of the Company Group
on which they serve, and from all positions as officers of the Company or any
member of the Company Group in which they serve.
2.5. VRM Certificate of Incorporation and By-Laws; Rights Plan; Name
Change. Prior to the Distribution Date, (a) the VRM Board of Directors shall
(i) approve the Certificate of Incorporation and shall file the same with the
Secretary of State of the State of Delaware and (ii) adopt the By-Laws, and
(b) the Company, as sole stockholder of VRM, shall approve such Certificate of
Incorporation. Prior to the Distribution Date, VRM shall adopt the VRM Rights
Agreement. Prior to the Distribution Date, the Company shall approve as sole
stockholder VRM changing its name to "Valero Energy Corporation" following the
Effective Time and thereafter shall take any and all other action necessary to
be taken by the Company to effect such change.
2.6. Insurance. The Company maintains various forms of insurance coverages
(the "Policies") applicable to both the Retained Business and the VRM Business
and in which VRM and/or other members of the VRM Group are included as
insureds or named insureds. Effective as of the Time of Distribution, all such
Policies (including all prepaid premiums, deposits, refunds, dividends,
accrued claims (excluding claims related solely to the Retained Business) and
other rights therein) shall be assigned or transferred to VRM and the coverage
of the Company and the Retained Subsidiaries under the Policies shall cease
under the Policies as of the Time of Distribution; provided however the
Retained Companies shall receive a cash payment from VRM equivalent to the
prepaid premiums, deposits, refunds and dividends with respect to such
Policies at the Time of Distribution to the extent attributable to expenses
which have been charged to the Retained Business. From and after the Time of
Distribution, the Company and the Retained Subsidiaries shall be responsible
for obtaining and maintaining insurance coverages for their own account.
Insofar as any existing Policies may provide "claims made" or equivalent
coverage, the VRM Group shall, if requested, use reasonable best efforts to
assist or cooperate with the Company in purchasing (to the extent obtainable,
and at the Retained Companies' sole cost and expense) continuing coverages for
claims which are unknown, undiscovered and/or unreported at the Time of
Distribution (i.e. "long tail coverage"). Insofar as any claims made (in the
case of "claims made" or equivalent coverages) or accrued (in the case of
"occurrence" or equivalent coverages) under the Policies prior to the Time of
Distribution relate solely to the Retained Business, VRM shall use its
reasonable best efforts to assure that the Retained Company and the Retained
Subsidiaries can continue to make and/or pursue such claims under the
Policies, or that VRM can continue to make and/or pursue such claims on behalf
of the Retained Companies, notwithstanding assignment or transfer of the
Policies to VRM.
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2.7. Nonassignable Contracts. Anything contained herein to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign
any lease, license agreement, contract, agreement, sales order, purchase
order, open bid or other commitment or asset if an assignment or attempted
assignment of the same without the consent or waiver of the other party or
parties thereto would constitute a breach thereof or in any way impair the
rights of the VRM Group or the Company Group thereunder. If any such consent
or waiver is not obtained or if an attempted assignment would be ineffective
or would impair either Group's rights under any such lease, license agreement,
contract, agreement, sales order, purchase order, open bid or other commitment
or asset so that the Company or VRM or a Subsidiary of either, as applicable,
would not receive all such rights, then (x) the Company or VRM, as applicable,
shall use reasonable best efforts to provide or cause to be provided to the
other or its Subsidiary, to the extent permitted by law, the benefits of any
such lease, license agreement, contract, agreement, sales order, purchase
order, open bid or other commitment or asset and the Company or VRM, as
applicable, shall promptly pay or cause to be paid to the other or its
Subsidiary when received all moneys received by the Company Group or VRM
Group, as applicable, with respect to any such lease, license agreement,
contract, agreement, sales order, purchase order, open bid or other commitment
or asset and (y) in consideration thereof the other party or its Subsidiary
shall pay, perform and discharge on behalf of such Group all of such Group's
debts, liabilities, obligations and commitments with respect thereto in a
timely manner and in accordance with the terms thereof. In addition, the
Company or VRM, as applicable, shall take such other actions (at the expense
of the other) as may reasonably be requested by the other in order to place
the other, insofar as reasonably possible, in the same position as if such
lease, license agreement, contract, agreement, sales order, purchase order,
open bid or other commitment or asset had been transferred as contemplated
hereby and so all the benefits and burdens relating thereto, including
possession, use, risk of loss, potential for gain and dominion, control and
command, shall inure to the applicable Group. If and when such consents and
approvals are obtained, the transfer of the applicable lease, license
agreement, contract, agreement, sales order, purchase order, open end or other
commitment or asset shall be effected in accordance with the terms of this
Agreement.
2.8. Interim Services Agreement. In connection with the Intercompany
Reorganization the Company and VRM shall enter into an Interim Services
Agreement in form and substance substantially the same as the Interim Services
Agreement attached hereto as Annex A.
2.9. Company Guarantees. (a) Neither VRM nor any member of the VRM Group
shall increase its outstanding obligations in excess of the aggregate amounts
of all obligations under the Company Guarantees as of January 31, 1997, set
forth on Schedule 1.1(a), nor shall VRM or any of the VRM Group renew or enter
into any additional obligations for which the Company would act as guarantor
unless such guarantee by its terms expires as to the Company and its
Subsidiaries without further liability at or prior to the Time of
Distribution. VRM agrees to use its reasonable best efforts to obtain any
amendments to, or consents with respect to, the Company Guarantees that are
necessary in order that the Company be released no later than the Time of
Distribution from any liability or obligation under the Company Guarantees;
provided that if any such release has not been obtained by the Time of
Distribution, VRM shall; (i) pursuant to Section 8.1 provide the Company with
a full indemnity with respect thereto; and (ii) continue to use its best
efforts to obtain such release as soon as practicable thereafter.
(b) VRM shall use its reasonable best efforts to refund the IRBs with
replacement industrial revenue bonds prior to the Time of Distribution, which
refunding shall eliminate the guarantee by the Company of the IRBs. In the
event VRM is unable to so refund the IRBs prior to the Time of Distribution,
for a period of up to 120 days following the Time of Distribution VRM shall
use its reasonable best efforts to so refund the IRBs and shall pursuant to
Section 8.1 provide the Company with a full indemnity with respect to the
Company's guarantee of the IRBs. In the event VRM is unable to so refund the
IRBs by the 120th day following the Time of Distribution, VRM shall prepay the
IRBs in full no later than such 120th day.
2.10. Conduct of Businesses. Except as otherwise provided in this Agreement
from and after December 31, 1996, the VRM Group and the Company Group have
carried on and shall carry on their respective businesses and activities
diligently and in substantially the same manner as they previously have been
carried
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out and neither the VRM Group nor the Company Group shall make or institute
any methods of operation or accounting that vary materially from the methods
used by the VRM Group and the Company Group prior to the date hereof. Since
December 31, 1996 all intercompany transactions, including without limitation
asset transfers and intercompany loans have, and after the date hereof will
until the Time of Distribution be accounted for through the Intercompany Note.
ARTICLE III
MECHANICS OF DISTRIBUTION
3.1. Mechanics of Distribution. The Distribution shall be effected by the
distribution to each holder of record of Company Common Stock, as of the
record date designated for the Distribution by or pursuant to the
authorization of the Board of Directors of the Company (the "Record Date"), of
certificates representing one share of VRM Common Stock and associated VRM
Right for each share of Company Common Stock held by such holder.
3.2. Timing of Distribution. The Board of Directors of the Company shall
formally declare the Distribution and shall authorize the Company to pay it
immediately prior to the Effective Time, subject to the satisfaction or waiver
of the conditions set forth in Article VII, by delivery of certificates for
VRM Common Stock to the Transfer Agent for delivery to the holders entitled
thereto. The Distribution shall be deemed to be effective upon notification by
the Company to the Transfer Agent that the Distribution has been declared and
that the Transfer Agent is authorized to proceed with the distribution of VRM
Common Stock.
ARTICLE IV
OTHER AGREEMENTS
4.1. Use of Names, Trademarks, etc. (a) From and after the Time of
Distribution, VRM shall have all rights, including all intellectual property
rights in and exclusive use of the trademarks, trade names and service marks,
the U.S. federal and Mexican registrations and applications, the Internet
domain registration and exclusive use of the name "Valero", and any and all
other designs, logos and slogans, related to the names "Valero" and "Valero
Energy Corporation" and the "Walking Flame" service mark, all as more
particularly set forth on Schedule 4.1, attached hereto, and all other rights
(whether tangible or intangible, statutory, at common law or otherwise) in
connection therewith, whether alone or in combination with one or more other
words or marks in connection therewith. During the period from five business
days after January 31, 1997 to the Time of Distribution the VRM group shall
not affix the name "Valero" or any other design, logo, slogan, name related to
the names "Valero", or "Valero Energy Corporation" or the "Walking Flame"
service mark to any new or existing equipment (including without limitation
vehicles), or facilities which are Retained Assets. As promptly as practicable
after the Effective Time, but in any event no later than six months after the
Effective Time, the Company shall cease using the "Valero" name and mark or
service mark and the "Walking Flame" service mark, including without
limitation, on any signs, badges, parking stickers, letterhead, business
cards, invoices and other business forms, telephone directory listings, and
advertising and promotional materials; provided, however, that nothing herein
shall be construed to prohibit, and neither party shall hereafter take any
action which could have the effect of prohibiting, either the Company Group or
the VRM Group from continuing to use, after the Effective Time of the blue-
green color (PMS 315) now utilized by both the Company Group and the VRM Group
on their respective facilities.
4.2. Intercompany Accounts as of the Time of Distribution. From and after
the Time of Distribution all receivables and payables between VRM and any of
its Subsidiaries, on the one hand, and the Company and any Retained
Subsidiaries, on the other hand, which were intercompany receivables or
payables prior to the Time of Distribution and not subject to the intercompany
note shall be handled pursuant to the terms of the applicable Intercompany
Arrangement.
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4.3. Hunting Lease. Subject to any necessary consents, Valero Corporate
Services and Valero Management Company shall assign to VRM its leasehold
interest in the Hunting Leases set forth on Schedule 2.1(b)(ii)(K).
4.4. Airplanes. The terms of ownership of the Airplanes shall be in
accordance with the terms and provisions substantially similar to those set
forth on Schedule 2.1(b)(ii)(J).
4.5. Intercompany Arrangements. All agreements, contracts, arrangements and
commitments, between a member of the VRM Group on the one hand, and a member
of the Company Group on the other hand, entered into prior to the Closing Date
for the purchase or sale of goods or services ("Intercompany Arrangements")
set forth on Schedule 4.5, shall remain in effect as of and after the Time of
Distribution. To the knowledge of the Company, the Intercompany Arrangements
set forth on Schedule 4.5, the Reorganization Agreements and the Interim
Services Agreement collectively comprise all agreements, contracts,
arrangements and commitments between a member of the VRM Group on the one
hand, and a member of the Company Group on the other hand entered into prior
to the date hereof for the purchase or sale of goods or services, except for
such agreements, contracts, arrangements or commitments entered into in the
ordinary course in accordance with past practice which agreements, contracts,
arrangements or commitments will terminate at or before the Time of
Distribution. If following the Time of Distribution any other such agreements,
contracts, arrangements or commitments are identified by either Group, then
(i) if any such agreement, contract, arrangement or commitment is oral, it
shall terminate as of the Time of Distribution and be of no further force and
effect, and (ii) if any such agreement, contract, arrangement or commitment is
in writing, either party thereto may terminate such agreement, contract,
arrangement or commitment upon 45 days written notice to the other party
thereto. Each of the Intercompany Arrangements was based on market terms at
the date of its inception, other than any interest rates provided for therein.
Complete and correct copies of each of the Intercompany Arrangements have been
delivered to the Acquiror.
4.6. Further Assurances. Each of the parties hereto, at its own cost and
expense, promptly shall execute such documents and other instruments and take
such further actions as may be reasonably required or desirable to carry out
the provisions hereof and to consummate the transactions contemplated hereby.
ARTICLE V
TAX AND EMPLOYEE MATTERS
5.1. Tax Sharing; Exclusivity of Tax Sharing Agreement. Prior to the Time of
Distribution, VRM and the Company shall enter into a Tax Sharing Agreement in
substantially the form attached as Annex C to the Merger Agreement which
agreement shall, notwithstanding anything in this Agreement to the contrary,
be the exclusive agreement among the parties hereto with respect to all Tax
matters, including without limitation indemnification of Tax matters.
5.2. Employee Benefits. Prior to the Time of Distribution, VRM and the
Company shall enter into an Employee Benefits Agreement in substantially the
form attached as Annex B to the Merger Agreement.
5.3. Employees. (a) The Company has made available to Acquiror a list of the
employees currently employed exclusively or primarily in the Retained Business
indicating the positions which they now hold, their current rates of
compensation and which employees, if any, are on short or long term
disability, family and medical, military, workers' compensation, or any other
type of leave of absence; and copies of all employee handbooks, and policy and
procedure manuals. The VRM Group shall use its reasonable efforts to see that
the employees on such list shall be transferred to or retained in the Company
Group at the Time of Distribution and such employees as shall be transferred
to or retained in the Company Group at the Time of Distribution shall include
all of the employees necessary to conduct the Retained Business as conducted
in the past. The Company and the Acquiror shall cooperate in good faith to
reach a mutually satisfactory agreement with respect to the employment of
employees whose employment involves both the VRM Group and the Company Group.
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(b) With respect to the Retained Business, neither the Company nor any of
its Subsidiaries is a party to, or is bound by, any collective bargaining
agreement, contract, or other agreement or understanding with a labor union or
labor organization, nor is the Company or any of its Subsidiaries the subject
of any proceeding or organizing activity asserting that it or any such
Subsidiary has committed an unfair labor practice or seeking to compel it or
such Subsidiary to bargain with any labor organization as to wages and
conditions of employment, nor is there any strike, labor dispute, slow down or
stoppage involving the Company or any of its Subsidiaries pending or, to the
knowledge of the Company, threatened that, individually or in the aggregate,
are reasonably likely to have a material adverse effect on the Retained
Business taken as a whole.
5.4. Non-Competition Covenants. (a) From and after Distribution until the
second anniversary of the Closing Date, VRM shall not, and shall cause its
Affiliates and Subsidiaries not to, directly or indirectly, within the
geographic area in which such businesses are currently conducted by the
Company Group (i) engage in marketing natural gas, or marketing and trading
electric power (a "Competitive Business") (provided, that nothing herein shall
be construed to preclude VRM from marketing surplus electric power generated
at its refineries), (iii) sell, assign or otherwise transfer the trademarks,
trade names, service marks, the use of the name "Valero" or any and all other
designs, logos and slogans, related to the names "Valero" and "Valero Energy
Corporation" and the "Walking Flame" service mark or any other right set forth
on Schedule 4.1 to a Competitive Business, or (iv) invest in, as principal,
partner or stockholder (otherwise than through the ownership of less than 4%
of the outstanding voting securities of any corporation which are listed on a
national securities exchange or accepted for quotation of The Nasdaq Stock
Market), any person, partnership, firm, corporation or other business entity
which is engaged in a Competitive Business; provided, that nothing herein
shall be construed to preclude VRM from acquiring (or, thereafter, from
operating) a Competitive Business if the operations constituting a Competitive
Business are incidental to a larger acquisition of a business or entity whose
principal operations do not constitute a Competitive Business. From and after
the Distribution, until the second anniversary of the Time of Distribution,
VRM shall not, and shall cause its Affiliates and Subsidiaries not to,
directly or indirectly, solicit (other than through a general solicitation not
directed at a particular individual or group of individuals employed by the
Retained Business) for hire any employee, officer, director, executive or
consultant currently employed primarily in activities related to the Retained
Business or encourage any such employee, officer, director, executive or
consultant to leave such employment. Following the Closing, VRM shall not, and
shall cause its Affiliates and Subsidiaries not to, directly or indirectly,
disclose, divulge, communicate, use to the detriment of Acquiror or the
Retained Business or for the benefit of any other person or persons, any
confidential, proprietary or sensitive information or trade secrets of the
Retained Business, including, without limitation, any and all personnel
information, know-how, customer lists, price lists or other financial and
operating data relating to the Retained Assets and the Retained Business,
unless required to do so by law or legal process. In the event that such
disclosure is required by law or legal process, VRM shall immediately notify
the Company of the existence, terms and circumstances surrounding such
disclosure so that the Company may seek an appropriate protective order prior
to the disclosure of such information.
(b) VRM expressly agrees and understands that the remedy at law for any
breach by it or its Affiliates or Subsidiaries of this Section 5.4 will be
inadequate and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly, VRM acknowledges
that upon a violation of any provision of this Section 5.4, the Company shall
be entitled to immediate injunctive relief and may obtain a temporary
restraining order restraining any threatened or further breach and the Company
shall be further entitled to require VRM to account for and pay over to the
Company all compensation, profits, monies, accruals, or other benefits derived
or received by VRM during the period of, and resulting from, the breach of any
of the provisions of this Section 5.4. Nothing contained in this Section 5.4
shall be deemed to limit the Company's remedies at law or in equity for any
breach of the provisions of this Section 5.4 by VRM or its Affiliates or
Subsidiaries. Any covenant on VRM's part contained in this Section 5.4 which
may not be specifically enforceable shall nevertheless, if breached, give rise
to a cause of action for monetary damages.
(c) The parties hereto acknowledge that the covenants contained in this
Section 5.4 are independent covenants and shall not be affected by performance
or nonperformance of any other provision of this Agreement. VRM has carefully
considered the nature and extent of the restrictions upon them and their
Affiliates and
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Subsidiaries and the rights and remedies conferred upon the Company under this
Section 5.4, and VRM has independently consulted with their counsel and after
such consultation acknowledges and agrees that the covenants set forth in this
Section 5.4 are reasonable in time and territory, are designed to eliminate
competition that would otherwise be inequitable to the Company and the
Retained Business, are fully required to protect the legitimate interests of
the Company and do not confer a benefit upon the Company disproportionate to
the detriment to VRM and its Affiliates and Subsidiaries. It is the desire and
intent of the parties that the provisions of this Section 5.4 shall be
enforced to the fullest extent permissible under applicable law.
ARTICLE VI
ACCESS TO INFORMATION
6.1. Provision of Records and Information. Prior to the Time of
Distribution: (i) the Company shall transfer to VRM all minute books and other
Information relating to the VRM Business, and (ii) the Company shall transfer
to VRM all Tax Records (as defined in the Tax Sharing Agreement) exclusively
related to the assets and activities of the VRM Group's Pre-Distribution
Periods (as defined in the Tax Sharing Agreement); provided that the
transferor of such documents may retain copies of such documents for its use.
The original minute books, Tax Records and Information shall be the property
of the transferee.
6.2. Access to Information. From and after the Time of Distribution, each of
the Company and VRM shall afford to the other and to the other's
Representatives reasonable access and duplicating rights (at the requesting
party's expense) during normal business hours and upon reasonable advance
notice to each such member all Information within the possession or control of
any member of the Company Group or the VRM Group, as the case may be, relating
to the business, assets or Liabilities as they existed prior to the Time of
Distribution or relating to or arising in connection with the relationship
between the constituent elements of the Groups on or prior to the Time of
Distribution, insofar as such access is reasonably required for a reasonable
business purpose. Without limiting the foregoing, Information may be requested
under this Section 6.2 for audit, accounting, claims, litigation and tax
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations and for performing this Agreement and the other Reorganization
Agreements.
6.3. Production of Witnesses. After the Time of Distribution, each of the
Company and VRM shall, and shall cause each member of the Company Group and
the VRM Group, respectively, to, make available to VRM or any member of the
VRM Group or to the Company or any member of the Company Group, as the case
may be, upon written request and without charge (other than the reimbursement
by the requesting party of reasonable direct expenses incurred in performance
of the obligations described in this Section), such Group's directors,
officers, employees and agents as witnesses to the extent that any such Person
may reasonably be required in connection with any legal, administrative or
other proceedings in which the requesting party may from time to time be
involved and relating to the business of the VRM Group or the Company Group as
it existed prior to the Time of Distribution or relating to or in connection
with the relationship between the constituent elements of the Groups on or
prior to the Time of Distribution, provided that the same shall not
unreasonably interfere with the conduct of business by the Group of which the
request is made.
6.4. Retention of Records. Except as otherwise required by law or agreed to
in writing (including without limitation, in the Tax Sharing Agreement), if
any Information relating to the business, assets or Liabilities of a member of
a Group as they existed prior to the Time of Distribution is retained by a
member of the other Group, each of the Retained Company and VRM shall, and
shall cause the members of the Group of which it is a member to, retain all
such Information in such Group's possession or under its control until such
Information is at least six years old except that if, prior to the expiration
of such period, any member of either Group wishes to destroy or dispose of any
such Information that is at least three years old, prior to destroying or
disposing of any of such Information, (1) VRM or the Retained Company, on
behalf of the member of its Group that is proposing to dispose of or destroy
any such Information, shall provide no less than 30 days' prior written notice
to the other party, specifying the Information proposed to be destroyed or
disposed of, and (2) if, prior to the scheduled date for such destruction or
disposal, the other party requests in writing that any of the Information
proposed to be destroyed or disposed of be delivered to such other party, the
party whose Group is proposing to dispose of
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or destroy such Information promptly shall arrange for the delivery of the
requested Information to a location specified by, and at the expense of, the
requesting party.
6.5. Confidentiality. From and after the Time of Distribution, each of the
Company Group and the VRM Group shall hold, and shall cause its Affiliates and
Representatives to hold, in strict confidence all Information concerning the
other party's Group obtained by it prior to the Time of Distribution or
furnished to it by such other party's Group pursuant to the Reorganization
Agreements and shall not release or disclose such Information to any other
Person, except its Affiliates and Representatives, who shall be bound by the
provisions of this Section 6.5, and each party shall be responsible for a
breach of this Section 6.5 by any of its Affiliates or Representatives;
provided, however, that any member of the Company Group or the VRM Group may
disclose such Information to the extent that (a) disclosure is compelled by
judicial or administrative process or, in the opinion of such Person's
counsel, by other requirements of law, or (b) such Person can show that such
Information was (i) available to such Person on a nonconfidential basis (other
than from a member of the other party's Group) prior to its disclosure by such
Person, (ii) in the public domain through no fault of such Person, (iii)
lawfully acquired by such Person from another source after the time that it
was furnished to such Person by the other party's Group, and not acquired from
such source subject to any confidentiality obligation on the part of such
source, or on the part of the acquiror, known to the acquiror, or (iv) treated
by such Person with the same care as such Person takes to preserve
confidentiality for its own similar Information; provided further that if
either Group is requested or required (by oral questions, interrogatories,
requests for information or documents in legal proceedings, subpoena, civil
investigative demand or other similar process) to disclose any such
Information, such Group shall provide the other Group with prompt written
notice of any such request or requirement so that such other Group may seek a
protective order or other appropriate remedy or waive compliance with the
provisions of this Agreement; if, in the absence of a protective order or
other remedy or the receipt of a waiver the Group which received such request
is, in the written opinion of its counsel, legally compelled to disclose
Information to any tribunal or else stand liable for contempt or suffer other
censure or penalty, such Group may, without liability hereunder, disclose to
such tribunal only that portion of the Information which such counsel advises
is legally required to be disclosed, provided that such Group exercises its
best efforts to preserve the confidentiality of the Information, including,
without limitation, by cooperating with the other Group to obtain an
appropriate protective order or other reliable assurance that confidential
treatment will be accorded the Information by such tribunal.
ARTICLE VII
CONDITIONS
7.1. Conditions to Obligations of the Company. The obligations of the
Company to consummate the Distribution hereunder shall be subject to the
fulfillment of each of the following conditions:
(a) Each of the covenants and provisions in this Agreement required to be
performed or complied with on or before the Time of Distribution shall have
been performed and complied with.
(b) Each condition to the Closing of the Merger Agreement set forth in
Article VIII thereof, other than the condition set forth in Sections 8.1(g)
thereof as to the consummation of the Distribution, shall have been fulfilled
or waived by the party for whose benefit such condition exists.
(c) The Board of Directors of the Company and the Acquiror shall be
satisfied that the Company's surplus would be sufficient to permit, without
violation of Section 170 of the DGCL, the Distribution and shall have given
final approval of the Distribution.
(d) The VRM Common Stock shall have been approved for listing, upon notice
of issuance, on the NYSE.
(e) The Distribution shall have been duly approved by the requisite vote of
the holders of Company Common Stock.
[(f) The No-action Letter shall have been issued and shall be in full force
and effect.]
(g) The Intercompany Reorganization shall have been completed as
contemplated by the terms of this Agreement.
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<PAGE>
ARTICLE VIII
INDEMNIFICATION
8.1. Indemnification by VRM. From and after the Effective Time, subject to
the provisions of this Article VIII, VRM, its successors and assigns, shall
indemnify, defend and hold harmless the Retained Company Indemnitees from and
against, and pay or reimburse the Retained Company Indemnitees for, all
Indemnifiable Losses, as incurred:
(i) relating to or arising from the VRM Assets or the VRM Liabilities
(including the failure by VRM or any VRM Company, as applicable, to pay,
perform or otherwise discharge such Liabilities in accordance with their
terms), whether such Indemnifiable Losses relate to or arise from events,
occurrences, actions, omissions, facts or circumstances occurring, existing
or asserted before, at or after the Time of Distribution;
(ii) arising from or based upon any untrue statement of a material fact
contained in any of the Filings, or any omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; but only in each case with respect to information
provided by the Company relating to the VRM Group contained in or omitted
from the Filings;
(iii) relating to the Company Guarantees and the Company's guarantee of
the IRBs
(iv) relating to the warranty deeds described in Sections 2.1(c) and
2.1(d);
(v) relating to any breach or violation of this Agreement by VRM or,
prior to the Time of Distribution, by the Company; any breach by VRM or,
prior to the Time of Distribution; by the Company of any of the
representations, warranties or covenants made in this Agreement, or any
inaccuracy or misrepresentation in the Schedules hereto or in any
certificate or document delivered in accordance with the terms of this
Agreement;
(vi) incurred in connection with the enforcement by any Retained Company
Indemnitees of their rights to be indemnified, defended and held harmless
under this Agreement.
8.2. Indemnification by Retained Company. From and after the Effective Time,
subject to the provisions of this Article VIII, the Retained Company, its
successors and assigns, shall indemnify, defend and hold harmless the VRM
Indemnitees from and against, and pay or reimburse the VRM Indemnitees for,
all Indemnifiable Losses, as incurred:
(i) relating to or arising from the Retained Assets or the Retained
Liabilities (including the failure by the Retained Companies to pay,
perform or otherwise discharge such Liabilities in accordance with their
terms), whether such Indemnifiable Losses relate to or arise from events,
occurrences, actions, omissions, facts or circumstances occurring, existing
or asserted before, at or after the Time of Distribution;
(ii) arising from or based upon any untrue statement of a material fact
contained in any Filings, or any omission to state therein a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
but only in each case with respect to information provided by Acquiror
relating to Acquiror or any of its Subsidiaries contained in or omitted
from the Filings;
(iii) incurred in connection with the enforcement by any VRM Indemnitees
of their rights to be indemnified, defended and held harmless under this
Agreement.
8.3. Procedures Relating to Indemnification. (a) In order for an Indemnitee
to be entitled to any indemnification provided for under this Agreement in
respect of, arising out of or involving a claim made by any Person who is not
an Indemnitee against the Indemnitee (a "Third Party Claim"), such Indemnitee
must notify the party who may become obligated to provide indemnification
hereunder (the "indemnifying party") in
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<PAGE>
writing, and in reasonable detail, of the Third Party Claim reasonably
promptly, and in any event within 20 days after receipt by such Indemnitee of
written notice of the Third Party Claim; provided, however, that failure to
give such notification shall not affect the indemnification provided hereunder
except to the extent the indemnifying party shall have been actually
prejudiced as a result of such failure (except that the indemnifying party
shall not be liable for any expenses incurred during the period in which the
Indemnitee failed to give such notice). After any required notification (if
applicable), the Indemnitee shall deliver to the indemnifying party, promptly
after the Indemnitee's receipt thereof, copies of all notices and documents
(including court papers) received by the Indemnitee relating to the Third
Party Claim.
(b) If a Third Party Claim is made against an Indemnitee, the indemnifying
party will be entitled to participate in the defense thereof and, if it so
chooses, to assume the defense thereof (at the expense of the indemnifying
party) with counsel selected by the indemnifying party and reasonably
satisfactory to the Indemnitee. Should the indemnifying party so elect to
assume the defense of a Third Party Claim, the indemnifying party will not be
liable to the Indemnitee for any legal expenses subsequently incurred by the
Indemnitee in connection with the defense thereof; provided, however, that if
the indemnifying party fails to take reasonable steps necessary to defend
diligently such Third Party Claim within 30 calendar days after receiving
written notice from the Indemnitee that the Indemnitee believes the
indemnifying party has failed to take such steps or if the indemnifying party
has not undertaken fully to indemnify the Indemnitee in respect of all
Indemnifiable Losses relating to the matter, the Indemnitee may assume its own
defense, and the Indemnifying Party will be liable for all reasonable costs or
expenses paid or incurred in connection therewith. If the indemnifying party
assumes such defense, the Indemnitee shall have the right to participate in
the defense thereof and to employ counsel, at its own expense, separate from
the counsel employed by the indemnifying party, it being understood that the
indemnifying party shall control such defense. The indemnifying party shall be
liable for the fees and expenses of counsel employed by the Indemnitee for any
period during which the indemnifying party has not assumed the defense thereof
(other than during any period in which the Indemnitee shall have failed to
give notice of the Third Party Claim as provided above). If the indemnifying
party chooses to defend or prosecute a Third Party Claim, all the parties
hereto shall cooperate in the defense or prosecution thereof, which
cooperation shall include the retention in accordance with this Agreement and
(upon the indemnifying party's request) the provision to the indemnifying
party of records and information which are reasonably relevant to such Third
Party Claim, and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. If the indemnifying party chooses to defend or prosecute any Third
Party Claim, the Indemnitee will agree to any settlement, compromise or
discharge of such Third Party Claim which the indemnifying party may recommend
and which by its terms obligates the indemnifying party to pay the full amount
of liability in connection with such Third Party Claim; provided, however,
that, without the Indemnitee's consent, the indemnifying party shall not
consent to entry of any judgment or enter into any settlement that provides
for injunctive or other nonmonetary relief affecting the Indemnitee, that does
not include as an unconditional term thereof the giving by each claimant or
plaintiff to such Indemnitee of a release from all liability with respect to
such claim. Whether or not the indemnifying party shall have assumed the
defense of a Third Party Claim, the Indemnitee shall not admit any liability
with respect to, or settle, compromise or discharge, such Third Party Claim
without the indemnifying party's prior written consent (which consent shall
not be unreasonably withheld).
(c) In order for an Indemnitee to be entitled to any indemnification
provided for under this Agreement in respect of a claim that does not involve
a Third Party Claim, the Indemnitee shall deliver notice of such claim with
reasonable promptness to the indemnifying party. The failure by any Indemnitee
so to notify the indemnifying party shall not relieve the indemnifying party
from any liability which it may have to such Indemnitee under this Agreement,
except to the extent that the indemnifying party shall have been actually
prejudiced by such failure. If the indemnifying party has within 30 business
days from the receipt of such notice disputed its liability with respect to
such claim, as provided above, the indemnifying party and the Indemnitee shall
proceed in good faith to negotiate a resolution of such dispute and, if not
resolved through negotiations, such dispute shall be resolved by litigation in
an appropriate court of competent jurisdiction.
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<PAGE>
8.4. Certain Limitations. (a) The amount of any Indemnifiable Losses or
other liability for which indemnification is provided under this Agreement
shall be net of any amounts actually recovered by the Indemnitee from third
parties (including, without limitation, amounts actually recovered under
insurance policies) with respect to such Indemnifiable Losses or other
liability. Any indemnifying party hereunder shall be subrogated to the rights
of the Indemnitee upon payment in full of the amount of the relevant
Indemnifiable Loss. An insurer who would otherwise be obligated to pay any
claim shall not be relieved of the responsibility with respect thereto or,
solely by virtue of the indemnification provisions hereof, have any
subrogation rights with respect thereto. If any Indemnitee recovers an amount
from a third party in respect of an Indemnifiable Loss for which
indemnification is provided in this Agreement after the full amount of such
Indemnifiable Loss has been paid by an indemnifying party or after an
indemnifying party has made a partial payment of such Indemnifiable Loss and
the amount received from the third party exceeds the remaining unpaid balance
of such Indemnifiable Loss, then the Indemnitee shall promptly remit to the
indemnifying party the excess (if any) of (A) the sum of the amount
theretofore paid by the indemnifying party in respect of such Indemnifiable
Loss plus the amount received from the third party in respect thereof, less
(B) the full amount of such Indemnifiable Loss or other liability.
(b) The amount of any Indemnifiable Losses or other Liability for which
indemnification is provided under this Agreement or any other amounts payable
or reimbursable by one party to another under this Agreement shall be
increased or decreased to take account of any net Tax cost or any net Tax
benefit in a manner analogous to that described in the Tax Sharing Agreement.
8.5. Express Negligence. INSOFAR AS TEXAS LAW MAY APPLY, THE PARTIES
EXPRESSLY INTEND AND AGREE THAT THE INDEMNIFICATION OBLIGATIONS OF EACH SET
FORTH IN SECTIONS 8.1 AND 8.2 SHALL EXTEND TO AND INCLUDE, WITHOUT LIMITATION,
ACTIONS FOR INJURIES OR DAMAGES TO ANY PERSON, PARTY OR PROPERTY THAT WERE
CAUSED IN WHOLE OR IN PART BY THE INDEMNITEE'S OWN ACTS OR OMISSIONS
(SPECIFICALLY INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE AND ACTS OR OMISSIONS
GIVING RISE TO STRICT LIABILITY).
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1. Modification or Amendment. The parties hereto may modify or amend this
Agreement only by written agreement executed and delivered by duly authorized
officers of the respective parties, and the written consent of the Acquiror
thereto.
9.2. Waiver; Remedies. The conditions to the Company's obligation to
consummate the Distribution are for the benefit of the Company and the
Acquiror and may be waived in whole or in part as may be agreed by the Company
and the Acquiror in writing and to the extent permitted by applicable law. No
delay on the part of any party hereto in exercising any right, power or
privilege hereunder will operate as a waiver thereof, nor will any waiver on
the part of any party hereto of any right, power or privilege hereunder
operate as a waiver of any other right, power or privilege hereunder, nor will
any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder. Unless otherwise provided, the rights and
remedies herein provided are cumulative and are not exclusive of any rights or
remedies which the parties may otherwise have at law or in equity.
9.3. Counterparts. For the convenience of the parties, this Agreement may be
executed in any number of separate counterparts each such counterpart being
deemed to be an original instrument, and all such counterparts shall together
constitute the same agreement.
9.4. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware applicable to
contracts made and to be performed entirely within such State, without regard
to the conflicts of law principles of such State.
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<PAGE>
9.5. Notices. Any notice, request, instruction or other communication to be
given hereunder by any party to any other party shall be in writing and shall
be deemed to have been duly given (i) on the date of delivery if delivered
personally, or by telecopy or telefacsimile, upon confirmation of receipt,
(ii) on the first business day following the date of dispatch if delivered by
Federal Express or other nationally reputable next-day courier service, or
(iii) on the third business day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage prepaid. All
notices hereunder shall be delivered as set forth below, or pursuant to such
other instructions as may be designated in writing by the party to receive
such notice:
(a) If to VRM:
Valero Refining and Marketing Company 530 McCullough Avenue San
Antonio, Texas 78215 Attention: General Counsel Telecopy: (210) 246-
2354
with copies to:
Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York
10019 Attention: Edward D. Herlihy, Esq. Telecopy: (212) 403-2000
(b) If to the Company:
Valero Energy Corporation c/o PG&E Corporation 77 Beale Street San
Francisco, California 94105 Attention: General Counsel Telecopy: (415)
973-8083
with copies to:
Orrick, Herrington & Sutcliffe, LLP 400 Sansome Street San Francisco,
California 94111 Attention: Leslie P. Jay, Esq. Telecopy: (415) 773-
5759
9.6. Entire Agreement. The Reorganization Agreements (including the Annexes
and Schedules thereto) and the Interim Services Agreement (including the
Annexes and Schedules thereto) constitute the entire agreement, and supersede
all other prior agreements, understandings, representations and warranties,
both written and oral, among the parties, with respect to the subject matter
hereof and thereof.
9.7. Certain Obligations. Whenever this Agreement requires any of the
Subsidiaries of any party to take any action, this Agreement will be deemed to
include an undertaking on the part of such party to cause such Subsidiary to
take such action.
9.8. Assignment. No party to this Agreement shall convey, assign or
otherwise transfer any of its rights or obligations under this Agreement
without the express written consent of the other party hereto, which shall not
be unreasonably withheld or delayed, except that the Company may assign its
rights hereunder to an Affiliate or to a successor to all or substantially all
of the business of the Company as conducted at the time of the Intercompany
Reorganization.
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<PAGE>
9.9. Captions. The Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
9.10. Specific Performance. In the event of any actual or threatened default
in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are or are to be thereby aggrieved shall
have the right of specific performance and injunctive relief giving effect to
its or their rights under this Agreement, in addition to any and all other
rights and remedies at law or in equity, and all such rights and remedies
shall be cumulative. The parties agree that the remedies at law for any breach
or threatened breach, including monetary damages, are inadequate compensation
for any loss and that any defense in any action for specific performance that
a remedy at law would be adequate is waived.
9.11. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
hereof, or the application of such provision to persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party. Upon any such determination, the parties shall negotiate in good faith
in an effort to agree upon a suitable and equitable substitute provision to
effect the original intent of the parties.
9.12. Third Party Beneficiaries. Acquiror shall be a third party beneficiary
of this Agreement. Nothing contained in this Agreement is intended to confer
upon any Person or entity other than the parties hereto and their respective
successors and permitted assigns (other than Acquiror), any benefit, right or
remedies under or by reason of this Agreement, except that the provisions of
Article VIII hereof shall inure to the benefit of Indemnitees.
9.13. Schedules. All Schedules attached hereto or referred to herein are
hereby incorporated in and made a part of this Agreement as if set forth in
full herein. Matters reflected on the Schedules are not necessarily limited to
matters required by this Agreement to be reflected on such Schedules. Such
additional matters are set forth for informational purposes only and do not
necessarily include other matters of a similar nature. Capitalized terms used
in any Schedule but not otherwise defined therein shall have the respective
meanings assigned to such terms in this Agreement.
9.14. Tax Sharing Agreement. With respect to Tax matters, if there is a
conflict between this Agreement and the Tax Sharing Agreement the Tax Sharing
Agreement shall control.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first
hereinabove written.
VALERO ENERGY CORPORATION
By:
----------------------------------
Name:
Title:
VALERO REFINING AND MARKETING COMPANY
By:
----------------------------------
Name:
Title:
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<PAGE>
EXHIBIT 2.3
ANNEX_____
TO
THE MERGER AGREEMENT
TAX SHARING AGREEMENT
among
Valero Energy Corporation
Valero Refining and Marketing Company
and
PG&E Corporation
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. DEFINITION OF TERMS...................... 1
SECTION 2. ALLOCATION OF TAX LIABILITIES............ 6
2.01 General Rule............................. 7
2.02 Allocation of Federal Income Tax......... 7
2.03 Allocation of State Income Taxes......... 8
2.04 Allocation of Other Taxes................ 9
2.05 Transaction Taxes........................ 10
SECTION 3. ALLOCATION OF TAX CREDIT CARRYFORWARDS... 10
3.01 Allocation of Alternative Minimum Tax
Credit Carryforwards................... 11
3.02 Allocation of Other Credit
Carryforwards.......................... 11
SECTION 4. PREPARATION AND FILING OF TAX RETURNS.... 12
4.01 General.................................. 12
4.02 Refining's Responsibility................ 12
4.03 Valero's Responsibility.................. 12
4.04 Consistent Tax Accounting Practices...... 12
4.05 Consolidated or Combined Return.......... 13
4.06 Right to Review Tax Returns.............. 13
4.07 Claims for Refund, Carrybacks, and
Self-Audit Adjustments................. 14
SECTION 5. TAX PAYMENTS AND INTERCOMPANY BILLINGS... 16
5.01 Payment of Taxes with Respect to
Valero Federal Consolidated Income
Tax Returns Filed After the Time of
Distribution........................... 16
5.02 Payment of Federal Income Tax Related
to Adjustments......................... 17
5.03 Payment of Consolidated or Combined
State Income Tax With Respect to Returns
Filed After the Time of Distribution... 18
5.04 Payment of State Income Taxes Related
to Adjustments......................... 18
5.05 Payment of Separate Company Taxes........ 19
5.06 Indemnification Payments................. 19
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Page
----
SECTION 6. TAX BENEFITS FOR ACCOUNT OF OTHER
PARTY................................. 19
SECTION 7. ASSISTANCE AND COOPERATION.............. 19
7.01 General................................. 19
7.02 Income Tax Return Information........... 20
SECTION 8. TAX RECORDS............................. 20
SECTION 9. TAX CONTESTS............................ 21
9.01 Notices................................. 21
9.02 Control of Tax Contest.................. 22
SECTION 10. EFFECTIVE DATE; TERMINATION OF PRIOR
INTERCOMPANY TAX ALLOCATION
AGREEMENTS............................ 22
SECTION 11. NO INCONSISTENT ACTIONS................. 23
SECTION 12. SURVIVAL OF OBLIGATIONS................. 24
SECTION 13. EMPLOYEE MATTERS........................ 24
SECTION 14. TREATMENT OF PAYMENTS; TAX GROSS UP..... 24
SECTION 15. DISAGREEMENTS........................... 25
SECTION 16. LATE PAYMENTS........................... 25
SECTION 17. EXPENSES................................ 25
SECTION 18. GENERAL PROVISIONS...................... 26
-ii-
<PAGE>
TAX SHARING AGREEMENT
This Agreement is made and entered into as of ______________, 1997 by
and between Valero Energy Corporation, a Delaware corporation ("Valero"), Valero
Refining and Marketing Company, a Delaware corporation ("Refining") and PG&E
Corporation, a California corporation ("Acquiror"). Valero and Refining are
sometimes collectively referred to herein as the "Companies." Capitalized terms
used in this Agreement are defined in Section 1 below. Unless otherwise
indicated, all "Section" references in this Agreement are to sections of this
Agreement.
RECITALS
WHEREAS, as of the date hereof, Valero is the common parent of an
affiliated group of corporations, including Refining, which has elected to
file consolidated federal income tax returns; and
WHEREAS, the Companies have entered into a Distribution Agreement
setting forth the corporate transaction pursuant to which Valero will distribute
Refining's common stock to Valero shareholders in a transaction intended to
qualify as a tax-free distribution under Section 355 of the Code; and
WHEREAS, as a result of the Distribution, Refining and its respective
subsidiaries, will cease to be members of the affiliated group of which Valero
is the common parent, effective as of the Time of Distribution; and
WHEREAS, the Companies desire to provide for and agree upon the
allocation between the parties of liabilities for Taxes arising prior to, as a
result of, and subsequent to the transaction contemplated by the Distribution
Agreement, and to provide for and agree upon other matters relating to Taxes;
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein, the Companies and Acquiror hereby agree as follows:
SECTION 1. DEFINITION OF TERMS. For purposes of this Agreement
(including the recitals hereof), the following terms have the following
meanings.
"ACCOUNTING FIRM" shall have the meaning provided in Section 15.
<PAGE>
"ACQUIROR" means PG&E Corporation, a California corporation.
"ADJUSTMENT REQUEST" means any formal or informal claim or request
filed with any Tax Authority or with any administrative agency or court, for
the adjustment, refund, or credit of Taxes, including (a) any amended Tax Return
claiming adjustment to the Taxes as reported on the Tax Return or, if
applicable, as previously adjusted, or (b) any claim for refund or credit of
Taxes previously paid.
"AGREEMENT" shall mean this Tax Sharing Agreement.
"ALLOCATED FEDERAL TAX LIABILITY" shall have the meaning provided in
Section 5.01(b)(i).
"CARRYBACK" means any net operating loss, net capital loss, excess tax
credit or other similar Tax Item which may or must be carried from one Tax
Period to another Tax Period under the Code or other applicable Tax Law.
"CODE" means the United States Internal Revenue Code of 1986, as
amended, or any successor law.
"COMPANIES" means Valero and Refining, collectively, and "COMPANY"
means any one of Valero or Refining.
"CONSOLIDATED OR COMBINED INCOME TAX" means any Income Tax computed by
reference to the assets and activities of members of more than one Group.
"CONSOLIDATED TAX LIABILITY" means, with respect to any Valero Federal
Consolidated Income Tax Return, the "tax liability of the group" as that term is
used in Treasury Regulation Section 1.1552-1(a) and any interest, penalties,
additions to tax, or additional amounts in respect thereto; provided that such
tax liability shall be treated as including any alternative minimum tax
liability under Code Section 55; and provided further that in the case of the
Tax Period which includes the Time of Distribution, the Consolidated Tax
Liability shall be computed as if the Time of Distribution were the last day of
the Tax Period.
"CUMULATIVE FEDERAL TAX PAYMENT" shall have the meaning provided in
Section 5.01(b)(ii).
"DISTRIBUTION AGREEMENT" means the agreement setting forth the
corporate transaction required to effect the distribution to Valero
shareholders of all the outstanding common
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<PAGE>
stock of Refining, and to which this Agreement is attached as an exhibit.
"DISTRIBUTION" means the distribution to Valero shareholders at the
Time of Distribution of all of the outstanding common stock of Refining owned
by Valero.
"EFFECTIVE TIME" shall have the meaning provided in the Merger
Agreement.
"FEDERAL INCOME TAX" means any Tax imposed by Subtitle A of the Code.
"GROUP" means the Valero Group or the Refining Group, as the context
requires.
"INCOME TAX" means any Federal Income Tax or State Income Tax.
"MERGER" means the merger of [PG&E SubCo] with and into Valero as
described in the Merger Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Merger between
Valero and Acquiror and [PG&E SubCo] dated as of ____________ 1997.
"PAYMENT DATE" means (i) with respect to any Valero Federal
Consolidated Income Tax Return, the due date for any required installment of
estimated taxes determined under Code Section 6655, the due date (determined
without regard to extensions) for filing the return determined under Code
Section 6072, and the date the return is filed, and (ii) with respect to any Tax
Return for any Consolidated or Combined State Income Tax, the corresponding
dates determined under the applicable Tax Law.
"POST-DISTRIBUTION PERIOD" means any Tax Period beginning after the
Time of Distribution.
"PRE-DISTRIBUTION PERIOD" means any Tax Period ending on or before the
Time of Distribution.
"PRIME RATE" means the base rate on corporate loans charged by
Citibank, N.A., New York, New York from time to time, compounded daily on the
basis of a year of 365 or 366 (as applicable) days and actual days elapsed.
"PRIOR INTERCOMPANY TAX ALLOCATION AGREEMENTS" means any written or
oral agreement or any other arrangements relating to allocation of Taxes
existing between or among the Valero
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<PAGE>
Group, and the Refining Group as of the Time of Distribution (other than this
Agreement and other than any such agreement or arrangement between or among
persons who are members of a single Group).
"PROHIBITED ACTION" shall have the meaning provided in Section 11.
"REFINING" means Valero Refining and Marketing Company, a Delaware
corporation, and any successor.
"REFINING ADJUSTMENT" means any proposed adjustment by a Tax Authority
or any claim for a Tax refund to the extent the Refining Group would be
exclusively liable for any resulting Tax under this Agreement and exclusively
entitled to receive any resulting Tax Benefit under this Agreement.
"REFINING GROUP" means the VRM Group as that term is defined in the
Distribution Agreement.
"REFINING GROUP PRIOR FEDERAL TAX LIABILITY" shall have the meaning
provided in Section 2.02(b)(ii).
"REFINING GROUP PRIOR STATE TAX LIABILITY" shall have the meaning
provided in Section 2.03(b)(ii)(B).
"REFINING GROUP RECOMPUTED FEDERAL TAX LIABILITY" shall have the
meaning provided in Section 2.02(b)(i).
"REFINING GROUP RECOMPUTED STATE TAX LIABILITY" shall have the meaning
provided in Section 2.03(b)(ii)(A).
"RESPONSIBLE COMPANY" means, with respect to any Tax Return, the
Company having responsibility for preparing and filing such Tax Return under
this Agreement.
"SEPARATE COMPANY TAX" means any Tax computed by reference to the
assets and activities of a member or members of a single Group.
"STATE INCOME TAX" means any Tax imposed by any State of the United
States or by any political subdivision of any such State which is imposed on or
measured by net income, including state and local franchise or similar Taxes
measured by net income.
"SUBSIDIARY" shall have the meaning set forth in the Merger Agreement.
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"TAX" or "TAXES" means any income, gross income, gross receipts,
profits, capital stock, franchise, withholding, payroll, social security,
workers compensation, unemployment, disability, property, ad valorem, stamp,
excise, occupation, service, sales, use, license, lease, transfer, import,
export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment, or other charge in the nature of or in lieu of
any tax) imposed by any governmental entity or political subdivision thereof,
and any interest, penalties, additions to tax, or additional amounts in respect
of the foregoing.
"TAX AUTHORITY" means, with respect to any Tax, the governmental
entity or political subdivision thereof that imposes such Tax and the agency (if
any) charged with the collection of such Tax for such entity or subdivision.
"TAX BENEFIT" means any refund, credit, or other reduction in
otherwise required Tax payments (including any reduction in estimated tax
payments).
"TAX CONTEST" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes of any of the Companies or their Subsidiaries (including any
administrative or judicial review of any claim for refund) for any Tax Period
ending on or before the Time of Distribution.
"TAX ITEM" means, with respect to any Income Tax, any item of income,
gain, loss, expense, or credit.
"TAX LAW" means the law of any governmental entity or political
subdivision thereof relating to any Tax.
"TAX OPINION" means the opinion letter to be issued by Valero's tax
counsel as required by the Merger Agreement.
"TAX PERIOD" means, with respect to any Tax, the period for which the
Tax is reported as provided under the Code or other applicable Tax Law.
"TAX RECORDS" means Tax Returns, Tax Return work-papers, documentation
relating to any Tax Contests, and any other books of account or records required
to be maintained, or that have been maintained, under the Code or other
applicable Tax Laws or under any record retention agreement with any Tax
Authority.
"TAX RETURN" means any report of Taxes due, any claims for refund of
Taxes paid, any information return with
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respect to Taxes, or any other similar report, statement, declaration, or
document required to be filed under the Code or other Tax Law, including any
attachments, exhibits, or other materials submitted with any of the foregoing
and including any amendments or supplements to any of the foregoing.
"TIME OF DISTRIBUTION" means the Time of Distribution as that term is
defined in the Distribution Agreement.
"TRANSACTION" means the events contemplated by the Distribution
Agreement and by the Merger Agreement.
"TREASURY REGULATIONS" means the regulations promulgated from time to
time under the Code as in effect for the relevant Tax Period.
"VALERO" means Valero Energy Corporation, a Delaware corporation, and
any successor.
"VALERO ADJUSTMENT" means any proposed adjustment by a Tax Authority
or any claim for a Tax refund to the extent the Valero Group would be
exclusively liable for any resulting Tax under this agreement and exclusively
entitled to receive any resulting Tax Benefit under this Agreement.
"VALERO FEDERAL CONSOLIDATED INCOME TAX RETURN" means any United
States federal Tax Return for the affiliated group (as that term is defined in
Code Section 1504) that includes Valero as the common parent and includes any
member of the Refining Group.
"VALERO GROUP" means the Company Group as that term is defined in the
Distribution Agreement.
"VNG DECEMBER 31, 1996 BALANCE SHEET" means the VNG December 31 1996
Balance Sheet as that term is defined in the Merger Agreement.
SECTION 2. ALLOCATION OF TAX LIABILITIES. The provisions of this
Section 2 are intended to determine each Company's liability for Taxes with
respect to Pre-Distribution Periods. Once the liability has been determined
under this Section 2, Section 5 determines the time when payment of the
liability is to be made, and whether the payment is to be made to the Tax
Authority directly or to another Company.
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2.1 GENERAL RULE.
(a) Valero Liability. The Valero Group shall be liable for all Taxes
not specifically allocated to the Refining Group under this Section 2. Valero
shall indemnify and hold harmless the Refining Group from and against any
liability for Taxes for which the Valero Group is liable under this Section
2.01(a).
(b) Refining Liability. Refining shall be liable for, and shall
indemnify and hold harmless the Valero Group from and against any liability for
Taxes which are allocated to the Refining Group under this Section 2.
2.2 ALLOCATION OF FEDERAL INCOME TAX. Except as provided in Sections
2.04 and 2.05, Federal Income Tax shall be allocated as follows:
(a) Allocation of Tax Reported on Valero Federal Consolidated Income
Tax Returns Filed After the Time of Distribution. With respect to any Valero
Federal Consolidated Income Tax Return filed after the Time of Distribution, the
Consolidated Tax Liability shall be allocated among the Valero and Refining
Groups in accordance with the method prescribed in Treasury Regulation Sections
1.1502-33(d)(3) and 1.1552-1(a)(2) (as in effect on the date hereof) determined
by treating each Group as a single member of the consolidated group. For
purposes of such allocation the fixed percentage of additional amounts to be
allocated under Treasury Regulation Section 1.1502-33(d)(3)(i) shall be 100%.
Any amount so allocated to the Refining Group shall be a liability of Refining
to Valero under this Section 2. Amounts described in Code Section 1561 (relating
to limitations on certain multiple benefits) shall be divided equally among the
Valero Group and the Refining Group to the extent permitted by the Code.
(b) Allocation of Valero Federal Consolidated Income Tax Return Tax
Adjustments. If there is any adjustment to the reported Consolidated Tax
Liability with respect to any Valero Federal Consolidated Income Tax Return, or
to such Consolidated Tax Liability as previously adjusted, Refining shall be
liable to Valero for the excess (if any) of:
(i) the Consolidated Tax Liability that would have been allocated to
the Refining Group in accordance with Section 2.02(a), taking into account
any adjustments to the reported Consolidated Tax Liability, or to such
Consolidated Tax Liability as previously adjusted (the "Refining Group
Recomputed Federal Tax Liability"); over
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(ii) the Consolidated Tax Liability allocated to the Refining Group in
accordance with Section 2.02(a) based on the return as filed (or if
applicable, as previously adjusted) (the "Refining Group Prior Federal
Tax Liability").
If the Refining Group Prior Federal Tax Liability exceeds the Refining Group
Recomputed Federal Tax Liability, Valero shall be liable to Refining for such
excess.
2.03 ALLOCATION OF STATE INCOME TAXES. Except as provided in
Sections 2.04 and 2.05, State Income Taxes shall be allocated as follows:
(a) Separate Company Taxes. In the case of any State Income Tax which
is a Separate Company Tax, Refining shall be liable for such Tax imposed on any
members of the Refining Group, and Valero shall be liable for such Tax imposed
on any members of the Valero Group.
(b) Consolidated or Combined State Income Taxes. In the case of any
Consolidated or Combined State Income Tax, the liability of Refining with
respect to such Tax for any Tax Period shall be computed as follows:
(i) Allocation of Tax Reported on Tax Returns Filed after the Time of
Distribution. In the case of any Consolidated or Combined State Income
Tax reported on any Tax Return filed after the Time of Distribution,
Refining shall be liable to Valero for the excess (if any) of:
(A) the State Income Tax liability computed by including all
members of the Valero and Refining Groups in the filing of a
Consolidated or Combined Tax Return based on the income, apportionment
factors, and other items of such members; over
(B) the State Income Tax liability computed as if only the Valero
Group members had filed a Consolidated or Combined Tax Return based
upon the income, apportionment factors, and other items of such
members.
(ii) Allocation of Consolidated or Combined State Income Tax
Adjustments. If there is any ad justment to the amount of Consolidated or
Combined State Income Tax reported on any Tax Return (or as previously
adjusted), Refining shall be liable to Valero for the excess (if any) of:
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(A) the State Income Tax liability computed as if all members of
the Refining Group included in the Tax Return had filed a Consolidated
or Combined Tax Return based upon the income, apportionment factors,
and other items of such members as so adjusted (the "Refining Group
Recomputed State Tax Liability"); over
(B) the State Income Tax liability computed as if all members of
the Refining Group included in the Tax Return had filed a Consolidated
or Combined Tax Return based upon the income, apportionment factors,
and other items of such members as previously reported (or, if
applicable, as previously adjusted) (the "Refining Group Prior State
Tax Liability").
If the Refining Group Prior State Tax Liability exceeds the Refining Group
Recomputed State Tax Liability, Valero shall be liable to Refining for such
excess.
2.04 ALLOCATION OF OTHER TAXES. Except as provided in this Section
2.04 or Section 2.05, all Taxes other than those specifically allocated pursuant
to Section 2.02 or 2.03 shall be allocated based on the legal entity on which
the legal incidence of the Tax is imposed. Refining shall be liable for all
Taxes imposed on any member of the Refining Group and Valero shall be liable for
all Taxes imposed on any member of the Valero Group, except that Refining shall
be liable for all Taxes (other than Income Taxes) with respect to Tax Periods
ending on or before December 31, 1996 (or, with respect to Taxes that are not
assessed with respect to periods, such Taxes due and payable on or before
December 31, 1996), except for such Taxes provided for in the VNG December 31,
1996 Balance Sheet, but only to the extent such Taxes exceed $5,000,000 in the
aggregate, and except that Refining shall not be liable with respect to any Tax
or Tax Return which is (i) the subject of the litigation set forth and described
in Section I, paragraphs 3 through 6, of Schedule 5.1(l) of the Merger Agreement
(the "Existing Tax Claims"), or (ii) heretofore or hereafter made a subject of
any claim, demand or litigation involving claims substantially similar to those
asserted in the Existing Tax Claims. The Companies believe that there is no Tax
not specifically allocated pursuant to Section 2.02 or 2.03 which is legally
imposed on more than one legal entity (e.g., joint and several liability);
however, if there is any such Tax, it shall be allocated in accordance with past
practices as reasonably determined by the affected Companies, or in the absence
of such practices, in accordance with any allocation method agreed upon by the
affected Companies.
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2.05 TRANSACTION TAXES.
(a) Refining Liability. Except with respect to any liability with
respect to any Tax that is reflected on the VNG December 31, 1996 Balance Sheet,
and except to the extent of Valero's liability pursuant to Section 2.05(b)
below, Refining shall be liable for all Taxes resulting from the Transaction
including:
(i) Any sales and use, gross receipts, or other transfer Taxes
resulting from the Transaction;
(ii) any Tax resulting from any income or gain recognized
under Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any
comparable provisions of other applicable Tax Laws) as a result of the
Transaction;
(iii) any Tax resulting from any income or gain recognized as
a result of the Transaction contemplated by the Distribution Agreement
failing to qualify for tax-free treatment under Code Section 355 or 361(c),
or other provisions of the Code or other applicable Tax Laws, or as a
result of the Merger failing to constitute a "reorganization" under Code
Section 368 or any comparable provisions of other applicable Tax Laws (as
contemplated in the Merger Agreement);
provided, however, that Refining shall be liable for Taxes described in Section
2.05(a)(i) and Section 2.05(a)(ii) only to the extent that the aggregate amount
of such Taxes exceeds $3,000,000. For purposes of this Section 2.05(a),any
increase in Tax resulting from any disallowance of deductions pursuant to
Section 162(m) of the Code or Section 280G of the Code shall be treated as a Tax
resulting from the Transaction and described in Section 2.05(a)(ii); provided,
however, that this sentence shall not apply to any such Tax reflected on the VNG
December 31, 1996 Balance Sheet.
(b) Indemnity for Inconsistent Acts and Misrepresentations. Valero
shall be liable for, and shall indemnify and hold harmless the Refining Group
from and against any liability for, any Tax (described in subparagraph (a)(iii))
above but only to the extent resulting solely from any breach of Valero's
covenants under Section 11 of this Agreement. Acquiror shall be liable for, and
shall indemnify and hold harmless the Refining Group from and against any
liability for, any Tax described in subparagraph (a)(iii) above but only to the
extent resulting either (x) from any breach of Acquiror's representations or
covenants under Section 11 of this Agreement or (y) from the inaccuracy of any
factual statements or representations made by
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Acquiror and relating to Acquiror or its Subsidiaries (other than the Valero
Group) in connection with the Tax Opinion.
SECTION 3. ALLOCATION OF TAX CREDIT CARRYFORWARDS.
3.01 ALLOCATION OF ALTERNATIVE MINIMUM TAX CREDIT CARRYFORWARDS.
With respect to the Valero Federal Consolidated Income Tax Return filed for
calendar year 1995, the consolidated minimum tax credit carryforward
("Consolidated MTC") reported therein is allocated among the Valero and Refining
Groups as follows:
Valero Group $ 6,049,232
Refining Group 15,266,111
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Total $21,315,343
Valero and Refining mutually represent that no additional amount of Consolidated
MTC is expected to be generated nor is any Consolidated MTC expected to be
utilized on the Valero Federal Consolidated Income Tax Return for calendar year
1996. Any adjustments to the above amounts for Tax Periods ending after 1995
and on or before the Time of Distribution shall be allocated among the Valero
and Refining Groups in accordance with the principles of Code Section 53 and
Proposed Treasury Regulation 1.1502-55(h)(6)(ii).
3.02 ALLOCATION OF OTHER CREDIT CARRYFORWARDS. With respect to the
Valero Federal Consolidated Income Tax Return filed for calendar year 1995, the
consolidated general business credit carryforward ("Consolidated GBC") reported
therein is allocated among the Valero and Refining Groups as follows:
Valero Group $ 4,920,738
Refining Group 11,119,818
-----------
Total $16,040,556
Any adjustments to the above amounts of Consolidated GBC or any other credits
allowable against any Tax for Tax Periods ending after 1995 and on or before the
Time of Distribution shall be allocated among the Valero and Refining Groups in
accordance with past tax accounting practices used with respect to such credits
(unless such past practices are no longer permissible under the Code or other
applicable Tax Law). Based upon the Companies' latest estimate of 1996 taxable
income, the Consolidated GBC at the end of calendar year 1996 is as follows:
Valero Group $245,621
Refining Group 274,349
--------
Total $519,970
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SECTION 4. PREPARATION AND FILING OF TAX RETURNS.
4.01 GENERAL. Except as otherwise provided in this Section 4, Tax
Returns shall be prepared and filed when due (including extensions) by the
person obligated to file such Tax Return under the Code or applicable Tax Law.
The Companies shall provide, and shall cause their Subsidiaries to provide,
assistance and cooperate with one another in accordance with Section 7 with
respect to the preparation and filing of Tax Returns, including providing
information required to be provided in Section 7.
4.02 REFINING'S RESPONSIBILITY. Refining shall have the exclusive
obligation and right to properly prepare and timely file, or to cause to be
properly prepared and timely filed:
(a) Valero Federal Consolidated Income Tax Returns for Tax Periods
ending on or before the end of the day on which the Time of Distribution occurs.
(b) Tax Returns for State Income Taxes (excluding any amended returns,
but including Tax Returns with respect to State Income Taxes that are Separate
Company Taxes) which the Companies reasonably determine are required to be filed
by the Companies or any of their Subsidiaries for Tax Periods ending on or
before the end of the day on which the Time of Distribution occurs.
Nothing in this Section 4.02 shall impose on Refining any liability for any
failure to file any Tax Return, or for failure to file any Tax Return when due,
with respect to any Pre-Distribution Period if the due date for such return
(including extensions) was prior to the Time of Distribution.
4.03 VALERO'S RESPONSIBILITY. Valero shall prepare and file, or
shall cause to be prepared and filed, Tax Returns required to be filed by or
with respect to members of the Valero Group other than those Tax Returns which
Refining is required to prepare and file under Section 4.02. The Tax Returns
required to be prepared and filed by Valero under this Section shall include Tax
Returns for Federal or State Income Taxes (excluding any amended returns, but
including Tax Returns with respect to State Income Taxes that are Separate
Company Taxes) which the Companies reasonably determine, in accordance with
Valero's past practices, are required to be filed by any member of the Valero
Group for Tax Periods ending after the end of the day on which the Time of
Distribution occurs.
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4.04 CONSISTENT TAX ACCOUNTING PRACTICES. Any Tax Return for any
Pre-Distribution Period and any Tax Return for any Post-Distribution Period to
the extent items reported on such Tax Return might reasonably be expected to
affect Tax Items reported on any Tax Return for any Pre-Distribution Period,
shall be prepared in accordance with past Tax accounting practices used with
respect to the Tax Returns in question (unless such past practices are no longer
permissible under the Code or other applicable Tax Law), and to the extent any
items are not covered by past practices (or in the event such past practices are
no longer permissible under the Code or other applicable Tax Law), in accordance
with reasonable Tax accounting practices selected by the Company whose Tax
liability for such Tax Period will be most affected by such selection.
4.05 CONSOLIDATED OR COMBINED RETURN. The Companies will elect and
join, and will cause their respective Subsidiaries to elect and join, in filing
consolidated, unitary, combined, or other similar Tax Returns with respect to
any Tax Period ending on or before the end of the day on which the Time of
Distribution occurs, to the extent each entity is eligible to join in such Tax
Returns, if the Companies reasonably determine that the filing of such Tax
Returns is consistent with past reporting practices, or in the absence of
applicable past practices, will result in the minimization of the net present
value of the aggregate Tax to the entities eligible to join in such Tax Returns.
4.06 RIGHT TO REVIEW TAX RETURNS.
(a) General. The Responsible Company with respect to any Tax Return
shall make such Tax Return and related work-papers available for review by the
other Companies during regular business hours, if requested, in the event (i)
such Tax Return relates to Taxes for which the requesting party may be liable,
(ii) such Tax Return relates to Taxes for which the requesting party may be
liable in whole or in part for any additional Taxes owing as a result of
adjustments to the amount of Taxes reported on such Tax Return, (iii) such Tax
Return relates to Taxes for which the requesting party may have a claim for Tax
Benefits under this Agreement, or (iv) the requesting party reasonably
determines that it must inspect such Tax Return to confirm compliance with the
terms of this Agreement. The Responsible Company shall use its reasonable best
efforts to make such Tax Return available for review as required under this
paragraph sufficiently in advance of, but in any event no later than thirty
calendar days prior to, the due date for filing such Tax Returns to provide the
requesting party with a meaningful opportunity to analyze and comment on
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such Tax Returns and have such Tax Returns modified before filing, taking into
account the person responsible for payment of the Tax (if any) reported on such
Tax Return and the materiality of the amount of Tax liability with respect to
such Tax Return. The Companies shall attempt in good faith to resolve any issues
arising out of the review of such Tax Returns.
(b) Reporting of Transaction Tax Items. The Companies agree that the
tax treatment reported on any Tax Return of Tax Items relating to the
Transaction shall be consistent with the treatment of such item in the Tax
Opinion. To the extent there is a Tax Item relating to the Transaction which is
not covered by the Tax Opinion, the Companies shall agree on the tax treatment
of any such Tax Item reported on any Tax Return. For this purpose, the tax
treatment of such Tax Items on a Tax Return by the Responsible Company with
respect to such Tax Return shall be agreed to by the other Company unless either
(i) such other Company reasonably believes that such tax treatment may result in
a penalty or addition to Tax under applicable Tax Law, or (ii) such tax
treatment is inconsistent with the tax treatment contemplated in the Tax
Opinion. Such Tax Return shall be submitted for review pursuant to Section
4.06(a), and any dispute regarding such proper tax treatment shall be referred
for resolution pursuant to Section 15, sufficiently in advance of the filing
date of such Tax Return (including extensions) to permit timely filing of the
return.
(c) Execution of Returns Prepared by Other Party. In the case of any
Tax Return which is required to be prepared and filed by one Company under this
Agreement and which is required by law to be signed by another Company (or by
its authorized representative), the Company which is legally required to sign
such Tax Return (the "Signatory Company") shall not be required to sign such Tax
Return under this Agreement if the Signatory Company reasonably believes that
the tax treatment of the items reported on the Tax Return may result in a
penalty or addition to Tax under applicable Tax Law.
4.07 CLAIMS FOR REFUND, CARRYBACKS, AND SELF-AUDIT ADJUSTMENTS.
(a) Consent Required for Adjustment Requests Related to Consolidated
or Combined Income Taxes. Except as provided in paragraph (b) below, each of
the Companies hereby agrees that, unless the other Company consents in writing,
which consent shall not be unreasonably withheld, (i) no Adjustment Request with
respect to any Consolidated or Combined Income Tax for a Pre-Distribution Period
shall be filed, and (ii) any
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available elections to waive the right to claim, in any Pre-Distribution Period
with respect to any Consolidated or Combined Income Tax, any Carryback arising
in a Post-Distribution Period shall be made, and no affirmative election shall
be made to claim any such Carryback. Any Adjustment Request which Valero
consents to make under this Section 4.07 shall be prepared and filed by Refining
under Section 4.02. Valero shall provide to Refining all information required
for the preparation and filing of such Adjustment Request in such form and
detail as reasonably requested by Refining.
(b) Exception for Adjustment Requests Related to Audit Adjustments.
Each of the Companies shall be entitled, without the consent of the other
Company, to require Refining to file an Adjustment Request to take into account
any net operating loss, net capital loss, deduction, credit, or other adjustment
attributable to such Company or any member of its Group corresponding to any
adjustment resulting from any audit by the Internal Revenue Service or other Tax
Authority with respect to Consolidated or Combined Income Taxes for any Pre-
Distribution Period. For example, if the Internal Revenue Service requires
either Company to capitalize an item deducted for the taxable year 1993, the
Company shall be entitled, without the consent of the other Company, to require
Refining to file an Adjustment Request for the taxable year 1994 (and later
years) to take into account any depreciation or amortization deductions in such
years directly related to the item capitalized in 1993.
(c) Other Adjustment Requests Permitted. Nothing in this Section 4.07
shall prevent either Company or its Subsidiaries from filing any Adjustment
Request with respect to Income Taxes which are not Consolidated or Combined
Income Taxes or with respect to any Taxes other than Income Taxes. Any refund
or credit obtained as a result of any such Adjustment Request (or otherwise)
shall be for the account of the person liable for the Tax under this Agreement.
(d) Payment of Refunds. Any refunds or other Tax Benefits received by
either Company (or any of its Subsidiaries) as a result of any Adjustment
Request which are for the account of the other Company (or member of such other
Company's Group) shall be paid by the Company receiving (or whose Subsidiary
received) such refund or Tax Benefit to such other Company in accordance with
Section 6.
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SECTION 5. TAX PAYMENTS AND INTERCOMPANY BILLINGS
5.01 PAYMENT OF TAXES WITH RESPECT TO VALERO FEDERAL CONSOLIDATED
INCOME TAX RETURNS FILED AFTER THE TIME OF DISTRIBUTION. In the case of any
Valero Federal Consolidated Income Tax Return the due date for which (including
extensions) is after the Time of Distribution,
(a) Computation and Payment of Tax Due. At least thirty calendar days
prior to any Payment Date, Refining shall compute the amount of Tax required to
be paid to the Internal Revenue Service (taking into account the requirements of
Section 4.04 relating to consistent accounting practices) with respect to such
Tax Return and shall notify Valero in writing of the amount of Tax required to
be paid on or before such due date. Valero will pay such amount to the Internal
Revenue Service on or before the due date.
(b) Computation and Payment of Refining Liability With Respect to Tax
Due. At least three business days before any Payment Date, Refining will pay to
Valero the excess (if any) of --
(i) the Consolidated Tax Liability determined as of such Payment
Date with respect to the applicable Tax Period allocable to the members of
the Refining Group as determined by Refining in a manner consistent with
the provisions of Section 2.02(a) (relating to allocation of the
Consolidated Tax Liability --) (the "Allocated Federal Tax Liability"),
over
(ii) the cumulative net payments with respect to such Tax
Return prior to such Payment Date by the members of Refining Group (the
"Cumulative Federal Tax Payment").
If the Refining Group Cumulative Federal Tax Payment is greater than the
Refining Group Allocated Federal Tax Liability, then Valero shall pay such
excess to Refining within 10 business days following such Payment Date.
(c) Deemed Cumulative Federal Tax Payment for First Payment Date After
the Time of Distribution. For purposes of Section 5.01(b)(ii), the Refining
Group's Cumulative Federal Tax Payment as of the first Payment Date after the
Time of Distribution shall be deemed equal to the portion of the total
payments of Tax by the affiliated group with respect to the Tax Return allocated
to the Refining Group in accordance with Section 2.02(a) determined by
substituting for the "tax liability
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of the group" as such term is used in Treasury Regulation Section 1.1552-1(a)(2)
the amount of such total payments of Tax. For example, if the Time of
Distribution is March 1, 1997, and prior to April 15, 1997 (i.e., the first
Payment Date after the Time of Distribution) the total payments of Tax by the
affiliated group with respect to Valero's Federal Consolidated Income Tax Return
for the year ended December 31, 1996 is $100x, the portion of such $100x deemed
paid by the Refining Group as of April 15, 1997 (excluding the payment to be
made on that date) would be determined under Section 2.02(a).
(d) Interest on Intergroup Tax Allocation Payments. In the case of any
payments required under paragraph (b) of this subsection 5.01, the payor shall
also pay to the payee an amount of interest computed at the Prime Rate on the
amount of the payment required under paragraph (b), as applicable, based on the
number of days from the applicable Payment Date to the date of payment of the
amount determined under such paragraph (b).
5.02 PAYMENT OF FEDERAL INCOME TAX RELATED TO ADJUSTMENTS.
(a) Adjustments Resulting in Underpayments. Valero shall pay to the
Internal Revenue Service when due any additional Federal Income Tax required to
be paid as a result of any adjustment to the Consolidated Federal Income Tax
Liability with respect to any Valero Federal Consolidated Income Tax Return for
any Pre-Distribution Period. Refining shall pay to Valero the Refining Group's
share of any such additional Tax payment determined in accordance with Section
2.02(a) within 30 days from the later of (i) the date the additional Tax was
paid by Valero or (ii) the date of receipt by Refining of a written notice and
demand from Valero for payment of the amount due, accompanied by evidence of
payment and a statement detailing the Taxes paid and describing in reasonable
detail the particulars relating thereto. Refining shall also pay to Valero
interest on the Refining Group's respective share of such Tax computed at the
Prime Rate based on the number of days from the date the additional Tax was paid
by Valero to the date of its payment to Valero under this Section 5.02(a).
(b) Adjustments Resulting in Overpayments. Within 30 days of receipt
by Valero of any Tax Benefit resulting from any adjustment to the Consolidated
Federal Income Tax Liability with respect to any Valero Federal Consolidated
Income Tax Return for any Pre-Distribution Period, Valero shall pay to Refining
the Refining Group's respective share of any such Tax Benefit determined in
accordance with Section 2.02(a). Valero
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shall also pay to Refining interest on Refining Group's respective share of such
Tax Benefit computed at the Prime Rate based on the number of days from the date
the Tax Benefit was received by Valero to the date of payment to Refining under
this Section 5.02(b).
5.03 PAYMENT OF CONSOLIDATED OR COMBINED STATE INCOME TAX WITH
RESPECT TO RETURNS FILED AFTER THE TIME OF DISTRIBUTION. In the case of any Tax
Return for any Consolidated or Combined State Income Tax the due date for filing
of which (including extensions) is after the Time of Distribution, at least
thirty calendar days prior to any Payment Date with respect to such Tax Return,
Refining shall compute the amount of Tax required to be paid to the applicable
Tax Authority (taking into account the requirements of Section 4.04 relating to
consistent accounting practices) and shall notify Valero in writing of the
amount of Tax required to be paid on or before such due date. Valero will pay
such amount to such Tax Authority on or before the due date. At least three
business days before such Payment Date, Refining shall pay to Valero the Tax
liability allocable to the Refining Group as determined under the provisions of
Section 2.03(b)(i).
5.04 PAYMENT OF STATE INCOME TAXES RELATED TO AD JUSTMENTS.
(a) Adjustments Resulting in Underpayments. Valero shall pay to the
applicable Tax Authority when due any additional State Income Tax required to be
paid as a result of any adjustment to the Tax liability with respect to any Tax
Return for any Consolidated or Combined State Income Tax for any Pre-
Distribution Period. Refining shall pay to Valero the Refining Group's share of
any such additional Tax payment determined in accordance with Section
2.03(b)(ii) within 30 days from the later of (i) the date the additional Tax was
paid by Valero or (ii) the date of receipt by Refining of a written notice and
demand from Valero for payment of the amount due, accompanied by evidence of
payment and a statement detailing the Taxes paid and describing in reasonable
detail the particulars relating thereto. Refining shall also pay to Valero
interest on the Refining Group's respective share of such Tax computed at the
Prime Rate based on the number of days from the date the additional Tax was paid
by Valero to the date of its payment to Valero under this Section 5.04(a).
(b) Adjustments Resulting in Overpayments. Within 30 days of receipt
by Valero of any Tax Benefit resulting from any adjustment to the Tax liability
with respect to any Tax Return for any Consolidated or Combined State Income Tax
for any Pre-Distribution Period, Valero shall pay to Refining the
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Refining Group's share of any such Tax Benefit determined in accordance with
Section 2.03(b)(ii). Valero shall also pay to Refining interest on the Refining
Group's share of such Tax Benefit computed at the Prime Rate based on the number
of days from the date the Tax Benefit was received by Valero to the date of
payment to Refining under this Section 5.04(b).
5.05 PAYMENT OF SEPARATE COMPANY TAXES. Each Company shall pay, or
shall cause to be paid, to the applicable Tax Authority when due all Separate
Company Taxes owed by such Company or a member of such Company's Group.
5.06 INDEMNIFICATION PAYMENTS. If any Company (the "payor") is
required to pay to such Tax Authority a Tax that another Company (the
"responsible party") is required to pay to such Tax Authority under this
Agreement, the responsible party shall reimburse the payor within 30 days of
delivery by the payor to the responsible party of an invoice for the amount due,
accompanied by evidence of payment and a statement detailing the Taxes paid and
describing in reasonable detail the particulars relating thereto. The
reimbursement shall include interest on the Tax payment computed at the Prime
Rate based on the number of days from the date of the payment to the Tax
Authority to the date or reimbursement under this Section 5.06.
SECTION 6. TAX BENEFITS FOR ACCOUNT OF OTHER PARTY. If a member of
one Group receives any Tax Benefit with respect to any Taxes for which a member
of another Group is liable hereunder, the Company receiving such Tax Benefit
shall make a payment to the Company who is liable for such Taxes hereunder
within 30 days following receipt of the Tax Benefit in an amount equal to the
Tax Benefit (including any Tax Benefit realized as a result of the payment) plus
interest on such amount computed at the Prime Rate based on the number of days
from the date of receipt of the Tax Benefit to the date of payment of such
amount under this Section 6.
SECTION 7. ASSISTANCE AND COOPERATION.
7.01 GENERAL. After the Time of Distribution, each of the Companies
shall cooperate (and cause their respective Subsidiaries to cooperate) with each
other and with each other's agents, including accounting firms and legal
counsel, in connection with Tax matters relating to the Companies and their
Subsidiaries including (i) preparation and filing of Tax Returns (including,
where necessary, preparation of Tax Returns by one Company for signature by the
other Company), (ii) determining the liability for and amount of any Taxes due
(including
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estimated Taxes) or the right to and amount of any refund of Taxes, (iii)
examinations of Tax Returns, and (iv) any administrative or judicial proceeding
in respect of Taxes assessed or proposed to be assessed. Such cooperation shall
include making all information and documents in their possession relating to the
Companies and their Subsidiaries available to such other Companies as provided
in Section 8. Each of the Companies shall also make available to each other, as
reasonably requested and available, personnel (including officers, directors,
employees and agents of the Companies or their respective Subsidiaries)
responsible for preparing, maintaining, and interpreting information and
documents relevant to Taxes, and personnel reasonably required as witnesses or
for purposes of providing information or documents in connection with any
administrative or judicial proceedings relating to Taxes. Any information or
documents provided under this Section 7 shall be kept confidential by the
Company receiving the information or documents, except as may otherwise be
necessary in connection with the filing of Tax Returns or in connection with any
administrative or judicial proceedings relating to Taxes.
7.02 INCOME TAX RETURN INFORMATION. Each Company will provide to
each other Company information and documents relating to their respective Groups
required by the other Companies to prepare Tax Returns. The Responsible Company
shall determine a reasonable compliance schedule for such purpose in accordance
with Valero's past practices. Any additional information or documents the
Responsible Company requires to prepare such Tax Returns will be provided in
accordance with past practices, if any, or as the Responsible Company reasonably
requests and in sufficient time for the Responsible Company to file such Tax
Returns timely.
SECTION 8. TAX RECORDS.
(a) Retention of Tax Records. Except as provided in paragraph (b),
Refining shall preserve and keep all Tax Records exclusively relating to the
assets and activities of the Refining Group's Pre-Distribution Periods, and
Valero shall preserve and keep all other Tax Records relating to Taxes for so
long as the contents thereof may become material in the administration of any
matter under the Code or other applicable Tax Law, but in any event until the
later of (i) the expiration of any applicable statutes of limitation, and (ii)
seven years after the Time of Distribution. If prior to the expiration of the
applicable statute of limitation and such seven-year period Refining or Valero
reasonably determines that any Tax Records which it is required to preserve and
keep under this Section 8 are no longer material in the administration of any
matter under the
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<PAGE>
Code or other applicable Tax Law, such Company may dispose of such records upon
90 days prior written notice to the other Company. Such notice shall include a
list of the records to be disposed of describing in reasonable detail each file,
book or other record accumulation being disposed. The notified Company shall
have the opportunity, at its cost and expense, to copy or remove, within such
90-day period, all or any part of such Tax Records.
(b) State Income Tax Returns. Tax Returns with respect to State
Income Taxes and workpapers prepared in connection with preparing such Tax
Returns shall be preserved and kept, in accordance with the guidelines of
paragraph (a), by the Company responsible for preparing and filing the
applicable Tax Return.
(c) Access to Tax Records. The Companies and their respective
Subsidiaries shall make available to each other for inspection and copying
during normal business hours upon reasonable notice all Tax Records in their
possession to the extent reasonably required by the other Company in connection
with the preparation of Tax Returns, audits, litigation, or the resolution of
items under this Agreement.
SECTION 9. TAX CONTESTS.
9.01 NOTICES. Each of the parties shall provide prompt notice to the
other parties of any pending or threatened Tax audit, assessment or proceeding
or other Tax Contest of which it becomes aware related to Taxes for Tax Periods
for which it is indemnified by one or more other parties hereunder. Such notice
shall contain factual information (to the extent known) describing any asserted
Tax liability in reasonable detail and shall be accompanied by copies of the
relevant portions of any notice and other documents received from any Tax
Authority in respect of any such matters. If an indemnified party has knowledge
of an asserted Tax liability with respect to a matter for which it is to be
indemnified hereunder and such party fails to give the indemnifying party prompt
notice of such asserted Tax liability, then if the indemnifying party is
precluded from contesting the asserted Tax liability in any forum as a result
of the failure to give prompt notice, the indemnifying party shall have no
obligation to indemnify the indemnified party for any Taxes arising out of such
asserted Tax liability.
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<PAGE>
9.02 CONTROL OF TAX CONTEST.
(a) Separate Company Taxes. In the case of any Tax Contest with
respect to any Separate Company Tax, the Company having liability for the Tax
shall have exclusive control over the Tax Contest, including exclusive authority
with respect to any settlement of such Tax liability.
(b) Consolidated or Combined Income Taxes. In the case of any Tax
Contest with respect to any Consolidated or Combined Income Tax, Refining shall
control the defense or prosecution of the portion of the Tax Contest directly
and exclusively related to any Refining Adjustment, including settlement of
any such Refining Adjustment, and Valero shall control the defense or
prosecution of all other portions of the Tax Contest, including settlement of
any Valero Adjustment. A Company shall not agree to any Tax liability for which
the other Company may be liable under this Agreement, or compromise any claim
for any Tax Benefit which the other Company may be entitled under this
Agreement, without such other Company's written consent (which consent may be
given or withheld at the sole discretion of the Company from which the consent
would be required). Notwithstanding any other provision contained in this
Section 9, the indemnified party may settle any claim otherwise indemnifiable
hereunder for any Tax Period (x) if the indemnified party waives the
indemnification payment that might otherwise be payable under this Agreement in
respect of such claim for such Tax Period and any other claim the contest of
which is precluded by such settlement or (y) the party responsible for payment
hereunder consents in writing to such settlement, such consent not to be
unreasonably withheld based solely on the merits of the items indemnifiable
hereunder.
SECTION 10. EFFECTIVE DATE; TERMINATION OF PRIOR INTERCOMPANY TAX
ALLOCATION AGREEMENTS. This Agreement shall be effective at the Time of
Distribution. Immediately prior to the close of business at the Time of
Distribution (i) all Prior Intercompany Tax Allocation Agreements shall be
terminated, and (ii) amounts due under such agreements as of the Time of
Distribution shall be settled as of the Time of Distribution (including
capitation or distribution of amounts due or receivable under such agreements).
Upon such termination and settlement, no further payments by or to Valero, or by
or to the Refining Group with respect to such agreements shall be made, and all
other rights and obligations resulting from such agreements between the
Companies and their Subsidiaries shall cease at such time. Any payments
pursuant to such agreements shall be ignored for purposes of computing amounts
due under this Agreement.
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<PAGE>
SECTION 11. NO INCONSISTENT ACTIONS. Each of the Companies and the
Acquiror covenants and agrees that it will not take any action, and it will
cause its Subsidiaries to refrain from taking any action, which is inconsistent
with the Tax treatment of the Transaction contemplated in the Tax Opinion (any
such act or failure to act is referred to in this Section 11 as a "Prohibited
Action"), unless such Prohibited Action is required by law, or the person acting
has obtained the prior written consent of each of the other parties (which
consent shall not be unreasonably withheld). With respect to any Prohibited
Action proposed by a Company or the Acquiror (the "Requesting Party"), each of
the other parties (the "Requested Parties") shall grant its consent to such
Prohibited Action if the Requesting Party either obtains a ruling from the
Internal Revenue Service or other applicable Tax Authority or an opinion of
independent tax counsel with respect to the Prohibited Action that is reasonably
satisfactory to each of the Requested Parties (except that the Requesting Party
shall not submit any such ruling request if a Requested Party determines in good
faith that filing such request might have a materially adverse affect upon such
Requested Party). Without limiting the foregoing:
(i) Refining represents and warrants that neither it nor any of
its Subsidiaries nor, to the best knowledge of Refining, any other person
or entity, has any plan or intent to take any action which is inconsistent
with any factual statements or representations made in connection with
the Tax Opinion. Regardless of any change in circumstances, Refining
covenants and agrees that it will not take, and it will cause its
Subsidiaries to refrain from taking, any such inconsistent action on or
before the last day of the calendar year ending after the second
anniversary of the Time of Distribution other than as permitted in this
Section 11. For purposes of applying this Section 11 to any such
inconsistent action prior to the Effective Time, the members of the Valero
Group shall be treated as Subsidiaries of Refining.
(ii) Acquiror represents and warrants that neither it nor
any of its Subsidiaries has any plan or intent to take any action which is
inconsistent with any factual statements or representations made in
connection with the Tax Opinion. Regardless of any change in
circumstances, Acquiror covenants and agrees that it will not take, and it
will cause
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<PAGE>
Valero and the other Subsidiaries of Acquiror to refrain from taking, any
such inconsistent action on or before the last day of the calendar year
ending after the second anniversary of the Time of Distribution other than
as permitted in this Section 11.
SECTION 12. SURVIVAL OF OBLIGATIONS. The obligations and liabilities
of the parties, as well as the representations, warranties, covenants and
agreements, set forth in this Agreement shall be unconditional and absolute and
shall remain in effect without limitation as to time.
SECTION 13. EMPLOYEE MATTERS. Each of the Companies agrees to
utilize, or cause its Subsidiaries to utilize, the alternative procedure set
forth in Revenue Procedure 84-77, 1984-2 C.B. 753, with respect to wage
reporting.
SECTION 14. TREATMENT OF PAYMENTS; TAX GROSS UP.
(a) Treatment of Tax Indemnity and Tax Benefit Payments. In the
absence of any change in tax treatment under the Code or other applicable Tax
Law:
(i) any Tax indemnity payments made by a Company under Section 5
shall be reported for Tax purposes by the payor and the recipient as
distributions or capital contribution, as appropriate, occurring
immediately before the Distribution but only to the extent the payment does
not relate to a Tax allocated to the payor in accordance with Treasury
Regulation Section 1.1502-33(d) (or under corresponding principles of other
applicable Tax Laws), and
(ii) any Tax Benefit payments made by a Company under Section 6,
shall be reported for Tax purposes by the payor and the recipient as
distributions or capital contributions, as appropriate, occurring
immediately before the Distribution but only to the extent payment does not
relate to a Tax allocated to the payor in accordance with Treasury
Regulation Section 1.1502-33(d) (or under corresponding principles of other
applicable Tax Laws).
(b) Tax Gross Up. If, notwithstanding the manner in which Tax
indemnity payments and Tax Benefit payments were reported, there is an
adjustment to the Tax liability of a Company as a result of its receipt of a
payment or its payment
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<PAGE>
pursuant to this Agreement, such payment shall be appropriately adjusted so that
the amount of such payment, reduced by the amount of all Income Taxes payable
with respect to the receipt thereof (but taking into account all correlative Tax
Benefits resulting from the payment of such Income Taxes), shall equal the
amount of the payment which the Company receiving such payment would otherwise
be entitled to receive pursuant to this Agreement.
SECTION 15. DISAGREEMENTS. If after good faith negotiations the
parties cannot agree on the application of this Agreement to any matter, then
the matter will be referred to a nationally recognized accounting firm
acceptable to each of the parties (the "Accounting Firm"). The Accounting Firm
shall furnish written notice to the parties of its resolution of any such
disagreement as soon as practical, but in any event no later than 45 days after
its acceptance of the matter for resolution. Any such resolution by the
Accounting Firm will be conclusive and binding on all parties to this Agreement.
In accordance with Section 17, each party shall pay its own fees and expenses
(including the fees and expenses of its representatives) incurred in connection
with the referral of the matter to the Accounting Firm. All fees and expenses
of the Accounting Firm in connection with such referral shall be shared equally
by the parties affected by the matters.
SECTION 16. LATE PAYMENTS. Any amount owed by one party to another
party under this Agreement which is not paid when due shall bear interest at the
Prime Rate plus three percent, compounded semiannually, from the due date of
the payment to the date paid. To the extent interest required to be paid under
this Section 16 duplicates interest required to be paid under any other
provision of this Agreement, interest shall be computed at the higher of the
interest rate provided under this Section or the interest rate provided under
such other provision.
SECTION 17. EXPENSES. Except as otherwise provided in this
Agreement, each party and its Subsidiaries shall bear its own expenses incurred
in connection with preparation of Tax Returns and other matters related to Taxes
under the provisions of this Agreement.
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<PAGE>
SECTION 18. GENERAL PROVISIONS.
(a) Addresses and Notices. Any notice, demand, request or report
required or permitted to be given or made to any party under this Agreement
shall be in writing and shall be deemed given or made when delivered in part or
when sent by first class mail or by other commercially reasonable means of
written communication (including delivery by an internationally recognized
courier service or by facsimile transmission) to the party at the party's
address as follows:
If to Refining: ________________________
________________________
________________________
________________________
If to Valero: ________________________
________________________
________________________
________________________
If to Acquiror: ________________________
________________________
________________________
________________________
A party may change the address for receiving notices under this Agreement by
providing written notice of the change of address to the other parties.
(b) Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their successors and assigns.
(c) Waiver. No failure by any party to insist upon the strict
performance of any obligation under this Agreement or to exercise any right or
remedy under this Agreement shall constitute waiver of such obligation, right,
or remedy or any other obligation, rights, or remedies under this Agreement.
(d) Invalidity of Provisions. If any provision of this Agreement is
or becomes invalid, illegal or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained herein shall
not be affected thereby.
(e) Further Action. The parties shall execute and deliver all
documents, provide all information, and take or refrain from taking action as
may be necessary or appropriate
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<PAGE>
to achieve the purposes of this Agreement, including the execution and delivery
to the other parties and their Subsidiaries and representatives of such powers
of attorney or other authorizing documentation as is reasonably necessary or
appropriate in connection with Tax Contests (or portions thereof) under the
control of such other parties in accordance with Section 9.
(f) Integration. This Agreement constitutes the entire agreement
among the parties pertaining to the subject matter of this Agreement and
supersedes all prior agreements and understandings pertaining thereto. In the
event of any inconsistency between this Agreement and the Distribution Agreement
or any other agreements relating to the transactions contemplated by the
Distribution Agreement, the provisions of this Agreement shall control.
(g) Construction. The language in all parts of this Agreement shall
in all cases be construed according to its fair meaning and shall not be
strictly construed for or against any party.
(h) No Double Recovery; Subrogation. No provision of this Agreement
shall be construed to provide an indemnity or other recovery for any costs,
damages, or other amounts for which the damaged party has been fully compensated
under any other provision of this Agreement or under any other agreement or
action at law or equity. Unless expressly required in this Agreement, a party
shall not be required to exhaust all remedies available under other agreements
or at law or equity before recovering under the remedies provided in this
Agreement. Subject to any limitations provided in this Agreement (for example,
the limitation on filing claims for refund in Section 4.08), the indemnifying
party shall be subrogated to all rights of the indemnified party for recovery
from any third party.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
(j) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware applicable to contracts
executed in and to be performed in that State.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by the respective officers as of the date set forth above.
VALERO ENERGY CORPORATION
By:
------------------------------
Its:
-----------------------------
VALERO REFINING AND MARKETING
COMPANY
By:
------------------------------
Its:
-----------------------------
PG&E CORPORATION
By:
------------------------------
Its:
-----------------------------
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<PAGE>
EXHIBIT 2.4
EMPLOYEE BENEFITS AGREEMENT
BETWEEN
VALERO ENERGY CORPORATION
AND
VALERO REFINING AND MARKETING COMPANY
DATED AS OF ______, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS................................................... 2
1.01. Definitions.......................................... 2
1.02. Schedules, etc....................................... 6
ARTICLE II
GENERAL....................................................... 7
2.01. Transfers of Employees............................... 7
2.02. Liabilities Under Plans.............................. 7
ARTICLE III
STOCK-BASED PLANS............................................. 7
3.01. Stock Options........................................ 7
ARTICLE IV
RETIREMENT PLANS.............................................. 8
4.01. Pension Plan......................................... 8
4.02. Non-Employee Directors Pension Plan.................. 9
4.03. Thrift Plan.......................................... 9
4.04. Excess Thrift Plan................................... 10
4.05. Supplemental Retirement Plan and Supple-
mental Executive Retirement Agreements.............. 11
4.06. Other Postemployment Benefits........................ 12
ARTICLE V
OTHER PLANS AND ARRANGEMENTS.................................. 12
5.01. Deferred Compensation................................ 12
5.02. Severance Pay........................................ 12
5.03. VESOP................................................ 13
5.04. ESOP................................................. 14
5.05. Reimbursement Account Plan........................... 14
ARTICLE VI
OTHER LIABILITIES............................................. 14
6.01. Other Liabilities and Obligations.................... 14
ARTICLE VII
MISCELLANEOUS................................................. 15
7.01. Recognition of Company Employment
Service, etc. ...................................... 15
{i)
<PAGE>
7.02. Indemnification...................................... 15
7.03. Guarantee of Subsidiaries' Obligations............... 15
7.04. Sharing of Information............................... 15
7.05. Amendments........................................... 15
7.06. Successors and Assigns............................... 16
7.07. Termination.......................................... 16
7.08. Rights to Amend or Terminate Plans; No
Third Party Beneficiaries........................... 16
7.09. Transfer of Reserves................................. 16
7.10. Further Transfers.................................... 16
7.11. Payment Under Other Agreements....................... 17
7.12. Incorporation by Reference........................... 17
SCHEDULE A
LIST OF COMPANY PLANS....................................... A-1
SCHEDULE B
EMPLOYEES TRANSFERRING TO VRM............................... B-1
{ii)
<PAGE>
EMPLOYEE BENEFITS AGREEMENT
EMPLOYEE BENEFITS AGREEMENT, dated as of _______, 1997 (this "Agreement"),
by and between Valero Energy Corporation, a Delaware corporation (the
"Company"), and Valero Refining and Marketing Company, a Delaware corporation
and a wholly owned Subsidiary of the Company ("VRM").
RECITALS
A. The Merger Transaction. The Company, PG&E Corporation, a California
----------------------
corporation ("Acquiror"), and [PG&E SubCo.], a Delaware corporation ("Sub") have
entered into a Plan and Agreement of Merger, dated as of January 31, 1997 (the
"Merger Agreement"), providing for the Merger (as defined in the Merger
Agreement) of Sub with and into the Company, with the Company as the surviving
corporation.
B. The Distribution. Immediately prior to the Effective Time (as defined
----------------
in the Merger Agreement), the Company intends to distribute (the "Distribution")
to the holders of the Company's common stock, par value $1.00 per share
("Company Common Stock"), on a pro rata basis, all of the then outstanding
shares of common stock, par value $0.01 per share ("VRM Common Stock"), of VRM.
C. Purpose. The purpose of the Distribution is to facilitate the
-------
reorganization of the Company, wherein the stockholders of the Company will
continue to own and operate VRM, and to make possible the Merger by divesting
the Company of the businesses and operations conducted by VRM in a tax-free
distribution to the Company's stockholders. The Company and VRM have entered
into an Agreement and Plan of Distribution (the "Distribution Agreement"), which
sets forth or provides for certain agreements between the Company and VRM in
consideration of the separation of their ownership.
D. This Agreement. Among other things, the Distribution Agreement
--------------
provides that the Company and VRM will enter into this Employee Benefits
Agreement regarding certain liabilities and obligations relating to employees.
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
<PAGE>
ARTICLE I
DEFINITIONS
1.01. Definitions. As used in this Agreement, the following terms shall
-----------
have the following respective meanings (capitalized terms used but not defined
herein (other than the names of Company employee benefit plans) shall have the
respective meanings ascribed thereto in the Distribution Agreement):
"Agreement" shall have the meaning specified in the first paragraph
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning specified in the first paragraph
hereof.
"Company Annual Bonus Plan" shall mean the Company's Executive
Incentive Bonus Plan effective on or about February 27, 1980 and amended
and restated effective as of January 23, 1997.
"Company Common Stock" shall have the meaning specified in paragraph
B of the recitals to this Agreement.
"Company Deferred Compensation Plans" shall mean the Company's
Executive Deferred Compensation Plan, effective as of November 26, 1984 and
amended and restated effective as of October 21, 1986, and the Company's
Key Employee Deferred Compensation Plan, effective as of August 20, 198_,
and amended and restated effective as of October 21, 1986.
"Company Employee" shall mean any individual who is employed by any
member of the Company Group immediately before the Time of Distribution and
who is not a VRM Employee.
"Company ESIP" shall mean the Executive Stock Incentive Plan,
effective as of July 21, 1994 and amended and restated effective as of
November 21, 1996.
"Company Excess Thrift Plan" shall mean the Company Excess Thrift
Plan, effective as of January 1, 1990.
"Company Former Employee" shall mean any individual who is,
immediately before the Time of Distribution, a former employee of any
member of the Company Group who has not been an employee of any member of
the VRM Group since
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<PAGE>
his or her most recent active employment with any member of the
Company Group.
"Company Group" shall have the meaning set forth in the Distribution
Agreement.
"Company Non-Employee Director Retirement Plan" shall mean the Non-
Employee Director Retirement Plan, effective as of January 1, 1991.
"Company Participants" shall mean Company Employees, Company Former
Employees and their respective beneficiaries and dependents.
"Company Pension Plan" shall mean the Company's Pension Plan,
effective as of March 1, 1985 and amended and restated effective as of
January 1, 1994.
"Company Performance Shares" shall have the meaning set forth in the
Company ESIP for "Performance Shares."
"Company Plan" shall mean any plan, policy, program, payroll practice,
on-going arrangement, trust, insurance policy or other agreement or funding
vehicle maintained by, contributed to or sponsored by any member of the
Company Group providing benefits to employees, former employees or non-
employee directors of any member of the Company Group, including without
limitation the plans listed on Schedule A hereto; provided, however, that
the term "Company Plans" shall not include any VRM Plans.
"Company Reimbursement Account Plan" shall mean the Company's
Reimbursement Account Plan, effective as of November 29, 1983.
"Company Restricted Stock" shall mean restricted shares of Company
Common Stock granted pursuant to, and subject to forfeiture under, the
Company's Restricted Stock Bonus and Incentive Stock Plan, effective as of
April 30, 1981 and amended and restated effective as of November 21, 1996,
the 1990 Restricted Stock Plan for Non-employee Directors, effective as of
November 14, 1990 and amended and restated effective as of August 22, 1996,
or the Company ESIP.
"Company SAR" or "stock appreciation right" shall mean the right,
subject to the provisions of the applicable Company plan, to receive a
payment in cash equal to the difference between the specified exercise
price of
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<PAGE>
the SAR and the fair market value (as defined in the applicable plan) of
one share of Company Common Stock.
"Company SERA" shall mean any Supplemental Executive Retirement
Agreement entered into prior to the Time of Distribution between the
Company and either a Company Participant or a VRM Participant.
"Company Stock Option" shall mean an option to purchase shares of
Company Common Stock, granted pursuant to the Company's Stock Option Plan
No. 3, effective as of January 21, 1986 and amended and restated effective
as of August 22, 1996; Stock Option Plan No. 4, effective as of January 1,
1990 and amended and restated effective as of August 22, 1996; Stock Option
Plan No. 5, effective as of September 16, 1992 and amended and restated
effective as of August 22, 1996; the Company ESIP; or the Non-Employee
Director Stock Option Plan, effective as of July 25, 1995 and amended and
restated effective as of November 21, 1996.
"Company Supplemental Retirement Plan" shall mean the Company's
Supplemental Executive Retirement Plan, effective as of January 1, 1983 and
amended and restated effective as of January 1, 1996.
"Company Thrift Plan" shall mean the Company's Thrift Plan, effective
as of December 31, 1979 and amended and restated effective as of January 1,
1994.
"Distribution" shall have the meaning specified in paragraph B of the
recitals to this Agreement.
"Distribution Agreement" shall have the meaning specified in paragraph
C of the recitals to this Agreement.
"Distribution Year" shall mean the calendar year in which the Time of
Distribution occurs.
"ESOP" shall mean the Company's Employees' Stock Ownership Plan,
effective as of January 1, 1983 and amended and restated effective as of
January 1, 1994.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Liabilities" shall have the meaning set forth in the Distribution
Agreement.
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<PAGE>
"Merger Agreement" shall have the meaning specified in paragraph A of
the recitals to this Agreement.
"Merger Partner Common Stock" shall mean the common stock, 0 par
value, of PG&E Corporation.
"Merger Partner Thrift Plan" shall mean the [name] Plan, a defined
contribution plan intended to qualify under Section 401(a) of the Code.
"Notes" shall mean the 9.14% Senior ESOP Notes Due 1999 and the 9.85%
VESOP Note Due 2001, together with any amendments thereto, issued by Frost
National Bank of San Antonio, N.A., in its capacity as trustee for the
VESOP Trust forming part of the VESOP.
"Pre-Distribution Year" shall mean the calendar year immediately
preceding the Distribution Year.
"Rabbi Trust" shall mean a grantor trust subject to (S)(S) 671 et seq.
of the Code.
"Ratio" shall mean the amount obtained by dividing the average of the
daily high and low trading prices on the New York Stock Exchange for the
Company Common Stock on each of the fifteen trading days prior to the ex-
dividend date for the Distribution by the average of the daily high and low
trading prices on the New York Stock Exchange for the VRM Common Stock on
each of the fifteen trading days beginning with either (a) in the event the
VRM Common Stock trades on a "when-issued" basis prior to the Time of the
Distribution, the ex-dividend date for the Distribution or (b) in the event
the VRM Common Stock does not trade on a "when-issued" basis prior to the
Time of the Distribution, the Time of Distribution.
"Subsidiary" shall have the meaning set forth in the Merger Agreement.
"Thrift Plan Transfer" shall have the meaning set forth in Section
4.03(b) of this Agreement.
"VESOP" shall mean the Valero Employees' Stock Ownership Plan of
Valero Energy Corporation, effective as of February 15, 1989.
"VESOP Stock Sale" shall have the meaning set forth in Section 5.03(a)
of this Agreement.
-5-
<PAGE>
"VRM" shall have the meaning set forth in the first paragraph of this
Agreement.
"VRM Assumed Plans" shall have the meaning set forth in Section 2.02.
"VRM Common Stock" shall have the meaning specified in paragraph B of
the recitals to this Agreement.
"VRM Employee" shall mean any individual who, immediately before the
Time of Distribution, is employed by any member of the VRM Group.
"VRM Former Employee" shall mean any individual who is, immediately
before the Time of Distribution, a former employee of any member of the VRM
Group who has not been an employee of any member of the Company Group since
his or her most recent active employment with any member of the VRM Group.
"VRM Group" shall have the meaning set forth in the Distribution
Agreement.
"VRM SAR" or "VRM stock appreciation right" shall mean the right,
subject to the provisions of the applicable VRM plan, to receive a payment
in cash equal to the difference between the specified exercise price of the
VRM SAR and the fair market value (as defined in the applicable plan) of
one share of VRM Common Stock.
"VRM Stock Option" shall mean an option to purchase from VRM shares of
VRM Common Stock provided to a VRM Participant pursuant to Section 3.01.
"VRM Participants" shall mean VRM Employees, VRM Former Employees, and
their respective beneficiaries and dependents.
"VRM Plans" shall mean any plan, policy, program, payroll practice,
on-going arrangement, trust, insurance policy or other agreement or funding
vehicle maintained by, contributed to or sponsored by any member of the VRM
Group providing benefits to employees, former employees or non-employee
directors of any member of the VRM Group, but excluding any Company Plan.
"VRM Thrift Plan" shall have the meaning set forth in Section 4.03(a)
of this Agreement.
1.02. Schedules, etc. References to a "Schedule" are, unless otherwise
---------------
specified, to one of the Schedules attached to this Agreement, and references to
a "Section" are, unless otherwise specified, to one of the Sections of this
Agreement.
-6-
<PAGE>
ARTICLE II
GENERAL
2.01. Transfers of Employees. Within thirty days of the effective date of
----------------------
the Merger Agreement, the Company, VRM and Acquiror will mutually consent to a
decision-making procedure for the purpose of determining the identity of
individuals who shall be transferred from the employ of members of the Company
Group to the employ of VRM or any of its affiliated companies designated by VRM,
which individuals shall be listed on Schedule B hereto; provided, however,
that the consent of the Company, VRM or the Acquiror to any proposal for such
decision-making procedure shall not be unreasonably withheld. Schedule B hereto
may be amended by VRM or the Company at any time or from time to time before the
Time of Distribution with the consent of the other party and the Acquiror, which
consent shall not be unreasonably withheld.
2.02. Liabilities Under Plans. From and after the Time of Distribution,
-----------------------
except as otherwise specifically set forth in this Agreement, VRM shall (a)
sponsor and (b) assume or retain, as the case may be, and be solely responsible
for all Liabilities arising under, resulting from or relating to, the VRM Plans
and the Company Plans marked with an asterisk on Schedule A (the "VRM Assumed
Plans") (whether to Company Participants or to VRM Participants), whether
incurred before, on or after the Time of Distribution, and the Company shall
assume or retain, as the case may be, and shall be solely responsible for, all
Liabilities arising under the other Company Plans to Company Participants
incurred before, on or after the Time of Distribution; provided, however,
--------
that VRM shall be under no obligation (except with respect to any obligation
specifically described in this Agreement or the Merger Agreement) to permit
Continuing Employees (as such term is defined in the Merger Agreement) to
continue to participate in the VRM Assumed Plans after the Time of Distribution.
ARTICLE III
STOCK-BASED PLANS
3.01. Stock Options and SARS. (a) The Company and VRM shall take all
----------------------
action necessary or appropriate (including amending appropriate Company Plans,
if required) so that each Company Stock Option held by a VRM Participant or by a
non-employee director of the Company that is outstanding as of the Time of
Distribution shall be replaced as of the Time of Distribution with a VRM Stock
Option with respect to a number of shares of VRM Common Stock equal to the
number of shares of
-7-
<PAGE>
Company Common Stock subject to such Company Stock Option immediately before
such replacement, multiplied by the Ratio (rounded up to the nearest whole share
if necessary), and with a per-share exercise price equal to the per-share
exercise price of such Company Stock Option immediately before such
replacement, divided by the Ratio (rounded down to the nearest cent). Such VRM
Stock Option shall otherwise have the same terms and conditions as the
corresponding Company Stock Option, except that references to the Company shall
be changed to refer to VRM. Each Company SAR which is held by a VRM Participant
which is outstanding of the Time of Distribution shall be replaced as of the
Time of Distribution with a number of VRM SARs equal to the number of Company
SARs held by the VRM Participant immediately before such replacement, multiplied
by the Ratio (rounded up to the nearest whole share if necessary), and with a
per-SAR exercise price equal to the per-SAR exercise price of such Company SAR
immediately before such replacement, divided by the Ratio (rounded down to the
nearest cent); such VRM SAR shall otherwise have the same terms and conditions
as the corresponding Company SAR, except that references to the Company shall be
changed to refer to VRM.
(b) Effective as of the Time of Distribution, VRM shall assume and be
solely responsible for all Liabilities of the Company to or with respect to VRM
Employees, VRM Former Employees and non-employee directors of the Company
arising out of or relating to Company Stock Options and Company SARs that are
outstanding as of the Time of Distribution. VRM shall be solely responsible for
all Liabilities arising out of or relating to VRM Stock Options and VRM SARs.
(c) The Company shall take all action necessary or appropriate (including
amending appropriate Company Plans, if required) so that the terms of each
Company Stock Option or Company SAR held by a Company Participant that is
outstanding immediately after the Time of Distribution shall be appropriately
adjusted, either immediately prior to or in connection with the Merger (based
upon when-issued trading and in a manner similar to paragraph (a) hereof), to
take into account the impact of the Distribution upon the capitalization of the
Company.
(d) Any adjustments to Company Stock Options or Company SARs (other than
those provided by, or necessary to implement, this Section 3.01 and Section
3.1(a)(iii) of the Merger Agreement) shall be subject to the approval of the
Acquiror. VRM shall indemnify, defend and hold harmless the Retained Companies
(as defined in the Distribution Agreement) from any and all claims by any holder
of any Company Stock Option or Company SAR (or replacement option or SAR
thereto) that such holder is entitled to any securities (or other property,
including without limitation, cash) other than the securities expressly provided
by the adjustments specified by this Section 3.01 and Section 3.1(a)(iii) of the
Merger Agreement.
ARTICLE IV
RETIREMENT PLANS
4.01. Pension Plan. (a) The Company and VRM shall take all action
------------
necessary or appropriate (including amending appropriate Company Plans,
including, without limitation, the
-8-
<PAGE>
Company Pension Plan) so that, effective as of the Time of Distribution, VRM
shall become the Sponsor (as defined in the Company Pension Plan) of the Company
Pension Plan and in such capacity assume responsibility for maintaining the
Company Pension Plan. Except as specifically set forth in this Section, from and
after the Time of Distribution the VRM Group shall assume, and shall be solely
responsible for all Liabilities existing under the Company Pension Plan as of
the Time of Distribution to or with respect to Company and VRM Participants.
Each Company Participant in the Company Pension Plan shall become entitled to
all benefits accrued and vested under the Company Pension Plan as of the Time of
Distribution pursuant to the terms and conditions of the Company Pension Plan
upon termination of his or her employment with the Company, but (except in the
case of the death of the Participant) no earlier than the date of the
Participant's attainment of the Early Retirement Age (as defined in Section 1.16
of the Company Pension Plan).
4.02. Non-Employee Directors Pension Plan. The Company and VRM shall take
-----------------------------------
all action necessary or appropriate (including amending appropriate Company
Plans, including, without limitation, the Non-Employee Directors Pension Plan)
so that, effective as of the Time of Distribution, VRM shall assume and be
solely responsible for all Liabilities existing under the Non-Employee Directors
Pension Plan as of the Time of Distribution. VRM and the Company shall
cooperate in taking all actions necessary or appropriate to accomplish the
foregoing.
4.03. Thrift Plan. (a) The Company and VRM shall take all action necessary
-----------
or appropriate (including amending appropriate Company Plans, including,
without limitation, the Company Thrift Plan) so that (i) effective as of the
Time of Distribution, VRM shall become the Sponsor (as defined in the Company
Thrift Plan) of the Company Thrift Plan (such plan, following such event, is
hereinafter referred to as the "VRM Thrift Plan"), and in such capacity assume
responsibility for maintaining the VRM Thrift Plan, and (ii) immediately
following the Time of Distribution, each Company Employee in the VRM Thrift Plan
shall be entitled, in connection with the transactions contemplated by the
Merger Agreement and to the extent permissible by applicable law and the Plan,
to direct the trustee of the VRM Thrift Plan to take any of the following
actions with respect to the Company Employee's account (including all Company
contributions thereto, whether previously vested or nonvested, and the earnings
thereon) in the VRM Thrift Plan: (A) maintain the account in the VRM Thrift
Plan; (B) transfer the account to a qualified Individual Retirement Account
held in the name of such Participant; (C) transfer the account to the Merger
Partner Thrift Plan; or (D) receive a distribution
-9-
<PAGE>
of the account. The transfers described in clauses (ii)(B) and (C) of this
paragraph (each a "Thrift Plan Transfer") shall be effected in cash, except that
the Merger Partner Thrift Plan may accept promissory notes evidencing any
outstanding participant loans. As a condition to the Merger Partner Thrift Plan
accepting any transfer under this Section 4.03, VRM shall provide Acquiror with
an IRS letter ruling addressed to VRM, an IRS Determination Letter or an opinion
of counsel satisfactory to Acquiror confirming the permissibility of the
transfers under applicable law.
(b) VRM and the Company shall cooperate in making all appropriate filings
required under the Code or ERISA, and the regulations thereunder and any
applicable securities laws, implementing all appropriate communications with
Company Thrift Plan participants, transferring appropriate records, and taking
all such other actions as may be necessary and appropriate to implement the
provisions of this Section and to permit the timely effectuation of Thrift Plan
Transfers.
(c) From and after the time when VRM becomes Sponsor of the Company Thrift
Plan, VRM and the VRM Thrift Plan shall be solely responsible for all
Liabilities of the Company under the Company Thrift Plan arising after the Time
of Distribution to or with respect to VRM Participants, Company Former
Employees, and Company Employees who have elected to maintain their account
balances in the VRM Thrift Plan, except that the Company shall be responsible
------
for any Liabilities arising under Section 5.2 of the Company Thrift Plan with
respect to any Participant Basic Contribution (as such term is defined in the
Company Thrift Plan) for any Company Employee made with respect to any period of
employment prior to the Time of Distribution. The VRM Group and the VRM
Thrift Plan shall be solely responsible for all Liabilities arising out of or
relating to the VRM Thrift Plan.
4.04. Excess Thrift Plan. (a) The Company and VRM shall take all action
------------------
necessary or appropriate (including amending appropriate Company Plans,
including, without limitation, the Company Excess Thrift Plan) so that,
effective as of the Time of Distribution, VRM shall become the Sponsor (as
defined in the Company Excess Thrift Plan) of the Company Excess Thrift Plan
(such plan, following such event, is hereinafter referred to as the "VRM Excess
Thrift Plan"), and in such capacity assume responsibility for maintaining the
VRM Excess Thrift Plan and for all Liabilities of the Company under the Company
Excess Thrift Plan arising after the Time of Distribution to or with respect to
VRM Participants and Company Participants, except
------
-10-
<PAGE>
that the Company shall be responsible for any Liabilities arising under the
Company Excess Thrift Plan with respect to any Participant Basic Contribution
(as such term is defined in the Company Thrift Plan) for any Company Employee
made with respect to any period of employment prior to the Time of Distribution.
The VRM Group and the VRM Excess Thrift Plan shall be solely responsible for all
Liabilities arising out of or relating to the VRM Excess Thrift Plan.
4.05. Supplemental Retirement Plan and Supplemental Executive Retirement
------------------------------------------------------------------
Agreements. (a) Effective as of the Time of Distribution, the Company shall
- ----------
amend the Company Supplemental Retirement Plan, if necessary, so that (i) no VRM
Employee who is a participant therein shall be deemed to have terminated
employment as a result of the Distribution or as a result of becoming a VRM
Employee in connection with the Distribution and (ii) from and after the Time
of Distribution, VRM shall become the sponsor of the Company Supplemental
Retirement Plan and assume and remain solely responsible for all Liabilities of
the Company arising under the Company Supplemental Retirement Plan to or
relating to both Company Participants and VRM Participants.
(b) Effective as of the Time of Distribution, the Company shall amend such
Company SERAs as may be necessary so that (i) no VRM Employee who is a signatory
to a SERA shall be deemed to have terminated employment as a result of the
Distribution or as a result of becoming a VRM Employee in connection with the
Distribution, and (ii) from and after the Time of Distribution, VRM shall assume
and remain solely responsible for all Liabilities of the Company arising under
Company SERAs to or relating to both Company Participants and VRM Participants.
(c) VRM and the Company shall cooperate in taking all actions necessary or
appropriate to accomplish the foregoing and to ensure that as of the Time of
Distribution, the Company ceases to have any Liabilities to or relating to
Company Participants and VRM Participants under the Company Supplemental
Retirement Plan and any Company SERA, including, but not limited to, the
following: (i) amending the Company Supplemental Retirement Plan or any grant
thereunder; (ii) obtaining any necessary consents of affected Company or VRM
Employees; and (iii) effective as of the Time of Distribution, transferring to
VRM control of the Rabbi Trust formed by that certain Trust Agreement, dated as
of September 1, 1996, between the Company and Frost National Bank of San
Antonio, N.A., as trustee.
-11-
<PAGE>
4.06. Other Postemployment Benefits. The Company and VRM shall take all
-----------------------------
action necessary or appropriate so that effective at the Time of Distribution,
VRM shall assume and be solely responsible for all Liabilities to Company Former
Employees and VRM Former Employees and (except with respect to any period after
such persons subsequently recommence active employment with the Company) all
Company and VRM Employees who at the Time of Distribution are not actively at
work (excluding Company Employees who are on vacation at such time) under the
Company's health care and life insurance programs.
ARTICLE V
OTHER PLANS AND ARRANGEMENTS
5.01. Deferred Compensation. Effective as of the Time of Distribution, the
---------------------
Company shall amend the Company Deferred Compensation Plans, if necessary, so
that (a) no VRM Employee who is a participant therein shall be deemed to have
terminated employment as a result of the Distribution or as a result of becoming
a VRM Employee in connection with the Distribution and (b) from and after the
Time of Distribution, VRM shall become the sponsor of the Deferred Compensation
Plans and assume and remain solely responsible for all Liabilities of the
Company arising under the Company Deferred Compensation Plans to or relating to
both Company Participants and VRM Participants. VRM and the Company shall
cooperate in taking all actions necessary or appropriate to accomplish the
foregoing and to ensure that, as of the Time of Distribution, the Company ceases
to have any Liabilities to or relating to Company Participants or VRM
Participants under the Company Deferred Compensation Plans, including, but not
limited to, the following: (i) amending the Company Deferred Compensation Plans
or any grant thereunder and (ii) obtaining any necessary consents of affected
participants, and (iii) causing the insurance policies referred to in Section
2.1(b)(ii)(Q) of the Distribution Agreement to be assigned to VRM.
5.02. Severance Pay. (a) VRM and the Company agree that individuals who,
-------------
on or prior to the Time of Distribution, in connection with the Distribution,
cease to be Company Employees and become VRM Employees shall not be deemed to
have experienced a termination or severance of employment from the Company and
its Subsidiaries for purposes of any policy, plan, program or agreement of the
Company or any of its Subsidiaries that provides for the payment of severance,
salary continuation or similar benefits.
-12-
<PAGE>
(b) VRM shall assume and be solely responsible for all Liabilities of the
Company in connection with claims made by or on behalf of VRM Employees in
respect of severance pay, salary continuation and similar obligations relating
to the termination or alleged termination of any such person's employment on
or after the Time of Distribution.
5.03 VESOP. (a) At a date sufficiently in advance of the Time of
-----
Distribution to permit the requirements of paragraph (b) of this Section to be
met, the Company shall direct the trustee of the Company's VESOP to sell an
amount of the Company's Common Stock maintained in the Exempt Loan Suspense
Account (as described in Section 5.4(a)(1) of the VESOP) such that the proceeds
from such sale (the "VESOP Stock Sale") are sufficient to prepay the Notes in
whole; provided, however, that the VESOP Stock Sale shall occur via transactions
-------- -------
on a national exchange or in the over-the-counter market, to parties other than
a "party in interest," as defined in ERISA Section 3(14), and for "adequate
consideration," as defined in ERISA Section 3(18).
(b) After the VESOP Stock Sale, but prior to the Thrift Plan Transfer, the
Company shall (i) direct the trustee of the VESOP to release the stock remaining
in the Exempt Loan Suspense Account, if any, and allocate such stock to Company
Participants and VRM Participants in the VESOP in the manner prescribed by
Section 5.5 of the VESOP, as amended, and (ii) following such release and
allocation, the Company shall cause the VESOP to be terminated and/or merged
into the Company Thrift Plan, in a transaction consistent (in the case of a
merger) with the requirements of Section 414(1) of the Code.
(c) If the VESOP is merged into the Company Thrift Plan, immediately after
receipt from the VESOP of the accounts of Company and VRM Participants in the
VESOP, the trustee of the Company Thrift Plan shall allocate the stock thus
transferred to the Participants' respective Thrift Plan accounts; provided that,
in the case of any VESOP Participant who, as of the date of such allocation, is
not participating in the Company Thrift Plan, the Company and the trustee of the
Company Thrift Plan shall take all action necessary to establish a Company
Thrift Plan account for such Participant, to which the stock transferred from
the VESOP shall be allocated.
(d) VRM and the Company shall cooperate in making all appropriate filings
required under the Code or ERISA and the regulations thereunder and any
applicable securities laws, implementing all appropriate communications with
VESOP participants, transferring records, and taking all such other
-13-
<PAGE>
actions as may be necessary and appropriate to implement the provisions of this
Section.
5.04. ESOP. (a) Prior to the Thrift Plan Transfer, the Company shall
----
cause the ESOP to be terminated and/or merged into the Company Thrift Plan, in a
transaction consistent (in the case of a merger) with the requirements of
Section 414(1) of the Code.
(b) If the ESOP is merged into the Company Thrift Plan, immediately after
receipt from the ESOP of the accounts of Company and VRM Participants in the
ESOP, the trustee of the Company Thrift Plan shall allocate the stock thus
transferred to the Participants' respective Thrift Plan accounts; provided that,
in the case of any ESOP Participant who, as of the date of such allocation, is
not participating in the Company Thrift Plan, the Company and the trustee of the
Company Thrift Plan shall take all action necessary to establish a Company
Thrift Plan account for such Participant, to which the stock transferred from
the ESOP shall be allocated.
(c) VRM and the Company shall cooperate in making all appropriate filings
required under the Code or ERISA and the regulations thereunder and any
applicable securities laws, implementing all appropriate communications with
ESOP participants, transferring records, and taking all such other actions as
may be necessary and appropriate to implement the provisions of this Section.
5.05. Reimbursement Account Plan. Effective as of the Time of
--------------------------
Distribution, the Company shall amend the Company Reimbursement Account Plan, if
necessary, so that: (a) effective as of the Time of Distribution, VRM shall have
responsibility for administering and maintaining such plan and thereby assume,
and be solely responsible for, all Liabilities existing under the Reimbursement
Account Plan to or with respect to Company Participants and VRM Participants;
and (b) any Company Employee shall be entitled to continue to receive
reimbursements for the 1997 plan year pursuant to the terms of the Company
Reimbursement Account Plan and such transaction rules as VRM may adopt until
[April 30, 1998].
ARTICLE VI
OTHER LIABILITIES
6.01. Other Liabilities and Obligations. As of the Time of Distribution:
---------------------------------
(i) VRM shall assume and be solely responsible for all Liabilities of the
Company not otherwise provided for in this Agreement to or relating to VRM
Employees and VRM
-14-
<PAGE>
Former Employees arising out of or relating to employment by any of the Company
or VRM, or any predecessors thereof; and (ii) the Company shall assume and be
solely responsible for all Liabilities of VRM not otherwise provided for in
this Agreement to or relating to Company Participants arising out of or relating
to employment by any of the Company or VRM, or any predecessors thereof.
ARTICLE VII
MISCELLANEOUS
7.01. Recognition of Company Employment Service, etc. To the extent
----------------------------------------------
applicable, the VRM Plans shall recognize service by a VRM Employee before the
Distribution with the Company as service with VRM. The foregoing provision
shall not, however, be construed to require VRM or any member of the VRM Group
to adopt or continue any specific employee benefit plans or arrangements.
7.02. Indemnification. All Liabilities retained or assumed by or
---------------
allocated to VRM pursuant to this Agreement shall be deemed to be Indemnifiable
Losses arising out of the VRM Business, as defined in the Distribution
Agreement, and all Liabilities retained or assumed by or allocated to the
Company pursuant to this Agreement shall be deemed to be Indemnifiable Losses
arising out of the Company Business, as defined in the Distribution Agreement
and, in each case, shall be subject to the indemnification provisions set forth
in Article VIII thereof.
7.03. Guarantee of Subsidiaries' Obligations. Each of the parties hereto
--------------------------------------
shall cause to be performed, and hereby guarantees the performance and payment
of, all actions, agreements, obligations and liabilities set forth herein to
be performed or paid by any Subsidiary of such party which is contemplated
by the Distribution Agreement to be a Subsidiary of such party on or after the
Time of Distribution.
7.04. Sharing of Information. Each of the Company and VRM shall provide
----------------------
to the other all such information in its possession as the other may reasonably
request to enable it to administer its employee benefit plans and programs, and
to determine the scope of, and fulfill, its obligations under this Agreement.
Such information shall, to the extent reasonably practicable, be provided in
the format and at the times and places requested, but in no event shall the
party providing such information be obligated to incur any direct expense not
reimbursed by the party making such request, nor to make such
-15-
<PAGE>
information available outside its normal business hours and premises.
7.05. Amendments. This Agreement may be amended, modified or
----------
supplemented only by a written agreement signed by the parties hereto and the
Acquiror.
7.06. Successors and Assigns. This Agreement and all of the provisions
----------------------
hereof shall be binding upon and inure to the benefit of the parties and their
respective successors and permitted assigns.
7.07. Termination. This Agreement shall be terminated in the event that
-----------
the Distribution Agreement is terminated and the Distribution abandoned prior to
the Time of Distribution. In the event of such termination, neither party shall
have any liability of any kind to the other party.
7.08. Rights to Amend or Terminate Plans; No Third Party Beneficiaries.
----------------------------------------------------------------
No provision of this Agreement shall be construed (a) to limit the right of any
member of the Company Group or any member of the VRM Group to amend any plan or
terminate any plan, or (b) to create any right or entitlement whatsoever in
any employee or beneficiary including, without limitation, a right to continued
employment or to any benefit under a plan or any other benefit or compensation
(it being understood that this Agreement will also not be construed to limit any
right or entitlement of any employee or beneficiary existing without reference
to this Agreement). This Agreement is solely for the benefit of the parties
hereto and their respective Subsidiaries and should not be deemed to confer
upon third parties any remedy, claim, liability, reimbursement, claim of action
or other right in excess of those existing without reference to this Agreement.
7.09. Transfer of Reserves. To the extent that any Liability assumed by
--------------------
VRM hereunder is secured by a reserve on the books of the Company, such reserve
shall be transferred from the Company to the books of VRM as soon as practicable
on or following the Time of Distribution.
7.10. Further Transfers. The Company and VRM recognize that there may be
-----------------
VRM Employees who will, after the Time of Distribution, become employed by the
Company and there may be Company Employees who become employed, after the Time
of Distribution, by VRM. If the Company and VRM (each in their sole
discretion) so agree with respect to any such individuals, the assets and
liabilities with respect to such employees which are associated with the plans
and programs described in this Agreement may be transferred and assumed in a
manner consistent with
-16-
<PAGE>
this Agreement and such employees will be treated as Company Employees or VRM
Employees, as the case may be. Any such transfers or assumptions will be
considered to be governed by the terms of this Agreement and shall not require
the agreement of the Company and VRM if they occur within 3 months of the Time
of Distribution.
7.11. Payment Under Other Agreements. No payment made by one party to the
------------------------------
other pursuant to this Agreement will affect in any manner any payments required
to be made under the Distribution Agreement or any other agreement between the
parties hereto, including, without limitation, the settlement of intercompany
payables and receivables provided for in the Distribution Agreement.
7.12. Incorporation by Reference. The following provisions of the
--------------------------
Distribution Agreement are hereby incorporated into this Agreement by reference
(except that references therein to the Distribution Agreement shall be deemed to
be references to this Agreement): Section 6.5 (Confidentiality); Section 9.4
(Governing Law); Section 9.5 (Notices); Section 9.3 (Counterparts); Section 9.10
(Severability); and Section 9.9 (Captions).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
VALERO ENERGY CORPORATION
By:___________________________________
Name:
Title:
VALERO REFINING AND MARKETING
COMPANY
By:___________________________________
Name:
Title:
-17-
<PAGE>
SCHEDULE A
LIST OF COMPANY PLANS
EMPLOYEE BENEFIT PLANS/AGREEMENTS/INSURANCE POLICIES
Benefit Plans
- -------------
*Valero Energy Corporation Thrift Plan
*Excess Thrift Plan
*Employees Stock Ownership Plan
*Pension Plan
*Supplemental Pension Plan
*Valero Employees' Stock Ownership Plan (VESOP)
Restricted Stock Bonus and Incentive Stock Plan
Stock Option Plan No. 3
Stock Option Plan No. 4
Stock Option Plan No. 5
Executive Stock Incentive Plan
*Executive Incentive Bonus Plan
*Supplemental Executive Retirement Plan (SERP)
*Key Employee Deferred Compensation Plan
*Executive Deferred Compensation Plan
*Non-Employee Director Stock Option Plan
*Non-Employee Director Retirement Plan
*1990 Restricted Stock Plan for Non-Employee Directors
All-Employee Incentive Bonus Plan
Shareholder Value Bonus Plan
*Flex Plan
*Comprehensive Health Care Plan - Active/Retiree
- Pacific Care/PCA/Principal
*Survivor Income Benefit Plan
*Life (Basic, Supplemental, & Retiree) and Accidental Death & Dismemberment
Plan
*Long-Term Disability Plan/LTD ASO - Administrative
*Reimbursement Account Plan
*Dependent Life Plan
*Vision Care
*Dental
*Business Travel Accident Plan
*Educational Assistance Program
Severance Pay Plan
*Workers' Compensation
*Fireman's Accidental Death & Dismemberment
*Executive Liability Insurance
A-1
<PAGE>
*Stop Loss Insurance
Incentive Bonus Agreements
Management Stability Agreements
______________________
* All Liabilities (with respect to Company Participants and VRM Participants)
to be the sole responsibility of VRM.
A-2
<PAGE>
INDIVIDUAL INDEMNIFICATION AGREEMENTS WITH EFFECTIVE DATES
Consulting Agreements - Leroy Lamprecht (pending)
Part-time Employment Agreements
Executive Separation Agreements
Joe Becraft (11/20/96) Palmer Moe
SERA participants
Curt Wilker (11/1/92) James Strickland (11/1/92)
Leroy Lamprecht - pending Geoff Willig (pending)
Canadian Employees - Special benefit arrangement included in offer letter
Leslee Horniacheck (1/8/96) Robert Fougere (4/17/96)
Part-time Employees with special benefit arrangements
- -----------------------------------------------------
Stephanie Baller (7/1/96)
Cindy Baldwin (6/16/96)
Pat Barela (4/1/96)
Susie Gold (7/1/96)
Liza Holmes (2/1/96)
Jeanine Leeder (7/16/96)
Joanne Poss (7/16/96)
Becky Richard (5/1/96)
Individual Retirement Arrangements
- ----------------------------------
William E. Greehey
Edward C. Benninger, Jr.
Stan L. McLelland
John Ehlers
Indemnification Agreements
- --------------------------
Valero Energy Corporation -- Current Directors
- ----------------------------------------------
Edward C. Benninger, Jr., dated February 24, 1987
Ronald K. Calgaard, dated February 16, 1996
Robert G. Dettmer, dated October 17, 1991
A. Ray Dudley, dated July 21, 1988
Ruben M. Escobedo, dated October 1, 1994
William E. Greehey, dated February 24, 1987
James L. Johnson, dated April 25, 1991
Lowell H. Lebermann, dated February 24, 1987
Susan Kaufman Purcell, dated October 1, 1994
Valero Energy Corporation -- Former Directors
- ---------------------------------------------
F. Joseph Becraft, dated February 24, 1987
W. Richard Gingham, dated February 24, 1987
Jack T. Currie, dated February 24, 1987
Joe B. Foster, dated May 17, 1990
Robert B. Gilmore, dated February 24, 1987
John C. Holmgreen, dated February 24, 1987
A-3
<PAGE>
INDIVIDUAL INDEMNIFICATION AGREEMENTS WITH EFFECTIVE DATES
Palmer L. Moe, dated February 24, 1987
Mayfield R. Shilling, February 24, 1987
Philip K. Verleger, dated April 25, 1991
Harry E. Walker, February 24, 1987
Valero Energy Corporation -- Current Officers
- ---------------------------------------------
G. G. Beem, dated February 24, 1987
John D. Gibbons, dated October 15, 1992
John H. Krueger, dated September 17, 1992
Stan L. McLelland, dated February 24, 1987
Roberta M. Rossi, dated January 21, 1993
Rand C. Schmidt, dated February 24, 1987
Diana J. Shiller, dated February 24, 1987
William H. Zesch, dated February 24, 1987
Valero Energy Corporation -- Former Officers
- --------------------------------------------
James W. Allen, dated February 24, 1987
Luis A. de la Garza, dated February 24, 1987
Steven E. Fry, dated February 24, 1987
Jerry J. Fulton, dated February 24, 1987
Don M. Heep, dated February 22, 1990
Wayne H. King, dated February 24, 1987
Earl K. Lance, dated February 24, 1987
Bruce A. Smith, dated February 24, 1987
Richard A. Upton, dated February 24, 1987
Martin P. Zanotti, dated February 24, 1987
Valero Energy Corporation -- Former Directors of VNGC
- -----------------------------------------------------
Mack Wallace, dated December 21, 1987
Ronald K. Calgaard, dated December 21, 1987
Glenn Biggs, dated December 21, 1987
Valero Natural Gas Company -- Current Directors
- -----------------------------------------------
Edward C. Benninger, dated March 23, 1987
Stan L. McLelland, dated March 23, 1987
Valero Natural Gas Company -- Former Directors
- ----------------------------------------------
F. Joseph Becraft, dated March 23, 1987
E. Glenn Biggs, dated March 23, 1987
Ronald K. Calgaard, dated October 29, 1987
Ruben M. Escobedo, dated April 11, 1989
William E. Greehey, dated March 23, 1987
Palmer L. Moe, dated March 23, 1987
Mack Wallace, dated October 29, 1987
A-4
<PAGE>
INDIVIDUAL INDEMNIFICATION AGREEMENTS WITH EFFECTIVE DATES
Valero Natural Gas Company -- Current Officers
- -----------------------------------------------
G. G. Beem, dated March 23, 1987
John D. Gibbons, dated October 20, 1992
John H. Krueger, dated October 20, 1992
Rand C. Schmidt, dated March 23, 1987
Valero Natural Gas Company -- Former Officers
- ---------------------------------------------
James W. Allen, dated March 23, 1987
Luis de la Garza, dated March 23, 1987
Steven E. Fry, dated March 23, 1987
Jerry J. Fulton, dated March 23, 1987
Don M. Heep, dated June 22, 1988
Wayne H. King, dated March 23, 1987
Don E. Newquist, dated March 23, 1987
Roberta M. Rossi, dated January 20, 1993
Bruce A. Smith, dated March 23, 1987
A-5
<PAGE>
SCHEDULE B
EMPLOYEES TRANSFERRING TO VRM
B-1
<PAGE>
EXHIBIT 2.5
INTERIM SERVICES AGREEMENT
--------------------------
This INTERIM SERVICES AGREEMENT is entered into by and among Valero
Refining and Marketing Company, a Delaware corporation, and Valero Energy
Corporation, a Delaware corporation, as of [ , 1997,] and is made effective
as of the Effective Time.
WHEREAS, VEC, PG&E Corporation and PG&E Acquisition Corporation have
executed the Merger Agreement, pursuant to which PG&E Acquisition Corporation
will merge with and into VEC, and
WHEREAS, in connection with the Merger, VEC and Valero Refining have
executed the Distribution Agreement, pursuant to which VEC will cause, prior to
the Merger, all of the common stock of Valero Refining to be distributed to the
stockholders of VEC, and Valero Refining will cease to be a subsidiary of VEC,
and
WHEREAS, for a period of time following the Merger, Valero Refining
desires to continue to procure certain services from VEC that were formerly
performed by or through VEC, and VEC desires to procure certain services from
Valero Refining, and each of VEC and Valero Refining has agreed to provide (or
cause to be provided) the services described in this Agreement according to the
terms and conditions of this Agreement,
NOW, THEREFORE, Valero Refining and VEC, in consideration of the mutual
promises and obligations described in this Agreement, hereby agree as follows:
I. Definitions.
"Aircraft Ownership Agreement" means that certain Ownership Agreement dated
_______, 1997 by and between VMC and VCSC providing the terms and
conditions under which VMC and VCSC will jointly own certain aircraft
formerly owned by or leased to VMC.
"Distribution Agreement" means that certain Agreement and Plan of Distribution
dated as of ______, 1997 between VEC and Valero Refining providing for,
among other things, the distribution prior to the Effective Time of all of
the issued and outstanding shares of common stock of Valero Refining to the
stockholders of VEC.
"Effective Date" and "Effective Time" mean the date and the time, respectively,
upon which the Merger is consummated as prescribed by the Merger Agreement.
"Houston Sublease" means that certain Sublease dated _____ 1997, between Valero
Refining (as sublessor) and Valero Natural Gas Company (as sublessee)
providing for the rental of office space and common areas at Two Allen
Center for the business needs of Valero Natural Gas Company in Houston
after the Effective Time.
"including," "includes," or "include" when used in this Agreement means
"including but not limited to."
"Merger" means the merger and related transactions contemplated by the Merger
Agreement.
<PAGE>
"Merger Agreement" means that certain Agreement and Plan of Merger dated January
[31], 1997 by and between VEC, PG&E Corporation and PG&E Acqusition
Corporation providing for the merger of PG&E Acquisition Corporation with
and into VEC.
"PG&E Acquisition Corporation" means PG&E Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of PG&E Corporation formed for the
purpose of participating in the Merger.
"PG&E Corporation" means Pacific Gas & Electric Corporation, a California
corporation.
"Performing Party" means that party to this Agreement that is rendering Services
to the Receiving Party.
"Receiving Party" means that party to this Agreement that is receiving, or is
the beneficiary of, Services rendered by the Performing Party.
"Records Agreement" means that certain Records Access and Storage Agreement
dated _____, 1997 between VEC and Valero Refining.
"San Antonio Sublease" means that certain Amended and Restated Sublease
Agreement dated _____, 1997, between VMC (as sublessor) and Valero
Marketing and Supply Company (as sublessee) providing for the rental of
office space, common areas, and parking at 530 McCullough for the business
needs of Valero Refining in San Antonio after the Time of Distribution.
"Services" means, generally and collectively, the set of services to be provided
in accordance with the terms of this Agreement.
"Tax Agreement" means that certain Tax Sharing Agreement dated _____, 1997,
among VEC, Valero Refining and PG&E Corporation.
"Time of Distribution" means the time at which the distribution of the common
stock of Valero Refining to the stockholders of VEC is consummated in
accordance with the Distribution Agreement.
"Valero Refining" means Valero Refining and Marketing Company, a Delaware
corporation, and its subsidiaries.
"VCSC" means Valero Corporation Services Company, a Delaware corporation.
"VEC" means Valero Energy Corporation, a Delaware corporation, and its
subsidiaries.
"VEC System" means the computer data processing systems operated by VEC prior to
the Effective Date--whether located in San Antonio, Houston, Corpus
Christi, or any office of VEC--as may be modified by VEC after the
Effective Date.
"VMC" means Valero Management Company, a Delaware corporation.
II. Terms of General Application
2.1 Performance of Services. Each Performing Party will perform (or
-----------------------
cause to be performed) its Services in a professional manner, with due diligence
and due care. Each Performing Party agrees to perform (or cause to be performed)
its Services as economically as possible with the minimum number of
2
<PAGE>
employees, time, and materials necessary to perform properly the Services. Each
Performing Party agrees to use its best efforts to meet any completion dates
established in this Agreement for the performance of the Services. Except as
otherwise expressly provided in this Agreement, the Services shall be of the
type and extent provided by each Performing Party prior to the Effective Date.
The Performing Party's obligation to provide any particular Service is limited
to its performance of Services using its resources existing as of the Effective
Date. In no event shall the Performing Party be required to add to its staff,
equipment, facilities or other resources in order to provide any Service.
2.2. Cooperation. Each party to this Agreement will cooperate with each
-----------
other and assist each other to facilitate the performance of the Services. To
this end, each party agrees to furnish timely any information in its possession
that is reasonably necessary for the performance of the Services but which the
other party does not possess.
2.3. Severability and Cancellation of Services. The Services described
-----------------------------------------
in the various sections of this Agreement are severable. (The San Antonio
Sublease and the Houston Sublease are not considered "Services" to which the
provisions of this Section 2.3 apply.) A Receiving Party may elect to cancel any
one or more of the Services at any time by providing written notice to the
Performing Party. Unless expressly provided elsewhere in this Agreement, any
election of cancellation received by the Performing Party on or before the first
business day of a given month will be effective as of the last calendar day of
that month (e.g., notice received on July 19, 1997 will be effective as of
August 31, 1997; notice received on August 1, 1997 will be effective as of
August 31, 1997). Each of the Services provided to each Receiving Party
hereunder is to be provided on an interim basis for the period of time
reasonably necessary for such Receiving Party to arrange for the delivery of
such Service by third parties or to develop the ability itself to provide such
Service. Each Receiving Party will use its best efforts to arrange for the
delivery of such Service by third parties or to develop the ability itself to
provide such Service, and will cancel each such Service pursuant to this Section
2.3 as soon as practicable after the date of this Agreement.
2.4 Term and Termination. The term of this Agreement will commence at
--------------------
the Effective Time and will end at 5:00 p.m. on December 31, 1998, except for
any particular Service that is earlier canceled pursuant to Section 2.3 or for
which this Agreement specifically provides for an earlier or later termination
of a Performing Party's obligation to provide that Service.
2.5 Payment. The parties agree to the amounts listed in Exhibit A
------- ------- -
(attached to this Agreement and incorporated herein for all purposes), as
increased from time to time in accordance with Section 2.5.4, as full and
adequate compensation for the Services rendered under this Agreement.
2.5.1 Billing and Payment for Services Rendered. Each party will
-----------------------------------------
bill the other party monthly (in accordance with the rates listed in
Exhibit A) as of the first day of the month, for Services rendered
------- -
during the prior month. VEC will send invoices to Valero Refining to
the attention of the Treasurer. Valero Refining will send invoices to
VEC to the attention of the Treasurer. Invoices may be delivered to
either party by facsimile. The parties agree to pay the stated fees and
charges within 30 days from the date of invoice. The parties may offset
amounts owing to one another so that only one payment is required. In
satisfaction of amounts owing under this Agreement, the parties will
remit funds either by wire transfer or ACH (Automated Clearing House)
in accordance with the payment instructions stated in Exhibit B.
------- -
2.5.2 Reimbursements. If either party incurs a reasonable and
--------------
necessary out-of-pocket expense directly in connection with the rendering of
Services (e.g., payroll, payables), then the party for whom the payment was made
will reimburse that amount to the payor-party either on the day that
3
<PAGE>
the payment was made or the next business day, in accordance with the
payment instructions stated in Exhibit B, without regard to the billing
------- -
and payment schedule described in Section 2.5.1.
2.5.3 Misapplied Cash Receipts. If a cash receipt belonging to one
------------------------
party is erroneously deposited into the other party's account, then the
party who received the misapplied funds will promptly transfer the
funds to the other party's bank account in accordance with the payment
instructions listed in Exhibit B. The transfer will be made either on
------- -
the same day that available funds are received, or on the business day
when available funds have been collected.
2.5.4 Fee Increases. Each Performing Party may increase the fee
-------------
for any Service provided by that Performing Party upon 60 days' prior
written notice to the Receiving Party in order to reflect any increase
in the cost of providing that Service.
2.6 Confidentiality. Each party will use due care to protect the
---------------
confidentiality of all proprietary information regarding the other party
received or generated pursuant to this Agreement, and will use and copy such
information only as required to perform the Services in accordance with the
terms of this Agreement. Each party will limit disclosure of proprietary
information of the other party to those individuals who have a need to know such
information in order to provide the Services, except for any disclosures that
are required by law or other governmental authority.
2.7 Conflict of Terms. If the terms of this Agreement conflict with the
-----------------
terms of the Aircraft Ownership Agreement, Distribution Agreement, Houston
Sublease, Merger Agreement, Records Agreement, San Antonio Sublease, or Tax
Agreement (collectively the "Other Agreement(s)") with respect to any matter,
then the terms of the Other Agreement(s) will control.
III. Information Services
3.1 Information Services. In consideration for the fees described on
--------------------
Exhibit A, VEC will provide the following Information Services to Valero
- ------- -
Refining (the "Information Services").
3.1.1 Processing Services. VEC will provide data processing
-------------------
services on the VEC System to Valero Refining for all applications
supporting the VRM Business (as defined in the Distribution Agreement)
as of the Effective Date. In all cases, Valero Refining will be
responsible for furnishing to VEC all data necessary to run the
applications and achieve the desired results.
3.1.2 Maintenance and Support. VEC will provide the following
-----------------------
maintenance and support services to Valero Refining.
(a) Maintenance. VEC will provide maintenance required for
-----------
the VEC System computer equipment, data communications facilities
and operating system software used in performance of the
Information Services. For the VEC System software used in
performing the Information Services, VEC will provide all
maintenance necessary to keep such software performing in
accordance with the specifications in effect as of the Effective
Date.
(b) Exclusion of PCs and Servers. VEC will not provide
----------------------------
maintenance for the desktop personal computers, printers, and
servers operated by Valero Refining. Valero Refining will be
responsible for procuring any maintenance required by Valero
Refining for these assets.
4
<PAGE>
3.2 Procedures. The following procedures will apply to the rendering of
----------
Information Services.
3.2.1 Access to the VEC System. VEC will provide to Valero Refining
------------------------
all reasonable access to the VEC System during the same access hours for
which Valero Refining had access immediately prior to the Effective Date.
3.2.2 Delivery. Valero Refining, at its own risk and expense, will
--------
be responsible for transporting or transmitting to and from the VEC System
(i) all data and information necessary for VEC to perform the Information
Services, and (ii) all reports provided by VEC hereunder. VEC will have no
obligation to determine the authenticity, genuineness or accuracy of items
delivered by Valero Refining or the accuracy or correctness of the reports
based thereon.
3.2.3 Computer System Instructions. VEC may from time to time
----------------------------
provide Valero Refining with instructions governing the operation of the VEC
System. Valero Refining will comply with all reasonable policies, procedures
and standards published and provided by VEC relating to the operation of the
VEC System and to the performance of Information Services.
3.2.4 Communications. All costs associated with the installation
--------------
and removal of remote terminals, printers, modems, servers, controllers and
related equipment of Valero Refining are the responsibility of Valero
Refining. All interconnected communications configurations are subject to the
approval of VEC before installation, whose approval shall not be unreasonably
withheld or delayed.
3.3 Fees. In addition to the fees described on Exhibit A, the following
---- ------- -
terms will apply to Information Services.
3.3.1 Service Fees. For all mainframe-based use of the VEC System
------------
by Valero Refining, Valero Refining agrees to pay to VEC a fee determined on
a "percentage of use" basis. Each month VEC will determine the percentage of
Valero Refining's mainframe-based use of the VEC System, and will bill Valero
Refining an amount equal to the total VEC System mainframe-based operating,
maintenance and data storage costs multiplied by Valero Refining's percentage
of such use.
3.3.2 Programming. VEC will provide all labor required for the
-----------
initial setup prior to the Effective Date of programs in connection with the
Information Services. After the Effective Date, Valero Refining agrees to pay
for all subsequent programming performed by VEC on behalf of Valero Refining
at a rate which includes all direct and indirect labor costs of VEC for such
programming. Valero Refining will reimburse all reasonable and direct out-of-
pocket expenses incurred by VEC in connection with such programming services.
3.4 Data Storage. VEC will apply the same backup, storage, and recovery
------------
procedures to data relating to the Information Services that VEC applies to its
own data. Upon receipt of a written request from Valero Refining, VEC will
tender to Valero Refining all stored data, provided that Valero Refining shall
not be in default with respect to any amounts due for the Information Services
provided hereunder.
IV. FINANCIAL AND REGULATORY SERVICES
4.1 Financial and Regulatory Services. In consideration for the fees
---------------------------------
described on Exhibit A of this Agreement, VEC and Valero Refining will provide
------- -
the following financial and regulatory services (the "Financial and Regulatory
Services"):
5
<PAGE>
4.1.1 Tax Services. VEC and Valero Refining (or their affiliates)
------------
will perform any tax services in accordance with terms of the Tax Agreement.
4.1.2 Governmental Compliance. VEC will furnish all accounting,
-----------------------
finance, and legal support requested by Valero Refining to assist Valero
Refining in the preparation, review, and timely filing in 1997 and years
thereafter of all documents (including financial statements) covering
periods prior to the Effective Date, as such filings may be required by the
Securities Exchange Act of 1934, the Securities Act of 1933, or the rules
and regulations promulgated by the Securities and Exchange Commission
pursuant to those Acts. These documents may include registration statements,
annual reports, and quarterly reports of Valero Refining. VEC and Valero
Refining each will assist the other in the preparation and filing of any
other documents required by regulatory authorities, whether federal or
state, that are related to the operations of VEC or Valero Refining prior to
the Effective Time. A Performing Party's obligation to offer the Services
described in this paragraph shall continue until the passage of all
regulatory deadlines and statutes of limitation for the applicable document
or filing.
4.1.3 Check Printing. For a period not to exceed four months after
--------------
the Effective Date, Valero Refining will make available to VEC check
printing services through the Treasury department of Valero Refining,
provided that VEC will be responsible for the mailing of all checks printed
by Valero Refining on behalf of VEC.
V. ADMINISTRATIVE SERVICES
5.1 Administrative Services to be Provided by VEC. In consideration for
---------------------------------------------
the fees described on Exhibit A of this Agreement, VEC will provide the
------- -
following administrative services to Valero Refining.
5.1.1 San Antonio Office Space and Parking. VEC will cause VMC to
------------------------------------
provide to Valero Refining office space, use of common areas, and parking
for the business needs of Valero Refining in San Antonio in accordance with
terms of the San Antonio Sublease.
5.1.2 Security. VEC will provide security services for the
--------
personnel and property of Valero Refining and the Valero Federal Credit
Union located at 530 McCullough in San Antonio in the same manner as
security services are provided by VEC for its own personnel and property in
San Antonio.
5.1.3 Telecommunications. VEC will provide local and long-distance
------------------
telephone, facsimile, teleconference, and other telecommunications
availablity and support for the business needs of Valero Refining in San
Antonio.
5.1.4 Mail Room. VEC will provide mail (including U.S. postal
---------
service and commercial expedited courier services) receiving, sorting, and
distribution services for Valero Refining in San Antonio.
5.1.5 Printing and Document Design. VEC will provide printing and
----------------------------
document design services to Valero Refining for a period not to exceed six
months following the Effective Date.
5.1.6 Purchasing. In coordination with the Vice President-
----------
Administration of Valero Refining, VEC will provide purchasing services to
Valero Refining with respect to its San Antonio and Houston operations. VEC
will issue purchase orders on behalf of and in the name of Valero Refining.
6
<PAGE>
5.1.7 Records. VEC will provide records storage and access
-------
services to Valero Refining in accordance with the Records Agreements.
5.1.8 Travel. VEC will provide travel-related services to Valero
------
Refining, including the booking and ticketing of airline flights and
related reservation services. Air-carriage services will be provided in
accordance with the Aircraft Ownership Agreement.
5.2 Administrative Services to be Provided by Valero Refining. In
---------------------------------------------------------
consideration for the fees described on Exhibit A of this Agreement, Valero
------- -
Refining will provide the following administrative services to VEC.
5.2.1 Houston Office Space. Valero Refining will provide to VEC
--------------------
office space and the use of common areas for the business needs of VEC in
Houston in accordance with terms of the Houston Sublease.
5.2.2 Health Care Administration. Valero Refining will provide
--------------------------
claims processing through April 15, 1998 for the medical, dental,
reimbursement, and other health care claims incurred prior to the Effective
Time by VEC employees.
5.2.3 Payroll. For a period not to exceed four months after the
-------
Effective Date, Valero Refining will provide payroll services for VEC with
respect to the employees of VEC, such services to include the preparation
and distribution of semi-monthly payroll checks, administration of employee
federal payroll tax and other withholdings, administration (including
remittance) of employer payroll tax contributions, maintenance of payroll-
related tax returns, and preparation and mailing of Forms W-2 for the year
1997.
5.2.4 Accounts Payable. For a period not to exceed four months
----------------
after the Effective Date, Valero Refining will provide accounts payable
processing for VEC accounts. Valero Refining will process invoices from VEC
creditors, provide data for appropriate bookkeeping, and print checks for
the processed accounts.
VI. MISCELLANEOUS
6.1 Additional Services. Valero Refining and VEC may determine that
-------------------
services not specifically described in this Agreement may be necessary or
desirable during the term of this Agreement. If the parties through their
appropriate representatives agree upon such other services, then these services
will be incorporated into this Agreement by a written amendment and will be
subject to all provisions of this Agreement unless expressly stated otherwise in
the written amendment. The persons authorized to request additional services on
behalf of Valero Refining are the President, any Vice President, the Controller
and the Treasurer. The persons authorized to request additional services on
behalf of VEC are the President, any Vice President, the Controller and the
Treasurer.
6.2 Independence of Parties.
-----------------------
6.2.1 Independent Contractors. The parties agree that each of VEC (or
-----------------------
its designee) and Valero Refining (or its designee), with respect to one
another, is an independent contractor in the performance of Services under
this Agreement. The parties agree that this Agreement is not intended to
create a joint venture or partnership relationship. The Performing Party's
employees will not be, or be deemed to be, the employees of the Receiving
Party, and these employees shall be subject to
7
<PAGE>
the Performing Party's exclusive supervision, direction, and control. The
Receiving Party will have the right to inspect the performance of the
Services to ensure satisfactory completion of them, but the parties
acknowledge that the Receiving Party is not directly responsible for the
actual performance of the Services. It is further agreed that the Performing
Party is solely and individually liable for all labor and expenses in
connection with the Services performed. The parties agree that neither party
will have the right or authority to assume or create any obligation or
responsibility, express or implied, on behalf of, or in the name of the
other party, or to bind the other party in any way.
6.2.2 No Obligation for Compensation or Benefits. Neither federal,
------------------------------------------
state nor local income or payroll tax will be withheld or paid by the
Receiving Party on behalf of the Performing Party or the Performing Party's
employees. No workers' compensation insurance will be obtained by the
Receiving Party concerning the Performing Party or the Performing Party's
employees. The employees of the Performing Party shall have no claim against
the Receiving Party for any compensation, reimbursement, injury or damages
of any kind.
6.3 Liability and Indemnification. Neither party makes any warranty,
-----------------------------
express or implied, with respect to the Services to be provided by such party
under this Agreement. The liability of any Performing Party with respect to the
quality of performance of Services provided under this Agreement is limited to
the total compensation for the Services provided by that party under this
Agreement and shall not include any contingent liability. The sole remedy (other
than the amount of damages described in the foregoing sentence) for the
Performing Party's breach of this Agreement shall be the termination of this
Agreement. The Receiving Party's receipt of any Service performed hereunder
shall be deemed an unqualified acceptance of such Service and a waiver by the
Receiving Party of any and all claims with respect to such Service, unless the
Receiving Party gives notice of such claim within five days after the date such
item of Service was performed. Neither party will be liable under this Agreement
to the other party (or affiliate thereof) for indirect, incidental, punitive,
special or consequential damages, including lost profits or revenue, even if the
liable party has been advised of the possibility of such damages or any claim
against the other party by any third party. A Performing Party will not be
liable for any costs, expenses, losses, liabilities, claims or damages,
including attorneys' fees (hereafter "Claims") directly or indirectly
attributable to the actions of the Performing Party, whether or not negligent,
in performance of its obligations under this Agreement, except that the same may
be attributable to the [gross negligence] or willful misconduct of the
Performing Party.
6.3.1 Indemnification Covenant of Receiving Party. With respect to
----------------------------------------------
any Service performed for the benefit of a Receiving Party, the Receiving
Party shall indemnify, defend and hold the Performing Party harmless from
and against any and all Claims (except for those Claims described in Section
6.3.2 or excluded by Section 6.3.3 of this Agreement) incurred by or
assessed against the Performing Party in connection with: (a) the
performance of Services by the Performing Party under this Agreement, (b)
the injury to or death of any person during the term of this Agreement who
is an employee of the Receiving Party at the time of the occurrence which
causes such injury or death, or (c) loss of or damage to any property of the
Receiving Party during the term of this Agreement.
6.3.2 Indemnification Covenant of Performing Party. With respect to
--------------------------------------------
the Services performed by the Performing Party, the Performing Party shall
indemnify, defend and hold the Receiving Party harmless from and against any
and all Claims incurred by or assessed against the Receiving Party in
connection with the gross negligence, willful misconduct, or fraud of, or
the imposition of punitive or exemplary damages against, the Performing
Party in the performance of Services under the terms of this Agreement.
8
<PAGE>
6.3.3 General Terms Regarding Indemnification. All indemnities set forth in
---------------------------------------
this Agreement extend to the officers, directors, employees and affiliates
of the party indemnified. Unless this agreement expressly provides to the
contrary, the indemnities set forth herein apply regardless of whether the
indemnified party (or its employees, agents, contractors, successors or
assigns) was a contributing cause of the indemnified Claim, expressly
including indemnified Claims arising out of or resulting, in whole or part,
from the indemnified party's (or its employees', agents', contractors',
successors' or assigns') sole or concurrent negligence. However, the
indemnities set forth in this agreement do not extend to any part of an
indemnified Claim that is the result of the gross negligence, willful
misconduct or fraud of the indemnified party or the result of the
imposition of punitive or exemplary damages on the indemnified party.
6.4 DTPA Waiver. Each Receiving Party hereby waives the provisions of
-----------
the Texas Deceptive Trade Practices-Consumer Protection Act, chapter 17,
subchapter E, sections 17.41 through 17.63, inclusive, Texas Business and
Commerce Code. To evidence its ability to grant such waiver, each Receiving
Party hereby represents and warrants to the Performing Party that the Receiving
Party (a) is in the business of seeking or acquiring, by purchase or lease,
goods or services for commercial or business use, (b) has assets of $5 million
or more according to its most recent financial statement prepared in accordance
with generally accepted accounting principles, (c) has knowledge and experience
in financial and business matters that enable it to evaluate the merits and
risks of the transactions contemplated by this Agreement, and (d) is not in a
significantly disparate bargaining position.
6.5 Force Majeure. A Performing Party will not be considered in default
-------------
in performance of its obligations hereunder if performance is prevented or
delayed by acts of God or government, labor disputes, fires, power failures,
failure or delay of transportation, or by vendors or subcontractors, or any
other similar cause or causes beyond the reasonable control of that party,
whether similar to the causes specified herein or not, provided that the
Performing Party exercises all diligence in response to the force majeure and
uses its best efforts to perform its obligations hereunder as soon as possible
after termination of the force majeure. Neither party will be obligated to
settle a dispute or otherwise take any action that is not commercially
reasonable to terminate an event of force majeure.
6.6 Governing Law, Amendments, Successors and Assigns. This Agreement
-------------------------------------------------
will be governed by and construed in accordance with Texas law. This Agreement
may be amended, but only by a written instrument executed by a duly authorized
representative of each of VEC and Valero Refining. No party to this Agreement
may assign its rights or obligations under the Agreement without the prior
written consent of the other. This Agreement is binding upon the successors and
permitted assigns of VEC and Valero Refining.
6.7 Disputes. If a Receiving Party, within 10 days after receipt of an
--------
invoice, disputes any charge set forth therein, the Receiving Party shall notify
the Performing Party in writing. The parties shall promptly attempt to resolve
any such dispute. If either party determines that the dispute cannot be
resolved in a mutually agreeable manner, the dispute shall be submitted, within
five days of notification to the other party, to Arthur Andersen LLP, or if
Arthur Andersen LLP declines the referral, to another independent public
accountant mutually acceptable to the parties (the "Accountant"). The
Accountant shall make an investigation of the disputed charges as it deems
necessary and shall finally determine the amount of the charge. The cost of the
Accountant shall be borne by the Receiving Party if the invoiced amount is
determined to be correct, and shall be borne by the Performing Party if the
invoiced amount is determined to be incorrect. Pending such determination, the
Receiving Party shall pay the invoiced amount, with appropriate adjustments to
be made by the Performing Party following a final determination.
9
<PAGE>
The Parties have executed this Agreement to be effective as of the Effective
Date.
VALERO ENERGY CORPORATION
By:__________________________________
[insert name and title]
VALERO REFINING AND MARKETING COMPANY
By:__________________________________
[insert name and title]
10
<PAGE>
EXHIBIT A
---------
to Interim Services Agreement
INFORMATION SERVICES FEES
Processing Services (Section 3.1.1) Included in Section 3.3.1 fee
Maintenance and Support (Section 3.1.2) Included in Section 3.3.1 fee
Service Fee (Section 3.3.1) As stated in Section 3.3.1
Programming (Section 3.3.2) As stated in Section 3.3.2
Data Storage (Section 3.4) Included in Section 3.3.1 fee
FINANCIAL AND REGULATORY SERVICES FEES
Financial and Regulatory
Governmental Compliance (Section 4.1.2) Service provided without charge
Check Printing (Section 4.1.3) Service provided without charge
ADMINISTRATIVE SERVICES FEES
Services Provided by Merger Partner
Security (Section 5.1.2) Included in Sublease rentals
Telecommunications (Section 5.1.3) At cost
Mail Room (Section 5.1.4) At cost
Printing (Section 5.1.5) At cost
Purchasing (Section 5.1.6) At cost
Travel (Section 5.1.8) for no charge greater than any
commissions earned upon the
booking of reservations
Services Provided by Valero Refining
Health Care Administration
(Section 5.2.2) [Service provided without charge]
Payroll (Section 5.2.3) [$__ per employee per pay period]
Accounts Payable (Section 5.2.4) [$__ per invoice/check)
<PAGE>
EXHIBIT B
---------
to Interim Services Agreement
PAYMENT INSTRUCTIONS
The following are wire transfer/ACH payment instructions for payment to VEC and
Valero Refining and Marketing Company for amounts owing under this Interim
Services Agreement:
Valero Energy Corporation:
Bank Name: [to be determined]
Bank ABA #: [to be determined]
Account Name: [to be determined]
Account Number: [to be determined]
Valero Refining and Marketing Company:
Bank Name: [to be determined]
Bank ABA #: [to be determined]
Account Name: [to be determined]
Account Number: [to be determined]
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
VALERO REFINING AND MARKETING COMPANY
(AMENDED AND RESTATED EFFECTIVE AS OF APRIL 23, 1997)
Valero Refining and Marketing Company, a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Valero Refining and Marketing Company and
the name under which the corporation was originally incorporated is Saber
Energy, Inc. The date of filing of its original Certificate of Incorporation
with the Secretary of State was June 8, 1981.
2. This Restated Certificate of Incorporation restates and integrates and
also further amends the provisions of the Certificate of Incorporation of this
corporation as heretofore amended or supplemented.
3. The text of the Certificate of Incorporation as heretofore amended,
supplemented, or restated, is hereby restated and further amended to read as
herein set forth in full:
RESTATED CERTIFICATE OF INCORPORATION
of
VALERO REFINING AND MARKETING COMPANY
ARTICLE I
The name of the corporation is Valero Refining and Marketing Company.
ARTICLE II
The address of its registered office in the State of Delaware is 1209 Orange
Street, in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
The total number of shares of all classes of stock that the corporation
shall have authority to issue is 170,000,000 divided into classes as follows:
150,000,000 shares shall be Common Stock, par value $0.01 per share ("Common
Stock"); and 20,000,000 shares shall be Preferred Stock par value $0.01 per
share ("Preferred Stock"). Shares of any class of stock of the corporation may
be issued for such consideration and for such corporate purposes as the Board of
Directors of the corporation may from time to time determine.
<PAGE>
The following is a statement of the powers, preferences and rights, and the
qualifications, limitations and restrictions, of the classes of stock of the
corporation, and the authority with respect thereto expressly vested in the
Board of Directors of the corporation.
DIVISION A -- PREFERRED STOCK
(1) Issuance in Series. The Preferred Stock may be issued in one or more
series and in such amounts as may be established and designated from time to
time by the Board of Directors as hereinafter provided. The Board of Directors
is hereby vested with authority to establish and designate any unissued shares
of Preferred Stock as a series of such stock. The designations, powers,
preferences and relative and other special rights and the qualifications,
limitations and restrictions of the Preferred Stock of any series shall be those
that are stated and expressed herein and, to the extent not stated and expressed
herein, shall be such as may be fixed by the Board of Directors and stated and
expressed in resolutions adopted by the Board of Directors providing for the
issuance of Preferred Stock of such series. The resolutions shall (a) specify
the series to which such Preferred Stock shall belong; (b) specify the annual
rate of dividends, if any, payable on shares of such series; (c) fix the amount
which the holders of shares of such series shall be entitled to be paid in the
event of any liquidation, dissolution or winding up of the corporation; and (d)
state whether and at what times and under what conditions the shares of such
series shall be redeemable and the amount or amounts payable thereon in the
event of redemption. The resolutions may, in a manner not inconsistent with the
provisions of this Article IV, (i) limit the number of shares of such series
that may be issued, (ii) provide for a sinking fund for the purchase or
redemption, or a purchase fund for the purchase, of shares of such series and
the terms and provisions governing the operation of any sinking or purchase fund
and the status as to reissuance of shares purchased or otherwise reacquired or
redeemed or retired through the operation thereof, and provide that so long as
the corporation is in default as to the sinking or purchase fund the corporation
shall not (with such exceptions, if any, as may be provided) pay any dividends
upon or purchase or redeem shares of any class of capital stock ranking junior
to the Preferred Stock in respect of dividends or distributions of assets on
liquidation of the corporation (all of which classes, other than the Preferred
Stock, are hereinafter sometimes in this Division A of this Article IV embraced
in the term "junior stock"), (iii) grant voting rights, full or limited, to the
holders of shares of such series, (iv) impose conditions or restrictions upon
the creation of indebtedness of the corporation or upon the issue of additional
Preferred Stock or other capital stock ranking on a parity therewith or prior
thereto with respect to dividends or distribution of assets upon liquidation,
(v) impose conditions or restrictions upon the payment of dividends upon, or the
making of other distributions in respect of, or the acquisition of, junior
stock, (vi) grant to the holders of shares of such series the right to convert
such shares into shares of junior stock, and (vii) grant other special rights to
the holders of shares of such series as the Board of Directors may determine and
as shall not be inconsistent with the provisions of this Division A of this
Article IV. The term "fixed for such series" and similar terms as used in this
Division A of this Article IV shall mean stated and expressed in this Division A
of this Article IV or in resolutions adopted by the Board of Directors providing
for the issue of Preferred Stock of the series referred to therein.
(2) Dividends. The holders of shares of Preferred Stock of each series, in
preference to the holders of Common Stock and any other junior stock, shall be
entitled to receive, as and when declared by the Board of Directors out of the
assets of the corporation that are by law available for the payment of
dividends, cash dividends as and to the extent provided in resolutions of the
Board of Directors providing for the issuance of such series of Preferred Stock.
(3) Redemption. The corporation may redeem in whole or in part the
Preferred Stock of any series which by its terms is redeemable, at the time or
times and on the terms and conditions fixed for such series, upon notice duly
given as hereinafter provided, by paying therefor in cash the sum fixed for such
series, together, in each case, with an amount equal to dividends accrued to the
date fixed for redemption and remaining unpaid. In case of the redemption of
only part of the Preferred Stock of any series at the time outstanding, at the
option of the Board of Directors such redemption shall be made pro rata or the
shares of such series to be redeemed shall be chosen by lot in such manner as
may be prescribed by the Board of Directors, except as may otherwise be provided
herein or in the resolutions adopted by the Board of Directors for the issuance
of such series.
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<PAGE>
Notice of any proposed redemption of Preferred Stock shall be given by the
corporation by mailing a copy of such notice at least 30 days prior to the date
fixed for such redemption to each holder of record of the shares to be redeemed
at the holder's address appearing on the books of the corporation. From and
after the date of redemption so designated, notwithstanding that any certificate
representing shares of Preferred Stock so called for redemption shall not have
been surrendered for cancellation, the shares represented thereby shall no
longer be deemed outstanding, the right to receive dividends thereon shall cease
to accrue and all rights with respect to such shares of Preferred Stock so
called for redemption shall forthwith on such redemption date cease and
terminate, except for the right of the holders thereof to receive the redemption
price of such shares so to be redeemed plus accrued and unpaid dividends up to
the date fixed for redemption, but without interest thereon.
(4) Liquidation. In the event of any liquidation, dissolution or winding up
of the affairs of the corporation (all of which are hereinafter embraced in the
word "liquidation"), then, before any distribution or payment shall be made to
the holders of the Common Stock or any other junior stock, the holders of the
Preferred Stock of the respective series shall be entitled to be paid in full
the respective amounts fixed for such series, plus in each case a sum equal to
accrued and unpaid dividends thereon to the date of payment thereof. After this
payment has been made in full to the holders of the Preferred Stock, the
remaining assets and funds of the corporation shall be distributed among the
holders of the Common Stock and the other junior stock of the corporation
according to their respective rights. In the event that the assets of the
corporation are not sufficient to make the payment herein required to be made in
full, such assets shall be distributed to the holders of the Preferred Stock of
the respective series pro rata in proportion to the respective amounts fixed for
such series.
Neither (a) the merger or consolidation of the corporation into or with
another corporation, nor (b) the merger of any other corporation into the
corporation, shall be deemed to be a liquidation, dissolution or winding up of
the corporation with the meaning of this Paragraph (4).
(5) Limitations. So long as any shares of Preferred Stock are outstanding,
the corporation shall not, without the consent of the holders of a majority of
the total number of shares of the Preferred Stock at the time outstanding, given
in person or by proxy, either in writing or by vote at a meeting called for the
purpose:
(a) Create or authorize any shares of any class of stock ranking
prior to the Preferred Stock in respect of dividends or distributions of
assets on liquidation of the corporation (hereinafter sometimes referred to
as "prior stock") or any securities convertible into any such prior stock;
or
(b) Amend, alter or repeal any of the rights, preferences or powers
of the holders of Preferred Stock to affect adversely any such rights,
preferences or powers; provided, however, that if any amendment, alteration
or repeal affects adversely the rights, preferences or powers of one or
more, but not all, series of Preferred Stock at the time outstanding, only
the consent of the holders of at least a majority of the total number of
shares of all series so affected shall be required by this Paragraph (5).
(6) Status of Shares Redeemed or Retired. Except as otherwise provided in
this Division A of this Article IV or in any resolutions of the Board of
Directors providing for the issuance of any particular series of Preferred
Stock, Preferred Stock redeemed or otherwise retired by the corporation shall
assume the status of authorized but unissued Preferred Stock and may thereafter,
subject to the provisions of this Division A of this Article IV and of any
restrictions contained in any resolutions of the Board of Directors providing
for the issuance of any particular series of Preferred Stock, be reissued in the
same manner as other authorized but unissued Preferred Stock.
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<PAGE>
DIVISION B -- COMMON STOCK
(1) Dividends. After the requirements with respect to any preferential
dividends upon the Preferred Stock have been met, the holders of the Common
Stock shall be entitled to receive dividends as may be declared from time to
time by the Board of Directors.
(2) Voting Rights. Each share of Common Stock shall entitle the holder
thereof to one vote for each share held.
(3) Liquidation. In the event of any liquidation of the corporation, after
the holders of the Preferred Stock of each series and any other class of stock
ranking prior to the Common Stock in respect of distributions of assets on
liquidation of the corporation have been paid in full the amount to which they
respectively shall be entitled, or a sum sufficient for such payment in full has
been set aside, the remaining net assets of the corporation shall be distributed
pro rata to the holders of the Common Stock in accordance with their respective
rights and interests, to the exclusion of the holders of the Preferred Stock and
any other class of stock ranking prior to the Common Stock.
DIVISION C -- PROVISIONS APPLICABLE TO ALL CAPITAL STOCK
(1) Voting Rights. Except as otherwise provided herein or by law, the
Common Stock and any other capital stock of the corporation at the time entitled
thereto shall vote together as one class.
(2) Regarding Pre-emptive Rights. No stockholder of the corporation shall
by reason of holding shares of any class have any pre-emptive or preferential
right to purchase or subscribe to any shares of any class of this corporation,
now or hereafter to be authorized, or any notes, debentures, bonds or other
securities convertible into or carrying options or warrants to purchase shares
of any class, now or hereafter to be authorized, whether or not the issuance of
any shares, or notes, debentures, bonds or other securities, would adversely
affect the dividend or voting rights of such stockholder, other than such
rights, if any, as the Board of Directors in its discretion may fix. The Board
of Directors may issue shares of stock of any class of this corporation, or any
notes, debentures, bonds or other securities convertible into or carrying
options or warrants to purchase shares of stock of any class, without offering
any such shares of stock of any class or any notes, debentures, bonds or other
either in whole or in part, to the existing stockholders of any class.
ARTICLE V
(1) Exercise of Corporate Powers. All corporate powers shall be exercised
by or under the direction of the Board of Directors except as otherwise provided
by law or by the Restated Certificate of Incorporation.
(2) Number and Classification of Directors. The number of Directors which
shall constitute the whole Board of Directors shall be as specified from time to
time in the By-Laws of the corporation (but in any event not fewer than five
(5)), except in the case of an increase in the number of Directors by reason of
any default provisions with respect to any outstanding series of Preferred
Stock. The Board of Directors (excluding any Directors elected by reason of any
default provisions with respect to any outstanding series of Preferred Stock)
shall be divided into three classes as nearly equal in number as may be, being
Class I, Class II and Class III. The number of Directors in each class shall be
the whole number contained in the quotient derived by dividing the authorized
number of Directors by three, and if a fraction is also contained in the
quotient, then if that fraction is one-third (1/3) then the extra Director shall
be a member of Class III, and if the fraction is two-thirds (2/3) then one of
the extra Directors shall be a member of Class III and the other shall be a
member of Class II. Each Director shall serve for a term ending on the third
annual meeting following the annual meeting at which such director was elected;
provided, however, that the Directors first elected to Class I shall serve for a
term ending on the annual meeting following their first election as Directors,
the Directors first elected to
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<PAGE>
Class II shall serve for a term ending on the second annual meeting following
their first election as Directors, and the Directors first elected to Class III
shall serve a full term as hereinabove provided. The foregoing notwithstanding,
each Director shall serve until his or her successor shall have been qualified,
or until he or she becomes disabled or is otherwise removed.
(3) Designation and Redesignation of Directors. For purposes of Paragraph
(2) of this Article V, reference to the first election of Directors shall
signify the first election of Directors concurrent with or following the first
date on which this Article V shall become effective in accordance with the laws
of Delaware. At each annual election held thereafter, the Directors chosen to
succeed those whose terms then expire shall be identified as being of the same
class as the Directors they succeed. If for any reason the number of Directors
in the various classes shall not conform with the formula set forth in the
preceding paragraph, the Board of Directors may (but shall not be required to)
redesignate any Director into a different class in order that the balance of
Directors in such classes shall conform thereto.
(4) Election and Removal of Directors. At each annual meeting of
stockholders, Directors chosen to succeed those whose terms then expire shall be
elected for a full term of office expiring at the third succeeding annual
meeting of stockholders after their election. When the number of Directors is
increased by amendment to the By-Laws of the corporation, and any newly created
directorships are filled by the Board of Directors, such additional Directors
shall not be assigned to a director class until the next annual meeting of
stockholders. Subject to the foregoing, Directors elected to fill a vacancy
shall hold office for a term expiring at the annual meeting at which the term of
the class to which they shall have been elected expires. No decrease in the
number of Directors constituting the Board of Directors shall shorten the term
of any incumbent Director. Subject to the rights of the holders of any series
of Preferred Stock or any other series or class of stock as set forth in this
Restated Certificate of Incorporation to elect additional directors under
specific circumstances, any director may be removed from office at any time, but
only for cause and only by the affirmative vote of the holders of at least 60
percent of the voting power of the then outstanding voting stock, voting
together as a single class.
(5) Certain Matters to be Prescribed by By-Laws. The number,
qualifications, terms of office, manner of election, time and place of meeting,
compensation and powers and duties of the Directors may be prescribed from time
to time by the By-Laws of the corporation, and the By-Laws of the corporation
may also contain any other provisions for the regulation and management of the
affairs of the corporation not inconsistent with law or the Restated Certificate
of Incorporation. Unless and except to the extent that the By-Laws of the
corporation shall so require, the election of Directors of the corporation need
not be by written ballot.
(6) Express Powers of the Board of Directors. In furtherance and not in
limitation of the powers conferred by statute, the Board of Directors is
expressly authorized:
(a) To adopt, amend or repeal the By-laws of the corporation; provided,
however, that the By-laws adopted by the Board of Directors under the
powers hereby conferred may be amended or repealed by the Board of
Directors or by the stockholders having voting power with respect thereto,
provided further that in the case of amendments by stockholders, the
affirmative vote of the holders of at least 80 percent of the voting power
of the then outstanding voting stock, voting together as a single class,
shall be required to alter, amend or repeal any provision of the By-laws.
(b) To fix, determine and vary from time to time the amount to be
maintained as surplus and the amount or amounts to be set apart as working
capital.
(c) To authorize and cause to be executed mortgages and liens upon the
real and personal property of the corporation.
(d) To set apart out of any of the funds of the corporation available
for dividends a reserve for any proper purposes and to abolish any such
reserve in the manner in which it was created.
(e) To designate by resolution passed by a majority of the whole Board
one or more committees, each committee to consist of one or more of the
Directors of the corporation, which, to the extent provided in said
resolution or resolutions or in the By-Laws of the corporation, shall have
and may exercise the
5
<PAGE>
powers of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation
to be affixed to all papers that may require it. Such committees shall have
such names as may be stated in the By-Laws of the corporation or as may be
determined from time to time by resolution adopted by the Board of
Directors.
(f) From time to time to determine whether and to what extent, and at
what times and places, and under what conditions and regulations, the
accounts and books of the corporation, or any of them, shall be open to
inspection of stockholders; and, except as so determined, or as expressly
provided by law or in this Restated Certificate of Incorporation, no
stockholder shall have any right to inspect any account, book or document
of the corporation other than such rights as may be conferred by applicable
law.
(7) Vote Required to Amend Certain Provisions. Notwithstanding anything
contained in this Restated Certificate of Incorporation to the contrary, the
affirmative vote of the holders of at least 80 percent of the voting power of
the then outstanding voting stock, voting together as a single class, shall be
required to amend, repeal or adopt any provision inconsistent with any of
Paragraphs (2), (3) or (4), or paragraph (a) of Paragraph (6), of this Article
V.
(8) Regarding Certain Contracts and Transactions. No contract or other
transaction between the corporation and any other corporation shall be affected
or invalidated by the fact that one or more of the Directors of this corporation
is or are interested in, or is a director or officer, or are directors or
officers, of such other corporation, and no contract or other transaction
between the corporation and any other person or firm shall be affected or
invalidated by the fact that one or more of the Directors of this corporation is
a party to, or are parties to, or interested in, such contract or transaction;
provided, that in each such case the nature and extent of the interest of such
Director in the contract or other transaction and the fact that such Director is
a director or officer of such other corporation is known to the Board of
Directors or is disclosed at the meeting of the Board of Directors at which the
contract or other transaction is authorized.
(9) Indemnification of Directors, Officers and Others. The corporation
shall indemnify the Directors, officers, employees or agents of the corporation,
or any person who is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, benefit plan, non-profit or charitable organization, or other
enterprise, to the full extent that corporations shall have the power to
indemnify such persons under the General Corporation Law of the State of
Delaware.
(10) Limitation on Personal Liability. No Director shall be personally
liable to the corporation or any stockholder for monetary damages for breach of
fiduciary duty as a Director, except for any matter in respect of which such
Director shall be liable under Section 174 of Title 8 of the Delaware Code
(relating to the General Corporation Law of the Sate of Delaware) or any
amendment thereto or successor provision thereto or shall be liable by reason
that, in addition to any and all other requirements for such liability, he or
she (a) breached his or her duty of loyalty to the corporation or its
stockholders, (b) shall not have acted in good faith, or in failing to act,
shall not have acted in good faith, (c) acted in a manner involving intentional
misconduct or a knowing violation of law or, in failing to act, acted in a
manner involving intentional misconduct or a knowing violation of law, or (d)
derived an improper personal benefit. Neither the amendment nor repeal of this
paragraph, nor the adoption of any provision of the Restated Certificate of
Incorporation inconsistent with this paragraph, shall eliminate or reduce the
effect of this paragraph in respect of any matter occurring, or any cause of
action, suit or claim that, but for this paragraph would accrue or arise, prior
to such amendment, repeal or adoption of an inconsistent provision.
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<PAGE>
ARTICLE VI
Subject to the rights of the holders of any series of Preferred Stock or any
other series or class of stock as set forth in this Restated Certificate of
Incorporation, any action required or permitted to be taken by the stockholders
of the corporation must be effected at a duly called annual or special meeting
of stockholders of the corporation and may not be effected by any consent in
writing in lieu of a meeting of such stockholders. Notwithstanding anything
contained in this Restated Certificate of Incorporation to the contrary, the
affirmative vote of at least 80 percent of the voting power of the then
outstanding voting stock, voting together as a single class, shall be required
to amend, repeal or adopt any provision inconsistent with this Article VI.
ARTICLE VII
The Board of Directors is hereby authorized to create and issue, whether or
not in connection with the issuance and sale of any of its stock or other
securities or property, rights entitling the holders thereof to purchase from
the corporation shares of stock or other securities of the corporation or any
other corporation. The times at which and the terms upon which such rights are
to be issued will be determined by the Board of Directors and set forth in the
contracts or instruments that evidence such rights. The authority of the Board
of Directors with respect to such rights shall include, but not be limited to,
determination of the following:
(a) the initial purchase price per share or other unit of the stock or
other securities or property to be purchased upon exercise of such rights;
(b) provisions relating to the times at which and the circumstances
under which such rights may be exercised or sold or otherwise transferred,
either together with or separately from, any other stock or other
securities of the Corporation;
(c) provisions which adjust the number or exercise price of such rights
or amount or nature of the stock or other securities or property receivable
upon exercise of such rights in the event of a combination, split or
recapitalization of any stock of the corporation, a change in ownership of
the corporation's stock or other securities or a reorganization, merger,
consolidation, sale of assets or other occurrence relating to the
corporation or any stock of the corporation, and provisions restricting the
ability of the corporation to enter into any such transaction absent an
assumption by the other party or parties thereto of the obligations of the
corporation under such rights;
(d) provisions which deny the holder of a specified percentage of the
outstanding stock or other securities of the corporation the right to
exercise such rights and/or cause the rights held by such holder to become
void;
(e) provisions which permit the corporation to redeem or exchange such
rights; and
(f) the appointment of a rights agent with respect to such rights.
ARTICLE VIII
(1) Vote Required for Certain Business Combinations.
(a) In addition to any affirmative vote required by law or this Restated
Certificate of Incorporation, and except as otherwise expressly provided in
Paragraph (2) of this Article VIII:
(i) any merger or consolidation of the corporation or any Subsidiary
(as hereinafter defined) with (A) any Interested Stockholder (as
hereinafter defined), or (B) any other corporation
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<PAGE>
(whether or not itself an Interested Stockholder) which is, or after
such merger or consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or
with any Interested Stockholder, including all Affiliates of the
Interested Stockholder, of any assets of the corporation or any
Subsidiary having an aggregate Fair Market Value (as hereinafter
defined) of $10,000,000 or more; or
(iii) the issuance or transfer by the corporation or any Subsidiary
(in one transaction or a series of transactions) of any securities of
the corporation or any Subsidiary to any Interested Stockholder,
including all Affiliates of the Interested Stockholder, in exchange
for cash, securities or other property (or a combination thereof)
having an aggregate Fair Market Value of $10,000,000 or more; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by or on behalf of an
Interested Stockholder or any Affiliates of an Interested Stockholder;
or
(v) any reclassification of securities (including any reverse stock
split), or recapitalization of the corporation, or any merger or
consolidation of the corporation with any of its Subsidiaries or any
other transaction (whether or not an Interested Stockholder is a party
thereto) which has the effect, directly or indirectly, of increasing
the proportionate share of the outstanding shares of any class of
equity or convertible securities of the corporation or any Subsidiary
which are directly or indirectly owned by any Interested Stockholder
or one or more Affiliates of the Interested Stockholder;
shall require the affirmative vote of the holders of at least 66-2/3% of
the voting power of the then outstanding voting stock, voting together as a
single class, including the affirmative vote of the holders of at least 66-
2/3% of the voting power of the then outstanding voting stock not owned
directly or indirectly by an Interested Stockholder or any Affiliate of any
Interested Stockholder. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be permitted, by law or in any agreement with any national
securities exchange or otherwise.
(b) The term "Business Combination" as used in this Article VIII shall
mean any transaction described in any one or more of clauses (i) through
(v) of paragraph (a) of this Paragraph (1).
(2) When Higher Vote is Not Required. The provisions of Paragraph (1) of
this Article VIII shall not be applicable to any particular Business
Combination, and such Business Combination shall require only such affirmative
vote as is required by law or any other provision of this Restated Certificate
of Incorporation, if the conditions specified in either of the following
paragraphs (a) or (b) are met:
(a) The Business Combination shall have been approved by a majority of
the Continuing Directors (as hereinafter defined).
(b) Price and Procedure Requirements. All of the following conditions
shall have been met:
(i) The aggregate amount of the cash and the Fair Market Value (as
hereinafter defined) as of the date of the consummation of the
Business Combination of consideration other than cash, to be received
per share by holders of Common Stock in such Business Combination,
shall be at least equal to the highest of the following:
(A) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Stockholder for any shares of Common
Stock acquired by it (I) within the two-year period immediately
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prior to the first public announcement of the proposal of such
Business Combination (the "Announcement Date"), or (II) in the
transaction in which it became an Interested Stockholder,
whichever is higher;
(B) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (the "Determination
Date"), whichever is higher; and
(C) (if applicable) the price per share equal to the Fair
Market Value per share of Common Stock determined pursuant to
paragraph (b)(i)(B) above, multiplied by the ratio of (I) the
highest per share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid by the
Interested Stockholder for any shares of Common Stock acquired by
it within the two year period immediately prior to the
Announcement Date to (II) the Fair Market Value per share of
Common Stock on the first day in such two-year period upon which
the Interested Stockholder acquired any shares of Common Stock.
(ii) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of
shares of any other class, other than Common Stock or Excluded
Preferred Stock, of outstanding voting stock shall be at least equal
to the highest of the following (it being intended that the
requirements of this paragraph (b)(ii) shall be required to be met
with respect to every such class of outstanding voting stock whether
or not the Interested Stockholder has previously acquired any shares
of a particular class of voting stock):
(A) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Stockholder for any shares of such
class of voting stock acquired by it (I) within the two-year
period immediately prior to the Announcement Date, or (II) in the
transaction in which it became an Interested Stockholder,
whichever is higher;
(B) (if applicable) the highest preferential amount per share
to which the holders of shares of such class of voting stock are
entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation;
(C) the Fair Market Value per share of such class of voting
stock on the Announcement Date or on the Determination Date,
whichever is higher; and
(D) (if applicable) the price per share equal to the Fair
Market Value per share of such class of voting stock determined
pursuant to paragraph (b)(ii)(C) above, multiplied by the ratio
of (I) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Stockholder for any shares of such class of voting
stock acquired by it within the two-year period immediately prior
to the Announcement Date to (II) the Fair Market Value per share
of such class of voting stock on the first day in such two-year
period upon which the Interested Stockholder acquired any shares
of such class of voting stock.
(iii) The consideration to be received by holders of a particular
class of outstanding voting stock (including Common Stock and other
than Excluded Preferred Stock) shall be in cash or in the same form as
the Interested Stockholder has previously paid for shares of such
class of voting stock. If the Interested Stockholder has paid for
shares of any class of voting stock with varying forms of
consideration, the form of consideration for such class of voting
stock shall be either cash or the form used to acquire the largest
number of shares of such class of voting stock previously acquired by
it.
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(iv) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (A) there shall have been no failure to declare and pay
at the regular date therefor any full quarterly dividends (whether or
not cumulative) on any outstanding Preferred Stock, except as approved
by a majority of the Continuing Directors, (B) there shall have been
no reduction in the annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of the Common Stock),
except as approved by a majority of the Continuing Directors; (C)
there shall have been an increase in the annual rate of dividends as
necessary fully to reflect any recapitalization (including any reverse
stock split), reorganization or any similar reorganization which has
the effect of reducing the number of outstanding shares of the Common
Stock, unless the failure so to increase such annual rate is approved
by a majority of the Continuing Directors; and (D) such Interested
Stockholder shall not have become the Beneficial Owner of any
additional voting stock except as part of the transaction which
results in such Interested Stockholder becoming an Interested
Stockholder.
(v) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to stockholders of the corporation at
least thirty (30) days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is
required to be mailed pursuant to such Act or subsequent provisions).
(3) Certain Definitions. For purposes of this Article VIII:
(a) "Person" shall mean any individual, firm, corporation or other
entity.
(b) "Interested Stockholder" shall mean any Person (other than the
corporation or any Subsidiary) who or which:
(i) itself, or along with its Affiliates, is the Beneficial Owner,
directly or indirectly, of more than 15% of the then outstanding
voting stock; or
(ii) is an Affiliate of the corporation and at any time within the
two-year period immediately prior to the date in question was itself,
or along with its Affiliates, the Beneficial Owner, directly or
indirectly, of 15% or more of the then outstanding voting stock; or
(iii) is an assignee of or has otherwise succeeded to any voting
stock which was at any time within the two-year period immediately
prior to the date in question beneficially owned by any Interested
Stockholder, if such assignment or succession shall have occurred in
the course of a transaction or series of transactions not involving a
public offering within the meaning of the Securities Act of 1933.
(c) "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations of the Securities Exchange
Act of 1934, as in effect on April 23, 1997. In addition, a person shall
be the "Beneficial Owner" of any voting stock which such Person or any of
its Affiliates or Associates has (A) the right to acquire (whether such
right is exercisable immediately or only after the passage of time),
pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement
or understanding (but neither such Person nor any such Affiliate or
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Associate shall be deemed to be the Beneficial Owner of any shares of
voting stock solely by reason of a revocable proxy granted for particular
meeting of stockholders, pursuant to a public solicitation of proxies for
such meeting, and with respect to which shares neither such Person nor any
such Affiliate or Associate is otherwise deemed the Beneficial Owner).
(d) For the purpose of determining whether a Person is an Interested
Stockholder pursuant to paragraph (b) of this Paragraph (3), the number of
shares of voting stock deemed to be outstanding shall include shares deemed
owned through application of paragraph (c) of this Paragraph (3) but shall
not include any other shares of voting stock which may be issuable pursuant
to any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options or otherwise.
(e) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on April 23, 1997.
(f) "Subsidiary" shall mean any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the
corporation, provided, however, that for the purposes of the definition of
Interested Stockholder set forth in paragraph (b) of this Paragraph (3),
the term "Subsidiary" shall mean only a corporation of which a majority of
each class of equity security is owned, directly or indirectly, by the
corporation.
(g) "Continuing Director" shall mean any member of the Board of
Directors of the corporation (the "Board") who is unaffiliated with the
Interested Stockholder and was a member of the Board prior to the time that
the Interested Stockholder became an Interested Stockholder, and any
director who is thereafter chosen to fill any vacancy on the Board or who
is elected and who, in either event, is unaffiliated with the Interested
Stockholder and in connection with his or her initial assumption of office
is recommended for appointment or election by a majority of Continuing
Directors then on the Board.
(h) "Fair Market Value" shall mean (i) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the date
in question of a share of such stock on the Composite Tape for New York
Stock Exchange listed stocks, or, if such stock is not quoted on the
Composite Tape, on the New York Stock Exchange, or, if such stock is not
listed on such exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the 30-
day period preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system then in
use in its stead, or if no such quotations are available, the fair market
value on the date in question of a share of such stock as determined by the
Board in accordance with Paragraph (4) of this Article VIII; and (ii) in
the case of property other than cash or stock, the fair market value of
such property on the date in question as determined by the Board in
accordance with Paragraph (4) of this Article VIII.
(i) In the event of any Business Combination in which the corporation
survives, the phrase "other consideration to be received" as used in
paragraphs (b)(i) and (ii) of Paragraph (2) of this Article VIII shall
include the shares of Common Stock and/or the shares of any other class of
outstanding voting stock retained by the holders of such shares.
(j) "Excluded Preferred Stock" means any series of Preferred Stock with
respect to which a majority of the continuing Directors have approved a
Preferred Stock designation creating such series that expressly provides
that the provisions of this Article VIII shall not apply.
(4) Powers of Continuing Directors. The Continuing Directors of the
corporation shall have the power and duty to determine for the purposes of this
Article VIII, on the basis of information known to them after reasonable
inquiry, all facts necessary to determine compliance with this Article VIII,
including, without limitation (a) whether a Person is an Interested Stockholder,
(b) the number of shares of voting stock beneficially owned by
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any Person, (c) whether a Person is an Affiliate or Associate of another, (d)
whether the applicable conditions set forth in paragraph (b) of Paragraph (2) of
this Article VIII have been met with respect to any Business Combination, (e)
the Fair Market Value of stock or other property in accordance with paragraph
(h) of Paragraph (3) of this Article VIII, and (f) whether the assets which are
the subject to any Business Combination have, or the consideration to be
received for the issuance or transfer of securities by the corporation or any
Subsidiary in any Business Combination has, an aggregate Fair Market Value of
$10,000,000 or more.
(5) No Effect on Fiduciary Obligations of Interested Stockholders. Nothing
contained in this Article VIII shall be construed to relieve any Interested
Stockholder from any fiduciary obligation imposed by law.
(6) Amendment, Repeal, etc. Notwithstanding any other provisions of this
Restated Certificate of Incorporation or the By-laws of the corporation (and
notwithstanding the fact that a lesser percentage may be permitted by law, this
Restated Certificate of Incorporation or the By-laws of the corporation), but in
addition to any affirmative vote of the holders of any particular class of the
voting stock required by law or this Restated Certificate of Incorporation, the
affirmative vote of the holders of 66-2/3% of the voting power of the shares of
the then outstanding voting stock voting together as a single class, including
the affirmative vote of the holders of 66-2/3% of the voting power of the then
outstanding voting stock now owned directly or indirectly by any Interested
Stockholder or any Affiliate of any Interested Stockholder, shall be required to
amend or repeal, or adopt any provisions inconsistent with, this Article VIII of
this Restated Certificate of Incorporation.
4. This Restated Certificate of Incorporation was duly adopted by the Board
of Directors in accordance with Sections 242 and 245 of the General Corporation
Law of the State of Delaware.
5. In accordance with Section 103(d) of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation shall be effective
at ___________, Central Standard Time, on _____________________, 1997,
notwithstanding the actual date and time of filing hereof.
IN WITNESS WHEREOF, said Valero Refining and Marketing Company has caused
this Restated Certificate of Incorporation to be signed by its
____________________, and attested by its Secretary this _______ day of
_________________________, 1997.
VALERO REFINING AND MARKETING COMPANY
By:
------------------------------------------
[NAME OF OFFICER AND TITLE]
ATTEST:
By:
---------------------------
[NAME OF OFFICER, SECRETARY]
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EXHIBIT 3.2
VALERO REFINING AND MARKETING COMPANY
BY-LAWS
(AMENDED AND RESTATED EFFECTIVE AS OF APRIL 23, 1997)
ARTICLE I.
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of stockholders shall be held at such date and
time and at such place as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting, for the purposes of electing
directors and of transacting such other business as may properly come before the
meeting. At least ten days' notice shall be given to the stockholders of the
date, time and place so fixed. Any previously scheduled annual meeting of the
stockholders may be postponed by resolution of the Board of Directors upon
public notice given on or prior to the date previously scheduled for such annual
meeting of stockholders.
SECTION 2. Except as otherwise provided by law or by the Restated Certificate
of Incorporation of the Corporation, as from time to time amended (the "Restated
Certificate of Incorporation"), special meetings of the stockholders may be
called only by the Chief Executive Officer or by the Board of Directors pursuant
to a resolution adopted by a majority of the directors which the Corporation
would have if there were no vacancies. Upon written request of any person or
persons who have duly called a special meeting, it shall be the duty of the
Secretary to fix the date and time of the special meeting (which date shall be
not less than ten nor more than sixty days after receipt of the request) and to
give due notice thereof. If the Secretary shall neglect or refuse to fix the
date or time of the meeting or to give notice thereof, the person or persons
calling the meeting may do so. Any such notice shall include a statement of the
purpose or purposes for which the special meeting is called. Any previously
scheduled special meeting of the stockholders may be postponed by resolution of
the Board of Directors upon public notice given on or prior to the date
previously scheduled for such special meeting of stockholders.
SECTION 3. Every special meeting of the stockholders shall be held at such
place within or without the State of Delaware as the Board of Directors may
designate, or, in the absence of such designation, at the registered office of
the Corporation in the State of Delaware.
SECTION 4. Written notice of every meeting of the stockholders shall be given
by the Secretary to each stockholder of record entitled to vote at the meeting,
by placing such notice in the mail at least ten days, but not more than sixty
days, prior to the date fixed for the meeting addressed to each stockholder at
his address appearing on the books of the Corporation or supplied by him to the
Corporation for the purpose of notice.
SECTION 5. The Board of Directors may fix a date, which date shall not precede
the date upon which the resolution fixing such record date is adopted by the
Board of Directors, and which date shall be not less than ten nor more than
sixty days preceding the date of any meeting of stockholders, as a
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record date for the determination of stockholders entitled to notice of, or to
vote at, any such meeting. The Board of Directors shall not close the books of
the Corporation against transfers of shares during the whole or any part of such
period.
SECTION 6. The notice of every meeting of the stockholders may be accompanied
by a form of proxy approved by the Board of Directors in favor of such person or
persons as the Board of Directors may select.
SECTION 7. (a) Except as otherwise provided by law or by the Restated
Certificate of Incorporation or by these By-Laws, at any meeting of stockholders
the presence in person or by proxy of the holders of the outstanding shares of
stock of the Corporation entitled to vote thereat and having a majority of the
voting power with respect to a subject matter shall constitute a quorum for the
transaction of business as to that subject matter, and all questions with
respect to a subject matter, except the election of directors, shall be decided
by vote of the shares having a majority of the voting power so represented in
person or by proxy at the meeting and entitled to vote thereat. Election of
directors shall be determined by a plurality vote of the shares present in
person or by proxy and entitled to vote on the election of directors. The
stockholders present at any duly organized meeting may continue to do business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum.
(b) Every stockholder having the right to vote shall be entitled to vote in
person, or by proxy appointed by an instrument in writing subscribed by such
stockholder (which for purposes hereof may include a signature and form of proxy
pursuant to a facsimile or telegraphic form of proxy or any other instrument
acceptable to the duly appointed inspector or inspectors of such election),
bearing a date not more than three years prior to voting, unless such instrument
provides for a longer period, and filed with the Secretary of the Corporation
before, or at the time of, the meeting, or by such other method as may be
permitted under the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "DGCL"), and approved by the Board
of Directors. If such instrument shall designate two or more persons to act as
proxies, unless such instrument shall provide to the contrary, a majority of
such persons present at any meeting at which their powers thereunder are to be
exercised shall have and may exercise all the powers of voting thereby
conferred, or if only one be present, then such powers may be exercised by that
one; or, if an even number attend and a majority do not agree on any particular
issue, each proxy so attending shall be entitled to exercise such powers in
respect of the same portion of the shares as he is of the proxies representing
such shares.
(c) Any other corporation owning voting shares in the Corporation may vote
the same by its President or by proxy appointed by him, unless some other person
shall be appointed to vote such shares by resolution of the Board of Directors
of such shareholder corporation. A partnership holding shares of the
Corporation may vote such shares by any general partner or by proxy appointed by
any general partner.
(d) Shares standing in the name of a deceased person may be voted by the
executor or administrator of such deceased person, either in person or by proxy.
Shares standing in the name of a guardian, conservator or trustee may be voted
by such fiduciary, either in person or by proxy,
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but no such fiduciary shall be entitled to vote shares held in such fiduciary
capacity without a transfer of such shares into the name of such fiduciary.
Shares standing in the name of a receiver may be voted by such receiver. A
stockholder whose shares are pledged shall be entitled to vote such shares,
unless in the transfer by the pledgor on the books of the Corporation, he has
expressly empowered the pledgee to vote thereon, in which case only the pledgee,
or his proxy, may represent the stock and vote thereon.
SECTION 8. Except as otherwise provided by law or by the Restated Certificate
of Incorporation, the presiding officer of any meeting or the holders of a
majority of the shares of stock of the Corporation entitled to vote at such
meeting, present in person or represented by proxy, whether a quorum is present,
shall have the power to adjourn the meeting from time to time, without notice
other than announcement at the meeting. At any such adjourned meeting at which
a quorum shall be present any action may be taken that could have been taken at
the meeting originally called; provided, that if the adjournment is for more
than thirty days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the adjourned meeting.
SECTION 9. (a) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the Corporation who was a stockholder
of record at the time of giving of the notice provided for in this Section 9,
who is entitled to vote with respect to such matter at the meeting and who
complies with the notice procedures set forth in this Section 9. At any annual
meeting of stockholders, the presiding officer of such meeting may announce the
nominations and other business to be considered which are set forth in the
Corporation's notice of meeting and proxy statement and, by virtue thereof, such
nominations and other business so announced shall be properly before such
meeting and may be considered and voted upon by the stockholders of the
Corporation entitled to vote thereat without further requirement of nomination,
motion or second.
(b) In order for nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (iii) of Paragraph
(a) of this Section 9, the stockholder making such nominations or proposing such
other business must theretofore have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice
shall be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the 60th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the giving of a stockholder's
notice as described above. Such stockholder's notice shall set forth (i) a
description
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of any arrangements or understandings that exist with respect to the election or
reelection of directors of the Corporation between such stockholder or the
beneficial owner, if any, on whose behalf such notice is given and any other
person (or, if no such arrangements or understandings exist, a statement to such
effect), together with, as to each person whom the stockholder proposes to
nominate at the meeting for election or reelection as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to serving as a director if elected);
(ii) as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (A) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner, and (B)
the class and number of shares of the Corporation which are owned beneficially
and of record by such stockholder and such beneficial owner.
(c) Notwithstanding anything in the second sentence of Paragraph (b) of
this Section 9 to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation at an annual meeting is
increased, whether by increase in the size of the Board of Directors, or by any
vacancy in the Board of Directors to be filled at such annual meeting, and there
is no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this Section 9 shall
also be considered timely, but only with respect to nominees for such vacant
positions and for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the 10th day following the day on which
such public announcement is first made by the Corporation.
SECTION 10. Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (a)
by or at the direction of the Board of Directors or (b) provided that the Board
of Directors has determined that directors shall be elected at such meeting, by
any stockholder of the Corporation who is a stockholder of record at the time of
giving of notice provided for in this Section 10, who shall be entitled to vote
at the meeting and who complies with the notice procedures set forth in this
Section 10. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder's notice required by Paragraph (b) of
Section 9 of this Article I shall be delivered to the Secretary at the principal
executive offices of the Corporation not earlier than the close of business on
the 90th day prior to such special meeting and not later than the close of
business on the later of the 60th day prior to such special meeting or the
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10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
SECTION 11. (a) Only such persons who are nominated in accordance with the
procedures set forth in Sections 9 and 10 of this Article I shall be eligible to
serve as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in such Sections. The presiding officer of the meeting
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in these By-Laws, and if any
proposed nomination or business is not in compliance with these By-Laws, to
declare that such defective proposal shall be disregarded.
(b) For purposes of Sections 9 and 10 of this Article I, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Services, Associated Press, Reuters or comparable national news service or
in a document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(c) Notwithstanding the provisions of Sections 9, 10 and 11 of this Article
I, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in these By-Laws shall be deemed to affect
any rights (i) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any class or series of Preferred Stock of the Corporation
to elect directors under specified circumstances.
SECTION 12. In accordance with Article VI of the Restated Certificate of
Incorporation, the stockholders shall not be entitled to consent to corporate
action in writing without a meeting.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. Except as otherwise fixed
pursuant to the provisions of the Restated Certificate of Incorporation relating
to the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, the number of directors shall be as
fixed in such manner as may be determined by the vote of not less than a
majority of the directors then in office, but shall not be less than five nor
more than thirteen directors. The Board of Directors, excluding however,
directors elected pursuant to the provisions of the Restated Certificate of
Incorporation relating to the rights of holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation to
elect additional directors under specified circumstances, shall be divided into
three classes as provided in the Restated Certificate of Incorporation. The
directors shall be elected
5
<PAGE>
as provided in the Restated Certificate of Incorporation at the annual meeting
of stockholders, except as provided in Section 2 of this Article II. Each
director shall hold office for the full term to which he shall have been elected
and until his successor is duly elected and shall qualify, or until his earlier
death, resignation or removal. A director need not be a resident of the State of
Delaware or a stockholder of the Corporation. Any person who is 70 years of age
or more (or, in the case of any person first elected or appointed as a director
of the Company, or of the Company's predecessor--Valero Energy Corporation, on
or prior to February 24, 1993, 72 years of age or more) shall not be eligible to
hold a directorship; provided, however, that any person who reaches the age of
70 (or, in the case of any person first elected or appointed as a director of
the Company, or of the Company's predecessor--Valero Energy Corporation, on or
prior to February 24, 1993, 72 years of age) while a director may serve the
remainder of his term of office but may not be reelected.
SECTION 2. Any vacancy in the Board of Directors, including vacancies resulting
from an increase in the number of directors, shall be filled by a majority of
the remaining members of the Board, though less than a quorum. When newly
created directorships are filled by the Board of Directors, such additional
directors shall not be assigned to a director class until the next annual
meeting of stockholders. Subject to the foregoing, directors elected to fill a
vacancy shall hold office for a term expiring at the annual meeting at which the
term of the class to which they shall have been elected expires.
SECTION 3. Any director may resign at any time by written notice to the
Corporation. Any such resignation shall take effect at the date of receipt of
such notice or at any later time specified therein, and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 4. Regular meetings of the Board of Directors shall be held at such
place or places within or without the State of Delaware, at such hour and on
such day as may be fixed by resolution of the Board of Directors, without
further notice of such meetings. The time or place of holding regular meetings
of the Board of Directors may be changed by the Chairman of the Board or the
Chief Executive Officer by giving written notice thereof as provided in Section
6 of this Article II.
SECTION 5. Special meetings of the Board of Directors shall be held, whenever
called by the Chairman of the Board or the Chief Executive Officer, by a
majority of the Board of Directors or by resolution adopted by the Board of
Directors, at such place or places within or without the State of Delaware as
may be stated in the notice of the meeting.
SECTION 6. Written notice of the time and place of all special meetings of the
Board of Directors, and written notice of any change in the time or place of
holding the regular meetings of the Board of Directors, shall be given to each
director either personally or by mail, telephone, express delivery service,
facsimile, telex or similar means of communication at least one day before the
date of the meeting; provided, however, that notice of any meeting need not be
given to any director if waived by him in writing, or if he shall be present at
such meeting.
SECTION 7. A majority of the directors in office shall constitute a quorum of
the Board of Directors for the transaction of business; but a lesser number may
adjourn from day to day until a quorum is
6
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present. The directors present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
directors to leave less than a quorum, provided however, that such remaining
directors constitute not less than one-third of the total number of directors.
Except as otherwise provided by law or in these By-Laws, all questions shall be
decided by the vote of a majority of the directors present. Directors may
participate in any meeting of the directors, and members of any committee of
directors may participate in any meeting of such committee, by means of
conference telephone or similar communications equipment by means of which all
persons participating in such meeting can hear each other, and such
participation shall constitute presence in person at any such meeting.
SECTION 8. Any action which may be taken at a meeting of the directors or
members of any committee of directors may be taken without a meeting if a
consent in writing setting forth the action so taken shall be signed by all of
the directors or members of such committee of directors, as the case may be, and
shall be filed with the Secretary.
SECTION 9. Directors shall be entitled to such compensation for their services
as may be approved by the Board of Directors, including, if so approved by
resolution of the Board of Directors, a fixed sum and expenses of attendance, if
any, for attendance at each regular or special meeting of the Board of Directors
or any meeting of a committee of directors. No provision of these By-Laws shall
be construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
SECTION 10. Subject to the rights of the holders of any series of Preferred
Stock with respect to such series of Preferred Stock, any director, or the
entire Board of Directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least 60 percent of
the voting power of all of the then-outstanding shares of voting stock, voting
together as a single class.
ARTICLE III.
COMMITTEES OF DIRECTORS
SECTION 1. The Board of Directors may, by resolution adopted by a majority of
the whole Board, designate one or more committees of the Board, including, as
they shall so determine, an Executive Committee, an Audit Committee and a
Compensation Committee. Any committee of the Board designated by the Board of
Directors shall consist of one or more of the directors of the Corporation.
SECTION 2. The Executive Committee, during intervals between meetings of the
Board of Directors and while the Board is not in session, shall have and
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, including (except as
otherwise limited by law, the Restated Certificate of Incorporation or these By-
Laws) the power and authority to appoint officers and agents of the Corporation,
to approve guarantees, leases, contracts, notes, bonds and other evidences of
indebtedness, to declare dividends, to authorize the issuance of stock, to adopt
certificates of ownership and merger pursuant to the provisions of the DGCL, and
to approve commitments for expenditures subject to such expenditure approval
authority
7
<PAGE>
limits as the Board of Directors may from time to time establish. In the absence
of the appointment of a Nominating Committee, the Executive Committee may also
review possible director candidates, including director recommendations properly
presented by stockholders, and recommend to the full Board of Directors
individuals suited for election as directors. The Executive Committee may
recommend the establishment of committees of the Board of Directors and review
and recommend annually to the full Board of Directors the slate of director
nominees for election by the Corporation's stockholders. The Executive Committee
may also review the qualifications of the Corporation's commercial and
investment bankers, review relations with the Corporation's creditors, security
holders and investment bankers and recommend changes to the capital structure of
the Corporation.
SECTION 3. The Audit Committee may make recommendations to the Board of
Directors concerning particular persons or firms to be employed by this
Corporation as its independent auditors and consult with the persons or firms so
chosen with regard to the plan of audit; review, in consultation with the
independent auditors, their audit report or proposed audit report and the
accompanying management letter, if any; consult with the independent auditors
periodically and out of the presence of management, if deemed appropriate, with
regard to the adequacy of internal reporting and controls, including those
concerning hedging and trading activities; consult with internal auditors, as
appropriate, and review and approve the annual internal audit program and
internal audit reports; and review and recommend approval of annual financial
statements and other financial statements, as required, of the Corporation. The
Audit Committee may review and make recommendations to the Board of Directors
concerning the Corporation's conflict of interest policy. The Audit Committee
may also review the Corporation's compliance with applicable environmental laws
and regulations; review and approve internal environmental assessment and
compliance programs, as it shall deem appropriate; and consult with such
officers and employees of the Corporation, and such independent persons or
firms, as it shall deem appropriate, with respect to environmental matters.
SECTION 4. The Compensation Committee may review the Corporation's compensation
policies and programs, review and adopt compensation and employee benefit plans
for the employees of the Corporation, administer the Corporation's stock bonus
plans, stock option plans, non-employee director stock plans and other executive
and director compensation arrangements, approve amendments to and
interpretations of all such plans for employees, executive officers or
directors, and have authority (which authority may be delegated to the Chief
Executive Officer or such other executive officers as the Compensation Committee
may determine) to appoint and remove, determine the term of office of members
of, and determine the size of any committee from time to time administering
employee benefit plans. The Compensation Committee shall make recommendations
to the Board of Directors with respect to directors' compensation and shall
approve compensation and management succession arrangements for the executive
officers of the Corporation, provided however, that compensation and management
succession arrangements for the Chief Executive Officer and the President shall
be approved by the Board of Directors upon recommendation of the Compensation
Committee. The Compensation Committee may also delegate to the Chief Executive
Officer or such other
8
<PAGE>
executive officer as the Compensation Committee may determine, provided however,
that each such amendment or related series of amendments so approved shall
involve costs to the Corporation not exceeding the expenditure approval
authority of the Chief Executive Officer as established from time to time by the
Board, and provided further, that neither the Chief Executive Officer nor any
such other executive officer shall have the authority to approve any such
amendment if such amendment would (a) materially increase the benefits accruing
to participants under such plan, (b) materially modify the requirements for
eligibility for participation in such plan, (c) increase the securities issuable
under such plan or (d) require stockholder approval under any provision of the
Restated Certificate of Incorporation, these By-Laws, or any federal or state
statute or regulation or the rules of the New York Stock Exchange.
SECTION 5. Any other committee of the Board designated by the Board of
Directors shall have and may, except as otherwise limited by statute, the
Restated Certificate of Incorporation or these By-Laws, exercise such powers and
authority of the Board of Directors in the management of the business of the
Corporation as may be provided in the resolution adopted by the Board of
Directors designating such committee of the Board of Directors. Each committee
of the Board of Directors may authorize the seal of the Corporation to be
affixed to all papers which may require it. The Board of Directors may
designate one or more directors as alternate members of any committee of the
Board of Directors who may replace any absent or disqualified member at any
meeting of such committee. In the absence or disqualification of any member of
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Such committee or committees shall have such name or names and such
limitations of authority as may be determined from time to time by resolution
adopted by the Board of Directors.
SECTION 6. Each committee of directors shall keep regular minutes of its
proceedings and report the same to the Board of Directors when required.
SECTION 7. Members of special or standing committees of the Board shall be
entitled to receive such compensation for serving on such committees as the
Board of Directors shall determine.
ARTICLE IV.
CHAIRMAN OF THE BOARD
The Chairman of the Board of Directors, if there be one, shall be elected from
among the directors, shall have the power to preside at all meetings of the
Board of Directors and to sign (together with the Secretary or an Assistant
Secretary) certificates for shares of the Corporation, and shall have such other
powers and shall be subject to such other duties as the Board of Directors may
from time to time prescribe.
ARTICLE V.
OFFICERS
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SECTION 1. The officers of the Corporation shall consist of a Chief Executive
Officer, a President, one or more Vice Presidents, any one or more of which may
be designated an Executive Vice President or a Senior Vice President, a General
Counsel, a Chief Financial Officer, a Secretary, a Treasurer and a Controller.
The Board of Directors may appoint such other officers and agents, including
Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, as it
shall deem necessary, who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined by the Board
of Directors. Any two or more offices may be held by the same person.
SECTION 2. The officers of the Corporation shall be elected annually by the
Board of Directors at a regular meeting of the Board of Directors held
immediately prior to, or immediately following, the annual meeting of
stockholders, or as soon thereafter as conveniently possible. Each officer
shall hold office until his successor shall have been chosen and shall have
qualified or until his death or the effective date of his resignation or
removal.
SECTION 3. Any officer or agent elected or appointed by the Board of Directors
or the Executive Committee may be removed without cause by the Board of
Directors whenever, in its judgment, the best interests of the Corporation shall
be served thereby, but such removal shall be without prejudice to the
contractual rights, if any, of the person so removed. Any officer may resign at
any time by giving written notice to the Corporation. Any such resignation
shall take effect at the date of the receipt of such notice or at any later time
specified therein, and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 4. Any vacancy occurring in any office of the Corporation by death,
resignation, removal or otherwise, may be filled by the Board of Directors for
the unexpired portion of the term.
SECTION 5. The salaries of all officers and agents of the Corporation shall be
fixed by the Board of Directors or pursuant to its direction; and no officer
shall be prevented from receiving such salary by reason of his also being a
director.
SECTION 6. The Chief Executive Officer, the President and each Vice President
shall have authority to sign any deeds, bonds, mortgages, guarantees,
indemnities, contracts, checks, notes, drafts or other instruments authorized to
be executed by the Board of Directors or any duly authorized committee thereof,
or if so authorized in any approval authority policy or procedure adopted by or
at the direction of the Board of Directors, or if not inconsistent with the
Restated Certificate of Incorporation, these By-laws, any action of the Board of
Directors or any duly authorized committee thereof or any such policy or
procedure, and, together with the Secretary or any other officer of the
Corporation thereunto authorized by the Board or the Executive Committee, may
sign any certificates for shares of the Corporation which the Board of Directors
or the Executive Committee has authorized to be issued, except in cases where
the signing and execution of any such instrument or certificate has been
expressly delegated by these By-Laws or by the Board or the Executive Committee
to some other officer or agent of the Corporation or shall be required by law to
be otherwise executed.
10
<PAGE>
SECTION 7. The Chief Executive Officer shall serve as general manager of the
business and affairs of the Corporation and shall report directly to the Board
of Directors, with all other officers, officials, employees and agents reporting
directly or indirectly to him. The Chief Executive Officer shall preside at all
meetings of the stockholders. In the absence of the Chairman of the Board, or
if there is no Chairman of the Board, the Chief Executive Officer shall also
preside at all meetings of the Board of Directors unless the Board of Directors
shall have chosen another presiding officer. The Chief Executive Officer shall
formulate and submit to the Board of Directors or the Executive Committee
matters of general policy for the Corporation; he shall keep the Board of
Directors and Executive Committee fully informed and shall consult with them
concerning the business of the Corporation. Subject to the supervision,
approval and review of his actions by the Board of Directors, the Chief
Executive Officer shall have authority to cause the employment or appointment of
and the discharge of assistant officers, employees and agents of the
Corporation, and to fix their compensation; and to suspend for cause, pending
final action by the Board of Directors or Executive Committee, any officer
subordinate to the Chief Executive Officer. The Chief Executive Officer shall
vote, or give a proxy to any other officer of the Corporation to vote, all
shares of stock of any other corporation (or any partnership or other interest
in any partnership or other enterprise) standing in the name of the Corporation,
and in general he shall perform all other duties normally incident to such
office and such other duties as may be prescribed from time to time by the Board
of Directors or the Executive Committee. The Chief Executive Officer shall
designate the person or persons who shall exercise his powers and perform his
duties in his absence or disability and the absence or disability of the
President.
SECTION 8. The President shall be the chief operating officer of the
Corporation and, subject to the control of the Board of Directors and Chief
Executive Officer, shall in general supervise and control the business
operations of the Corporation. In the absence of the Chairman of the Board and
the Chief Executive Officer, the President shall preside at all meetings of the
Board of Directors and, in the absence of the Chief Executive Officer, he shall
preside at all meetings of the stockholders of the Corporation, unless in either
case the Board of Directors shall have chosen another presiding officer. He
shall keep the Chief Executive Officer fully informed and shall consult with him
concerning the business of the Corporation. He shall perform all other duties
normally incident to such office and such other duties as may be prescribed from
time to time by the Board of Directors, the Executive Committee or the Chief
Executive Officer. In the absence or disability of the Chief Executive Officer,
the President shall exercise the powers and perform the duties of the Chief
Executive Officer, unless such authority shall have been designated by the Board
of Directors, Executive Committee or Chief Executive Officer to another person.
SECTION 9. The Vice Presidents shall perform all duties normally incident to
such office and such other duties as may be prescribed from time to time by the
Board of Directors, the Executive Committee, the Chief Executive Officer or the
President.
SECTION 10. The General Counsel, as the chief legal officer of the Corporation,
shall have charge of all matters of legal importance to the Corporation and
shall keep the Board of Directors, the Executive Committee, the Chief Executive
Officer and the President advised of the character and progress of all legal
proceedings and claims by and against the Corporation, or in which it is
interested by reason of its ownership of or affiliation with other corporations
or entities; when
11
<PAGE>
requested by the Board of Directors, the Executive Committee, the Chief
Executive Officer or the President, render his opinion upon any subjects of
interest to the Corporation which may be referred to him; monitor activities of
the Corporation to assure that the Corporation complies with the laws applicable
to the Corporation and in general perform all other duties normally incident to
such office and such other duties as may be prescribed from time to time by the
Board of Directors, the Executive Committee, the Chief Executive Officer or the
President.
SECTION 11. The Chief Financial Officer shall be the principal financial
officer of the Corporation and, unless the Board of Directors shall so designate
another officer, shall also be the principal accounting officer of the
Corporation. The Chief Financial Officer shall in general supervise and control
the keeping and maintaining of proper and correct accounts of the Corporation's
assets, liabilities, receipts, disbursements, gains, losses, capital, surplus,
shares, properties and business transactions, as well as all funds, securities,
evidences of indebtedness and other valuable documents of the Corporation. He
shall keep the Chief Executive Officer fully informed and shall consult with him
concerning financial matters affecting the Corporation and shall render such
reports to the Board of Directors, the Executive Committee, the Chief Executive
Officer or the President as they may request. He shall perform all other duties
normally incident to such office and such other duties as may be prescribed from
time to time by the Board of Directors, the Executive Committee, the Chief
Executive Officer or the President.
SECTION 12. The Secretary shall attend, and record and have custody of, the
minutes of the meetings of the stockholders, the Board of Directors and
committees of directors; see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law; be custodian of the
corporate records and of the seal of the Corporation; sign with the Chairman of
the Board, the President or a Vice President, certificates for shares of the
Corporation, the issue of which shall have been authorized by resolution of the
Board of Directors or the Executive Committee; and in general, perform all
duties normally incident to such office and such other duties as may be
prescribed from time to time by the Board of Directors, the Executive Committee,
the Chief Executive Officer or the President.
SECTION 13. The Treasurer shall have charge and custody of and be responsible
for all funds of the Corporation; and in general, perform all the duties
incident to such office and such other duties as may be prescribed from time to
time by the Board of Directors, the Executive Committee, the Chief Executive
Officer or the President.
SECTION 14. The Controller shall have charge and supervision of and be
responsible for the accounting function of the Corporation and, in general
perform all duties incident to such office and such other duties as may be
prescribed from time to time by the Board of Directors, the Executive Committee,
Chief Executive Officer or the President.
12
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ARTICLE VI.
SEAL
The seal of the Corporation shall be in such form as the Board of Directors
shall prescribe.
ARTICLE VII.
CERTIFICATES OF STOCK
The shares of stock of the Corporation shall be represented by certificates of
stock, signed by the Chairman of the Board, the President or such Vice President
or other officer as may be designated by the Board of Directors or the Executive
Committee, and countersigned by the Secretary or an Assistant Secretary; and if
such certificates of stock are signed or countersigned by a transfer agent other
than the Corporation, or by a registrar other than the Corporation, such
signature of the Chairman of the Board, President, Vice President, or other
officer, and such countersignature of the Secretary or an Assistant Secretary,
or any of them, may be executed in facsimile, engraved or printed. In case any
officer who has signed or whose facsimile signature has been placed upon any
share certificate shall have ceased to be such officer because of death,
resignation or otherwise before the certificate is issued, it may be issued by
the Corporation with the same effect as if the officer had not ceased to be such
at the date of its issuance. Said certificate of stock shall be in such form as
the Board of Directors may from time to time prescribe.
ARTICLE VIII.
INDEMNIFICATION
SECTION 1. Each director or officer of the Corporation who was or is made a
party or is threatened to be made a party to or is involved in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he, or a person of whom he is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust, non-profit or charitable
organization, or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity while serving as a director, officer, employee or agent, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the DGCL (but, in the case of any amendment thereto, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of his heirs, executors and administrators. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the DGCL requires, the payment of such expenses incurred by a
director or officer in his capacity as a
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director or officer (but not in any other capacity in which service was or
is rendered by such person while a director or officer, including, without
limitation, service with respect to an employee benefit plan) in advance of the
final disposition of a proceeding shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under the applicable
provisions of the DGCL. The Corporation may, by action of its Board of Directors
or as required pursuant to the Restated Certificate of Incorporation, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
SECTION 2. The indemnification and advancement of expenses provided herein
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any agreement,
vote of stockholders, vote of disinterested directors, insurance arrangement or
otherwise, both as to action in his official capacity and as to action in
another capacity or holding such office.
ARTICLE IX.
AMENDMENTS
These By-laws may be altered, amended, added to or repealed by the Board of
Directors, acting by a majority vote of the members of the Board of Directors in
office, or by the stockholders having voting power with respect thereto,
provided that in the case of amendments by stockholders, the affirmative vote of
the holders of at least 80 percent of the voting power of the then outstanding
voting stock, voting together as a single class, shall be required to alter,
amend or repeal any provision of the By-laws.
14
<PAGE>
EXHIBIT 4.1
- -------------------------------------------------------------------------------
VALERO REFINING AND MARKETING COMPANY
and
HARRIS TRUST AND SAVINGS BANK
Rights Agent
Rights Agreement
Dated as of June 18, 1997
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1. Certain Definitions................................................................... 1
Section 2. Appointment of Rights Agent........................................................... 5
Section 3. Issue of Right Certificates........................................................... 5
Section 4. Form of Right Certificates............................................................ 8
Section 5. Countersignature andS Registration.................................................... 8
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen
Right Certificates.................................................................... 9
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights......................... 11
Section 8. Cancellation and Destruction of Right Certificates.................................... 12
Section 9. Availability of Preferred Shares...................................................... 13
Section 10. Preferred Shares Record Date.......................................................... 14
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.................... 14
Section 12. Certificate of Adjusted Purchase Price or Number of Shares............................ 25
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.................. 25
Section 14. Fractional Rights and Fractional Shares............................................... 27
Section 15. Rights of Action...................................................................... 29
Section 16. Agreement of Right Holders............................................................ 29
Section 17. Right Certificate Holder Not Deemed a Stockholder..................................... 30
Section 18. Concerning the Rights Agent........................................................... 31
Section 19. Merger or Consolidation or Change of Name of Rights Agent............................. 31
</TABLE>
i
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<TABLE>
<CAPTION>
<S> <C> <C>
Section 20. Duties of Rights Agent................................................................. 32
Section 21. Change of Rights Agent................................................................. 36
Section 22. Issuance of New Right Certificates..................................................... 37
Section 23. Redemption............................................................................. 37
Section 24. Exchange............................................................................... 38
Section 25. Notice of Certain Events............................................................... 40
Section 26. Notices................................................................................ 42
Section 27. Supplements and Amendments............................................................. 43
Section 28. Successors............................................................................. 43
Section 29. Benefits of this Agreement............................................................. 43
Section 30. Severability........................................................................... 44
Section 31. Governing Law.......................................................................... 44
Section 32. Counterparts........................................................................... 44
Section 33. Descriptive Headings................................................................... 44
Exhibit A - Form of Certificate of Designations....................................................... A-1
Exhibit B - Form of Right Certificate................................................................. B-1
Exhibit C - Summary of Rights to Purchase Preferred Shares............................................ C-1
</TABLE>
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Agreement, dated as of June 18, 1997, between Valero Refining and
Marketing Company, a Delaware corporation which following the Spin-Off (as
defined herein), will be renamed Valero Energy Corporation (the "Company"), and
Harris Trust and Savings Bank (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
(as hereinafter defined) of the Company to be issued in the distribution of
Common Shares (the "Spin-Off") by Valero Energy Corporation, a Delaware
corporation, to its stockholders, each Right representing the right to purchase
one one-hundredth of a Preferred Share of the Company, upon the terms and
subject to the conditions herein set forth, and has further authorized and
directed the issuance of one Right with respect to each Common Share that shall
become outstanding between the effective date of the Spin-Off (the "Record
Date") and the earliest of the Distribution Date, the Redemption Date and the
Final Expiration Date (as such terms are hereinafter defined).
Accordingly, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement,
-------------------
the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 15% or more of the Common Shares
of the Company then outstanding, but shall not include the Company, any
Subsidiary (as such term is hereinafter defined) of the Company, any employee
<PAGE>
benefit plan of the Company or any Subsidiary of the Company, any entity holding
Common Shares for or pursuant to the terms of any such plan or up until
immediately after the effective time of the Spin-Off, Valero Energy Corporation.
Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as
the result of an acquisition of Common Shares by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 15% or more of the Common Shares of the
Company then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 15% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
"Acquiring Person". Notwithstanding the foregoing, if the Board of Directors of
the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently, and such Person divests as
promptly as practicable a sufficient number of Common Shares so that such Person
would no longer be an "Acquiring Person," as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be an
"Acquiring Person" for any purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
2
<PAGE>
(i) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a bona fide
public offering of securities), or upon the exercise of conversion rights,
exchange rights, rights (other than these Rights), warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the
-------- -------
Beneficial Owner of, or to beneficially own, securities tendered pursuant
to a tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; provided, however, that a Person
-------- -------
shall not be deemed the Beneficial Owner of, or to beneficially own, any
security if the agreement, arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to such
Person in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable rules and regulations
promulgated under the Exchange Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding (other than
customary agreements with and between
3
<PAGE>
underwriters and selling group members with respect to a bona fide public
offering of securities) for the purpose of acquiring, holding, voting
(except to the extent contemplated by the proviso to Section 1(c)(ii)(B))
or disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday,
or a day on which banking institutions in New York or Illinois are authorized or
obligated by law or executive order to close.
(e) "Close of business" on any given date shall mean 5:00 P.M.,
Chicago, Illinois time, on such date; provided, however, that if such date is
-------- -------
not a Business Day it shall mean 5:00 P.M., Chicago, Illinois time, on the next
succeeding Business Day.
(f) "Common Shares" when used with reference to the Company shall mean
the shares of common stock, par value $0.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(h) "Final Expiration Date" shall have the meaning set forth in
Section 7 hereof.
4
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(i) "Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
(j) "Preferred Shares" shall mean shares of Junior Participating
Preferred Stock, Series I, par value $0.01 per share, of the Company having the
rights and preferences set forth in the Form of Certificate of Designations
attached to this Agreement as Exhibit A.
(k) "Redemption Date" shall have the meaning set forth in Section 7
hereof.
(l) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(m) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such Person.
Section 2. Appointment of Rights Agent. The Company hereby
---------------------------
appoints the Rights Agent to act as agent for the Company and the holders of the
Rights (who, in accordance with Section 3 hereof, shall prior to the
Distribution Date also be the holders of the Common Shares) in accordance with
the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents as
it may deem necessary or desirable.
Section 3. Issue of Right Certificates. (a) Until the earlier of
---------------------------
(i) the tenth day after the Shares Acquisition Date or (ii) the tenth business
day (or such later date as may be determined by action of the Board of Directors
prior to such time as any Person becomes an Acquiring Person) after the date of
the commencement by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
5
<PAGE>
Company or any entity holding Common Shares for or pursuant to the terms of any
such plan) of, or of the first public announcement of the intention of any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any entity
holding Common Shares for or pursuant to the terms of any such plan) to
commence, a tender or exchange offer the consummation of which would result in
any Person becoming the Beneficial Owner of Common Shares aggregating 15% or
more of the then outstanding Common Shares (including any such date which is
after the date of this Agreement and prior to the issuance of the Rights; the
earlier of such dates being herein referred to as the "Distribution Date"), (x)
the Rights will be evidenced (subject to the provisions of Section 3(b) hereof)
by the certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be Right Certificates) and
not by separate Right Certificates, and (y) the right to receive Right
Certificates will be transferable only in connection with the transfer of Common
Shares. As soon as practicable after the Distribution Date, the Company will
prepare and execute, the Rights Agent will countersign, and the Company will
send or cause to be sent (and the Rights Agent will, if requested, send) by
first-class, insured, postage-prepaid mail, at the cost and expense of the
Company to each record holder of Common Shares as of the close of business on
the Distribution Date, at the address of such holder shown on the records of the
Company, a Right Certificate, in substantially the form of Exhibit B hereto (a
"Right Certificate"), evidencing one Right for each Common Share so held. As of
the Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of
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<PAGE>
Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid
mail, to each record holder of Common Shares as of the close of business on the
Record Date, at the address of such holder shown on the records of the Company.
With respect to certificates for Common Shares outstanding as of the Record
Date, until the Distribution Date, the Rights will be evidenced by such
certificates registered in the names of the holders thereof together with a copy
of the Summary of Rights attached thereto. Until the Distribution Date (or the
earlier of the Redemption Date or the Final Expiration Date), the surrender for
transfer of any certificate for Common Shares outstanding on the Record Date,
with or without a copy of the Summary of Rights attached thereto, shall also
constitute the transfer of the Rights associated with the Common Shares
represented thereby.
(c) Certificates for Common Shares which become outstanding
(including, without limitation, reacquired Common Shares referred to in the last
sentence of this paragraph (c)) after the Record Date but prior to the earliest
of the Distribution Date, the Redemption Date or the Final Expiration Date shall
have impressed on, printed on, written on or otherwise affixed to them a legend
substantially as follows:
This certificate also evidences and entitles the holder hereof to certain
rights as set forth in a Rights Agreement between Valero Energy Corporation
(formerly Valero Refining and Marketing Company) and Harris Trust and
Savings Bank, dated as of June 18, 1997, 1997 (the "Rights Agreement"), the
terms of which are hereby incorporated herein by reference and a copy of
which is on file at the principal executive offices of Valero Energy
Corporation. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and will
no longer be evidenced by this certificate. Valero Energy Corporation will
mail to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, Rights issued to any
Person who becomes an Acquiring Person (as defined in the Rights Agreement)
may become null and void.
7
<PAGE>
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
In the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed canceled and retired so that the Company shall not
be entitled to exercise any Rights associated with the Common Shares which are
no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates
--------------------------
(and the forms of election to purchase Preferred Shares and of assignment to be
printed on the reverse thereof) shall be substantially the same as Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. Subject to the provisions of Section 22 hereof, the Right Certificates
shall entitle the holders thereof to purchase such number of one one-hundredths
of a Preferred Share as shall be set forth therein at the price per one one-
hundredth of a Preferred Share set forth therein (the "Purchase Price"), but the
number of such one one-hundredths of a Preferred Share and the Purchase Price
shall be subject to adjustment as provided herein.
Section 5. Countersignature and Registration. The Right
---------------------------------
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its Chief Executive Officer, its
8
<PAGE>
President, any of its Vice Presidents, or its Treasurer, either manually or by
facsimile signature, shall have affixed thereto the Company's seal or a
facsimile thereof, and shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature. The Right
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Right Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates, nevertheless, may
be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Right
Certificates had not ceased to be such officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Right Certificate, shall be a proper
officer of the Company to sign such Right Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause
to be kept, at its principal office, books for registration and transfer of the
Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
-----------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
- ---------------------------------------------------------------------
to the provisions of Section 14 hereof, at any time after the close of business
on the Distribution Date, and at or prior to the close of business on the
earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate
9
<PAGE>
or Right Certificates (other than Right Certificates representing Rights that
have become void pursuant to Section 11(a)(ii) hereof or that have been
exchanged pursuant to Section 24 hereof) may be transferred, split up, combined
or exchanged for another Right Certificate or Right Certificates, entitling the
registered holder to purchase a like number of one one-hundredths of a Preferred
Share as the Right Certificate or Right Certificates surrendered then entitled
such holder to purchase. Any registered holder desiring to transfer, split up,
combine or exchange any Right Certificate or Right Certificates shall make such
request in writing delivered to the Rights Agent, and shall surrender the Right
Certificate or Right Certificates to be transferred, split up, combined or
exchanged at the principal office of the Rights Agent. Thereupon the Rights
Agent shall countersign and deliver to the person entitled thereto a Right
Certificate or Right Certificates, as the case may be, as so requested. The
Company may require payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any transfer, split up,
combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's or Rights
Agent's request, reimbursement to the Company and the Rights Agent of all
reasonable expenses incidental thereto, and upon surrender to the Rights Agent
and cancellation of the Right Certificate if mutilated, the Company will make
and deliver a new Right Certificate of like tenor to the Rights Agent for
delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
10
<PAGE>
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
------------------------------------------------------
Rights. (a) The registered holder of any Right Certificate may exercise the
- ------
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-hundredth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the close of business on June 30, 2007 (the "Final Expiration
Date"), (ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date"), or (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $________,
and shall be subject to adjustment from time to time as provided in Section 11
or 13 hereof and shall be payable in lawful money of the United States of
America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier's
check or money order payable to the order of the Company, the Rights Agent shall
thereupon promptly (i)(A) requisition from any transfer agent of the Preferred
Shares certificates for the number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) requisition from the depositary agent
11
<PAGE>
depositary receipts representing such number of one one-hundredths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company hereby directs the depositary
agent to comply with such request, (ii) when appropriate, requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional shares
in accordance with Section 14 hereof, (iii) after receipt of such certificates
or depositary receipts, cause the same to be delivered to or upon the order of
the registered holder of such Right Certificate, registered in such name or
names as may be designated by such holder and (iv) when appropriate, after
receipt, deliver such cash to or upon the order of the registered holder of such
Right Certificate.
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to his
duly authorized assigns, subject to the provisions of Section 14 hereof.
Section 8. Cancellation and Destruction of Right Certificates.
--------------------------------------------------
All Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly permitted
by any of the provisions of this Rights Agreement. The Company shall deliver to
the Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all cancelled Right Certificates to the Company, or shall, at the
written
12
<PAGE>
request of the Company, destroy such cancelled Right Certificates, and
in such case shall deliver a certificate of destruction thereof to the Company.
Section 9. Availability of Preferred Shares. The Company
--------------------------------
covenants and agrees that it will cause to be reserved and kept available out of
its authorized and unissued Preferred Shares or any Preferred Shares held in its
treasury, the number of Preferred Shares that will be sufficient to permit the
exercise in full of all outstanding Rights in accordance with Section 7. The
Company covenants and agrees that it will take all such action as may be
necessary to ensure that all Preferred Shares delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such Preferred Shares
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
13
<PAGE>
Section 10. Preferred Shares Record Date. Each person in whose
----------------------------
name any certificate for Preferred Shares is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of the
Preferred Shares represented thereby on, and such certificate shall be dated,
the date upon which the Right Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; provided, however, that if the date of such surrender and
-------- -------
payment is a date upon which the Preferred Shares transfer books of the Company
are closed, such person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the Preferred Shares transfer books of the Company are open. Prior to
the exercise of the Rights evidenced thereby, the holder of a Right Certificate
shall not be entitled to any rights of a holder of Preferred Shares for which
the Rights shall be exercisable, including, without limitation, the right to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or
-------------------------------------------------
Number of Rights. The Purchase Price, the number of Preferred Shares covered by
- ----------------
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of Preferred Shares or
(D) issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which
14
<PAGE>
the Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a), the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of capital
stock issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if such Right had
been exercised immediately prior to such date and at a time when the Preferred
Shares transfer books of the Company were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification; provided, however, that in no
-------- -------
event shall the consideration to be paid upon the exercise of one Right be less
than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any Person
becomes an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (y) 50% of
the then current per share market price of the Company's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of the occurrence of
such event. In the event that any Person shall become an Acquiring Person and
the Rights shall then be
15
<PAGE>
outstanding, the Company shall not take any action which would eliminate or
diminish the benefits intended to be afforded by the Rights.
From and after the occurrence of such event, any Rights that are or
were acquired or beneficially owned by any Acquiring Person (or any Associate or
Affiliate of such Acquiring Person) shall be void and any holder of such Rights
shall thereafter have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate shall be issued pursuant to Section 3 that
represents Rights beneficially owned by an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the transfer of
any Rights to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence or any Associate or Affiliate thereof or to any nominee of
such Acquiring Person, Associate or Affiliate; and any Right Certificate
delivered to the Rights Agent for transfer to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit the
exercise in full of the Rights in accordance with the foregoing subparagraph
(ii), the Company shall take all such action as may be necessary to authorize
additional Common Shares for issuance upon exercise of the Rights. In the event
the Company shall, after good faith effort, be unable to take all such action as
may be necessary to authorize such additional Common Shares, the Company shall
substitute, for each Common Share that would otherwise be issuable upon exercise
of a Right, a number of Preferred Shares or fraction thereof such that the
current per share market price of one Preferred Share multiplied by such
16
<PAGE>
number or fraction is equal to the current per share market price of one Common
Share as of the date of issuance of such Preferred Shares or fraction thereof.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section 11(d)) on such
record date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of Preferred
Shares which the aggregate offering price of the total number of Preferred
Shares and/or equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price and the denominator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
-------- -------
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other
17
<PAGE>
than cash, the value of such consideration shall be as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent. Preferred Shares owned by or held
for the account of the Company shall not be deemed outstanding for the purpose
of any such computation. Such adjustment shall be made successively whenever
such a record date is fixed; and in the event that such rights, options or
warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
-------- -------
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments
18
<PAGE>
shall be made successively whenever such a record date is fixed; and in the
event that such distribution is not so made, the Purchase Price shall again be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current
per share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
(as such term is hereinafter defined) immediately prior to such date; provided,
--------
however, that in the event that the current per share market price of the
- -------
Security is determined during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security and prior to the
expiration of 30 Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the current per share market
price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Security is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Security is listed or admitted to trading or, if the Security is
not listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so
19
<PAGE>
quoted, the average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers, Inc.
Automated Quotations System ("NASDAQ") or such other system then in use, or, if
on any such date the Security is not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Security selected by the Board of Directors
of the Company. The term "Trading Day" shall mean a day on which the principal
national securities exchange on which the Security is listed or admitted to
trading is open for the transaction of business or, if the Security is not
listed or admitted to trading on any national securities exchange, a Business
Day.
(ii) For the purpose of any computation hereunder, the "current per
share market price" of the Preferred Shares shall be determined in accordance
with the method set forth in Section 11(d)(i). If the Preferred Shares are not
publicly traded, the "current per share market price" of the Preferred Shares
shall be conclusively deemed to be the current per share market price of the
Common Shares as determined pursuant to Section 11(d)(i) (appropriately adjusted
to reflect any stock split, stock dividend or similar transaction occurring
after the date hereof), multiplied by one hundred. If neither the Common Shares
nor the Preferred Shares are publicly held or so listed or traded, "current per
share market price" shall mean the fair value per share as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
-------- -------
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
20
<PAGE>
shall be made to the nearest cent or to the nearest one one-millionth of a
Preferred Share or one ten-thousandth of any other share or security as the case
may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-hundredths of a
share covered by a
21
<PAGE>
Right immediately prior to this adjustment by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price and (ii) dividing the
product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price.
The Company shall make a public announcement of its election to adjust the
number of Rights, indicating the record date for the adjustment, and, if known
at the time, the amount of the adjustment to be made. This record date may be
the date on which the Purchase Price is adjusted or any day thereafter, but, if
the Right Certificates have been issued, shall be at least 10 days later than
the date of the public announcement. If Right Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Right Certificates on such record date Right Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior
22
<PAGE>
to the date of adjustment, and upon surrender thereof, if required by the
Company, new Right Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Right Certificates so to be distributed
shall be issued, executed and countersigned in the manner provided for herein
and shall be registered in the names of the holders of record of Right
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a Preferred Share issuable upon the exercise
of the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of a
Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
--------
however, that the Company shall deliver to such holder a due bill or
- -------
23
<PAGE>
other appropriate instrument evidencing such holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the Company
to holders of its Preferred Shares shall not be taxable to such stockholders.
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-hundredths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each
24
<PAGE>
Common Share outstanding immediately prior to such event had issued with respect
to it. The adjustments provided for in this Section 11(n) shall be made
successively whenever such a dividend is declared or paid or such a subdivision,
combination or consolidation is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of
---------------------------------------------------
Shares. Whenever an adjustment is made as provided in Section 11 or 13 hereof,
- ------
the Company shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) file with the Rights Agent and with each transfer agent for the Common
Shares or the Preferred Shares a copy of such certificate and (c) mail a brief
summary thereof to each holder of a Right Certificate in accordance with Section
25 hereof. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained and shall not be obligated
or responsible for calculating any adjustment, nor shall it be deemed to have
knowledge of such an adjustment unless and until it shall have received such
certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
------------------------------------------------------
Earning Power. In the event, directly or indirectly, at any time after a Person
- -------------
has become an Acquiring Person, the Company shall consolidate with, or merge
with and into, any other Person, any Person shall consolidate with the Company,
or merge with and into the Company and the Company shall be the continuing or
surviving corporation of such merger and, in connection with such merger, all or
part of the Common Shares shall be changed into or exchanged for stock or other
securities of any other Person (or the Company) or cash or any other property,
or the Company shall sell or otherwise transfer (or one or more of its
Subsidiaries shall sell or otherwise transfer), in one or more transactions,
assets or earning power aggregating 50% or more of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any other Person other
than the Company or one
25
<PAGE>
or more of its wholly-owned Subsidiaries, then, and in each such case, proper
provision shall be made so that (i) each holder of a Right (except as otherwise
provided herein) shall thereafter have the right to receive, upon the exercise
thereof at a price equal to the then current Purchase Price multiplied by the
number of one one-hundredths of a Preferred Share for which a Right is then
exercisable, in accordance with the terms of this Agreement and in lieu of
Preferred Shares, such number of Common Shares of such other Person (including
the Company as successor thereto or as the surviving corporation) as shall equal
the result obtained by (A) multiplying the then current Purchase Price by the
number of one one-hundredths of a Preferred Share for which a Right is then
exercisable and dividing that product by (B) 50% of the then current per share
market price of the Common Shares of such other Person (determined pursuant to
Section 11(d) hereof) on the date of consummation of such consolidation, merger,
sale or transfer; (ii) the issuer of such Common Shares shall thereafter be
liable for, and shall assume, by virtue of such consolidation, merger, sale or
transfer, all the obligations and duties of the Company pursuant to this
Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such
issuer; and (iv) such issuer shall take such steps (including, but not limited
to, the reservation of a sufficient number of its Common Shares in accordance
with Section 9 hereof) in connection with such consummation as may be necessary
to assure that the provisions hereof shall thereafter be applicable, as nearly
as reasonably may be, in relation to the Common Shares thereafter deliverable
upon the exercise of the Rights. The Company shall not consummate any such
consolidation, merger, sale or transfer unless prior thereto the Company and
such issuer shall have executed and delivered to the Rights Agent a supplemental
agreement so providing. The Company shall not enter into any transaction of the
kind referred to in this Section 13 if at the time of such transaction there are
any rights, warrants, instruments or
26
<PAGE>
securities outstanding or any agreements or arrangements which, as a result of
the consummation of such transaction, would eliminate or substantially diminish
the benefits intended to be afforded by the Rights. The provisions of this
Section 13 shall similarly apply to successive mergers or consolidations or
sales or other transfers.
Section 14. Fractional Rights and Fractional Shares. (a) The
-------------------------------- ------
Company shall not be required to issue fractions of Rights or to distribute
Right Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Right Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For the purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Rights
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
27
<PAGE>
market maker making a market in the Rights selected by the Board of Directors of
the Company. If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith by
the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred Share
may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided, that such agreement shall provide that the holders of
--------
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred Shares
that are not integral multiples of one one-hundredth of a Preferred Share, the
Company shall pay to the registered holders of Right Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one Preferred Share. For the purposes
of this Section 14(b), the current market value of a Preferred Share shall be
the closing price of a Preferred Share (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
28
<PAGE>
(c) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of
----------------
this Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right,
--------------------------
by accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
29
<PAGE>
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
-------------------------------------------------
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
30
<PAGE>
Section 18. Concerning the Rights Agent. The Company agrees to pay
---------------------------
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence or willful misconduct on the part of the Rights Agent, for anything
done or omitted by the Rights Agent in connection with the acceptance and
administration of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises. The indemnification provided
for hereunder shall survive the expiration of the Rights and the termination of
this Agreement. The costs and expenses of enforcing this right of
indemnification shall also be paid by the Company.
The Rights Agent may conclusively rely upon and shall be protected and
shall incur no liability for, or in respect of any action taken, suffered or
omitted by it in connection with, its administration of this Agreement in
reliance upon any Right Certificate or certificate for the Preferred Shares or
Common Shares or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons, or otherwise upon the advice of
counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights
---------------------------------------------------
Agent. Any corporation into which the Rights Agent or any successor Rights
- -----
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to
31
<PAGE>
which the Rights Agent or any successor Rights Agent shall be a party, or any
corporation succeeding to the stock transfer or corporate trust powers of the
Rights Agent or any successor Rights Agent, shall be the successor to the Rights
Agent under this Agreement without the execution or filing of any paper or any
further act on the part of any of the parties hereto; provided, that such
corporation would be eligible for appointment as a successor Rights Agent
under the provisions of Section 21 hereof. In case at the time such successor
Rights Agent shall succeed to the agency created by this Agreement, any of the
Right Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of the predecessor Rights
Agent and deliver such Right Certificates so countersigned; and in case at that
time any of the Right Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Right Certificates either in the
name of the predecessor Rights Agent or in the name of the successor Rights
Agent; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes
----------------------
the duties and obligations imposed by this Agreement upon the following terms
and conditions, and no implied
32
<PAGE>
duties or obligations shall be read into this Agreement against the Rights
Agent, by all of which the Company and the holders of Right Certificates, by
their acceptance thereof, shall be bound:
(a) Before the Rights Agent acts or refrains from acting, it may
consult with legal counsel (who may be legal counsel for the Company), and the
opinion of such counsel shall be full and complete authorization and protection
to the Rights Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
33
<PAGE>
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after actual
notice that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Secretary or the Treasurer of the Company, and to apply
to such officers for advice or instructions in connection with its duties, and
34
<PAGE>
it shall not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) The Rights Agent shall not be required to take notice or be deemed
to have notice of any fact, event or determination (including, without
limitation, any dates or events defined in this Agreement or the designation of
any person as an Acquiring Person, Affiliate or Associate)
35
<PAGE>
under this Agreement unless and until the Rights Agent shall be specifically
notified in writing by the Company of such fact, event or determination.
Section 21. Change of Rights Agent. The Rights Agent or any
----------------------
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company by registered or
certified mail and to each transfer agent of the Common Shares or Preferred
Shares by registered or certified mail, and to the holders of the Right
Certificates by first-class mail at the cost and expense of the Company. The
Company may remove the Rights Agent or any successor Rights Agent upon 30 days'
notice in writing, mailed to the Rights Agent or successor Rights Agent, as the
case may be, and to each transfer agent of the Common Shares or Preferred Shares
by registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of the State of Illinois (or of any other state of the United States so long as
such corporation is authorized to do business as a banking institution in the
State of Illinois, in good standing, having an office in the State of Illinois,
which is authorized under such laws to exercise corporate trust or stock
transfer
36
<PAGE>
powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares or Preferred Shares, and mail a
notice thereof in writing to the registered holders of the Right Certificates.
Failure to give any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding
----------------------------------
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Purchase Price and the number or kind or class of shares or
other securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. Redemption. (a) The Board of Directors of the Company
----------
may, at its option, at any time prior to such time as any Person becomes an
Acquiring Person, redeem all but not less than all the then outstanding Rights
at a redemption price of $.01 per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
37
<PAGE>
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"). The redemption of the Rights by the Board of Directors may be made
effective at such time, on such basis and with such conditions as the Board of
Directors in its sole discretion may establish.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights pursuant to paragraph (a) of this
Section 23, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price. The Company shall promptly
give public notice of any such redemption; provided, however, that the failure
-------- -------
to give, or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of Directors ordering
the redemption of the Rights, the Company shall mail a notice of redemption to
all the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem, acquire
or purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or in Section 24 hereof, and other
than in connection with the purchase of Common Shares prior to the Distribution
Date.
Section 24. Exchange. (a) The Board of Directors of the Company
--------
may, at its option, at any time after any Person becomes an Acquiring Person,
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become void pursuant
38
<PAGE>
to the provisions of Section 11(a)(ii) hereof) for Common Shares at an exchange
ratio of one Common Share per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such exchange ratio being hereinafter referred to as the "Exchange Ratio").
Notwithstanding the foregoing, the Board of Directors shall not be empowered to
effect such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any such
Subsidiary, or any entity holding Common Shares for or pursuant to the terms of
any such plan), together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to paragraph (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; provided,
--------
however, that the failure to give, or any defect in, such notice shall not
- -------
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange
will state the method by which the exchange of the Common Shares for Rights will
be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged. Any partial exchange shall be effected pro rata based
on the number of Rights (other
39
<PAGE>
than Rights which have become void pursuant to the provisions of Section
11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exchange of the Rights. In the event the Company shall, after
good faith effort, be unable to take all such action as may be necessary to
authorize such additional Common Shares, the Company shall substitute, for each
Common Share that would otherwise be issuable upon exchange of a Right, a number
of Preferred Shares or fraction thereof such that the current per share market
price of one Preferred Share multiplied by such number or fraction is equal to
the current per share market price of one Common Share as of the date of
issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares.
In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this paragraph (d), the current market value of a whole Common Share
shall be the closing price of a Common Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events. (a) In case the Company
------------------------
shall propose (i) to pay any dividend payable in stock of any class to the
holders of its Preferred Shares or to make any
40
<PAGE>
other distribution to the holders of its Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of stock of any class or any other securities, rights or
options, (iii) to effect any reclassification of its Preferred Shares (other
than a reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of 50% or more
of the assets or earning power of the Company and its Subsidiaries (taken as a
whole) to, any other Person, (v) to effect the liquidation, dissolution or
winding up of the Company, or (vi) to declare or pay any dividend on the Common
Shares payable in Common Shares or to effect a subdivision, combination or
consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares), then, in each such case, the Company
shall give to each holder of a Right Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the case of any action covered by clause (i) or (ii) above at least 10 days
prior to the record date for determining holders of the Preferred Shares for
purposes of such action, and in the case of any such other action, at least 10
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, whichever shall be the earlier.
41
<PAGE>
(b) In case the event set forth in Section 11(a)(ii) hereof shall
occur, then the Company shall as soon as practicable thereafter give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this
-------
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Valero Energy Corporation
530 McCullough Avenue
San Antonio, Texas 78215
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sent by registered or
certified mail and shall be deemed given upon receipt and addressed (until
another address is filed in writing with the Company) as follows:
Harris Trust and Savings Bank
311 W. Monroe
Chicago, IL 60606
Attention: Shareholder Services Division
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class
42
<PAGE>
mail postage prepaid, addressed to such holder at the address of such holder
as shown on the registry books of the Company.
Section 27. Supplements and Amendments. The Company may from time
--------------------------
to time supplement or amend this Agreement without the approval of any holders
of Right Certificates in order to cure any ambiguity, to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provisions herein, or to make any other provisions with respect to the
Rights which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
-------- -------
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights. Without limiting the
foregoing, the Company may at any time prior to such time as any Person becomes
an Acquiring Person amend this Agreement to lower the thresholds set forth in
Sections 1(a) and 3(a) to not less than the greater of (i) the sum of .001% and
the largest percentage of the outstanding Common Shares then known by the
Company to be beneficially owned by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any
Subsidiary of the Company, or any entity holding Common Shares for or pursuant
to the terms of any such plan) and (ii) 10%.
Section 28. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or corporation other than the Company,
the Rights Agent and the
43
<PAGE>
registered holders of the Right Certificates (and, prior to the Distribution
Date, the Common Shares) any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive benefit
of the Company, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the
--------------------
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
44
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and attested, all as of the day and year first above written.
VALERO REFINING AND MARKETING
COMPANY
Attest:
By By
------------------------------ ---------------------------
Title: Title:
HARRIS TRUST AND SAVINGS BANK,
as Rights Agent
Attest:
By By
------------------------------- ----------------------------
Title: Title:
45
<PAGE>
Exhibit A
---------
FORM
of
CERTIFICATE OF DESIGNATIONS
of
JUNIOR PARTICIPATING PREFERRED STOCK, SERIES I
of
VALERO REFINING AND MARKETING COMPANY
(Pursuant to Section 151 of the
Delaware General Corporation Law)
------------------------------
Valero Refining and Marketing Company, a corporation organized and
existing under the General Corporation Law of the State of Delaware (hereinafter
called the "Corporation"), hereby certifies that the following resolution was
adopted by the Board of Directors of the Corporation as required by Section 151
of the General Corporation Law at a meeting duly called and held on [_________],
1997:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Junior Participating Preferred Stock, Series I:
Section 1. Designation and Amount. The shares of such series
----------------------
shall be designated as "Junior Participating Preferred Stock, Series I" (the
"Series I Preferred Stock") and the number of shares constituting the Series I
Preferred Stock shall be 1,500,000. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease
--------
shall reduce the number of shares of Series I Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of
A-1
<PAGE>
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series I
Preferred Stock.
Section 2. Dividends and Distributions.
---------------------------
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to the
Series I Preferred Stock with respect to dividends, the holders of shares
of Series I Preferred Stock, in preference to the holders of Common Stock,
par value $0.01 per share (the "Common Stock"), of the Corporation, and of
any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of March,
June, September and December in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series I Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject
to the provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series I Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of Series I
Preferred Stock were entitled immediately prior to such event under clause
(b) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which
is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series I Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$1 per share on the Series I Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
A-2
<PAGE>
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series I Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares, unless the date of issue
of such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series I Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series
I Preferred Stock in an amount less than the total amount of such dividends
at the time accrued and payable on such shares shall be allocated pro rata
on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of
holders of shares of Series I Preferred Stock entitled to receive payment
of a dividend or distribution declared thereon, which record date shall be
not more than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series I
-------------
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series I Preferred Stock shall entitle the holder thereof to
100 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the number of votes per
share to which holders of shares of Series I Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or
by law, the holders of shares of Series I Preferred Stock and the holders
of shares of Common Stock and any other capital stock of the Corporation
having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series I Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
A-3
<PAGE>
Section 4. Certain Restrictions.
--------------------
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series I Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series I Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series I Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series I
Preferred Stock, except dividends paid ratably on the Series I
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series I Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the
Series I Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series I Preferred Stock, or any shares of stock ranking
on a parity with the Series I Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of
the Corporation unless the Corporation could, under paragraph (A) of this
Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series I Preferred
-----------------
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become
A-4
<PAGE>
authorized but unissued shares of Preferred Stock and may be reissued as part of
a new series of Preferred Stock subject to the conditions and restrictions on
issuance set forth herein, in the Certificate of Incorporation, or in any other
Certificate of Designations creating a series of Preferred Stock or any similar
stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
--------------------------------------
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series I
Preferred Stock unless, prior thereto, the holders of shares of Series I
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series I
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series I Preferred Stock, except distributions made ratably on the Series I
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series I Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
---------------------------
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each share
of Series I Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series I Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding
A-5
<PAGE>
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series I Preferred Stock
-------------
shall not be redeemable.
Section 9. Rank. The Series I Preferred Stock shall rank, with
----
respect to the payment of dividends and the distribution of assets, junior to
all series of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the
---------
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series I Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series I Preferred Stock, voting
together as a single class.
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by its Chairman of the Board and attested by its
Secretary this _____ day of ___________, 1997.
---------------------------------------------
Chairman of the Board
Attest:
- ------------------------------------
Secretary
A-6
<PAGE>
Exhibit B
---------
Form of Right Certificate
Certificate No. R- _____________ Rights
NOT EXERCISABLE AFTER [________], 2007 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT AND TO
EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
Right Certificate
Valero Energy Corporation
(formerly Valero Refining and Marketing Company)
This certifies that ____________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of __________, 1997 (the "Rights Agreement"),
between Valero Energy Corporation (formerly Valero Refining and Marketing
Company), a Delaware corporation (the "Company"), and Harris Trust and Savings
Bank (the "Rights Agent"), to purchase from the Company at any time after the
Distribution Date (as such term is defined in the Rights Agreement) and prior to
5:00 P.M., Chicago, Illinois time, on __________, 2007 at the principal office
of the Rights Agent, or at the office of its successor as Rights Agent, one one-
hundredth of a fully paid non-assessable share of Junior Participating Preferred
Stock, Series I, par value $.01 per share (the "Preferred Shares"), of the
Company, at a purchase price of $______ per one one-hundredth of a Preferred
Share (the "Purchase Price"), upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly executed. The number of
Rights evidenced by this Right Certificate (and the number of one one-hundredths
of a Preferred Share which may be purchased upon exercise hereof) set forth
above, and the Purchase Price set forth above, are the number and Purchase Price
as of __________, 1997, based on the Preferred Shares as constituted at such
date. As provided in the Rights Agreement, the Purchase Price and the number of
one one-hundredths of a Preferred Share which may be purchased upon the exercise
of the Rights evidenced by this Right Certificate are subject to modification
and adjustment upon the happening of certain events.
B-1
<PAGE>
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the above-mentioned offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate (i) may be redeemed by the Company at a redemption
price of $0.01 per Right or (ii) may be exchanged in whole or in part for
Preferred Shares or shares of the Company's Common Stock, par value $0.01 per
share.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
B-2
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of ___________________________, 1997.
ATTEST: VALERO ENERGY CORPORATION
(formerly Valero Refining and Marketing Company)
_____________________________ By____________________________________________
Countersigned:
HARRIS AND TRUST SAVINGS BANK
By________________________________
Authorized Signature
B-3
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED hereby sells, assigns
____________________________
and transfers unto
____________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________________
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint Attorney, to transfer
___________
the within Right Certificate on the books of the within-named Company, with full
power of substitution.
Dated:_________ , 19______
--------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
- -------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
-----------------------------------
Signature
B-4
<PAGE>
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to exercise
Rights represented by the Right Certificate.)
To: VALERO ENERGY CORPORATION
The undersigned hereby irrevocably elects to exercise Rights
--------
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of such Rights and requests that certificates for such
Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
Dated: , 19
-------------------------
----------------------------------------
Signature
B-5
<PAGE>
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
B-6
<PAGE>
Form of Reverse Side of Right Certificate -- continued
- --------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
-------------------------------------------------
Signature
- --------------------------------------------------------------------------------
NOTICE
------
The signature in the Form of Assignment or Form of Election to
Purchase, as the case may be, must conform to the name as written upon the face
of this Right Certificate in every particular, without alteration or enlargement
or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
B-7
<PAGE>
Exhibit C
---------
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On , 1997, the Board of Directors of Valero Refining
-----------------
and Marketing Company (the "Company") declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of common stock, par value
$0.01 per share (the "Common Shares"), of the Company. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Junior Participating Preferred Stock, Series I, par value $0.01 per share (the
"Preferred Shares"), of the Company at a price of $______ per one one-hundredth
of a Preferred Share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and Harris Trust and Savings Bank, as
Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 15% or more of the
outstanding Common Shares or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Shares
(the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Share certificates
outstanding as of the Record Date, by such Common Share certificate with a copy
of this Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the Common Shares. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Share certificates issued
after the Record Date upon transfer or new issuance of Common Shares will
contain a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates for Common Shares outstanding as of
the Record Date, even without such notation or a copy of this Summary of Rights
being attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Shares as of the close of business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire on June 30, 2007 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
C-1
<PAGE>
The Purchase Price payable, and the number of Preferred Shares or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then-current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1 per share but will be entitled to an aggregate
dividend of 100 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $100 per share but will be entitled to an
aggregate payment of 100 times the payment made per Common Share. Each
Preferred Share will have 100 votes, voting together with the Common Shares.
Finally, in the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
100 times the amount received per Common Share. These rights are protected by
customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-hundredth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.
In the event that the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold after a person or group has become an Acquiring Person,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction will have a market value
of two times the exercise price of the Right. In the event that any person or
group of affiliated or associated persons becomes an Acquiring Person, proper
provision shall be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise that number of Common Shares
having a market value of two times the exercise price of the Right.
C-2
<PAGE>
At any time after any person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of 50% or more of the
outstanding Common Shares, the Board of Directors of the Company may exchange
the Rights (other than Rights owned by such person or group which will have
become void), in whole or in part, at an exchange ratio of one Common Share, or
one one-hundredth of a Preferred Share (or of a share of a class or series of
the Company's preferred stock having equivalent rights, preferences and
privileges), per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-hundredth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 15% or more of the
outstanding Common Shares, the Board of Directors of the Company may redeem the
Rights in whole, but not in part, at a price of $0.01 per Right (the "Redemption
Price"). The redemption of the Rights may be made effective at such time on
such basis with such conditions as the Board of Directors in its sole discretion
may establish. Immediately upon any redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of
the Company without the consent of the holders of the Rights, including an
amendment to lower certain thresholds described above to not less than the
greater of (i) the sum of .001% and the largest percentage of the outstanding
Common Shares then known to the Company to be beneficially owned by any person
or group of affiliated or associated persons and (ii) 10%, except that from and
after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person no such amendment may adversely affect the interests
of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 10
dated , 1997. A copy of the Rights Agreement is available free of
--------
charge from the Company. This summary description of the Rights does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, which is hereby incorporated herein by reference.
C-3
<PAGE>
EXHIBIT 4.2
$835,000,000
CREDIT AGREEMENT
dated as of
May 1, 1997
among
Valero Energy Corporation,
Valero Refining and Marketing Company,
The Banks Listed Herein,
Morgan Guaranty Trust Company of New York,
as Administrative Agent,
and
Bank of Montreal,
as Syndication Agent and Issuing Bank
<PAGE>
TABLE OF CONTENTS
-------------
PAGE
----
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions.......................................2
SECTION 1.02. Accounting Terms and Determinations..............20
SECTION 1.03. Types of Borrowings..............................21
SECTION 1.04. Other Definitional Provisions....................21
ARTICLE 2
THE CREDITS
SECTION 2.01. Commitments to Lend..............................22
SECTION 2.02. Notice of Committed Borrowing....................22
SECTION 2.03. Money Market Borrowings..........................22
SECTION 2.04. Notice to Banks; Funding of Loans................27
SECTION 2.05. Notes............................................28
SECTION 2.06. Maturity of Loans................................28
SECTION 2.07. Interest Rates...................................28
SECTION 2.08. Facility Fee.....................................31
SECTION 2.09. Optional Termination or Reduction of
Commitments......................................31
SECTION 2.10. Mandatory Termination or Reduction of
Commitments......................................31
SECTION 2.11. Optional Prepayments.............................32
SECTION 2.12. General Provisions as to Payments................33
SECTION 2.13. Funding Losses...................................34
SECTION 2.14. Computation of Interest and Fees.................34
ARTICLE 3
LETTERS OF CREDIT
SECTION 3.01. Letter of Credit Commitment......................34
SECTION 3.02. Letter of Credit Requests........................35
SECTION 3.03. Letter of Credit Fees............................36
SECTION 3.04. Agreement to Repay Letter of Credit Drawings.....36
SECTION 3.05. Indemnity........................................38
<PAGE>
PAGE
----
ARTICLE 4
CONDITIONS
SECTION 4.01. Effectiveness....................................39
SECTION 4.02. Borrowings.......................................40
SECTION 4.03. Assumption.......................................41
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
SECTION 5.01. Corporate Existence and Power....................42
SECTION 5.02. Corporate and Governmental Authorization; No
Contravention....................................42
SECTION 5.03. Binding Effect...................................43
SECTION 5.04. Financial Information............................43
SECTION 5.05. Litigation.......................................43
SECTION 5.06. Compliance with ERISA............................44
SECTION 5.07. Environmental Matters............................44
SECTION 5.08. Taxes............................................45
SECTION 5.09. Subsidiaries.....................................45
SECTION 5.10. Not an Investment Company........................45
SECTION 5.11. Full Disclosure..................................45
SECTION 5.12. Representations in Other Documents...............46
ARTICLE 6
OLD VALERO COVENANTS
SECTION 6.01. Information
................................................46
SECTION 6.02. Payment of Obligations...........................48
SECTION 6.03. Maintenance of Property; Insurance...............48
SECTION 6.04. Conduct of Business and Maintenance of
Existence........................................48
SECTION 6.06. Inspection of Property, Books and Records........49
SECTION 6.07. Fixed Charge Coverage............................49
SECTION 6.08. Debt.............................................50
SECTION 6.09. Minimum Consolidated Net Worth...................50
SECTION 6.10. Negative Pledge--Liens...........................50
SECTION 6.11. Subsidiary Debt..................................53
SECTION 6.12. Investments, Loans, Advances.....................53
SECTION 6.13. Consolidations, Mergers and Transfers of Assets..55
ii
<PAGE>
PAGE
----
SECTION 6.14. Use of Proceeds..................................56
SECTION 6.15. Transactions with Affiliates.....................56
SECTION 6.16. Lease Payments...................................57
SECTION 6.17. Restriction on Other Agreements..................57
SECTION 6.18. Ordinary Course Transactions.....................57
SECTION 6.19. No Modification of Certain Documents Without
Consent..........................................57
ARTICLE 7
NEW VALERO COVENANTS
SECTION 7.01. Information......................................58
SECTION 7.02. Payment of Obligations...........................60
SECTION 7.03. Maintenance of Property; Insurance...............60
SECTION 7.04. Conduct of Business and Maintenance of
Existence........................................60
SECTION 7.05. Compliance with Laws
................................................60
SECTION 7.06. Inspection of Property, Books and Records........61
SECTION 7.07. Fixed Charge Coverage............................61
SECTION 7.08. Debt.............................................62
SECTION 7.09. Minimum Consolidated Net Worth...................62
SECTION 7.10. Negative Pledge--Liens...........................62
SECTION 7.11. Subsidiary Debt..................................65
SECTION 7.12. Investments, Loans, Advances.....................65
SECTION 7.13. Consolidations, Mergers and Transfers of Assets..66
SECTION 7.14. Use of Proceeds..................................67
SECTION 7.15. Transactions with Affiliates.....................67
SECTION 7.16. Lease Payments...................................68
SECTION 7.17. Restriction on Other Agreements..................68
SECTION 7.18. Restricted Payments..............................68
SECTION 7.19. Hedging Facilities...............................69
SECTION 7.20. Inventory Monetization...........................69
SECTION 7.21. Additional Guarantors............................69
ARTICLE 8
DEFAULTS
SECTION 8.01. Events of Default................................69
SECTION 8.02. Cash Cover.......................................72
SECTION 8.03. Notice of Default................................72
iii
<PAGE>
ARTICLE 9
THE ADMINISTRATIVE AGENT
SECTION 9.01. Appointment and Authorization....................73
SECTION 9.02. Administrative Agent and Agent...................73
SECTION 9.03. Action by Administrative Agent...................73
SECTION 9.04. Consultation with Experts........................73
SECTION 9.05. Liability of Administrative Agent................73
SECTION 9.06. Indemnification..................................74
SECTION 9.07. Credit Decision..................................74
SECTION 9.08. Successor Administrative Agent...................74
SECTION 9.09. Administrative Agent's Fee.......................75
SECTION 9.10. Syndication Agent................................75
ARTICLE 10
CHANGE IN CIRCUMSTANCES
SECTION 10.01. Basis for Determining Interest Rate Inadequate
or Unfair.......................................75
SECTION 10.02. Illegality......................................76
SECTION 10.03. Increased Cost and Reduced Return...............76
SECTION 10.04. Taxes...........................................78
SECTION 10.05. Base Rate Loans Substituted for Affected Fixed
Rate Loans......................................80
SECTION 10.06. Borrower's Right to Replace Banks...............80
ARTICLE 11
MISCELLANEOUS
SECTION 11.01. Notices.........................................81
SECTION 11.02. No Waivers......................................81
SECTION 11.03. Expenses; Indemnification.......................82
SECTION 11.04. Sharing of Set-Offs.............................82
SECTION 11.05. Amendments and Waivers..........................83
SECTION 11.06. Successors and Assigns..........................83
SECTION 11.07. Collateral......................................85
SECTION 11.08. Governing Law; Submission to Jurisdiction.......85
SECTION 11.09. Counterparts; Integration.......................85
SECTION 11.10. WAIVER OF JURY TRIAL............................85
Schedule I - Pricing Schedule
iv
<PAGE>
Exhibit A - Note
Exhibit B - Money Market Quote Request
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E-1 - Opinion of Counsel for the Obligors
Exhibit E-2 - Opinion of Counsel for New Valero
Exhibit F-1 - Opinion of Special Counsel for the Administrative Agent
Exhibit F-2 - Opinion of Special Counsel for the Administrative Agent
Exhibit G - Assignment and Assumption Agreement
Exhibit H - Notice of Borrowing
Exhibit I - Subsidiary Guarantee Agreement
Exhibit J - Valero Assignment Agreement
v
<PAGE>
CREDIT AGREEMENT
AGREEMENT dated as of May 1, 1997, among VALERO ENERGY CORPORATION, VALERO
REFINING AND MARKETING COMPANY, the BANKS listed on the signature pages hereof,
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent, and BANK OF
MONTREAL, as Syndication Agent and Issuing Bank.
W I T N E S S E T H:
WHEREAS, Valero Energy Corporation, a Delaware corporation ("OLD VALERO"),
PG&E Corporation, a California corporation ("PG&E") and PG&E Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of PG&E
("MERGER SUB") have entered into an Agreement and Plan of Merger dated as of
January 31, 1997 (the "MERGER AGREEMENT"), pursuant to which Merger Sub will
merge with and into Old Valero (the "MERGER") and Old Valero will become a
wholly-owned subsidiary of PG&E; and
WHEREAS, pursuant to the Distribution Agreement (as defined in the Merger
Agreement), Old Valero and Valero Refining and Marketing Company, a Delaware
corporation and a wholly-owned subsidiary of Old Valero ("NEW VALERO"), will
consummate the transactions contemplated in Article II of the Distribution
Agreement, including the distribution as a dividend by Old Valero to its
shareholders of all capital stock of New Valero (the "SPIN-OFF"); and
WHEREAS, following the consummation of the Spin-Off and the Merger, New
Valero intends to change its name to "VALERO ENERGY CORPORATION"; and
WHEREAS, under the Merger Agreement, Old Valero is required to redeem for
cash not later than the Effective Time (as defined in the Merger Agreement) all
outstanding shares of its $3.125 Convertible Preferred Stock (liquidation
preference $50.00 per share) (the "OLD VALERO PREFERRED STOCK") which shall not
have theretofore been converted into common stock of Old Valero (the "PREFERRED
STOCK REDEMPTION"); and
WHEREAS, Old Valero and Salomon Inc have entered into a Purchase Agreement
dated as of April 22, 1997 (the "PURCHASE AGREEMENT"), pursuant to which Old
Valero will acquire all outstanding capital stock of Basis Petroleum Inc., a
Texas corporation ("BASIS"), all on the terms and conditions therein set forth
(the "ACQUISITION"); and
<PAGE>
WHEREAS, after the consummation of the Acquisition and prior to the
Spin-Off, Old Valero will contribute all outstanding capital stock of Basis to
New Valero as a contribution to capital (the "CONTRIBUTION"); and
WHEREAS, the parties hereto desire to enter into this Agreement to provide
financing to, prior to the Spin-Off, Old Valero and subsequent to the SpinOff,
New Valero in order to finance the consummation of the transactions described
above (the "TRANSACTIONS") and for other general corporate purposes;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have the
following meanings:
"ABSOLUTE RATE AUCTION" means a solicitation of Money Market Quotes
setting forth Money Market Absolute Rates pursuant to Section 2.03.
"ACQUISITION" has the meaning set forth in the recitals hereto.
"ADDITIONAL IDB" means up to $25,000,000 aggregate principal amount of
industrial development bonds to be issued for the account of New Valero or a
Subsidiary and supported by a Letter of Credit to be issued hereunder.
"ADJUSTED LONDON INTERBANK OFFERED RATE" has the meaning set forth in
Section 2.07(b).
"ADMINISTRATIVE AGENT" means Morgan Guaranty in its capacity as
administrative agent and documentation agent for the Banks under the Financing
Documents, and its successors in such capacity.
"ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Administrative Agent
and submitted to the Administrative Agent (with a copy to the Borrower) duly
completed by such Bank.
2
<PAGE>
"AFFILIATE" means, with respect to any Person (the "SPECIFIED PERSON"),
(i) any Person that directly, or indirectly through one or more intermediaries,
controls the Specified Person (a "CONTROLLING PERSON") and (ii) any Person
(other than a Subsidiary of the Specified Person) which is controlled by or is
under common control with a Controlling Person. As used herein, the term
"CONTROL" means possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
"APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the
case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of
its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of
its Money Market Loans, its Money Market Lending Office.
"ASSET SALE" means any sale, lease or other disposition (including any
such transaction effected by way of merger or consolidation) by New Valero or
any of its Subsidiaries of any asset, including without limitation any
sale-leaseback transaction, but excluding (i) dispositions of inventory or
abandoned, obsolete or worn out machinery, fixtures, equipment and materials in
the ordinary course of business, (ii) dispositions to New Valero or to a
Wholly-Owned Consolidated Subsidiary of New Valero, (iii) dispositions pursuant
to the Distribution Agreement, (iv) dispositions of cash or short-term
investments otherwise permitted under this Agreement and (v) dispositions
pursuant to the inventory monetization arrangement contemplated by Section 7.20.
"ASSIGNEE" has the meaning set forth in Section 11.06(c).
"ASSUMPTION" means the assignment by Old Valero of all of its rights and
obligations under this Agreement and the Notes and the assumption by New Valero
thereof in accordance with Section 4.03.
"ASSUMPTION DATE" means the date and time on or after the Effective Date
on which the Assumption shall become effective in accordance with Section 4.03.
"AVAILABILITY LIMIT" means, at any date, (a) if such date is prior to the
Assumption Date, an amount equal to the lesser of (i) the aggregate amount of
the Commitments at such date and (ii) the sum of (x) $600,000,000 and (y) the
amount of cash payments made by Old Valero on or prior to such date in
connection with the Preferred Stock Redemption (such amount, for purposes of
this clause (y), not to exceed $175,000,000) and (b) if such date is on or after
the Assumption Date, the aggregate amount of the Commitments at such date.
3
<PAGE>
"BANK" means each bank listed on the signature pages hereof, each Assignee
which becomes a Bank pursuant to Section 11.06(c), and their respective
successors.
"BANK INFORMATION MEMORANDUM" means the information memorandum dated April
3, 1997 furnished to the Banks in connection with the financing hereunder.
"BASE RATE" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"BASE RATE LOAN" means a Committed Loan to be made by a Bank as a Base
Rate Loan in accordance with the applicable Notice of Borrowing or pursuant to
Article 10.
"BASIS" has the meaning set forth in the recitals hereto.
"BENEFIT ARRANGEMENT" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multi-employer
Plan and which is maintained or otherwise contributed to by any member of the
ERISA Group.
"BMO" means Bank of Montreal.
"BOND LETTER OF CREDIT" means the letter of credit issued by BMO pursuant
to the Existing Credit Agreement to support payment of up to $98,500,000
principal amount of Industrial Development Corporation of Port of Corpus Christi
Revenue Refunding Bonds (Valero Refining and Marketing Company Project) and
specified amounts of accrued interest thereon, which letter of credit will
become a Letter of Credit hereunder pursuant to Section 3.01(d). The amount
available under the Bond Letter of Credit shall include, for all purposes of
this Agreement, any amounts not currently available thereunder but subject to
reinstatement in accordance with the terms thereof.
"BORROWER" means (i) prior to the Assumption Date, Old Valero and (ii) on
and after the Assumption Date, New Valero.
"BORROWING" has the meaning set forth in Section 1.03.
"COMMITMENT" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature pages hereof, as such amount may
be reduced from time to time pursuant to Section 2.09 or 2.10 or increased or
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<PAGE>
reduced from time to time pursuant to Section 11.06(c), or the obligation of
such Bank to make Committed Loans and to participate in Letters of Credit
hereunder in an aggregate amount at any time outstanding not to exceed such
amount, as the context may require.
"COMMITMENT REDUCTION DATE" means each of May 1, 2000 and May 1, 2001 (or,
if either such date is not a Euro-Dollar Business Day, the next preceding
Euro-Dollar Business Day).
"COMMITTED BORROWINGS" has the meaning given such term in
Section 1.03.
"COMMITTED LOAN" means a loan made by a Bank pursuant to Section
2.01.
"CONSOLIDATED DEBT" means for any Person at any date the Debt of such
Person and its Consolidated Subsidiaries as of such date, determined on a
consolidated basis in accordance with generally accepted accounting principles.
"CONSOLIDATED NET INCOME" means, for any Person for any period, the net
income of such Person and its Consolidated Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles.
"CONSOLIDATED NET INCOME APPLICABLE TO COMMON STOCK" means, for any Person
for any period, the net income to common shareholders of such Person and its
Consolidated Subsidiaries for such period determined on a consolidated basis in
accordance with generally accepted accounting principles.
"CONSOLIDATED NET WORTH" means for any Person at any date the Net Worth of
such Person and its Consolidated Subsidiaries as of such date determined on a
consolidated basis in accordance with generally accepted accounting principles.
"CONSOLIDATED SUBSIDIARY" means for any Person at any date any Subsidiary
or other entity the accounts of which would be consolidated with those of such
Person in its consolidated financial statements if such statements were prepared
as of such date.
"CONSOLIDATED TOTAL ASSETS" means for any Person at any date the total
assets of such Person and its Consolidated Subsidiaries, determined on a
consolidated basis as of such date in accordance with generally accepted
accounting principles.
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<PAGE>
"CONTRIBUTION" has the meaning set forth in the recitals hereto.
"DEBT" of any Person means at any date, without duplication, (i) all items
of indebtedness or liability which, in accordance with generally accepted
accounting principles, would be included in determining total liabilities as
shown on the liability side of a balance sheet at the date as of which
indebtedness is to be determined, but excluding Net Worth, preferred stock
(including, in the case of Old Valero, its $3.125 Convertible Preferred Stock),
deferred credits, deferred taxes, accounts payable (not more than 120 days past
due), accrued expenses and taxes payable, (ii) all obligations under leases
which, in accordance with generally accepted accounting principles, would at
such time (and assuming that the Person was not a regulated enterprise) be
required to be capitalized on a balance sheet of such Person, (iii) all
non-contingent obligations (and, solely for purposes of Sections 6.10 and 7.10
and the definitions of Material Debt and Material Financial Obligations, all
contingent obligations) of such Person to reimburse any bank or other Person in
respect of amounts paid under a letter of credit or similar instrument, (iv) all
indebtedness, liabilities or obligations of others of the type described in
clause (i), (ii) or (iii) that are Guaranteed by such Person and (v) all
indebtedness, liabilities or obligations of others of the type described in
clause (i), (ii), (iii) or (iv) that are secured by any Lien upon the properties
or assets of such Person, provided that the amount of any Debt of such Person
which constitutes Debt of such Person solely by reason of this clause (v) shall
not for purposes of this Agreement exceed the greater of the book value or the
fair market value of the properties or assets subject to such Lien.
"DEFAULT" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"DEFERRED TURNAROUND AND CATALYST COST" means, for any period, the amount
of capital expenditures of New Valero and its Consolidated Subsidiaries during
such period in respect of scheduled or periodic maintenance of refineries where
such scheduled or periodic maintenance requires the shutdown of a refinery for a
period in excess of 14 days; provided that Deferred Turnaround and Catalyst Cost
shall not for purposes of calculations of compliance under Section 7.07 exceed
$40,000,000 for any period of four consecutive fiscal quarters.
"DERIVATIVES OBLIGATIONS" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other
6
<PAGE>
similar transaction (including any option with respect to any of the foregoing
transactions) or any combination of the foregoing transactions.
"DISTRIBUTION AGREEMENT" has the meaning set forth in the Merger
Agreement.
"DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other
day on which commercial banks in New York City are authorized by law to close.
"DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Administrative Agent.
"EFFECTIVE DATE" means the date this Agreement becomes effective in
accordance with Section 4.01.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules, judgments,
orders, decrees, plans, injunctions, permits, concessions, grants, franchises,
licenses, agreements and other governmental restrictions relating to the
environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA GROUP" means the Borrower, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
"EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
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<PAGE>
"EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or
affiliate located at its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire as its Euro-Dollar Lending
Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower
and the Administrative Agent.
"EURO-DOLLAR LOAN" means a Committed Loan to be made by a Bank as a
Euro-Dollar Loan in accordance with the applicable Notice of Committed
Borrowing.
"EURO-DOLLAR MARGIN" has the meaning set forth in Section 2.07(c).
"EURO-DOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section
2.07(c).
"EVENT OF DEFAULT" has the meaning set forth in Section 8.01.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXISTING CREDIT AGREEMENT" means the Credit Agreement dated as of
November 1, 1995 among Old Valero, the banks parties thereto, Morgan Guaranty,
as administrative agent, and BMO, as syndication agent and issuing bank, as
amended to the Effective Date.
"EXISTING LETTER OF CREDIT" means each letter of credit issued by BMO
pursuant to the Existing Credit Agreement and outstanding on the Effective Date,
including the Bond Letter of Credit.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty on such day on such
transactions as determined by the Administrative Agent.
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<PAGE>
"FEE LETTERS" means the respective fee letters dated March 31, 1997 from
Morgan Guaranty, from BOM and from Morgan Guaranty and BOM together to Old
Valero and New Valero.
"FINANCIAL LETTER OF CREDIT" means the Bond Letter of Credit and any other
Letter of Credit which is not a Performance Letter of Credit.
"FINANCIAL OFFICER" means the chief financial officer, vice president-
finance or other financial vice president, controller, treasurer or assistant
treasurer of the Borrower.
"FINANCING DOCUMENTS" means this Agreement, the Notes, the Subsidiary
Guarantee Agreement and the Valero Assignment Agreement.
"FIRST MORTGAGE NOTES" means the notes issued pursuant to the
Partnership Indenture.
"FIXED RATE BORROWING" has the meaning set forth in Section 1.03.
"FIXED RATE LOANS" means Euro-Dollar Loans or Money Market Loans
(excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant
to Section 10.01) or any combination of the foregoing.
"GUARANTEE" by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing any Debt of any other Person
and, without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt (whether
arising by virtue of partnership arrangements, by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the holder of such Debt of the payment
thereof or to protect such holder against loss in respect thereof (in whole or
in part), provided that the term Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business. The term "GUARANTEE"
used as a verb has a corresponding meaning.
"GUARANTOR" means each Subsidiary of New Valero from time to time party to
the Subsidiary Guarantee Agreement.
"HAZARDOUS SUBSTANCES" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives, by-products
9
<PAGE>
and other hydrocarbons, or any substance having any constituent elements
displaying any of the foregoing characteristics.
"INDEMNITEE" has the meaning set forth in Section 11.03(b).
"INTEREST PERIOD" means: (1) with respect to each Euro-Dollar Borrowing,
the period commencing on the date of such Borrowing and ending one, two, three
or six months thereafter, as the Borrower may elect in the applicable Notice of
Borrowing; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall, subject to clause (c)
below, be extended to the next succeeding Euro-Dollar Business Day
unless such Euro-Dollar Business Day falls in another calendar
month, in which case such Interest Period shall end on the next
preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of
such Interest Period) shall, subject to clause (c) below, end on the
last Euro-Dollar Business Day of a calendar month; and
(c) if any Interest Period includes a date on which a payment
of principal of any Loan is required (as of the commencement of such
Interest Period) to be made under Article 2 but does not end on such
date, then (i) the principal amount (if any) of each Euro-Dollar
Loan required to be repaid on such date shall have an Interest
Period ending on such date and (ii) the remainder (if any) of each
such Euro-Dollar Loan shall have an Interest Period determined as
set forth above.
(2) with respect to each Base Rate Borrowing, the period commencing on the
date of such Borrowing and ending on the Termination Date;
(3) with respect to each Money Market LIBOR Borrowing, the period
commencing on the date of such Borrowing and ending such whole number of months
thereafter as the Borrower may elect in accordance with Section 2.03; provided
that:
(a) any Interest Period which would otherwise end on a
day which is not a Euro-Dollar Business Day shall, subject to clause
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<PAGE>
(c) below, be extended to the next succeeding Euro-Dollar Business
Day unless such Euro-Dollar Business Day falls in another calendar
month, in which case such Interest Period shall end on the next
preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of
such Interest Period) shall, subject to clause (c) below, end on the
last Euro-Dollar Business Day of a calendar month; and
(c) if any Interest Period includes a date on which a payment
of principal of any Loan is required (as of the commencement of such
Interest Period) to be made under Article 2 but does not end on such
date, then (i) the principal amount (if any) of each Money Market
LIBOR Loan required to be repaid on such date shall have an Interest
Period ending on such date and (ii) the remainder (if any) of each
such Money Market LIBOR Loan shall have an Interest Period
determined as set forth above.
(4) with respect to each Money Market Absolute Rate Borrowing, the period
commencing on the date of such Borrowing and ending such number of days
thereafter (but not less than 7 days) as the Borrower may elect in accordance
with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall, subject to clause (b)
below, be extended to the next succeeding Euro-Dollar Business Day;
and
(b) if any Interest Period includes a date on which a payment
of principal of any Loan is required (as of the commencement of such
Interest Period) to be made under Article 2 but does not end on such
date, then (i) the principal amount (if any) of each Money Market
Absolute Rate Loan required to be repaid on such date shall have an
Interest Period ending on such date and (ii) the remainder (if any)
of each such Money Market Absolute Rate Loan shall have an Interest
Period determined as set forth above.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
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<PAGE>
"ISSUING BANK" means BMO.
"LETTERS OF CREDIT" has the meaning set forth in Section 3.01.
"LETTER OF CREDIT OUTSTANDINGS" means, at any time, the sum (without
duplication) of the aggregate Stated Amount of all outstanding Letters of Credit
and the aggregate amount of all Unpaid Drawings in respect of Letters of Credit
less the aggregate amount of cash collateral then held by the Administrative
Agent pursuant to Section 2.10(f).
"LETTER OF CREDIT TERMINATION DATE" means the date falling ten days prior
to the Termination Date.
"LIBOR AUCTION" means a solicitation of Money Market Quotes setting forth
Money Market Margins based on the London Interbank Offered Rate pursuant to
Section 2.03.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"LOAN" means a Base Rate Loan or a Euro-Dollar Loan or a Money Market Loan
and "LOANS" means Base Rate Loans or Euro-Dollar Loans or Money Market Loans or
any combination of the foregoing.
"LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section
2.07(c).
"MAJOR CASUALTY EVENT" means any loss of or damage to property through one
or more related events for which New Valero or any of its Subsidiaries receives
any insurance proceeds under any casualty insurance policy or any condemnation
of property (or any transfer or disposition of property in lieu of condemnation)
for which New Valero or any of its Subsidiaries receives a condemnation award or
other compensation, with respect to which the aggregate amount of such proceeds,
award or other compensation exceeds $5,000,000 ; provided that such event shall
not constitute a Major Casualty Event if New Valero notifies the Administrative
Agent promptly after receipt of such proceeds, award or other compensation that
the same will be committed by New Valero and
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<PAGE>
its Subsidiaries to be used to repair or replace the affected asset within six
months of the date of such notice and will be so used within thirty-six months
of the date of such notice, but only to the extent such proceeds, award or other
compensation is actually so used.
"MATERIAL DEBT" means Debt (other than the Notes) of the Borrower and/or
one or more of its Subsidiaries, arising in one or more related or unrelated
transactions, in an aggregate principal or face amount exceeding $25,000,000.
"MATERIAL FINANCIAL OBLIGATIONS" means a principal or face amount of Debt
and/or payment obligations in respect of Derivatives Obligations of the Borrower
and/or one or more of its Subsidiaries, arising in one or more related or
unrelated transactions, exceeding in the aggregate $25,000,000.
"MATERIAL PLAN" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $25,000,000.
"MATERIAL SUBSIDIARY" means (a) with respect to Old Valero: New Valero,
Valero Refining Company, a Delaware corporation; the Partnership, Valero
Management Partnership, L.P., a Delaware limited partnership; (b) with respect
to New Valero, Valero Refining Company and Valero Marketing and Supply Company;
and (c) with respect to the Borrower (whether Old Valero or New Valero): (i)
upon consummation of the Acquisition, Basis and (ii) each other Subsidiary of
the Borrower that would be a "SIGNIFICANT SUBSIDIARY" as such term is defined in
Regulation S-X promulgated pursuant to the Securities Exchange Act of 1934, as
amended to the date hereof, and their respective successors.
"MERGER" has the meaning set forth in the recitals hereto.
"MERGER AGREEMENT" has the meaning set forth in the recitals hereto.
"MOODY'S" means Moody's Investors Service, Inc.
"MONEY MARKET ABSOLUTE RATE" has the meaning set forth in Section
2.03(d).
"MONEY MARKET ABSOLUTE RATE LOAN" means a loan to be made by a Bank
pursuant to an Absolute Rate Auction.
"MONEY MARKET LENDING OFFICE" means, as to each Bank, its Domestic Lending
Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the Borrower
and the Administrative Agent; provided that any Bank may from time to time by
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<PAGE>
notice to the Borrower and the Administrative Agent designate separate Money
Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and
its Money Market Absolute Rate Loans, on the other hand, in which case all
references herein to the Money Market Lending Office of such Bank shall be
deemed to refer to either or both of such offices, as the context may require.
"MONEY MARKET LIBOR LOAN" means a loan to be made by a Bank pursuant to a
LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant
to Section 10.01).
"MONEY MARKET LOAN" means a Money Market LIBOR Loan or a Money
Market Absolute Rate Loan.
"MONEY MARKET MARGIN" has the meaning set forth in Section 2.03(d).
"MONEY MARKET QUOTE" means an offer by a Bank to make a Money Market Loan
in accordance with Section 2.03.
"MORGAN GUARANTY" means Morgan Guaranty Trust Company of New
York.
"MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"NET CASH PROCEEDS" means, with respect to any Reduction Transaction, an
amount equal to the cash proceeds received by New Valero or any of its
Subsidiaries from or in respect of such Reduction Transaction (including any
cash proceeds received as income or other proceeds of any noncash proceeds of
any Asset Sale), less (x) any expenses reasonably incurred by such Person in
respect of such Reduction Transaction, (y) the amount of any Debt secured by a
Lien on a related asset and discharged from the proceeds of any Asset Sale and
(z) any taxes paid or payable by such Person (as estimated by a Financial
Officer) in respect of any Asset Sale.
"NET WORTH" of a Person means at any time the sum of its capital stock,
additional paid in capital, retained earnings, and any other account which, in
accordance with generally accepted accounting principles, constitutes
stockholders' equity, less treasury stock; provided that "NET WORTH" shall not
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<PAGE>
include the liquidation value of any preferred stock classified as redeemable
preferred stock in accordance with generally accepted accounting principles.
"NEW VALERO" has the meaning set forth in the recitals hereto.
"NOTES" means promissory notes of the Borrower, substantially in the form
of Exhibit A hereto, evidencing the obligation of the Borrower to repay the
Loans, and "NOTE" means any one of such promissory notes issued hereunder.
"NOTICE OF BORROWING" means a notice of borrowing in substantially the
form of Exhibit H.
"OBLIGORS" means the Borrower and New Valero (if not the Borrower).
"OLD VALERO" has the meaning set forth in the recitals hereto.
"OLD VALERO FORM 10-K" means Old Valero's annual report on Form 10-K for
the fiscal year ended December 31, 1996, as filed with the Securities and
Exchange Commission pursuant to the Exchange Act.
"OLD VALERO PREFERRED STOCK" has the meaning set forth in the recitals
hereto.
"PARENT" means, with respect to any Bank, any Person controlling such
Bank.
"PARTICIPANT" has the meaning set forth in Section 11.06(b).
"PARTNERSHIP" shall mean Valero Natural Gas Partners, L.P., a Delaware
limited partnership.
"PARTNERSHIP INDENTURE" means the certain Indenture of Mortgage and Deed
of Trust and Security Agreement dated as of March 25, 1987, between Valero
Management Partnership, L.P., a Delaware limited partnership and State Street
Bank & Trust Company (as successor to The Bank of New England, N.A.), and Brian
J. Curtis, as Trustee, as amended, supplemented, restated, modified and in
effect from time to time.
"PARTNERSHIP LEASES" shall mean (a) that certain Lease and Agreement dated
as of December 1, 1992, as amended and in effect on the date hereof, between
ValeroTex, L.P., as lessor, and Valero Hydrocarbons, L.P., as lessee, relating
to an approximately 200MMcf/d natural gas processing plant near Thompsonville,
Texas, (b) that certain Lease and Agreement dated as of December
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1, 1992, as amended and in effect on the date hereof, between ValeroTex, L.P.,
as lessor, and Valero Marketing, L.P., as lessee, relating to certain pipeline
and fractionator facilities related to the natural gas processing plant
referenced in the preceding clause; (c) that certain Lease and Agreement dated
as of November 5, 1990, as amended and in effect on the date hereof, between
ValeroTex, L.P., as lessor, and Valero Transmission, L.P., as lessee, relating
to the approximately 105 mile extension of the Partnership's North Texas
pipeline system to Carthage, Texas, (d) that certain Lease and Agreement dated
as of December 1, 1991, as amended and in effect on the date hereof, between
ValeroTex, L.P., and Valero Marketing, L.P., as lessee, relating to the
expansion of the Partnership's fractionation and related pipeline facilities in
the Corpus Christi, Texas area, and (e) any supplement to the foregoing or any
other lease agreement which provides for additional equipment or other
facilities to be leased to the Partnership or any of its Subsidiaries and is not
required to be capitalized on the books of such lessee under generally accepted
accounting principles.
"PARTNERSHIP SUBSIDIARIES" shall mean the Partnership and its
Subsidiaries, including Valero Management Partnership, L.P., a Delaware limited
partnership.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERCENTAGE PARTICIPATION" means, for each Bank, the percentage obtained
by dividing the amount of such Bank's Commitment by the aggregate amount of the
Commitments.
"PERFORMANCE LETTER OF CREDIT" means a Letter of Credit to back
performance of non-financial or commercial contracts or undertakings of the
Borrower and its Subsidiaries of the type which qualifies for a 50% conversion
factor for purposes of risk-based capital adequacy regulations applicable to the
Banks.
"PERMITTED CASH INVESTMENTS" means investments in (i) marketable
obligations of the United States or any agency thereof, or obligations
guaranteed by the United States or any agency thereof, (ii) time deposits with,
including certificates of deposit issued by or money market deposits with, any
Bank or with any other bank or trust company having combined capital, surplus
and undivided profits of not less than $500,000,000 as of the date of its most
recent financial statement (collectively the "PERMITTED BANKS"), (iii) bankers
acceptances issued by or money market deposits with any Permitted Bank, (iv)
commercial paper rated at least P-2 or A-2 by Moody's or S&P, respectively, (v)
repurchase agreements with respect to the investments referred to in clauses
(i), (ii), (iii) and
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(iv) with any Permitted Bank or with a major national brokerage firm, (vi)
eurodollar time accounts or eurodollar certificates of deposit with any branch
of any Permitted Bank, or (vii) shares of mutual funds that invest solely in
investments of the types referred to in clauses (i) through (vi) above.
"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"PLAN" means at any time an employee pension benefit plan (other than a
Multi-employer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"PREFERRED STOCK REDEMPTION" has the meaning set forth in the recitals
hereto.
"PRICING SCHEDULE" means the Schedule attached hereto identified as such.
"PRIME RATE" means the rate of interest publicly announced by Morgan
Guaranty in New York City from time to time as its Prime Rate.
"PURCHASE AGREEMENT" has the meaning set forth in the recitals hereto.
"REDUCTION PERCENTAGE" means, for purposes of determining the amount of
any mandatory reduction of the Commitments pursuant to Section 2.10(c), (i) in
the case of any such reduction in respect of an Asset Sale, an incurrence of
Debt or a Major Casualty Event, 100% and (ii) in the case of any such reduction
in respect of the issuance of equity securities not constituting Debt, 75%.
"REDUCTION TRANSACTION" means (i) any Asset Sale, (ii) the incurrence of
any Debt by New Valero or any of its Subsidiaries (other than (A) Debt under
this Agreement, (B) Debt secured by a Lien permitted by clauses (b) through (f)
of Section 7.10, (C) Debt of a Subsidiary permitted by clause (iii) or (iv) of
Section 7.11, (D) the Additional IDB and (E) short-term borrowings under bank
lines of credit), (iii) the issuance of any equity securities by New Valero or
any of its Subsidiaries (other than (A) equity securities which constitute Debt
of New Valero or any of its Subsidiaries, (B) equity securities issued to New
Valero or any of its Subsidiaries and (C) equity securities issued pursuant to
employee or director
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<PAGE>
stock options or other benefit plans for employees or directors of New Valero or
any of its Subsidiaries) or (iv) a Major Casualty Event; provided that a
transaction shall not constitute a Reduction Transaction unless the Net Cash
Proceeds thereof (or, if such transaction is a part of a series of related
transactions, if the aggregate Net Cash Proceeds of such transactions) exceed
$1,000,000. By reason of the foregoing proviso, equity securities issued in
connection with an acquisition and Debt assumed in connection with an
acquisition shall not constitute a Reduction Transaction. The description of any
transaction as falling within the above definition does not affect any
limitation on such transaction imposed by Article 7 of this Agreement.
"REFERENCE BANKS" means the principal London offices of BMO and
Morgan Guaranty.
"REFINERY" means the petroleum refinery and related facilities owned by
New Valero and located in Nueces County, Texas.
"REFUNDING BORROWING" means a Committed Borrowing which, after application
of the proceeds thereof, results in no net increase in the outstanding principal
amount of Committed Loans made by any Bank.
"REGULATION G" means Regulation G of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"REGULATION U" means Regulation U of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"REQUIRED BANKS" means at any time Banks having at least 66 2/3% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding at least 66 2/3% of the sum of the aggregate unpaid
principal amount of the Loans and the Letter of Credit Outstandings.
"RESTRICTED PAYMENT" means (i) any dividend or other distribution on any
capital stock of New Valero or any Subsidiary of New Valero (except dividends
payable solely in capital stock of the same class of the same issuer) and (ii)
any payment on account of the purchase, redemption, retirement or acquisition of
(a) any capital stock of New Valero or any Subsidiary of New Valero or (b) any
option, warrant or other right to acquire capital stock of New Valero or any
Subsidiary of New Valero; provided that neither (x) the Special Dividend nor (y)
payments to New Valero or a Wholly-Owned Consolidated Subsidiary of New Valero
shall constitute Restricted Payments.
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"REVOLVING CREDIT PERIOD" means the period from and including the
Effective Date to but excluding the Termination Date.
"S&P" shall mean Standard & Poor's Ratings Services.
"SPECIAL DIVIDEND" means the special dividend payable by New Valero to Old
Valero in accordance with Section 2.3 of the Distribution Agreement; provided
that the gross amount of such special dividend shall not exceed $210,000,000.
"SPIN-OFF" has the meaning set forth in the recitals hereto.
"STATED AMOUNT" means, as to any Letter of Credit at any time, the maximum
amount then available to be drawn thereunder (without regard to whether any
conditions to drawing could then be met).
"SUBSIDIARY" means, as to any Person, (i) any corporation more than 50% of
whose stock of any class or classes having by the terms thereof ordinary voting
power to elect a majority of the directors of such corporation (irrespective of
whether or not at the time stock of any class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency) is at the time owned by such Person directly or indirectly through
one or more other Subsidiaries and (ii) any partnership, association, joint
venture or other entity in which such Person, directly or indirectly through one
or more other Subsidiaries, has a greater than 50% equity interest at the time.
"SUBSIDIARY GUARANTEE AGREEMENT" means an agreement in substantially the
form of Exhibit I executed and delivered pursuant to Section 4.03.
"SYNDICATION AGENT" means BMO in its capacity as syndication agent
hereunder.
"TERMINATION DATE" means May 1, 2002, or, if such day is not a Euro-Dollar
Business Day, the next preceding Euro-Dollar Business Day.
"TRANSACTION DOCUMENTS" means the Merger Agreement, the Distribution
Agreement and the Purchase Agreement.
"TRANSACTIONS" has the meaning set forth in the recitals hereto.
"TURNAROUND QUARTER" means any fiscal quarter of the Borrower in which
either the heavy oil cracker unit or the hydrogen desulfurization unit,
hydrocracker, reformer or butane upgrading unit at the Refinery is shut down for
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scheduled or periodic maintenance for a period in excess of 14 days; provided
that, on the date of any determination pursuant to this Agreement, only one of
the most recently completed five fiscal quarters may constitute a "TURNAROUND
QUARTER," and in the event that more than one such quarter would otherwise
qualify as a "TURNAROUND QUARTER" without regard to this proviso, the Borrower
shall select one such quarter as the "TURNAROUND QUARTER" for such five fiscal
quarter period and shall promptly notify the Banks of such selection.
"UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"UNITED STATES" means the United States of America, including the States
and the District of Columbia, but excluding its territories and possessions.
"UNPAID DRAWING" has the meaning set forth in Section 3.04(a).
"VALERO ASSIGNMENT AGREEMENT" means an Assignment and Assumption Agreement
between Old Valero and New Valero in substantially the form of Exhibit J.
"WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means, as to any Person, any
Consolidated Subsidiary all of the shares of capital stock or other ownership
interests of which (except directors' qualifying shares) are at the time
directly or indirectly owned by such Person.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most recent audited consolidated
financial statements of the Borrower and its Consolidated Subsidiaries delivered
to the Banks; provided that, if the Borrower notifies the Administrative Agent
that the Borrower wishes to amend any covenant in Article 6 or Article 7 to
eliminate the effect of any change in generally accepted accounting principles
on the operation of such covenant (or if
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the Administrative Agent notifies the Borrower that the Required Banks wish to
amend Article 6 or Article 7 for such purpose), then the Borrower's compliance
with such covenant shall be determined on the basis of generally accepted
accounting principles in effect immediately before the relevant change in
generally accepted accounting principles became effective, until either such
notice is withdrawn or such covenant is amended in a manner satisfactory to the
Borrower and the Required Banks.
SECTION 1.03. Types of Borrowings. The term "BORROWING" denotes the
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article 2 on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement either by reference to the pricing of
Loans comprising such Borrowing (e.g., a "EURO-DOLLAR BORROWING" is a Borrowing
comprised of Euro-Dollar Loans and a "FIXED RATE BORROWING" is a Borrowing
comprised of Fixed Rate Loans) or by reference to the provisions of Article 2
under which participation therein is determined (i.e., a "COMMITTED BORROWING"
is a Borrowing under Section 2.01 in which all Banks participate in proportion
to their Commitments, while a "MONEY MARKET BORROWING" is a Borrowing under
Section 2.03 in which the Bank participants are determined on the basis of their
bids in accordance therewith).
SECTION 1.04. Other Definitional Provisions. References in this Agreement
to "ARTICLES", "SECTIONS", "SCHEDULES" or "EXHIBITS" shall be to Articles,
Sections, Schedules or Exhibits of or to this Agreement unless otherwise
specifically provided. Any of the terms defined in Section 1.01 may, unless the
context otherwise requires, be used in the singular or plural depending on the
reference. "INCLUDE" or "INCLUDES" and "INCLUDING" shall be deemed to be
followed by "WITHOUT LIMITATION" whether or not they are in fact followed by
such words or words of like import. "WRITING", "WRITTEN" and comparable terms
refer to printing, typing and other means of reproducing words in a visible
form. References to any agreement or contract are to such agreement or contract
as amended, modified or supplemented from time to time in accordance with the
terms hereof and thereof. Reference to any Person include the successors and
permitted assigns of such Person. References "FROM" or "THROUGH" any date mean,
unless otherwise specified, "FROM AND INCLUDING" or "THROUGH AND INCLUDING",
respectively.
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ARTICLE 2
THE CREDITS
SECTION 2.01. Commitments to Lend. During the Revolving Credit Period each
Bank severally agrees, on the terms and conditions set forth in this Agreement,
to make loans to the Borrower pursuant to this Section from time to time in
amounts requested by the Borrower, provided that the sum of the aggregate
principal amount of Committed Loans by such Bank at any one time outstanding and
such Bank's ratable share of the Letter of Credit Outstandings at such time
shall not exceed the amount of its Commitment. Each Borrowing under this Section
shall be in an aggregate principal amount of $1,000,000 or any larger multiple
of $1,000,000 (except that any such Borrowing may be in the aggregate amount
available in accordance with Section 4.02(b)) and shall be made from the several
Banks ratably in proportion to their respective Commitments. Within the
foregoing limits, the Borrower may borrow under this Section, repay, or to the
extent permitted by Section 2.11, prepay Loans, and re-borrow at any time during
the Revolving Credit Period under this Section.
SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give the
Administrative Agent a Notice of Borrowing not later than 12:30 P.M. (New York
City time) on (x) the date of each Base Rate Borrowing and (y) the third
Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business Day in
the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a
Euro-Dollar Borrowing;
(b) the aggregate amount of such Borrowing;
(c) whether the Loans comprising such Borrowing are to be Base Rate
Loans or Euro-Dollar Loans; and
(d) in the case of a Fixed Rate Borrowing, the duration of the Interest
Period applicable thereto, subject to the provisions of the definition of
Interest Period.
SECTION 2.03. Money Market Borrowings.
(a) The Money Market Option. In addition to Committed Borrowings pursuant
to Section 2.01, the Borrower may, as set forth in this Section, request the
Banks during the Revolving Credit Period to make offers to make Money Market
Loans to the Borrower. The Banks may, but shall have no obligation to,
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make such offers and the Borrower may, but shall have no obligation to, accept
any such offers in the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request offers
to make Money Market Loans under this Section, it shall transmit to the
Administrative Agent by telex or facsimile transmission a Money Market Quote
Request substantially in the form of Exhibit B hereto so as to be received no
later than 12:30 P.M. (New York City time) on (x) the fifth Euro-Dollar Business
Day prior to the date of Money Market Borrowing proposed therein, in the case of
a LIBOR Auction or (y) the Domestic Business Day next preceding the date of
Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in
either case, such other time or date as the Borrower and the Administrative
Agent shall have mutually agreed and shall have notified to the Banks not later
than the date of the Money Market Quote Request for the first LIBOR Auction or
Absolute Rate Auction for which such change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a Euro-Dollar
Business Day in the case of a LIBOR Auction or a Domestic Business Day in
the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be $1,000,000
or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto, subject to
the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set forth a Money
Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a Money
Market Quote Request, the Administrative Agent shall send to the Banks by telex
or facsimile transmission an Invitation for Money Market Quotes substantially in
the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the Money
Market Loans to which such Money Market Quote Request relates in accordance with
this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank
may submit a Money Market Quote containing an offer or offers to make Money
Market Loans in response to any Invitation for Money Market Quotes. Each
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Money Market Quote must comply with the requirements of this subsection (d) and
must be submitted to the Administrative Agent by telex or facsimile transmission
at its offices specified in or pursuant to Section 10.01 not later than (x) 2:00
P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) 11:30 A.M.
(New York City time) on the proposed date of Borrowing, in the case of an
Absolute Rate Auction (or, in either case, such other time or date as the
Borrower and the Administrative Agent shall have mutually agreed and shall have
notified to the Banks not later than the date of the Money Market Quote Request
for the first LIBOR Auction or Absolute Rate Auction for which such change is to
be effective); provided that Money Market Quotes submitted by the Administrative
Agent (or any affiliate of the Administrative Agent) in the capacity of a Bank
may be submitted, and may only be submitted, if the Administrative Agent or such
affiliate notifies the Borrower of the terms of the offer or offers contained
therein not later than (x) one hour prior to the deadline for the other Banks,
in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the
other Banks, in the case of an Absolute Rate Auction. Subject to Articles 4 and
8, any Money Market Quote so made shall be irrevocable except with the written
consent of the Administrative Agent given on the instructions of the Borrower.
(ii) Each Money Market Quote shall be in substantially the form of Exhibit D
hereto and shall in any case specify:
(A) the proposed date of Borrowing;
(B) the principal amount of the Money Market Loan for which each
such offer is being made, which principal amount (w) may be greater
than or less than the Commitment of the quoting Bank, (x) must be
$1,000,000 or a larger multiple of $1,000,000, (y) may not exceed
the principal amount of Money Market Loans for which offers were
requested and (z) may be subject to an aggregate limitation as to
the principal amount of Money Market Loans for which offers being
made by such quoting Bank may be accepted;
(C) in the case of a LIBOR Auction, the margin above or below the
applicable London Interbank Offered Rate (the "MONEY MARKET MARGIN")
offered for each such Money Market Loan, expressed as a percentage
(specified to the nearest 1/10,000th of 1%) to be added to or
subtracted from such base rate;
(D) in the case of an Absolute Rate Auction, the rate of
interest per annum (specified to the nearest 1/10,000th of 1%) (the
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"MONEY MARKET ABSOLUTE RATE") offered for each such Money
Market Loan; and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto or
does not specify all of the information required by subsection
(d)(ii);
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower.
(i) The Administrative Agent shall promptly notify the Borrower of (A)
the terms of any Money Market Quote submitted by a Bank that is in
accordance with subsection (d) and (B) of any Money Market Quote that
amends, modifies or is otherwise inconsistent with a previous Money Market
Quote submitted by such Bank with respect to the same Money Market Quote
Request. Any such subsequent Money Market Quote shall be disregarded by
the Administrative Agent unless such subsequent Money Market Quote is
submitted solely to correct a manifest error in such former Money Market
Quote.
(ii) The Administrative Agent's notice to the Borrower shall specify (A)
the aggregate principal amount of Money Market Loans for which offers have
been received for each Interest Period specified in the related Money
Market Quote Request, (B) the respective principal amounts and Money
Market Margins or Money Market Absolute Rates, as the case may be, so
offered and (C) if applicable, limitations on the aggregate principal
amount of Money Market Loans for which offers in any single Money Market
Quote may be accepted.
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(f) Acceptance and Notice by Borrower. Not later than 12:30 P.M. (New York
City time) on (x) the third Euro-Dollar Business Day prior to the proposed date
of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of
Borrowing, in the case of an Absolute Rate Auction (or, in either case, such
other time or date as the Borrower and the Administrative Agent shall have
mutually agreed and shall have notified to the Banks not later than the date of
the Money Market Quote Request for the first LIBOR Auction or Absolute Rate
Auction for which such change is to be effective), the Borrower shall notify the
Administrative Agent of its acceptance or non-acceptance of the offers so
notified to it pursuant to subsection (e). In the case of acceptance, such
notice shall be a Notice of Borrowing which shall specify the aggregate
principal amount of offers for each Interest Period that are accepted. The
Borrower may accept any Money Market Quote in whole or in part; provided that:
(i) the aggregate principal amount of each Money Market Borrowing may
not exceed the applicable amount set forth in the related Money Market
Quote Request;
(ii) the principal amount of each Money Market Borrowing must be
$1,000,000 or a larger multiple of $1,000,000;
(iii) acceptance of offers may only be made on the basis of ascending
Money Market Margins or Money Market Absolute Rates, as the case may be;
and
(iv) the Borrower may not accept any offer that is described in
subsection (d)(iii) or that otherwise fails to comply with the
requirements of this Agreement.
(g) Allocation by Administrative Agent. If offers are made by two or more
Banks with the same Money Market Margins or Money Market Absolute Rates, as the
case may be, for a greater aggregate principal amount than the amount in respect
of which such offers are accepted for the related Interest Period, the principal
amount of Money Market Loans in respect of which such offers are accepted shall
be allocated by the Administrative Agent among such Banks as nearly as possible
(in multiples of $1,000,000, as the Administrative Agent may deem appropriate)
in proportion to the aggregate principal amounts of such offers. Determinations
by the Administrative Agent of the amounts of Money Market Loans shall be
conclusive in the absence of manifest error.
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SECTION 2.04. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall
promptly notify each Bank of the contents thereof and of such Bank's share (if
any) of such Borrowing and such Notice of Borrowing shall not thereafter be
revocable by the Borrower.
(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank participating therein shall (except as provided in
subsection (c) of this Section) make available its share of such Borrowing, in
Federal or other funds immediately available in New York City, to the
Administrative Agent at its address referred to in Section 11.01. Unless the
Administrative Agent determines that any applicable condition specified in
Article 4 has not been satisfied, the Administrative Agent will make the funds
so received from the Banks available to the Borrower at the Administrative
Agent's aforesaid address.
(c) If any Bank makes a new Loan hereunder on a day on which the Borrower
is to repay all or any part of an outstanding Loan from such Bank, such Bank
shall apply the proceeds of its new Loan to make such repayment and only an
amount equal to the difference (if any) between the amount being borrowed and
the amount being repaid shall be made available by such Bank to the
Administrative Agent as provided in subsection (b), or remitted by the Borrower
to the Administrative Agent as provided in Section 2.12, as the case may be.
(d) Unless the Administrative Agent shall have received notice from a Bank
prior to the date of any Borrowing that such Bank will not make available to the
Administrative Agent such Bank's share of such Borrowing, the Administrative
Agent may assume that such Bank has made such share available to the
Administrative Agent on the date of such Borrowing in accordance with
subsections (b) and (c) of this Section and the Administrative Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Administrative Agent, such Bank and the Borrower
severally agree to repay 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
repaid to the Administrative Agent, at the Federal Funds Rate. If such Bank
shall repay to the Administrative Agent such corresponding amount, such amount
so repaid shall constitute such Bank's Loan included in such Borrowing for
purposes of this Agreement.
(e) Nothing in subsection (d) shall be deemed to relieve any Bank from its
obligation to make Loans or to prejudice any right which the Borrower may
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have against any Bank if such Bank defaults in the performance of its
obligations under this Agreement.
SECTION 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a
single Note payable to the order of such Bank for the account of its Applicable
Lending Office in an amount equal to the aggregate unpaid principal amount of
such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Administrative Agent,
request that its Loans of a particular type be evidenced by a separate Note in
an amount equal to the aggregate unpaid principal amount of such Loans. Each
such Note shall be in substantially the form of Exhibit A hereto with
appropriate modifications to reflect the fact that it evidences solely Loans of
the relevant type. Each reference in this Agreement to the "NOTE" of such Bank
shall be deemed to refer to and include any or all of such Notes, as the context
may require.
(c) Upon receipt of each Bank's Note pursuant to Section 4.01(b), the
Administrative Agent shall forward such Note to such Bank. Each Bank shall
record the date, amount, type and maturity of each Loan made by it and the date
and amount of each payment of principal made by the Borrower with respect
thereto, and may, if such Bank so elects in connection with any transfer or
enforcement of its Note, endorse on the schedule forming a part thereof
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding; provided that the failure of any Bank to make any
such recordation or endorsement shall not affect the obligations of the Borrower
hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the
Borrower so to endorse its Note and to attach to and make a part of its Note a
continuation of any such schedule as and when required.
SECTION 2.06. Maturity of Loans. Each Loan included in any Borrowing shall
mature, and the principal amount thereof shall be due and payable, on the last
day of the Interest Period applicable to such Borrowing.
SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear interest
on the outstanding principal amount thereof, for each day from the date such
Loan is made until it becomes due, at a rate per annum equal to the Base Rate
for such day. Such interest shall be payable in arrears on the third Domestic
Business Day following the end of each calendar quarter and on the third
Domestic Business Day following the Termination Date (or earlier date of
termination of the Commitments in their entirety) for the period to and
including the last day of such calendar quarter or the Termination Date (or such
earlier date of termination of the Commitments in their entirety). Any overdue
principal of or interest on any Base Rate Loan shall bear interest, payable on
demand, for each day until paid at a rate
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per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate
Loans for such day.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding principal
amount thereof, for each day during the Interest Period applicable thereto, at a
rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the
Adjusted London Interbank Offered Rate applicable to such Interest Period. Such
interest shall be payable for each Interest Period on the last day thereof and,
if such Interest Period is longer than three months, at intervals of three
months after the first day thereof.
"EURO-DOLLAR MARGIN" means a rate per annum determined in accordance with
the Pricing Schedule.
The "ADJUSTED LONDON INTERBANK OFFERED RATE" applicable to any Interest
Period means a rate per annum equal to the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London
Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage.
The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
each of the Reference Banks in the London interbank market at approximately
11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of
such Interest Period in an amount approximately equal to the principal amount of
the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to
apply and for a period of time comparable to such Interest Period.
"EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum 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" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar 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). The Adjusted London Interbank Offered Rate shall be adjusted
automatically on and as of the effective date of any change in the Euro-Dollar
Reserve Percentage.
(c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear
interest, payable on demand, for each day until paid at a rate per annum equal
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to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus
the Adjusted London Interbank Offered Rate applicable to the Interest Period for
such Loan and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus
the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of
1%) by dividing (x) the average (rounded upward, if necessary, to the next
higher 1/16 of 1%) of the respective rates per annum at which one day (or, if
such amount due remains unpaid more than three Euro-Dollar Business Days, then
for such other period of time not longer than six months as the Administrative
Agent may select) deposits in dollars in an amount approximately equal to such
overdue payment due to each of the Reference Banks are offered to such Reference
Bank in the London interbank market for the applicable period determined as
provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the
circumstances described in clause (a) or (b) of Section 10.01 shall exist, at a
rate per annum equal to the sum of 2% plus the rate applicable to Base Rate
Loans for such day).
(d) Subject to Section 10.01(a), each Money Market LIBOR Loan shall bear
interest on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at a rate per annum equal to the sum of the London Interbank
Offered Rate for such Interest Period (determined in accordance with Section
2.07(c) as if the related Money Market LIBOR Borrowing were a Committed
Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the
Bank making such Loan in accordance with Section 2.03. Each Money Market
Absolute Rate Loan shall bear interest on the outstanding principal amount
thereof, for the Interest Period applicable thereto, at a rate per annum equal
to the Money Market Absolute Rate quoted by the Bank making such Loan in
accordance with Section 2.03. Such interest shall be payable for each Interest
Period on the last day thereof and, if such Interest Period is longer than three
months, at intervals of three months after the first day thereof. Any overdue
principal of or interest on any Money Market Loan shall bear interest, payable
on demand, for each day until paid at a rate per annum equal to the sum of 2%
plus the Base Rate for such day.
(e) The Administrative Agent shall determine each interest rate applicable
to the Loans hereunder. The Administrative Agent shall give prompt notice to the
Borrower and the participating Banks of each rate of interest so determined, and
its determination thereof shall be conclusive in the absence of manifest error.
(f) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Administrative Agent as contemplated by this Section. If any
Reference Bank does not furnish a timely quotation, the Administrative Agent
shall determine the relevant interest rate on the basis of the quotation or
quotations
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furnished by the remaining Reference Bank or Banks or, if none of such
quotations is available on a timely basis, the provisions of Section 10.01 shall
apply.
SECTION 2.08. Facility Fee. The Borrower shall pay to the Administrative
Agent for the account of the Banks ratably a facility fee at the Facility Fee
Rate (determined daily in accordance with the Pricing Schedule). Such facility
fee shall accrue (i) from and including the Effective Date to but excluding the
Termination Date (or such earlier date of termination of the Commitments in
their entirety), on the daily aggregate amount of the Commitments (whether used
or unused) and (ii) from and including the Termination Date or such earlier date
of termination to but excluding the date the Loans shall be repaid in their
entirety, on the daily sum of the aggregate outstanding principal amount of the
Loans and the Letter of Credit Outstandings. Any facility fee payable under this
Section shall be payable in arrears on the third Domestic Business Day following
the end of each calendar quarter and on the third Domestic Business Day
following the Termination Date (or earlier date of termination of the
Commitments in their entirety) for the period to and including the last day of
such calendar quarter or the Termination Date (or such earlier date of
termination of the Commitments in their entirety).
SECTION 2.09. Optional Termination or Reduction of Commitments. During the
Revolving Credit Period, the Borrower may, upon at least three Domestic Business
Days' notice to the Administrative Agent, (i) terminate the Commitments at any
time, if no Loans are outstanding at such time and there are no Letter of Credit
Outstandings at such time or (ii) ratably reduce from time to time by an
aggregate amount of $5,000,000 or any larger multiple thereof, the aggregate
amount of the Commitments in excess of the sum of the aggregate outstanding
principal amount of the Loans and the Letter of Credit Outstandings.
SECTION 2.10. Mandatory Termination or Reduction of Commitments.
(a) Scheduled Termination of Commitments. The Commitments shall terminate
on the Termination Date, and any Loans then outstanding (together with accrued
interest thereon) shall be due and payable on such date.
(b) Reduction of Commitments. On each Commitment Reduction Date,
the Commitments shall be reduced by $150,000,000.
(c) Reduction Transactions. In the event that New Valero or any of its
Subsidiaries shall at any time, or from time to time, receive any Net Cash
Proceeds of any Reduction Transaction, the Commitments shall be reduced by an
amount equal to the Reduction Percentage of such Net Cash Proceeds.
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(d) Timing of Reductions. The reductions required by subsection (c) of this
Section 2.10 shall be effective forthwith upon receipt by New Valero or any of
its Subsidiaries, as the case may be, of the proceeds of the related Reduction
Transaction; provided that if any such reduction in the Commitments would
otherwise require prepayment of Fixed Rate Loans or portions thereof prior to
the last day of the related Interest Period, such reduction shall, unless the
Administrative Agent otherwise notifies the Borrower upon the instructions of
the Required Banks, be deferred to such last day. The Borrower shall give the
Administrative Agent at least five Euro-Dollar Business Days' notice of each
reduction in the Commitments pursuant to subsection (c).
(e) Application of Reductions. Each reduction of Commitments pursuant to
this Section shall be applied ratably to the respective Commitments of all
Banks. The amount of any reduction of the Commitments pursuant to Section 2.09
or subsection (c) shall be applied to reduce the amount of subsequent scheduled
reductions of the Commitments pursuant to subsections (a) and (b) in inverse
order of maturity.
(f) Mandatory Prepayments. On the date of each reduction of Commitments
pursuant to this Section 2.10, the Borrower shall prepay or repay the
outstanding Loans and/or pay to the Administrative Agent immediately available
funds to be held as collateral for the obligations of the Borrower under Article
3 in such amounts as may be necessary so that after such payment the sum of the
aggregate unpaid principal amount of the outstanding Loans and the Letter of
Credit Outstandings does not exceed the aggregate amount of the Commitments as
then reduced. The Borrower shall select by not less than three Euro-Dollar
Business Days' notice to the Administrative Agent (or failing such timely
selection by the Borrower, the Administrative Agent shall select) the particular
Borrowings to be prepaid or repaid and/or the amount of cash to be delivered as
collateral pursuant to this subsection (f); provided that (i) all outstanding
Base Rate Loans shall be prepaid prior to any prepayment of Fixed Rate Loans
pursuant to this subsection (f), (ii) all outstanding Committed Loans shall be
prepaid prior to any prepayment of Money Market Loans pursuant to this
subsection (f) and (iii) unless the Borrower otherwise elects, all outstanding
Loans shall be prepaid prior to any payments of amounts to be held as cash
collateral hereunder.
SECTION 2.11. Optional Prepayments. (a) Subject in the case of any
Euro-Dollar Borrowing to Section 2.13, the Borrower may, upon notifying the
Administrative Agent no later than 12:30 p.m. (New York City time) on any
Domestic Business Day, prepay any Base Rate Borrowing (or any Money Market
Borrowing bearing interest at the Base Rate pursuant to Section 10.01(a)) or
upon at least three Euro-Dollar Business Days' notice to the Administrative
Agent, prepay any Euro-Dollar Borrowing, in each case in whole at any time, or
from
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time to time in part in amounts aggregating $1,000,000 or any larger multiple of
$1,000,000, (i) with respect to any Base Rate Borrowing, by paying the principal
amount to be prepaid and (ii) with respect to any Euro-Dollar Borrowing or Money
Market Borrowing bearing interest at the Base Rate, by paying the principal
amount to be prepaid together with accrued interest thereon to the date of
prepayment. Each such optional prepayment shall be applied to prepay ratably the
Loans of the several Banks included in such Borrowing.
(b) Except as provided in Sections 2.10(f) and 2.11(a), the Borrower may
not prepay all or any portion of the principal amount of any Money Market Loan
prior to the maturity thereof.
(c) Upon receipt of a notice of prepayment pursuant to this Section, the
Administrative Agent shall promptly notify each Bank of the contents thereof and
of such Bank's ratable share (if any) of such prepayment and such notice shall
not thereafter be revocable by the Borrower.
SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall
make each payment of principal of, and interest on, the Loans and fees
hereunder, not later than 2:00 P.M. (New York City time) on the date when due,
in Federal or other funds immediately available in New York City, to the
Administrative Agent at its address referred to in Section 11.01. The
Administrative Agent will promptly distribute to each Bank its ratable share of
each such payment received by the Administrative Agent for the account of the
Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans
or of fees shall be due on a day which is not a Domestic Business Day, the date
for payment thereof shall be extended to the next succeeding Domestic Business
Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans
shall be due on a day which is not a Euro-Dollar Business Day, the date for
payment thereof shall be extended to the next succeeding Euro-Dollar Business
Day unless such Euro-Dollar Business Day falls in another calendar month, in
which case the date for payment thereof shall be the next preceding Euro-Dollar
Business Day. Whenever any payment of principal of, or interest on, the Money
Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the
date for payment thereof shall be extended to the next succeeding Euro-Dollar
Business Day. If the date for any payment of principal is extended by operation
of law or otherwise, interest thereon shall be payable for such extended time.
(b) Unless the Administrative Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Banks hereunder
that the Borrower will not make such payment in full, the Administrative Agent
may assume that the Borrower has made such payment in full to the Administrative
Agent on such date and the Administrative Agent may, in reliance upon such
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assumption, cause to be distributed to each Bank on such due date an amount
equal to the amount then due such Bank. If and to the extent that the Borrower
shall not have so made such payment, each Bank shall repay to the Administrative
Agent forthwith on demand such amount distributed to such Bank together with
interest thereon, for each day from the date such amount is distributed to such
Bank until the date such Bank repays such amount to the Administrative Agent, at
the Federal Funds Rate.
SECTION 2.13. Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan (pursuant to Article 2, 8 or 10 or
otherwise) on any day other than the last day of the Interest Period applicable
thereto, or the last day of an applicable period fixed pursuant to Section
2.07(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after
notice has been given to any Bank in accordance with Section 2.04(a) or 2.11(c),
the Borrower shall reimburse each Bank within 15 days after demand for any
resulting loss or expense incurred by it (or by an existing or prospective
Participant in the related Loan), including (without limitation) any loss
incurred in obtaining, liquidating or employing deposits from third parties, but
excluding loss of margin for the period after any such payment or failure to
borrow or prepay, provided that such Bank shall have delivered to the Borrower a
certificate as to the amount of and basis for determining such loss or expense,
which certificate shall be conclusive in the absence of manifest error.
SECTION 2.14. Computation of Interest and Fees. Interest based on the
Prime Rate hereunder shall be computed on the basis of a year of 365 days (or
366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and all
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
ARTICLE 3
LETTERS OF CREDIT
SECTION 3.01. Letter of Credit Commitment. (a) Subject to and upon the
terms and conditions herein set forth, the Borrower may request the Issuing Bank
to issue, and the Issuing Bank agrees to issue, at any time and from time to
time on or after the Effective Date and prior to the Letter of Credit
Termination Date, one or more irrevocable letters of credit ("LETTERS OF
CREDIT") for the account of the Borrower, and for the benefit of any obligee of
payment obligations of the Borrower or any of its Subsidiaries, in amounts such
that the sum of the aggregate
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outstanding principal amount of the Loans and the Letter of Credit Outstandings
shall at no time exceed the aggregate amount of the Commitments.
(b) Each Letter of Credit shall be in a form customarily used by the
Issuing Bank on the Effective Date or otherwise in such form as may be approved
by the Issuing Bank. Each Letter of Credit shall be subject to the Uniform
Customs and Practice for Documentary Credits (1994 Revision), International
Chamber of Commerce Publication No. 500, (and any subsequent revisions thereof
approved by a Congress of the International Chamber of Commerce and adhered to
by the Issuing Bank), and shall also be subject to Section 5-114 of the New York
Uniform Commercial Code.
(c) Each Letter of Credit issued hereunder shall (i) be denominated in
United States dollars and provide for the payment of sight drafts and/or
documents when presented for honor thereunder in accordance with the terms
thereof and accompanied by the documents described therein, and (ii) have an
expiry date occurring not later than (1) the earliest of one year after the date
of issuance or (2) the Letter of Credit Termination Date. Notwithstanding
anything to the contrary contained in clause (ii) of the preceding sentence, if
requested prior to the Letter of Credit Termination Date, but not earlier than
45 days prior to the expiry date of any Letter of Credit, the expiry date of
such Letter of Credit may be extended for a period of up to one year from the
expiry date in effect before giving effect to such extension (but in no event
later than the Letter of Credit Termination Date) so long as such Letter of
Credit could otherwise be issued at such time pursuant to this Agreement.
(d) Upon the issuance of any Letter of Credit (or upon the Effective Date
with respect to any Existing Letter of Credit), the Issuing Bank shall be deemed
to have sold and each Bank shall be deemed to have acquired, an undivided
participation in each Letter of Credit issued by the Issuing Bank in accordance
with the terms hereof and in each drawing made thereunder in a percentage equal
to the Percentage Participation of such Bank.
SECTION 3.02. Letter of Credit Requests. Whenever the Borrower desires
that a Letter of Credit be issued for its account, the Borrower shall give the
Issuing Bank and the Administrative Agent notice no later than 12:30 p.m.
(Chicago time) on any Domestic Business Day, including instructions in such
notice, and such letter of credit applications or other documents that the
Issuing Bank customarily requires in connection therewith. In the event any
provision of any letter of credit application is inconsistent with, or in
conflict with, any provision of this Agreement, the provisions of this Agreement
shall control.
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SECTION 3.03. Letter of Credit Fees. (a) The Borrower agrees to pay to the
Administrative Agent for the account of the Banks, a letter of credit fee at a
rate per annum equal to the applicable Letter of Credit Rate (determined daily
in accordance with the Pricing Schedule) for such day on the aggregate daily
amount available for drawing under all Letters of Credit issued hereunder, such
fee to be payable for the account of the Banks ratably in proportion to their
participation therein.
(b) The Borrower agrees to pay the Issuing Bank, for its own account, a
fronting fee in respect of each Letter of Credit issued hereunder in accordance
with BMO's Fee Letter.
(c) Fees payable pursuant to subsections (a) and (b) shall be calculated to
the end of each calendar quarter and to the Letter of Credit Termination Date,
and shall be due and payable on the third Domestic Business Day following the
end of each calendar quarter during the term hereof and on the third Domestic
Business Day following the Letter of Credit Termination Date.
SECTION 3.04. Agreement to Repay Letter of Credit Drawings. (a) The
Borrower hereby agrees to reimburse the Issuing Bank for any payment or
disbursement made by the Issuing Bank under any Letter of Credit (each such
amount so paid or disbursed until reimbursed, an "UNPAID DRAWING") within one
Business Day after the date of such payment or disbursement, with interest on
the amount so paid or disbursed by the Issuing Bank, if and to the extent not
reimbursed prior to 2:00 P.M., Chicago time, on the date of such payment or
disbursement, from and including the date paid or disbursed to but excluding the
date the Issuing Bank was reimbursed therefor at a rate per annum which shall be
the rate of interest that would be applicable to Base Rate Loans during such
period.
(b) The Borrower's obligations under this Section 3.04 to reimburse the
Issuing Bank with respect to Unpaid Drawings in respect of Letters of Credit
(including, in each case, interest thereon) shall be absolute and unconditional
under any and all circumstances and irrespective of any set off, counterclaim or
defense to payment which the Borrower may have or have had against any Bank
(including the Issuing Bank in its capacity as issuer of the Letter of Credit or
as a Bank), including, without limitation, any defense based upon the failure of
any drawing under a Letter of Credit (each a "DRAWING") to conform to the terms
of the Letter of Credit or any non-application or misapplication by the
beneficiary of the proceeds of such Drawing. The Borrower assumes all risks as a
result of the acts or omissions of the user of any Letter of Credit and all
risks of the misuse of any Letter of Credit. The Issuing Bank in its capacity as
issuer of any Letter of Credit shall not be liable:
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(i) for the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document reasonably believed to be genuine by the
Person examining such document in connection with any Letter of Credit,
even if it should prove to be in any respect invalid, insufficient,
inaccurate, fraudulent or forged,
(ii) for the validity or insufficiency of any instrument
transferring or assigning or purporting to assign any Letter of Credit or
the rights and benefits thereunder or the proceeds thereof,
(iii) for clerical, administrative or other ministerial errors, such
as failure of any draft to bear any reference or adequate reference to any
applicable Letter of Credit, or failure of any Person to note the amount
of any draft on any applicable Letter of Credit or to surrender or take up
any applicable Letter of Credit or to send forward any such document apart
from drafts as required by the terms of any Letter of Credit, each of
which provisions, if contained in any Letter of Credit, may be waived by
the Issuing Bank,
(iv) for errors, omissions, interruptions or delays in transmissions
or delivery of any message, by mail, telegraph, telex or otherwise,
(v) for any error, neglect, default, suspension or insolvency of
any correspondent,
(vi) for errors in translation or for errors in interpretation of
technical terms,
(vii) for any loss or delay in the transmission or otherwise of any
Letter of Credit or any document or draft in connection therewith or the
proceeds thereof,
(viii) for any consequence arising from causes beyond the control of
the Issuing Bank, or
(ix) for any other act or omission to act or delay of any kind by
any Bank (including the Issuing Bank), the Administrative Agent or any
other Person which might, but for the provisions of this subsection (vii),
constitute a legal or equitable discharge of or defense to the Borrower's
obligations hereunder. Nothing in this subsection (b) is intended to limit
the right of the Borrower to make a claim against the Issuing Bank for
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damages as contemplated by the proviso to the first sentence of Section
3.05.
(c) Promptly upon the occurrence of any Unpaid Drawing, the Issuing Bank
shall notify the Borrower and the Banks thereof. Failure to give such notice,
however, shall not affect the obligations of the Borrower or the Banks in
respect of such Unpaid Drawing.
(d) Promptly after receiving notice of any Unpaid Drawing, each Bank shall
pay to the Issuing Bank the amount of such Bank's Percentage Participation in
such Unpaid Drawing by transferring the same to the Issuing Bank in immediately
available funds at the office specified by it in such notice. To the extent any
Bank does not effect such payment on the date of any Unpaid Drawing, such Bank
agrees to pay interest to the Issuing Bank on such amount until such payment is
made at the overnight Federal Funds Rate. If a Bank shall have made all payments
to the Issuing Bank required by this Section, the Issuing Bank shall pay such
Bank its proportionate share of all payments received by the Issuing Bank from
the Borrower in respect of Unpaid Drawings, all as, and, to the extent possible,
when received by the Issuing Bank.
SECTION 3.05. Indemnity. The Borrower hereby indemnifies and holds
harmless the Administrative Agent and each Bank from and against any and all
claims, damages, losses, liabilities, costs or expenses which it may incur, and
none of the Banks (including any Issuing Bank) nor the Administrative Agent nor
any of their officers, directors, employees or agents shall be liable or
responsible, by reason of or in connection with the execution and delivery or
transfer of or payment or failure to pay under any Letter of Credit, including
without limitation (i) any error, omission, interruption or delay in
transmission or delivery of any messages, by mail, cable, telegraph, telex or
otherwise, (ii) any error in interpretation of technical terms, (iii) any loss
or delay in the transmission of any document required in order to make a drawing
under a Letter of Credit, (iv) any consequences arising from causes beyond the
control of the Issuing Bank, including without limitation any government acts,
or any other circumstances whatsoever (including without limitation the
circumstances enumerated in Section 3.04(b) above) in making or failing to make
payment under such Letter of Credit; provided that the Borrower shall have a
claim against the Issuing Bank for direct (but not consequential) damage
suffered by it, to the extent caused by (x) the willful misconduct or gross
negligence of the Issuing Bank in determining whether a request presented under
any Letter of Credit complied with the terms of such Letter of Credit or (y) the
Issuing Bank's failure to pay under any Letter of Credit after the presentation
to it of a request that strictly complies with the terms and conditions of such
Letter of Credit. Nothing in this Section is intended to limit the obligations
of the Borrower under any other provision of this Agreement.
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ARTICLE 4
CONDITIONS
SECTION 4.01. Effectiveness. This Agreement shall become effective on the
date that each of the following conditions shall have been satisfied (or waived
in accordance with Section 11.05):
(a) receipt by the Administrative Agent of counterparts hereof signed by
each of the parties hereto (or, in the case of any party as to which an executed
counterpart shall not have been received, receipt by the Administrative Agent in
form satisfactory to it of telegraphic, telex or other written confirmation from
such party of execution of a counterpart hereof by such party);
(b) receipt by the Administrative Agent of a duly executed Note of Old
Valero for the account of each Bank dated on or before the Effective Date
complying with the provisions of Section 2.05;
(c) receipt by the Administrative Agent of an opinion of Stan L. McLelland,
Executive Vice President and General Counsel of Old Valero, substantially in the
form of Exhibit E-1 hereto and covering such additional matters relating to the
transactions contemplated hereby as the Required Banks may reasonably request;
(d) receipt by the Administrative Agent of an opinion of Davis Polk &
Wardwell, special counsel for the Administrative Agent, substantially in the
form of Exhibit F-1 hereto and covering such additional matters relating to the
transactions contemplated hereby as the Required Banks may reasonably request;
(e) receipt by the Administrative Agent of all documents the Administrative
Agent may reasonably request relating to the existence of the Obligors, the
corporate authority for and the validity of the Financing Documents and the
Transaction Documents, and any other matters relevant hereto, all in form and
substance satisfactory to the Administrative Agent;
(f) receipt by the Administrative Agent of evidence satisfactory to it of
the payment of all principal of and interest on any loans outstanding under, and
of all other amounts payable under, the Existing Credit Agreement;
(g) receipt by the Administrative Agent of copies of each of the
Transaction Documents, certified by a duly authorized officer of Old Valero as
being the forms thereof in effect at the time, which forms shall not differ in
any material respect from the respective forms of the Transaction Documents
delivered to the Banks prior to the execution and delivery of this Agreement;
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(h) receipt by the Agent of a certificate of a duly authorized officer of
Old Valero to the effect that the Acquisition is being consummated substantially
simultaneously with the effectiveness of this Agreement and the initial
Borrowing hereunder, all in accordance with the Purchase Agreement without
waiver of any material conditions to closing thereunder;
(i) receipt by the Administrative Agent of a report of Pace Consultants,
Inc. confirming the reasonableness in their view of the assumptions set forth in
Section XI of the Bank Information Memorandum;
(j) receipt by the Administrative Agent of an environmental due diligence
report prepared by RMT Jones & Nuese, which shall be consistent in all material
respects with the information relating to environmental matters in respect of
Basis heretofore disclosed to the Banks and in form and substance satisfactory
to the Administrative Agent; and
(k) receipt by the Administrative Agent of a certificate from Edward C.
Benninger, President of New Valero with respect to the solvency of New Valero on
a pro forma basis after giving effect to the Transactions and the financing
thereof, in substantially the form of the draft thereof heretofore furnished to
the Banks.
provided that this Agreement shall not become effective or be binding on any
party hereto unless all of the foregoing conditions are satisfied not later than
May 15, 1997. The Administrative Agent shall promptly notify the Obligors and
the Banks of the Effective Date, and such notice shall be conclusive and binding
on all parties hereto. The Banks that are parties to the Existing Credit
Agreement, comprising the "REQUIRED BANKS" as defined therein, and the Borrower
agree that the commitments under the Existing Credit Agreement shall terminate
in their entirety simultaneously with and subject to the effectiveness of this
Agreement and that the Borrower shall be obligated to pay the accrued commitment
and facility fees thereunder to but excluding the date of such effectiveness.
SECTION 4.02. Borrowings. The obligation of any Bank to make a Loan
on the occasion of any Borrowing or of the Issuing Bank to issue or extend any
Letter of Credit is subject to the satisfaction of the following conditions:
(a) receipt by the Administrative Agent of a Notice of Borrowing as
required by Section 2.02 or 2.03, or by the Issuing Bank and the Administrative
Agent of a notice as required by Section 3.02, as may be applicable;
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(b) the fact that, immediately after such Borrowing, the sum of the
aggregate outstanding principal amount of the Loans and the Letter of Credit
Outstandings will not exceed the Availability Limit;
(c) the fact that, immediately before and after such Borrowing, no
Default shall have occurred and be continuing; and
(d) the fact that the representations and warranties of the Borrower
contained in this Agreement (except, in the case of a Refunding Borrowing, the
representations and warranties set forth in Sections 5.04(c) and 5.05 as to any
matter which has theretofore been disclosed in writing by the Borrower to the
Banks) shall be true on and as of the date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(b), (c) and (d) of this Section.
SECTION 4.03. Assumption. The Assumption shall automatically become
effective immediately upon consummation of the Spin-Off; provided that the
Administrative Agent shall have theretofore received each of the documents
specified below:
(a) a duly executed Note of New Valero for the account of each Bank dated
on or before the Assumption Date complying with the provisions of Section 2.05;
(b) duly executed counterparts of the Valero Assignment Agreement;
(c) counterparts of the Subsidiary Guarantee Agreement, duly executed
by each Material Subsidiary of New Valero;
(d) an opinion of the General Counsel of New Valero, or other counsel for
New Valero reasonably satisfactory to the Administrative Agent, substantially in
the form of Exhibit E-2 hereto and covering such additional matters relating to
the transactions contemplated hereby as the Required Banks may reasonably
request;
(e) an opinion of Davis Polk & Wardwell, special counsel for the
Administrative Agent, substantially in the form of Exhibit F-2 hereto and
covering such additional matters relating to the transactions contemplated by
such assignment as the Required Banks may reasonably request;
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(f) a certificate of a duly authorized officer of New Valero certifying
that, on and as of the Assumption Date and after giving effect to the
Assumption, (i) all representations and warranties of the Borrower contained in
the Financing Documents are true and correct, (ii) no Default shall have
occurred and be continuing, (iii) the Acquisition has been consummated in
accordance with the Purchase Agreement, without waiver of any conditions
material thereunder, and (iv) the Contribution has been made; and
(g) all documents the Administrative Agent may reasonably request relating
to the existence of the Obligors, the corporate authority for and the validity
of the Financing Documents and the Transaction Documents and any other matters
relevant thereto, all in form and substance satisfactory to the Administrative
Agent.
On the Assumption Date all rights and obligations of the Borrower under this
Agreement (including, without limitation, the Loans) shall be assigned by Old
Valero to New Valero. On the Assumption Date, immediately and automatically upon
the effectiveness of the Assumption, Old Valero shall cease to be a party to
this Agreement and thereafter Old Valero shall be released from its liabilities
and obligations under this Agreement and its Notes and shall have no further
liabilities or obligations under this Agreement or its Notes. The Notes of Old
Valero shall be marked "CANCELED" and returned to Old Valero. The Administrative
Agent shall promptly notify Old Valero, New Valero and the Banks of the
Assumption Date, and such notice shall be conclusive and binding on all parties
hereto.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
Each Obligor represents and warrants that:
SECTION 5.01. Corporate Existence and Power. Each Obligor and each
Guarantor is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and has all
corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
SECTION 5.02. Corporate and Governmental Authorization; No Contravention.
The execution, delivery and performance by each Obligor and each Guarantor of
each Financing Document to which it is a party are within its corporate powers,
have been duly authorized by all necessary corporate action, require no action
by or in respect of, or filing with, any governmental body, agency or official
(except for any reports required to be filed by an Obligor with or to the
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Securities and Exchange Commission (or any successor thereto) pursuant to the
Exchange Act) and do not contravene, or constitute a default under, any
provision of applicable law or regulation or of its certificate of incorporation
or by-laws or of any agreement, judgment, injunction, order, decree or other
instrument binding upon the Borrower or any of its Subsidiaries or result in the
creation or imposition of any Lien on any asset of the Borrower or any of its
Subsidiaries.
SECTION 5.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Borrower and of New Valero (if not the Borrower), and
each other Financing Document, when executed and delivered in accordance with
this Agreement, will constitute a valid and binding obligation of each Obligor
and Guarantor party thereto, in each case enforceable in accordance with its
terms.
SECTION 5.04. Financial Information.
(a) The consolidated balance sheet of Old Valero and its Consolidated
Subsidiaries as of December 31, 1996 and the related consolidated statements of
income and cash flows for the fiscal year then ended, reported on by independent
public accountants and set forth in the Old Valero Form 10-K, a copy of which
has been delivered to each of the Banks, fairly present, in conformity with
generally accepted accounting principles, the consolidated financial position of
Old Valero and its Consolidated Subsidiaries as of such date and their
consolidated results of operations and cash flows for such fiscal year.
(b) The unaudited pro forma consolidated balance sheet of New Valero as of
December 31, 1996 and the related unaudited pro forma consolidated statement of
income for the year ended December 31, 1996 set forth in the Bank Information
Memorandum, are complete and correct in all material respects and have been
prepared on the basis described therein and otherwise in conformity with
generally accepted accounting principles applied on a basis consistent with the
financial statements referred to in subsection (b) of this Section and show the
consolidated financial position and results of operations of New Valero as if
the Transactions had occurred, in the case of the consolidated balance sheet, on
December 31, 1996 and in the case of the consolidated statement of earnings, as
of January 1, 1996.
(c) Since December 31, 1996, there has been no material adverse change in
the business, financial position, results of operations or prospects of the
Borrower and its Consolidated Subsidiaries, considered as a whole or of New
Valero (if not the Borrower) and its Consolidated Subsidiaries, taken as a
whole.
SECTION 5.05. Litigation. Except as disclosed in the Old Valero Form
10-K or otherwise disclosed in writing to the Banks prior to the execution and
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delivery of this Agreement, there is no action, suit or proceeding pending
against, or to the knowledge of the Borrower threatened against or affecting,
the Borrower or any of its Subsidiaries before any court or arbitrator or any
governmental body, agency or official in which there is a reasonable possibility
of an adverse decision which could reasonably be expected to materially
adversely affect the business, consolidated financial position or consolidated
results of operations of the Borrower and its Consolidated Subsidiaries,
considered as a whole, or of New Valero (if not the Borrower) and its
Consolidated Subsidiaries, taken as a whole, or which in any manner draws into
question the validity of any Financing Document.
SECTION 5.06. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multi-employer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which has resulted or could reasonably be expected to result in the imposition
of a Lien or the posting of a bond or other security under ERISA or the Internal
Revenue Code or (iii) incurred any liability under Title IV of ERISA other than
a liability to the PBGC for premiums under Section 4007 of ERISA.
SECTION 5.07. Environmental Matters. In the ordinary course of its
business, such Obligor conducts or causes to be conducted an ongoing review of
the effect of Environmental Laws on the business, operations and properties of
such Obligor and its Subsidiaries, in the course of which it identifies and
evaluates associated liabilities and costs (including, without limitation, any
capital or operating expenditures required for clean-up or closure of properties
presently or previously owned, any capital or operating expenditures required to
achieve or maintain compliance with environmental protection standards imposed
by law or as a condition of any license, permit or contract, any related
constraints on operating activities, including any periodic or permanent
shutdown of any facility or reduction in the level of or change in the nature of
operations conducted thereat, any costs or liabilities in connection with
off-site disposal of wastes or Hazardous Substances, and any actual or potential
liabilities to third parties, including employees, and any related costs and
expenses). On the basis of this review, each Obligor has reasonably concluded
that such associated liabilities and costs, including the costs of compliance
with Environmental Laws, are unlikely to have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Borrower and its Consolidated Subsidiaries, considered as a
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whole or of New Valero (if not the Borrower) and its Consolidated Subsidiaries,
taken as a whole.
SECTION 5.08. Taxes. The Borrower and its Subsidiaries have filed all
United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid all taxes due pursuant to
such returns or pursuant to any assessment received by the Borrower or any
Subsidiary. The charges, accruals and reserves on the books of the Borrower and
its Subsidiaries in respect of taxes or other governmental charges are, in the
opinion of the Borrower, adequate.
SECTION 5.09. Subsidiaries. Each of the Borrower's Subsidiaries is a
corporation, partnership or other legal entity duly organized, validly existing
and is in good standing in each jurisdiction in which the ownership of its
properties or the conduct of its business requires such qualification and where
the failure to so qualify could reasonably be expected to have a material
adverse effect on the business, financial position or results of operations of
the Borrower and its Subsidiaries, taken as a whole, or of New Valero (if not
the Borrower) and its Consolidated Subsidiaries, taken as a whole. Each of the
Borrower's Subsidiaries has all legal power and all governmental licenses,
authorizations, consents and approvals required to own its assets and to carry
on its business as now conducted and where the failure to have any such
corporate or partnership power, licenses, authorizations, consents or approvals
could reasonably be expected to have a material adverse effect on the business,
financial position, results of operation of the Borrower and its Subsidiaries,
taken as a whole.
SECTION 5.10. Not an Investment Company. No Obligor party hereto is
an "INVESTMENT COMPANY" within the meaning of the Investment Company Act of
1940, as amended.
SECTION 5.11. Full Disclosure. All information heretofore furnished by
Obligors to the Administrative Agent or any Bank for purposes of or in
connection with this Agreement or any transaction contemplated hereby is, and
all such information hereafter furnished by the Obligors to the Administrative
Agent or any Bank will be, true and accurate in all material respects on the
date as of which such information is stated or certified. Each Obligor has
disclosed to the Banks in writing any and all facts which materially and
adversely affect or could reasonably be expected to materially and adversely
affect (to the extent such Obligor can now reasonably foresee), the business,
operations or financial condition of the Borrower and its Consolidated
Subsidiaries, taken as a whole, or of New Valero (if not the Borrower) and its
Consolidated Subsidiaries, taken as a whole, or the ability of any Obligor to
perform its obligations under the Financing Documents.
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SECTION 5.12. Representations in Other Documents. (a) Each
representation and warranty contained in the Transaction Documents made by any
party thereto is true and correct in all material respects.
(b) Each representation and warranty of each Guarantor set forth in the
Subsidiary Guarantee Agreement is true and correct.
ARTICLE 6
OLD VALERO COVENANTS
Old Valero agrees that, so long as (i) it remains the Borrower hereunder
and (ii) any Bank has any Commitment hereunder or any amount payable under any
Note remains unpaid or any Letter of Credit Outstandings remain:
SECTION 6.01. Information. Old Valero will deliver to each of the Banks:
(a) as soon as available and in any event within 105 days after the end of
each fiscal year of Old Valero, a Form 10-K of Old Valero and its Consolidated
Subsidiaries for such fiscal year as filed with the Securities and Exchange
Commission;
(b) as soon as available and in any event within 60 days after the end of
each of the first three quarters of each fiscal year of Old Valero, a Form 10-Q
of Old Valero and its Consolidated Subsidiaries for such quarter as filed with
the Securities and Exchange Commission;
(c) simultaneously with the delivery of each set of financial statements
referred to in clauses (a) and (b) above, a certificate of a Financial Officer
of Old Valero (i) setting forth whether Old Valero was in compliance with the
requirements of Sections 6.07 to 6.13, inclusive, on the date of such financial
statements, (ii) with respect to Sections 6.07 to 6.09, inclusive, and Section
6.12, setting forth the calculations in reasonable detail required to establish
whether Old Valero was in compliance with the requirements of such Sections and
(iii) stating whether any Default exists on the date of such certificate and, if
any Default then exists, setting forth the details thereof and the action which
Old Valero is taking or proposes to take with respect thereto;
(d) simultaneously with the delivery of each set of financial statements
referred to in clause (a) above, a statement of the firm of independent public
accountants which reported on such statements whether anything has come to their
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attention to cause them to believe that any Default existed on the date of such
statements.
(e) within five days after any Financial Officer of Old Valero obtains
knowledge of any Default, if such Default is then continuing, a certificate of a
Financial Officer of Old Valero setting forth the details thereof and the action
which Old Valero is taking or proposes to take with respect thereto;
(f) promptly upon the mailing thereof to the shareholders of Old Valero
generally, copies of all financial statements, reports and proxy statements so
mailed;
(g) promptly upon the filing thereof, copies of all registration statements
(other than the exhibits thereto and any registration statements on Form S-8 or
its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents)
which Old Valero shall have filed with the Securities and Exchange Commission;
(h) if and when any member of the ERISA Group (i) gives or is required to
give notice to the PBGC of any "REPORTABLE EVENT" (as defined in Section 4043 of
ERISA) with respect to any Plan which could reasonably be expected to constitute
grounds for a termination of such Plan under Title IV of ERISA, or knows that
the plan administrator of any Plan has given or is required to give notice of
any such reportable event, a copy of the notice of such reportable event given
or required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multi-employer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent
to terminate, impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of
such notice; (iv) applies for a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code, a copy of such application; (v) gives
notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of
such notice and other information filed with the PBGC; (vi) gives notice of
withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such
notice; or (vii) fails to make any payment or contribution to any Plan or
Multi-employer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which has resulted or could
reasonably be expected to result in the imposition of a Lien or the posting of a
bond or other security, a certificate of a Financial Officer of Old Valero
setting forth details as to such occurrence and action, if any, which Old Valero
or applicable member of the ERISA Group is required or proposes to take; and
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(i) from time to time such additional information regarding the financial
position or business of Old Valero and its Subsidiaries as the Administrative
Agent, at the request of any Bank, may reasonably request.
SECTION 6.02. Payment of Obligations. Old Valero will pay and discharge,
and will cause each of its Subsidiaries to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where the same may be contested in
good faith by appropriate proceedings, and will maintain, and will cause each of
its Subsidiaries to maintain, in accordance with generally accepted accounting
principles, appropriate reserves for the accrual of any of the same.
SECTION 6.03. Maintenance of Property; Insurance.
(a) Old Valero keep, and will cause each of its Subsidiaries to keep, all
of its property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted, as would a prudent owner and
operator of similar properties.
(b) Old Valero shall, and shall cause each of its Subsidiaries to, maintain
or cause to be maintained, with financially sound and reputable insurers,
insurance with respect to its properties and business and the properties and
business of its Subsidiaries against loss or damage of the kinds customarily
insured against by corporations of established reputation engaged in the same or
similar businesses and similarly situated, of such type and in such amounts and
with such levels of deductibles, as are customarily carried under similar
circumstances by such other corporations.
SECTION 6.04. Conduct of Business and Maintenance of Existence. Old Valero
will continue, and will cause each of its Subsidiaries to continue, to engage in
business of the same general type as now conducted by Old Valero and its
Subsidiaries, and will preserve, renew and keep in full force and effect, and
will cause each of its Subsidiaries to preserve, renew and keep in full force
and effect their respective legal existence and their respective rights,
privileges and franchises necessary or desirable in the normal conduct of
business; provided that nothing in this Section shall prohibit (i) the merger of
a Subsidiary into Old Valero or the merger or consolidation of a Subsidiary with
or into another Person if the corporation surviving such consolidation or merger
is a Subsidiary and if, in each case, after giving effect thereto, no Default
shall have occurred and be continuing or (ii) the termination of the business or
corporate existence of any Subsidiary if Old Valero in good faith determines
that such termination is in the best interest of Old Valero and is not
materially disadvantageous to the Banks.
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SECTION 6.05. Compliance with Laws. Old Valero will comply, and cause each
of its Subsidiaries to comply, in all material respects with all applicable
laws, ordinances, rules, regulations, and requirements of governmental
authorities (including, without limitation, Environmental Laws and ERISA and the
rules and regulations thereunder) except where the necessity of compliance
therewith is contested in good faith by appropriate proceedings.
SECTION 6.06. Inspection of Property, Books and Records. Old Valero will
keep, and will cause each of its Subsidiaries to keep, proper books of record
and account in which complete and accurate entries shall be made of all
financial and business transactions of Old Valero and its Subsidiaries; and will
permit, and will cause each of its Subsidiaries to permit, representatives of
any Bank at such Bank's expense to visit and inspect any of their respective
properties, to examine and make abstracts from any of their respective books and
records and to discuss their respective affairs, finances and accounts with
their respective officers, employees and independent public accountants, all at
such reasonable times and as often as may reasonably be desired.
SECTION 6.07. Fixed Charge Coverage. Old Valero will not permit the
ratio of :
(a) the sum (without duplication) of (i) Consolidated Net Income (excluding
extraordinary items) of Old Valero for the applicable period, plus (ii) interest
expense for Old Valero and its Subsidiaries on a consolidated basis for such
period, plus (iii) deferred federal and state income taxes deducted in
determining such Consolidated Net Income for such period, plus (iv) depreciation
and amortization expense deducted in determining such Consolidated Net Income
for such period, plus (v) other noncash charges deducted in determining such
Consolidated Net Income for such period, minus (vi) other noncash credits added
in determining such Consolidated Net Income for such period, to
(b) the sum (without duplication) of (i) interest incurred by the Old
Valero and its Subsidiaries on a consolidated basis for such period (whether
expensed or capitalized), plus (ii) cash dividends paid by Old Valero on its
preferred and preference stock during such period (other than dividends paid on
preferred and preference stock held by Old Valero or a Subsidiary of Old
Valero), plus (iii) cash dividends paid by Old Valero on its common stock during
such period (other than dividends reinvested in newly issued or treasury shares
of common stock of Old Valero pursuant to any dividend reinvestment plan
maintained by Old Valero for holders of its common stock), plus (iv) the amount
of mandatory redemptions of preferred or preference stock made by Borrower
during such period (excluding (x) redemptions of shares of such preferred or
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preference stock held by Old Valero or Subsidiaries of Old Valero), and (y) the
Preferred Stock Redemption),
to be less than 1.6 to 1.0 for any period of four consecutive non-Turnaround
Quarter fiscal quarters (taken as one accounting period).
SECTION 6.08. Debt. Consolidated Debt of Old Valero will at no time exceed
57.5% of the sum of Consolidated Debt of Old Valero plus the Consolidated Net
Worth of Old Valero plus the involuntary liquidation value of outstanding shares
of redeemable preferred stock of Old Valero. For purposes of determining
compliance with this Section 6.08, any Debt incurred to finance the Preferred
Stock Redemption, and any reduction in Consolidated Net Worth of Old Valero on
account of the Preferred Stock Redemption, shall be disregarded.
SECTION 6.09. Minimum Consolidated Net Worth. Consolidated Net Worth will
at no time be less than the sum of (i) $818,000,000 plus (ii) an amount equal to
50% of Consolidated Net Income Applicable to Common Stock for each fiscal
quarter of Old Valero ending after June 30, 1995 but prior to the date of
determination for which fiscal quarter Consolidated Net Income Applicable to
Common Stock is positive (but with no deduction on account of negative
Consolidated Net Income Applicable to Common Stock for any fiscal period of Old
Valero) plus (iii) 75% of the aggregate increase in Consolidated Net Worth
attributable to the issuance and sale after June 30, 1995 of any capital stock
of Old Valero (other than the proceeds of any issuance and sale of any capital
stock (x) to a Subsidiary of Old Valero or (y) which is required to be redeemed,
or is redeemable at the option of the holder, if certain events or conditions
occur or exist or otherwise) or in connection with the conversion or exchange of
any Debt of Old Valero into capital stock after June 30, 1995.
SECTION 6.10. Negative Pledge--Liens. Neither Old Valero nor any
Subsidiary will create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it, except for:
(a) Liens existing on the date of this Agreement securing Debt outstanding
on the date of this Agreement in an aggregate principal or face amount not
exceeding $585,000,000;
(b) any Lien existing on any asset of any Person at the time such Person
becomes a Subsidiary;
(c) any Lien on any asset securing Debt incurred or assumed for the purpose
of financing all or any part of the cost of acquiring such asset, provided
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that such Lien attaches to such asset concurrently with or within 90 days after
the acquisition thereof;
(d) any Lien on any asset of any Person existing at the time such Person is
merged or consolidated with or into Old Valero or a Subsidiary;
(e) any Lien existing on any asset prior to the acquisition thereof by Old
Valero or a Subsidiary;
(f) any Lien arising out of refinancing, extending, renewing or refunding
(or successively refinancing, extending, renewing or refunding) any Debt secured
by any Lien permitted by any of the foregoing clauses of this Section, provided
that the principal amount of such Debt is not increased and such Debt is not
secured by any additional assets;
(g) any Lien on property constituting substitutions or replacements for, or
additions or accessions to, property of Old Valero or a Subsidiary and created
pursuant to after-acquired property provisions of any Lien otherwise permitted
by any of the foregoing clauses;
(h) Liens for or in connection with taxes or assessments, governmental
charges and similar charges not delinquent or being contested in good faith by
appropriate proceedings, including deposits as security in connection therewith;
(i) Liens reserved in or arising under leases constituting "DEBT" as
described in clause (ii) of the definition thereof, or reserved in or arising
under licenses, permits or operating leases for rent or other charges or to
secure the performance of obligations thereunder;
(j) Liens granted or arising in favor of an operator on assets subject to
joint operations to secure payments or other obligations due such operator in
connection with the operation of such assets;
(k) Liens granted or arising on joint venture and partnership interests in
favor of such joint ventures or partnerships or the other partners or owners
thereof on Old Valero or its Subsidiaries' interests therein, or on the assets
of such partnerships or joint ventures, to secure payments or other obligations
due to such partnerships or joint ventures or the other partners or owners
thereof with respect to the business of such partnerships or joint ventures;
(l) Mechanics' and materialmens' liens or any lien or charge in connection
with workmens' compensation, unemployment insurance or other social security or
old age pension obligations or deposits in connection therewith,
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including obligations under ERISA; good faith deposits in connection with
tenders or leases of real estate, bids or contracts; deposits to secure public
or statutory obligations or to secure or in lieu of surety bonds;
(m) Liens securing judgments or orders for the payment of money, or surety
or appeal bonds with respect to any such judgments or order, in an aggregate
amount not exceeding $25,000,000, so long as no Event of Default exists with
respect thereto under Section 8.01(j);
(n) Liens on property of a Subsidiary to secure obligations of such
Subsidiary to Old Valero or to another Subsidiary; provided however, that the
obligations so secured may not be assigned, sold or otherwise transferred to a
Person other than Old Valero or another Subsidiary unless such Liens are
otherwise permitted hereunder; provided further that any Lien on property of a
non-Partnership Subsidiary to secure obligations of such non-Partnership
Subsidiary to a Partnership Subsidiary shall not constitute a Lien permitted by
this clause (n);
(o) Rights reserved to or vested in, or obligations or duties owed to, any
governmental or public authority or railroad or utility by the terms of any
right, power, franchise, grant, license, permit or provision of law; and any
easement, right-of-way, mineral lease or other agreement relating to the
exploration, development, production or other exploitation of mining, oil, gas,
timber or other natural resources, exception or reservation in any property of
Old Valero or any Subsidiary granted or reserved in any property of Old Valero
or any Subsidiary which do not materially impair the use of the property of Old
Valero and its Subsidiaries, taken as a whole, for the purposes for which it is
held in the operation of the business of Old Valero and its Subsidiaries;
(p) Liens and encumbrances (other than those securing Debt or Derivative
Obligations) existing upon property or rights in or relating thereto, including
rights of tenants in common or other common owners; zoning, planning,
environmental laws and ordinances and governmental regulations; and minor
defects or irregularities in or encumbrances on the titles to properties which
in the aggregate do not materially impair the use of the property of Old Valero
and its Subsidiaries, taken as a whole, for the purposes for which it is held in
the operation of the business of Old Valero and its Subsidiaries;
(q) Liens on cash, cash equivalents, options or futures positions and other
account holdings securing Derivatives Obligations or otherwise incurred in
connection with margin accounts with brokerage or commodities firms; provided
that the aggregate amount of assets subject to such Liens shall at no time
exceed $60,000,000;
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(r) Liens arising in connection with statutory or contractual set-off
provisions granted or arising in the ordinary course of business in favor of
banks, brokers or other creditors;
(s) Liens arising in the ordinary course of its business which (i) do not
secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an
amount exceeding $25,000,000 and (iii) do not in the aggregate materially
detract from the value of its assets or materially impair the use thereof in the
operation of its business; and
(t) Liens not otherwise permitted by the foregoing clauses of this Section
securing Debt in an aggregate principal or face amount at any date not to exceed
5% of Consolidated Net Worth.
SECTION 6.11. Subsidiary Debt. Old Valero will not permit any Subsidiary
to become or to be liable in respect of any Debt other than (i) Debt existing on
the date of this Agreement in aggregate amount not exceeding $585,000,000, (ii)
Debt secured by a Lien permitted by clauses (a) through (r) of Section 6.10,
(iii) Debt of a Person existing at the time such Person becomes a Subsidiary and
not created in contemplation of such event, (iv) the Additional IDB and (v)
refinancings, extensions, renewals or refundings of any Debt permitted by the
foregoing clauses of this Section, provided that the principal amount of such
Debt is not increased.
SECTION 6.12. Investments, Loans, Advances.
(a) Neither Old Valero nor any of its Subsidiaries will make any loan or
advance to, or purchase or acquire any stock, obligations or securities of, or
any other interest in, or make any capital contribution to or Guarantee any
obligations of (each, an "INVESTMENT"), any Person, except that:
(i) Old Valero and its Subsidiaries may make or permit to remain
outstanding Investments in Old Valero or any Subsidiary of Old Valero, or
in any other entity which will be a Subsidiary of Old Valero immediately
after such Investment; provided that no such Investment may be made in any
Partnership Subsidiary unless such Investment is a Permitted Partnership
Investment, as such term is defined below in subsection (b);
(ii) Old Valero and its Subsidiaries may own, purchase or acquire any
Permitted Cash Investment, and may own any Investment existing at the
Effective Date;
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(iii) Old Valero and its Subsidiaries may make investments in
property used or useful in the business of Old Valero and its
Subsidiaries;
(iv) Old Valero and its Subsidiaries may own accounts receivable,
and conversions of overdue accounts receivable to notes, from the sale of
goods and services in the ordinary course of business of Old Valero and
its Subsidiaries;
(v) Old Valero and its Subsidiaries may make prepayments in the
ordinary course of business or to obtain trade credit;
(vi) Old Valero and its Subsidiaries may endorse negotiable
instruments for collection in the ordinary course of business;
(vii) Old Valero and its Subsidiaries may make travel, relocation and
other like advances to officers and employees in the ordinary course of
business; and
(viii) subject to the provisions of Section 6.04, Old Valero and its
Subsidiaries may make or acquire any Investment not otherwise permitted by
the foregoing clauses of this Subsection 6.12(a) if, immediately after
such Investment is made or acquired, the aggregate amount of all
Investments made pursuant to this clause (viii), net of repayment of any
such Investments, does not exceed 25% of the Consolidated Net Worth of Old
Valero as of the date of such determination.
(b) Notwithstanding the foregoing, neither Old Valero nor any
nonPartnership Subsidiary will make any Investment in any Partnership
Subsidiary, except for the following (each a "PERMITTED PARTNERSHIP
INVESTMENT"):
(i) transfers of assets made after the Effective Date so long as
the aggregate fair market value of such assets does not exceed
$47,500,000;
(ii) transfers of cash by Old Valero to any Partnership Subsidiary
in the form of indebtedness for borrowed money owing by any Partnership
Subsidiary to Old Valero in an aggregate outstanding principal amount that
does not exceed $50,000,000;
(iii) the Partnership Leases in existence on the date hereof and
described in clauses (a), (b), (c) and (d) of the definition of
"PARTNERSHIP LEASES," and other Partnership Leases entered into after the
date hereof with respect to which (A) Old Valero or a direct Subsidiary of
Old Valero is the lessor and a Partnership Subsidiary is the lessee and
(B) the
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aggregate costs incurred by such lessors to acquire or construct the
equipment or facilities subject to such Partnership Leases do not exceed
$50,000,000;
(iv) Old Valero or any Subsidiary may Guarantee any obligation
(other than Debt) arising in the ordinary course of business of any
Partnership Subsidiary;
(v) purchases by Old Valero or any Subsidiary of First Mortgage
Notes issued and outstanding prior to the Effective Date;
(vi) from and after December 31, 1996, Old Valero or any
nonPartnership Subsidiary may make any Investment in any Partnership
Subsidiary not otherwise permitted by the foregoing clauses of this
Subsection 6.12(b), provided that, at the time such Investment is proposed
to be made and after giving effect thereto, (A) the ratio determined
pursuant to Section 6.07 shall have been not less than 2.25 to 1.0 as at
the end of each of the two non-Turnaround fiscal quarters then most
recently ended, (B) no Default shall have occurred and be continuing and
(C) the aggregate amount of all Investments made pursuant to this clause
(vi), net of repayment of any such Investments, shall not exceed
$100,000,000.
SECTION 6.13. Consolidations, Mergers and Transfers of Assets. Neither
Old Valero nor any of its Subsidiaries will:
(a) merge or consolidate with any other Person; provided, that a Subsidiary
may merge with another Person to effect a Transfer permitted under clause (b)
below;
(b) sell, lease, transfer or otherwise dispose of (each, a "TRANSFER") all
or part of its assets (other than (x) Transfers of inventory in the ordinary
course of business, (y) Transfers of cash or short-term investments otherwise
permitted under this Agreement and (z) Transfers of abandoned, obsolete or
worn-out machinery, fixtures, equipment and materials), to any Person, which
assets have a fair market value (as determined in good faith by Old Valero or
applicable Subsidiary's Board of Directors) which, when aggregated with the
proceeds of the other assets of Old Valero and its Subsidiaries Transferred
subsequent to the date hereof (exclusive of Transfers permitted by the following
provisos) are in an amount in excess of 25% of Consolidated Total Assets as of
the end of the immediately preceding fiscal year; provided that, subject to
Section 6.12:
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(i) any Subsidiary may merge with Old Valero (provided that Old
Valero shall be the continuing or surviving corporation) or with any one
or more other Subsidiaries;
(ii) Old Valero or any non-Partnership Subsidiary may Transfer any
of its assets to Old Valero or another non-Partnership Subsidiary, and any
Partnership Subsidiary may Transfer any of its assets to Old Valero or
another Subsidiary;
(iii) Old Valero or any non-Partnership Subsidiary may transfer any
asset to any Partnership Subsidiary so long as (A) the consideration
received by the transferor in respect of such transfer is at least equal
to the fair market value of the assets so transferred and (B) the
warranty, indemnity and other non-monetary obligations imposed on the
parties to such transfer are no more burdensome than those that would be
imposed at such time in a comparable arm's-length transaction with a third
party;
(iv) Old Valero may merge or consolidate with any other Person,
provided that:
(A) at the time of such event no Default shall have occurred and
be continuing or would occur after giving effect to such event; and
(B) Old Valero shall be the continuing or surviving corporation;
and
(v) a Subsidiary may merge or consolidate with any Person organized
under the laws of the United States, the District of Columbia, or any
State of the United States, provided that no Default shall have occurred
and be continuing or would occur after giving effect to such event and
that the surviving or successor entity shall be a Subsidiary.
SECTION 6.14. Use of Proceeds. The proceeds of the Loans made under this
Agreement will be used by Old Valero to finance consummation of the
Transactions, to fund working capital, letters of credit and for general
corporate purposes. None of such proceeds will be used, directly or indirectly,
for the purpose, whether immediate, incidental or ultimate, of buying or
carrying any "MARGIN STOCK" within the meaning of Regulation U and Regulation G.
SECTION 6.15. Transactions with Affiliates. Old Valero will not, and will
not permit any of its Subsidiaries to, directly or indirectly, pay any funds to
or for the account of, make any investment (whether by acquisition of stock or
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indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect, any transaction with,
any Affiliate except in the ordinary course of business and on an arm's-length
basis on terms not materially less favorable to Old Valero or such Subsidiary
than could have been obtained from a third party who was not an Affiliate;
provided that the foregoing provisions of this Section shall not prohibit any
such Person from declaring or paying any lawful dividend or other payment
ratably in respect of all of its capital stock of the relevant class so long as,
after giving effect thereto, no Default shall have occurred and be continuing.
SECTION 6.16. Lease Payments. Neither Old Valero nor any of its
Consolidated Subsidiaries will incur or assume (whether pursuant to a Guarantee
or otherwise) any liability for rental payments under a lease with a lease term
(as defined in Financial Accounting Standards Board Statement No. 13, as in
effect on the date hereof) of three years or more if, after giving effect
thereto, the aggregate amount of minimum lease payments that Old Valero and its
Consolidated Subsidiaries have so incurred or assumed subsequent to June 30,
1995 (exclusive of leases which represent extensions or renewals of leases
entered into by Old Valero or any Consolidated Subsidiary prior to June 30,
1995) will exceed, on a consolidated basis, for any calendar year under all such
leases (excluding capital leases), an amount equal to 5% of Consolidated Net
Worth.
SECTION 6.17. Restriction on Other Agreements. Old Valero will not, and
will not permit any of its Subsidiaries to, enter into any agreement prohibiting
or having the effect of restricting the ability of any Subsidiary of Old Valero
to pay dividends or make any distribution, loans or advances to Old Valero or
any Subsidiary of Old Valero owning any capital stock of or other equity
interest in such Subsidiary (other than (i) the Partnership Indenture, as such
prohibition or restriction exists on the date hereof or (ii) this Agreement).
SECTION 6.18. Ordinary Course Transactions. Except for the transactions
expressly contemplated by the Transaction Documents or necessarily incidental
thereto, Old Valero will not, and will not permit any of its Subsidiaries to,
incur any Debt or Lien, acquire or dispose of any assets, declare or pay any
dividends or other distributions or enter into any other material transaction,
in any such case outside the ordinary course of business as heretofore conducted
by Old Valero and its Subsidiaries.
SECTION 6.19. No Modification of Certain Documents Without Consent.
Old Valero will not, and will not permit any of its Subsidiaries to, consent to
or solicit any material amendment or supplement to, or any material waiver or
other
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material modification of, any Transaction Document or any of the ancillary
agreements referred to therein without the prior written consent of the Required
Banks.
ARTICLE 7
NEW VALERO COVENANTS
New Valero agrees that, so long as any Bank has any Commitment hereunder
or any amount payable under any Note remains unpaid or any Letter of Credit
Outstandings remain:
SECTION 7.01. Information. New Valero will deliver to each of the
Banks:
(a) as soon as available and in any event within 105 days after the end of
each fiscal year of New Valero ending after the Assumption Date, a Form 10-K of
New Valero and its Consolidated Subsidiaries for such fiscal year as filed with
the Securities and Exchange Commission;
(b) as soon as available and in any event within 60 days after the end of
each of the first three quarters of each fiscal year of New Valero, which fiscal
quarter ends after the Assumption Date, a Form 10-Q of New Valero and its
Consolidated Subsidiaries for such quarter as filed with the Securities and
Exchange Commission;
(c) simultaneously with the delivery of each set of financial statements
referred to in clauses (a) and (b) above, a certificate of a Financial Officer
of New Valero (i) setting forth whether New Valero was in compliance with the
requirements of Sections 7.07 to 7.13, inclusive, on the date of such financial
statements, (ii) with respect to Sections 7.07 to 7.09, inclusive, and Sections
7.11, 7.12, 7.13, 7.16 and 7.18, setting forth the calculations in reasonable
detail required to establish whether New Valero was in compliance with the
requirements of such Sections and (iii) stating whether any Default exists on
the date of such certificate and, if any Default then exists, setting forth the
details thereof the action which New Valero is taking or proposes to take with
respect thereto;
(d) simultaneously with the delivery of each set of financial statements
referred to in clause (a) above, a statement of the firm of independent public
accountants which reported on such statements whether anything has come to their
attention to cause them to believe that any Default existed on the date of such
statements.
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(e) within five days after any Financial Officer of Borrower obtains
knowledge of any Default, if such Default is then continuing, a certificate of a
Financial Officer of New Valero setting forth the details thereof and the action
which New Valero is taking or proposes to take with respect thereto;
(f) after the Assumption Date, promptly upon the mailing thereof to the
shareholders of New Valero generally, copies of all financial statements,
reports and proxy statements so mailed;
(g) promptly upon the filing thereof, copies of all registration statements
(other than the exhibits thereto and any registration statements on Form S-8 or
its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents)
which New Valero shall have filed with the Securities and Exchange Commission;
(h) if and when any member of the ERISA Group (i) gives or is required to
give notice to the PBGC of any "REPORTABLE EVENT" (as defined in Section 4043 of
ERISA) with respect to any Plan which could reasonably be expected to constitute
grounds for a termination of such Plan under Title IV of ERISA, or knows that
the plan administrator of any Plan has given or is required to give notice of
any such reportable event, a copy of the notice of such reportable event given
or required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multi-employer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent
to terminate, impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of
such notice; (iv) applies for a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code, a copy of such application; (v) gives
notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of
such notice and other information filed with the PBGC; (vi) gives notice of
withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such
notice; or (vii) fails to make any payment or contribution to any Plan or
Multi-employer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which has resulted or could
reasonably be expected to result in the imposition of a Lien or the posting of a
bond or other security, a certificate of a Financial Officer of New Valero
setting forth details as to such occurrence and action, if any, which New Valero
or applicable member of the ERISA Group is required or proposes to take; and
(i) from time to time such additional information regarding the financial
position or business of New Valero and its Subsidiaries as the Administrative
Agent, at the request of any Bank, may reasonably request.
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SECTION 7.02. Payment of Obligations. New Valero will pay and discharge,
and will cause each of its Subsidiaries to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where the same may be contested in
good faith by appropriate proceedings, and will maintain, and will cause each of
its Subsidiaries to maintain, in accordance with generally accepted accounting
principles, appropriate reserves for the accrual of any of the same.
SECTION 7.03. Maintenance of Property; Insurance.
(a) New Valero will keep, and will cause each of its Subsidiaries to keep,
all of its property useful and necessary in its business in good working order
and condition, ordinary wear and tear excepted, as would a prudent owner and
operator of similar properties.
(b) New Valero shall, and shall cause each of its Subsidiaries to, maintain
or cause to be maintained, with financially sound and reputable insurers,
insurance with respect to its properties and business and the properties and
business of its Subsidiaries against loss or damage of the kinds customarily
insured against by corporations of established reputation engaged in the same or
similar businesses and similarly situated, of such type and in such amounts and
with such levels of deductibles, as are customarily carried under similar
circumstances by such other corporations.
SECTION 7.04. Conduct of Business and Maintenance of Existence. New Valero
will continue, and will cause each of its Subsidiaries to continue, to engage in
business of the same general type as now conducted by New Valero and its
Subsidiaries, and will preserve, renew and keep in full force and effect, and
will cause each of its Subsidiaries to preserve, renew and keep in full force
and effect their respective corporate existence and their respective rights,
privileges and franchises necessary or desirable in the normal conduct of
business; provided that nothing in this Section shall prohibit (i) the merger of
a Subsidiary into New Valero or the merger or consolidation of a Subsidiary with
or into another Person if the corporation surviving such consolidation or merger
is a Subsidiary and if, in each case, after giving effect thereto, no Default
shall have occurred and be continuing or (ii) the termination of the business or
corporate existence of any Subsidiary if New Valero in good faith determines
that such termination is in the best interest of New Valero and is not
materially disadvantageous to the Banks.
SECTION 7.05. Compliance with Laws. New Valero will comply, and
cause each of its Subsidiaries to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities
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(including, without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except where the necessity of compliance therewith is
contested in good faith by appropriate proceedings.
SECTION 7.06. Inspection of Property, Books and Records. New Valero will
keep, and will cause each of its Subsidiaries to keep, proper books of record
and account in which complete and accurate entries shall be made of all
financial and business transactions of New Valero and its Subsidiaries; and will
permit, and will cause each of its Subsidiaries to permit, representatives of
any Bank at such Bank's expense to visit and inspect any of their respective
properties, to examine and make abstracts from any of their respective books and
records and to discuss their respective affairs, finances and accounts with
their respective officers, employees and independent public accountants, all at
such reasonable times and as often as may reasonably be desired.
SECTION 7.07. Fixed Charge Coverage. After the Assumption Date, New
Valero will not permit the ratio of:
(a) the sum (without duplication) of (i) Consolidated Net Income (excluding
extraordinary items) of New Valero for the applicable period, plus (ii) interest
expense for New Valero and its Subsidiaries on a consolidated basis for such
period, plus (iii) deferred federal and state income taxes deducted in
determining such Consolidated Net Income for such period, plus (iv) depreciation
and amortization expense deducted in determining such Consolidated Net Income
for such period, plus (v) other noncash charges deducted in determining such
Consolidated Net Income for such period, minus (vi) other noncash credits added
in determining such Consolidated Net Income for such period, plus (vii) Deferred
Turnaround and Catalyst Cost for such period, to
(b) the sum (without duplication) of (i) interest incurred by New Valero
and its Subsidiaries on a consolidated basis for such period (whether expensed
or capitalized), plus (ii) cash dividends paid by New Valero on its preferred
stock during such period (other than dividends paid on preferred stock held by
New Valero or a Subsidiary of New Valero), plus (iii) cash dividends paid by New
Valero on its common stock during such period (other than (x) dividends
reinvested in newly issued or treasury shares of common stock of New Valero
pursuant to any dividend reinvestment plan maintained by New Valero for holders
of its common stock and (y) the Special Dividend), plus (iv) the amount of
mandatory redemptions of preferred stock made by New Valero during such period
(excluding redemptions of shares of such preferred stock held by New Valero or
Subsidiaries of New Valero), plus (v) Deferred Turnaround and Catalyst Cost for
such period,
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to be less than 1.8 to 1.0 (i) until such time as four full fiscal quarters
shall have commenced and ended subsequent to the Assumption Date, for the period
consisting of such number of consecutive full fiscal quarters as at the time
shall have commenced and ended subsequent to the Assumption Date and (ii)
thereafter, for any period of four consecutive fiscal quarters (taken as one
accounting period).
SECTION 7.08. Debt. Consolidated Debt of New Valero will at no time at or
after the Assumption Date exceed 45% of the sum of Consolidated Debt of New
Valero plus the Consolidated Net Worth of New Valero plus the involuntary
liquidation value of outstanding shares of redeemable preferred stock of New
Valero.
SECTION 7.09. Minimum Consolidated Net Worth. Consolidated Net Worth of
New Valero will at no time at or after the Assumption Date be less than the sum
of (i) $822,000,000 plus (ii) an amount equal to 50% of Consolidated Net Income
Applicable to Common Stock for each fiscal quarter of New Valero ending after
June 30, 1997 but prior to the date of determination for which fiscal quarter
Consolidated Net Income Applicable to Common Stock is positive (but with no
deduction on account of negative Consolidated Net Income Applicable to Common
Stock for any fiscal period of New Valero) plus (iii) 75% of the aggregate
increase in Consolidated Net Worth attributable to the issuance and sale after
June 30, 1997 of any capital stock of New Valero (other than the proceeds of any
issuance and sale of any capital stock (x) to a Subsidiary of New Valero or (y)
which is required to be redeemed, or is redeemable at the option of the holder,
if certain events or conditions occur or exist or otherwise) or in connection
with the conversion or exchange of any Debt of New Valero into capital stock
after June 30, 1997.
SECTION 7.10. Negative Pledge--Liens. Neither New Valero nor any
Subsidiary will create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it, except for:
(a) Liens existing on the date of this Agreement securing Debt outstanding
on the date of this Agreement in an aggregate principal or face amount not
exceeding $5,000,000;
(b) any Lien existing on any asset of any Person at the time such Person
becomes a Subsidiary;
(c) any Lien on any asset securing Debt incurred or assumed for the purpose
of financing all or any part of the cost of acquiring such asset, provided that
such Lien attaches to such asset concurrently with or within 90 days after the
acquisition thereof;
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(d) any Lien on any asset of any Person existing at the time such Person is
merged or consolidated with or into New Valero or a Subsidiary;
(e) any Lien existing on any asset prior to the acquisition thereof by New
Valero or a Subsidiary;
(f) any Lien arising out of refinancing, extending, renewing or refunding
(or successively refinancing, extending, renewing or refunding) any Debt secured
by any Lien permitted by any of the foregoing clauses of this Section, provided
that the principal amount of such Debt is not increased and such Debt is not
secured by any additional assets;
(g) any Lien on property constituting substitutions or replacements for, or
additions or accessions to, property of New Valero or a Subsidiary and created
pursuant to after-acquired property provisions of any Lien otherwise permitted
by any of the foregoing clauses;
(h) Liens for or in connection with taxes or assessments, governmental
charges and similar charges not delinquent or being contested in good faith by
appropriate proceedings, including deposits as security in connection therewith;
(i) Liens reserved in or arising under leases constituting "DEBT" as
described in clause (ii) of the definition thereof, or reserved in or arising
under licenses, permits or operating leases for rent or other charges or to
secure the performance of obligations thereunder;
(j) Liens granted or arising in favor of an operator on assets subject to
joint operations to secure payments or other obligations due such operator in
connection with the operation of such assets;
(k) Liens granted or arising on joint venture and partnership interests in
favor of such joint ventures or partnerships or the other partners or owners
thereof on New Valero's or its Subsidiaries' interests therein, or on the assets
of such partnerships or joint ventures, to secure payments or other obligations
due to such partnerships or joint ventures or the other partners or owners
thereof with respect to the business of such partnerships or joint ventures;
(l) Mechanics' and materialmens' liens or any lien or charge in connection
with workmens' compensation, unemployment insurance or other social security or
old age pension obligations or deposits in connection therewith, including
obligations under ERISA; good faith deposits in connection with tenders
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or leases of real estate, bids or contracts; deposits to secure public or
statutory obligations or to secure or in lieu of surety bonds;
(m) Liens securing judgments or orders for the payment of money, or surety
or appeal bonds with respect to any such judgments or order, in an aggregate
amount not exceeding $25,000,000, so long as no Event of Default exists with
respect thereto under Section 8.01(j);
(n) Liens on property of a Subsidiary to secure obligations of such
Subsidiary to New Valero or to another Subsidiary; provided however, that the
obligations so secured may not be assigned, sold or otherwise transferred to a
Person other than New Valero or another Subsidiary unless such Liens are
otherwise permitted hereunder; provided further that any Lien on property of a
non-Partnership Subsidiary to secure obligations of such non-Partnership
Subsidiary to a Partnership Subsidiary shall not constitute a Lien permitted by
this clause (n);
(o) Rights reserved to or vested in, or obligations or duties owed to, any
governmental or public authority or railroad or utility by the terms of any
right, power, franchise, grant, license, permit or provision of law; and any
easement, right-of-way, mineral lease or other agreement relating to the
exploration, development, production or other exploitation of mining, oil, gas,
timber or other natural resources, exception or reservation in any property of
New Valero or any Subsidiary granted or reserved in any property of New Valero
or any Subsidiary which do not materially impair the use of the property of New
Valero and its Subsidiaries, taken as a whole, for the purposes for which it is
held in the operation of the business of New Valero and its Subsidiaries;
(p) Liens and encumbrances (other than those securing Debt or Derivative
Obligations) existing upon property or rights in or relating thereto, including
rights of tenants in common or other common owners; zoning, planning,
environmental laws and ordinances and governmental regulations; and minor
defects or irregularities in or encumbrances on the titles to properties which
in the aggregate do not materially impair the use of the property of New Valero
and its Subsidiaries, taken as a whole, for the purposes for which it is held in
the operation of the business of New Valero and its Subsidiaries;
(q) Liens on cash, cash equivalents, options or futures positions and other
account holdings securing Derivatives Obligations or otherwise incurred in
connection with margin accounts with brokerage or commodities firms; provided
that the aggregate amount of assets subject to such Liens shall at no time
exceed $60,000,000;
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(r) Liens arising in connection with statutory or contractual set-off
provisions granted or arising in the ordinary course of business in favor of
banks, brokers or other creditors;
(s) Liens arising in the ordinary course of its business which (i) do not
secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an
amount exceeding $25,000,000 and (iii) do not in the aggregate materially
detract from the value of its assets or materially impair the use thereof in the
operation of its business; and
(t) Liens not otherwise permitted by the foregoing clauses of this Section
securing Debt in an aggregate principal or face amount at any date not to exceed
5% of Consolidated Net Worth.
SECTION 7.11. Subsidiary Debt. New Valero will not permit any Subsidiary
to become or to be liable in respect of any Debt other than (i) Debt existing on
the date of this Agreement in aggregate amount not exceeding $5,000,000, (ii)
Debt secured by a Lien permitted by clauses (a) through (r) of Section 7.10,
(iii) Debt of a Person existing at the time such Person becomes a Subsidiary and
not created in contemplation of such event, (iv) the Additional IDB and (v)
refinancings, extensions, renewals or refundings of any Debt permitted by the
foregoing clauses of this Section, provided that the principal amount of such
Debt is not increased.
SECTION 7.12. Investments, Loans, Advances.
Neither New Valero nor any of its Subsidiaries will make any loan or
advance to, or purchase or acquire any stock, obligations or securities of, or
any other interest in, or make any capital contribution to or Guarantee any
obligations of (each, an "INVESTMENT"), any Person, except that:
(a) New Valero and its Subsidiaries may make or permit to remain
outstanding Investments in New Valero or any Subsidiary of New Valero, or in any
other entity which will be a Subsidiary of New Valero immediately after such
Investment;
(b) New Valero and its Subsidiaries may own, purchase or acquire any
Permitted Cash Investment, and may own any Investment existing at the Effective
Date;
(c) New Valero and its Subsidiaries may make investments in property used
or useful in the business of New Valero and its Subsidiaries;
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(d) New Valero and its Subsidiaries may own accounts receivable, and
conversions of overdue accounts receivable to notes, from the sale of goods and
services in the ordinary course of business of New Valero and its Subsidiaries;
(e) New Valero and its Subsidiaries may make prepayments in the
ordinary course of business or to obtain trade credit;
(f) New Valero and its Subsidiaries may endorse negotiable instruments
for collection in the ordinary course of business;
(g) New Valero and its Subsidiaries may make travel, relocation and other
like advances to officers and employees in the ordinary course of business; and
(h) subject to the provisions of Sections 7.04 and 7.15, New Valero and its
Subsidiaries may make or acquire any Investment not otherwise permitted by the
foregoing clauses of this Section 7.12 if, immediately after such Investment is
made or acquired, the aggregate amount of all Investments made pursuant to this
clause (h), net of repayment of any such Investments, does not exceed 25% of the
Consolidated Net Worth of New Valero as of the date of such determination.
SECTION 7.13. Consolidations, Mergers and Transfers of Assets. Neither
New Valero nor any of its Subsidiaries will:
(a) merge or consolidate with any other Person; provided, that a Subsidiary
may merge with another Person to effect a Transfer permitted under clause (b)
below;
(b) sell, lease, transfer or otherwise dispose of (each, a "TRANSFER") all
or part of its assets (other than (w) Transfers of inventory or of abandoned,
obsolete or worn-out machinery, fixtures, equipment and materials in the
ordinary course of business, (x) Transfers of inventory pursuant to the
inventory monetization arrangement contemplated by Section 7.20, (y) Transfers
of cash or short-term investments otherwise permitted under this Agreement and
(z) Transfers pursuant to the Distribution Agreement), to any Person, which
assets have a fair market value (as determined in good faith by New Valero's or
the relevant Subsidiary's Board of Directors) which, when aggregated with the
proceeds of the other assets of New Valero and its Subsidiaries Transferred
subsequent to the date hereof (exclusive of Transfers permitted by the following
provisos) are in an amount in excess of 25% of Consolidated Total Assets as of
the end of the immediately preceding fiscal year; provided that, subject to
Section 7.12:
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(i) any Subsidiary may merge with New Valero (provided that New
Valero shall be the continuing or surviving corporation) or with any one
or more other Wholly Owned Consolidated Subsidiaries of New Valero;
(ii) New Valero or any Subsidiary may Transfer any of its assets to
New Valero or another Wholly Owned Consolidated Subsidiary of New Valero;
(iii) New Valero or any Subsidiary may transfer any asset to any
Subsidiary of New Valero so long as (A) the consideration received by the
transferor in respect of such transfer is at least equal to the fair
market value of the assets so transferred and (B) the warranty, indemnity
and other non-monetary obligations imposed on the parties to such transfer
are no more burdensome than those that would be imposed at such time in a
comparable arm's-length transaction with a third party;
(iv) New Valero may merge or consolidate with any other Person,
provided that:
(A) at the time of such event no Default shall have occurred and
be continuing or would occur after giving effect to such event; and
(B) New Valero shall be the continuing or surviving corporation;
and
(v) a Subsidiary of New Valero may merge or consolidate with any
Person organized under the laws of the United States, the District of
Columbia, or any State of the United States, provided that no Default
shall have occurred and be continuing or would occur after giving effect
to such event and that the surviving or successor entity shall be a
Subsidiary.
SECTION 7.14. Use of Proceeds. The proceeds of the Loans made under this
Agreement will be used by New Valero to finance consummation of the
Transactions, to fund working capital, letters of credit and for general
corporate purposes. None of such proceeds will be used, directly or indirectly,
for the purpose, whether immediate, incidental or ultimate, of buying or
carrying any "MARGIN STOCK" within the meaning of Regulation U and Regulation G.
SECTION 7.15. Transactions with Affiliates. New Valero will not, and will
not permit any of its Subsidiaries to, directly or indirectly, pay any funds to
or for the account of, make any investment (whether by acquisition of stock or
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indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect, any transaction with,
any Affiliate except in the ordinary course of business and on an arm's-length
basis on terms not materially less favorable to New Valero or such Subsidiary
than could have been obtained from a third party who was not an Affiliate;
provided that the foregoing provisions of this Section shall not prohibit any
such Person from declaring or paying any lawful dividend or other payment
ratably in respect of all of its capital stock of the relevant class so long as,
after giving effect thereto, no Default shall have occurred and be continuing.
SECTION 7.16. Lease Payments. On or after the Assumption Date, neither New
Valero nor any of its Consolidated Subsidiaries will incur or assume (whether
pursuant to a Guarantee or otherwise) any liability for rental payments under a
lease with a lease term (as defined in Financial Accounting Standards Board
Statement No. 13, as in effect on the date hereof) of four years or more if,
after giving effect thereto, the aggregate amount of minimum lease payments that
New Valero and its Consolidated Subsidiaries have so incurred or assumed
subsequent to December 31, 1996 (exclusive of leases which represent extensions
or renewals of leases entered into by New Valero or any Consolidated Subsidiary
prior to December 31, 1996) will exceed, on a consolidated basis, for any
calendar year under all such leases (excluding capital leases), an amount equal
to 5% of Consolidated Net Worth.
SECTION 7.17. Restriction on Other Agreements. New Valero will not, and
will not permit any of its Subsidiaries to, enter into any agreement prohibiting
or having the effect of restricting the ability of any Subsidiary of New Valero
to pay dividends or make any distribution, loans or advances to New Valero or
any Subsidiary of New Valero owning any capital stock of or other equity
interest in such Subsidiary (other than this Agreement).
SECTION 7.18. Restricted Payments. Until such time subsequent to the
Assumption Date as the senior unsecured long-term debt of New Valero without
third-party credit enhancement is rated BBB- or higher by S&P or Baa3 or higher
by Moody's, New Valero will not, and will not permit any of its Subsidiaries to,
declare or make any Restricted Payment except as expressly permitted by this
Section. New Valero may make Restricted Payments in an aggregate amount not to
exceed (i) in the case of Restricted Payments made during the period May 1, 1997
through April 30, 1998, $22,000,000 and (ii) in the case of Restricted Payments
made during the twelve-month period ending April 30 in any subsequent year, an
amount equal to the sum of 25% of Consolidated Net Income of New Valero for the
period of four consecutive fiscal quarters ending with the preceding
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March 31 plus such portion (if any) of the $22,000,000 specified in clause (i)
above which has not been utilized as the basis for a permitted Restricted
Payment in any prior period; provided that in the event the Preferred Stock
Redemption requires cash outlays in excess of $7,000,000 then unless and until
the senior unsecured long-term debt of New Valero without third party credit
enhancement is rated BB+ or higher by S&P and Ba1 or higher by Moody's, the
amount of Restricted Payments permitted above shall be adjusted by (x) changing
the figure "$22,000,000" to "$15,000,000", (y) changing the figure "25%" to
"15%" and (z) further limiting the aggregate amount of Restricted Payments
thereby permitted to be made in any twelve-month period to $15,000,000.
SECTION 7.19. Hedging Facilities. New Valero will enter into and
thereafter maintain in full force and effect interest rate cap agreements to the
extent necessary in order that, when such agreements are taken in conjunction
with any interest rate hedging arrangements theretofore in effect and any Debt
which by its terms bears interest at a fixed rate, the interest cost will be
effectively fixed or capped on not less than 25% of the Debt of New Valero and
its Subsidiaries from time to time outstanding. Any such agreements required
hereunder shall be in effect not later than 60 calendar days after the
Assumption Date and shall be on terms and conditions reasonably satisfactory to
the Required Banks.
SECTION 7.20. Inventory Monetization. New Valero will enter into and
thereafter maintain in full force and effect an inventory monetization
arrangement which will provide for a principal amount of financing of up to
$150,000,000. Such arrangement shall be in effect not later than 60 calendar
days after the Assumption Date.
SECTION 7.21. Additional Guarantors. New Valero agrees, within 10 days
after any Person becomes a Material Subsidiary subsequent to the Assumption
Date, to cause such Person to become a Guarantor hereunder, and in connection
therewith to deliver such documents relating to such Guarantor and its
obligations hereunder as the Administrative Agent may reasonably request.
ARTICLE 8
DEFAULTS
SECTION 8.01. Events of Default. If one or more of the following events
("EVENTS OF DEFAULT") shall have occurred and be continuing:
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(a) the Borrower shall fail to pay when due any principal of any Loan or
any Unpaid Drawing, or shall fail to pay within five days of the due date any
interest, any fees or any other amount payable hereunder;
(b) either Obligor shall fail to observe or perform any covenant contained
in Sections 6.07 to 6.19, inclusive or in Sections 7.07 to 7.21, inclusive;
(c) any Obligor or Guarantor shall fail to observe or perform any covenant
or agreement contained in the Financing Documents (other than those covered by
clause (a) or (b) above) for 30 days after notice thereof has been given to the
Borrower by the Administrative Agent at the request of any Bank;
(d) any representation, warranty, certification or statement made by any
Obligor or Guarantor in the Financing Documents or in any certificate, financial
statement or other document delivered pursuant to the Financing Documents shall
prove to have been incorrect in any material respect when made (or deemed made);
(e) the Borrower or any Subsidiary of the Borrower shall fail to make any
payment in respect of any Material Financial Obligations when due or within any
applicable grace period;
(f) any event or condition shall occur which results in the acceleration of
the maturity of any Material Debt or enables (or, with the giving of notice or
lapse of time or both, would enable) the holder of such Debt or any Person
acting on such holder's behalf to accelerate the maturity thereof;
(g) the Borrower or any Material Subsidiary of the Borrower shall commence
a voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall consent to any
such relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall fail generally to pay
its debts as they become due, or shall take any corporate action to authorize
any of the foregoing;
(h) an involuntary case or other proceeding shall be commenced against the
Borrower or any Material Subsidiary of the Borrower seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of
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it or any substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of 60 days; or an
order for relief shall be entered against the Borrower or any Material
Subsidiary of the Borrower under the federal bankruptcy laws as now or hereafter
in effect;
(i) any member of the ERISA Group shall fail to pay when due an amount or
amounts aggregating in excess of $25,000,000 which it shall have become liable
to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan
shall be filed under Title IV of ERISA by any member of the ERISA Group, any
plan administrator or any combination of the foregoing; or the PBGC shall
institute proceedings under Title IV of ERISA to terminate, to impose liability
(other than for premiums under Section 4007 of ERISA) in respect of, or to cause
a trustee to be appointed to administer any Material Plan; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or there shall occur a
complete or partial withdrawal from, or a default, within the meaning of Section
4219(c)(5) of ERISA, with respect to, one or more Multi-employer Plans which
could cause one or more members of the ERISA Group to incur a current payment
obligation in excess of $25,000,000;
(j) judgments or orders for the payment of money in excess of $25,000,000
in the aggregate shall be rendered against the Borrower or any Subsidiary of the
Borrower and such judgments or orders shall continue unsatisfied and unstayed
for a period of 60 days;
(k) any person or group of persons (within the meaning of Section 13 or 14
of the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 20% or more of the
outstanding shares of common stock of the Borrower (excluding, however, any such
Person or group entitled to report such ownership on Schedule 13G in accordance
with Rule 13d-1(b)(1) or (2)); or, during any period of 24 consecutive calendar
months, individuals who were directors of the Borrower on the first day of such
period shall cease to constitute a majority of the board of directors of the
Borrower (unless the election, or the nomination for election, by the
shareholders of the Borrower, or the appointment by the Board of Directors, of
each new director during such 24-month period was approved by the vote at a
meeting or the written consent of at least two-thirds of the directors then
still in office who were directors at the beginning of such period);
(l) New Valero shall cease to be a Wholly-Owned Consolidated
Subsidiary of Old Valero at any time prior to the Assumption Date; or
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(m) the Spin-Off shall not have been consummated by September 30, 1997;
then, and in every such event, the Administrative Agent shall (i) if requested
by Banks having more than 66 2/3% in aggregate amount of the Commitments, by
notice to the Borrower terminate the Commitments and they shall thereupon
terminate, and (ii) if requested by Banks holding Notes evidencing more than 66
2/3% in aggregate principal amount of the Loans, by notice to the Borrower
declare the Notes (together with accrued interest thereon) to be, and the Notes
shall thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower; provided that in the case of any of the Events of Default specified in
clause (g) or (h) above with respect to the Borrower, without any notice to the
Borrower or any other act by the Administrative Agent or the Banks, the
Commitments shall thereupon terminate and the Notes (together with accrued
interest thereon) shall become immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower.
SECTION 8.02. Cash Cover. The Borrower agrees, in addition to the
provisions of Section 8.01 hereof, that upon the occurrence and during the
continuance of any Event of Default, it shall, if requested by the
Administrative Agent upon the instruction of the Required Banks, pay to the
Administrative Agent an amount in immediately available funds (which funds shall
be held as collateral for the Letter of Credit Outstandings) equal to the
aggregate amount available for drawing under all Letters of Credit then
outstanding at such time, provided that, upon the occurrence of any Event of
Default specified in Section 8.01(g) or 8.01(h) with respect to the Borrower,
the Borrower shall pay such amount forthwith without any notice or demand or any
other act by the Administrative Agent or the Banks.
SECTION 8.03. Notice of Default. The Administrative Agent shall give
notice to the Borrower under Section 8.01(c) promptly upon being requested to do
so by any Bank and shall thereupon notify all the Banks thereof.
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ARTICLE 9
THE ADMINISTRATIVE AGENT
SECTION 9.01. Appointment and Authorization. Each Bank irrevocably
appoints and authorizes the Administrative Agent to take such action as
Administrative Agent on its behalf and to exercise such powers under the
Financing Documents and the Notes as are delegated to the Administrative Agent
by the terms thereof, together with all such powers as are reasonably incidental
thereto.
SECTION 9.02. Administrative Agent and Agent. Morgan Guaranty shall have
the same rights and powers under the Financing Documents as any other Bank and
may exercise or refrain from exercising the same as though it were not the
Administrative Agent, and Morgan Guaranty and its affiliates may accept deposits
from, lend money to, and generally engage in any kind of business with the
Borrower or any Subsidiary or affiliate of the Borrower as if it were not an
Administrative Agent hereunder.
SECTION 9.03. Action by Administrative Agent. The obligations of the
Administrative Agent under the Financing Documents are only those expressly set
forth therein. Without limiting the generality of the foregoing, the
Administrative Agent shall not be required to take any action with respect to
any Default, except as expressly provided in Article 8.
SECTION 9.04. Consultation with Experts. Each of the Administrative Agent
and the Issuing Bank may consult with legal counsel (who may be counsel for the
Borrower), independent public accountants and other experts selected by it and
shall not be liable for any action taken or omitted to be taken by it in good
faith in accordance with the advice of such counsel, accountants or experts.
SECTION 9.05. Liability of Administrative Agent. Neither the
Administrative Agent nor the Issuing Bank nor any of their affiliates nor any of
their respective directors, officers, agents or employees shall be liable for
any action taken or not taken by it in connection with the Financing Documents
(i) with the consent or at the request of the Required Banks or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the
Administrative Agent nor the Issuing Bank nor any of their affiliates nor any of
their respective directors, officers, agents or employees shall be responsible
for or have any duty to ascertain, inquire into or verify (i) any statement,
warranty or representation made in connection with the Financing Documents or
any borrowing hereunder; (ii) the performance or observance of any of the
covenants or agreements of the Obligors or the Guarantors; (iii) the
satisfaction of any condition specified in Article 4, except receipt of items
required to be delivered to the Administrative Agent or the
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Issuing Bank; or (iv) the validity, effectiveness or genuineness of the
Financing Documents or any other instrument or writing furnished in connection
therewith. Neither the Administrative Agent nor the Issuing Bank shall incur any
liability by acting in reliance upon any notice, consent, certificate,
statement, or other writing (which may be a bank wire, telex, facsimile
transmission or similar writing) believed by it to be genuine or to be signed by
the proper party or parties.
SECTION 9.06. Indemnification. Each Bank shall, ratably in accordance with
its Commitment, indemnify the Administrative Agent and the Issuing Bank, its
affiliates and their respective directors, officers, agents and employees (to
the extent not reimbursed by the Borrower) against any cost, expense (including
counsel fees and disbursements), claim, demand, action, loss or liability
(except such as result from such indemnitees' gross negligence or willful
misconduct) that such indemnitees may suffer or incur in connection with the
Financing Documents or any action taken or omitted by such indemnitees
thereunder.
SECTION 9.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Administrative Agent, the
Syndication Agent or any other Bank, and based on such documents and information
as it has deemed appropriate, made its own credit analysis and decision to enter
into this Agreement. Each Bank also acknowledges that it will, independently and
without reliance upon the Administrative Agent, the Syndication Agent or any
other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 9.08. Successor Administrative Agent. The Administrative Agent may
resign at any time by giving notice thereof to the Banks and the Borrower. Upon
any such resignation, the Required Banks shall have the right to appoint a
successor Administrative Agent. If no successor Administrative Agent shall have
been so appointed by the Required Banks, and shall have accepted such
appointment, within 30 days after the retiring Administrative Agent gives notice
of resignation, then the retiring Administrative Agent may, on behalf of the
Banks, appoint a successor Administrative Agent, which shall be a commercial
bank organized or licensed under the laws of the United States of America or of
any State thereof and having a combined capital and surplus of at least
$50,000,000. Upon the acceptance of its appointment as Administrative Agent
hereunder by a successor Administrative Agent, such successor Administrative
Agent shall thereupon succeed to and become vested with all the rights and
duties of the retiring Administrative Agent, and the retiring Administrative
Agent shall be discharged from its duties and obligations under the Financing
Documents. After any retiring Administrative Agent's resignation hereunder as
Administrative Agent,
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the provisions of this Article shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent.
SECTION 9.09. Administrative Agent's Fee. The Borrower shall pay to each
of the Administrative Agent, the Syndication Agent and the Issuing Bank, for its
own account fees in the amounts and at the times specified in the Fee Letters.
SECTION 9.10. Syndication Agent. Nothing in this Agreement shall impose
upon the Syndication Agent, in such capacity, any obligation or liability
whatsoever.
ARTICLE 10
CHANGE IN CIRCUMSTANCES
SECTION 10.01. Basis for Determining Interest Rate Inadequate or Unfair.
If on or prior to the first day of any Interest Period for any Fixed Rate
Borrowing:
(a) the Administrative Agent is advised by the Reference Banks that
deposits in dollars (in the applicable amounts) are not being offered to the
Reference Banks in the London interbank market for such Interest Period, or
(b) in the case of a Committed Borrowing, Banks having 50% or more of the
aggregate amount of the Commitments advise the Administrative Agent that the
Adjusted London Interbank Offered Rate, as the case may be, as determined by the
Administrative Agent will not adequately and fairly reflect the cost to such
Banks of funding their Euro-Dollar Loans for such Interest Period,
the Administrative Agent shall forthwith give notice thereof to the Borrower and
the Banks, whereupon until the Administrative Agent notifies the Borrower that
the circumstances giving rise to such suspension no longer exist, the
obligations of the Banks to make Euro-Dollar Loans shall be suspended. Unless
the Borrower notifies the Administrative Agent at least two Domestic Business
Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing
has previously been given that it elects not to borrow on such date, (i) if such
Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be
made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money
Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing
shall bear interest for each day from and including the first day to but
excluding the last day of the Interest Period applicable thereto at the Base
Rate for such day.
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SECTION 10.02. Illegality. If, on or after the date of this Agreement, the
adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Euro-Dollar Lending Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency shall make it unlawful or impossible for any Bank (or its
Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and
such Bank shall so notify the Administrative Agent, the Administrative Agent
shall forthwith give notice thereof to the other Banks and the Borrower,
whereupon until such Bank notifies the Borrower and the Administrative Agent
that the circumstances giving rise to such suspension no longer exist, the
obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before
giving any notice to the Administrative Agent pursuant to this Section, such
Bank shall designate a different Euro-Dollar Lending Office if such designation
will avoid the need for giving such notice and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine
that it may not lawfully continue to maintain and fund any of its outstanding
Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower
shall immediately prepay in full the then outstanding principal amount of each
such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with
prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan
in an equal principal amount from such Bank (on which interest and principal
shall be payable contemporaneously with the related Euro-Dollar Loans of the
other Banks), and such Bank shall make such a Base Rate Loan.
SECTION 10.03. Increased Cost and Reduced Return. (a) If on or after (x)
the date hereof, in the case of any Committed Loan or any obligation to make
Committed Loans or (y) the date of the related Money Market Quote, in the case
of any Money Market Loan, the adoption of any applicable law, rule or
regulation, or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency shall impose, modify or
deem applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System, but excluding
with respect to any Euro-Dollar Loan any such requirement included in an
applicable Euro-Dollar Reserve Percentage), special deposit, insurance
assessment or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Bank (or its Applicable Lending Office)
or shall impose on any Bank (or its
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Applicable Lending Office) or on the United States market for certificates of
deposit or the London interbank market any other condition affecting its Fixed
Rate Loans, its Note or its obligation to make Fixed Rate Loans or its
obligations hereunder in respect of Letters of Credit and the result of any of
the foregoing is to increase the cost to such Bank (or its Applicable Lending
Office) of making or maintaining any Fixed Rate Loan or of issuing or
participating in any Letter of Credit, or to reduce the amount of any sum
received or receivable by such Bank (or its Applicable Lending Office) under
this Agreement or under its Note with respect thereto, by an amount deemed by
such Bank to be material, then, within 15 days after demand by such Bank (with a
copy to the Administrative Agent), the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such increased
cost or reduction.
(b) If any Bank shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on capital
of such Bank (or its Parent) as a consequence of such Bank's obligations
hereunder to a level below that which such Bank (or its Parent) could have
achieved but for such adoption, change, request or directive (taking into
consideration its policies with respect to capital adequacy) by an amount deemed
by such Bank to be material, then from time to time, within 15 days after demand
by such Bank (with a copy to the Administrative Agent), the Borrower shall pay
to such Bank such additional amount or amounts as will compensate such Bank (or
its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Administrative
Agent of any event of which it has knowledge, occurring after the date hereof,
which will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate
of any Bank claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder, together with the basis
for determining such additional amounts, shall be conclusive in the absence of
manifest error. In determining such amount, such Bank agrees to act in good
faith and to use reasonable averaging and attribution methods.
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(d) In the event any Bank shall seek compensation pursuant to this Section,
the Borrower may give notice to such Bank (with copy to the Administrative
Agent) that it wishes to seek one or more financial institutions (which may be
one or more of the Banks) to assume the Commitment of such Bank and to purchase
its outstanding Loans and Note and its interest in any outstanding Letters of
Credit. Each Bank requesting compensation pursuant to this Section agrees to
sell its Commitment, Loans, Note and interest in this Agreement and any other
credit documents to any such financial institution pursuant to, and subject to
the conditions contained in Section 10.06.
SECTION 10.04. Taxes. (a) For purposes of this Section, the following
terms have the following meanings:
"TAXES" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings with respect to any payment by the
Borrower pursuant to this Agreement or under any Note, and all liabilities with
respect thereto, excluding (i) in the case of each Bank and the Administrative
Agent, taxes imposed on or measured by its income and/or net worth, and
franchise or similar taxes imposed on it by a jurisdiction under the laws of
which such Bank or the Administrative Agent (as the case may be) is organized or
in which its principal executive office is located or, in the case of each Bank,
in which its Applicable Lending Office or other permanent establishment for the
conduct of business is located, and (ii) in the case of each Bank, any United
States withholding tax imposed on such payments but only to the extent that such
Bank is subject to United States withholding tax at the time such Bank first
becomes a party to this Agreement.
"OTHER TAXES" means any present or future stamp or documentary taxes and
any other excise or property taxes, or similar charges or levies, which arise
from any payment made pursuant to this Agreement or under any Letter of Credit
or any Note or from the execution or delivery of, or otherwise with respect to,
this Agreement or any Letter of Credit or any Note.
(b) Any and all payments by the Borrower to or for the account of any Bank
or the Administrative Agent hereunder or under any Note shall be made without
deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be
required by law to deduct any Taxes or Other Taxes from any such payments, (i)
the sum payable shall be increased as necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section such Bank or the Administrative Agent (as the case may be)
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions, (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or
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other authority in accordance with applicable law and (iv) the Borrower shall
furnish to the Administrative Agent, at its address referred to in Section
11.01, the original or a certified copy of a receipt evidencing payment thereof.
(c) The Borrower agrees to indemnify each Bank and the Administrative Agent
for the full amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable
under this Section paid by such Bank or the Administrative Agent (as the case
may be) and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto. This indemnification shall be paid within 15
days after such Bank or the Administrative Agent (as the case may be) makes
demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the United
States, on or prior to the date of its execution and delivery of this Agreement
in the case of each Bank listed on the signature pages hereof and on or prior to
the date on which it becomes a Bank in the case of each other Bank, and from
time to time thereafter if requested in writing by the Borrower (but only so
long as such Bank remains lawfully able to do so), shall provide the Borrower
with Internal Revenue Service form 1001 or 4224, as appropriate, or any
successor form prescribed by the Internal Revenue Service, certifying that such
Bank is entitled to benefits under an income tax treaty to which the United
States is a party which exempts the Bank from United States withholding tax or
reduces the rate of withholding tax on payments of interest for the account of
such Bank or certifying that the income receivable pursuant to this Agreement is
effectively connected with the conduct of a trade or business in the United
States.
(e) For any period with respect to which a Bank has failed to provide the
Borrower with the appropriate form pursuant to Section 10.04(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent to
the date on which such form originally was required to be provided), such Bank
shall not be entitled to indemnification under Section 10.04(b) or (c) with
respect to Taxes imposed by the United States; provided that if a Bank, which is
otherwise exempt from or subject to a reduced rate of withholding tax, becomes
subject to Taxes because of its failure to deliver a form required hereunder,
the Borrower shall take such steps as such Bank shall reasonably request to
assist such Bank to recover such Taxes.
(f) Each Bank will promptly notify the Borrower and the Administrative
Agent of any event of which it has knowledge, occurring after the date hereof,
which would require the Borrower to pay additional amounts to or for the account
of such Bank pursuant to this Section 10.04, and such Bank will change the
jurisdiction of its Applicable Lending Office if, in the judgment of such Bank,
such
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change (i) will eliminate or reduce any such additional payment which may
thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. A
certificate of any Bank claiming compensation under this Section, and setting
forth the additional amount or amounts to be paid to it hereunder, together with
the basis for determining such additional amounts, shall be conclusive in the
absence of manifest error. In determining such amount, such Bank agrees to act
in good faith and to use reasonable averaging and attribution methods.
SECTION 10.05. Base Rate Loans Substituted for Affected Fixed Rate Loans.
If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended
pursuant to Section 10.02 or (ii) any Bank has demanded compensation under
Section 10.03 or 10.04 with respect to its Euro-Dollar Loans and the Borrower
shall, by at least five Euro-Dollar Business Days' prior notice to such Bank
through the Administrative Agent, have elected that the provisions of this
Section shall apply to such Bank, then, unless and until such Bank notifies the
Borrower that the circumstances giving rise to such suspension or demand for
compensation no longer exist:
(a) all Loans which would otherwise be made by such Bank as Euro-Dollar
Loans shall be made instead as Base Rate Loans (on which interest and principal
shall be payable contemporaneously with the related Euro-Dollar Loans of the
other Banks); and
(b) after each of its Euro-Dollar Loans has been repaid, all payments of
principal which would otherwise be applied to repay such Euro-Dollar Loans shall
be applied to repay its Base Rate Loans instead.
SECTION 10.06. Borrower's Right to Replace Banks. If at any time any Bank
shall be in receivership or shall seek compensation or recompense pursuant to
any provision of this Article 10, the Borrower shall have the right to replace
such Bank with another financial institution; provided, that such new financial
institution shall be acceptable to the Issuing Bank and the Administrative Agent
(unless the Bank to be replaced is the Administrative Agent, in which case such
new financial institution shall be acceptable to the Issuing Bank). Each Bank
agrees to its replacement at the option of the Borrower pursuant to this
Section, provided, that the successor financial institution shall purchase
without recourse the Commitment of such Bank and all obligations of the Borrower
to such Bank hereunder and under the Notes for cash in an aggregate amount equal
to the aggregate unpaid principal thereof, all unpaid interest accrued thereon,
all unpaid fees and letter of credit fees accrued for the account of such Bank,
and all other amounts (if any) then owing to such Bank hereunder and otherwise
in accordance with this Agreement (including such amounts, if any, as would be
payable by the Borrower pursuant to Section 2.13 if the Loans of such Bank were
prepaid in full
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on such date). Nothing contained in this Section shall alter or modify the
Borrower's obligation to pay any amount payable to or for the account of the
replaced Bank pursuant to any other Section of this Article 10 accruing prior to
the replacement of such Bank. Notwithstanding anything to the contrary contained
in this Section 10.06, the Issuing Bank may not be replaced hereunder at any
time while it has Letters of Credit outstanding hereunder unless arrangements
satisfactory to the such bank (including, the furnishing of a standby letter of
credit in form and substance, and issued by an issuer, satisfactory to such bank
or the furnishing of cash collateral in amounts and pursuant to arrangements
satisfactory to such bank) have been made with respect to such outstanding
Letters of Credit.
ARTICLE 11
MISCELLANEOUS
SECTION 11.01. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including bank wire, telex, facsimile
transmission or similar writing) and shall be given to such party: (w) in the
case of any Obligor or the Administrative Agent, at its address, facsimile
number or telex number set forth on the signature pages hereof, (x) in the case
of any Guarantor, to it care of the Borrower, (y) in the case of any Bank, at
its address, facsimile number or telex number set forth in its Questionnaire or
(z) in the case of any party, such other address, facsimile number or telex
number as such party may hereafter specify for the purpose by notice to the
Administrative Agent and the Borrower. Each such notice, request or other
communication shall be effective (i) if given by telex, when such telex is
transmitted to the telex number specified in this Section and the appropriate
answerback is received, (ii) if given by facsimile transmission, when
transmitted to the facsimile number specified in this Section and confirmation
of receipt is received, (iii) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iv) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the
Administrative Agent under Article 2 or Article 11 shall not be effective until
received.
SECTION 11.02. No Waivers. No failure or delay by the Administrative Agent
or any Bank in exercising any right, power or privilege or under any Financing
Document 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, power or privilege. The rights and remedies provided in the
Financing Documents shall be cumulative and not exclusive of any rights or
remedies provided by law.
81
<PAGE>
SECTION 11.03. Expenses; Indemnification. (a) The Borrower shall pay (i)
all reasonable out-of-pocket expenses of the Administrative Agent and the
Issuing Bank, including fees and disbursements of special counsel for the
Administrative Agent, in connection with the preparation of the Financing
Documents, any waiver or consent thereunder or any amendment thereof or any
Default or alleged Default hereunder and (ii) if an Event of Default occurs, all
out-of-pocket expenses incurred by the Administrative Agent, the Issuing Bank
and each Bank, including (without duplication) the reasonable fees and
disbursements of outside counsel and the allocated cost of inside counsel, in
connection with such Event of Default and collection, bankruptcy, insolvency and
other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Administrative Agent, the Issuing
Bank and each Bank, their respective affiliates and the respective directors,
officers, agents and employees of the foregoing (each an "INDEMNITEE") and hold
each Indemnitee harmless from and against any and all liabilities, losses,
damages, costs and expenses of any kind, including, without limitation, the
reasonable fees and disbursements of counsel, which may be incurred by such
Indemnitee in connection with any investigative, administrative or judicial
proceeding (whether or not such Indemnitee shall be designated a party thereto)
brought or threatened relating to or arising out of the Financing Documents or
any actual or proposed use of proceeds of Loans hereunder; provided that no
Indemnitee shall have the right to be indemnified hereunder for such
Indemnitee's own gross negligence or willful misconduct as determined by a court
of competent jurisdiction.
SECTION 11.04. Sharing of Set-Offs. Each Bank agrees that if it shall, by
exercising any right of set-off or counterclaim or otherwise, receive payment of
a proportion of the aggregate amount of principal and interest due with respect
to any Note held by it which is greater than the proportion received by any
other Bank in respect of the aggregate amount of principal and interest due with
respect to any Note held by such other Bank, the Bank receiving such
proportionately greater payment shall purchase such participations in the Notes
held by the other Banks, and such other adjustments shall be made, as may be
required so that all such payments of principal and interest with respect to the
Notes held by the Banks shall be shared by the Banks pro rata; provided that
nothing in this Section shall impair the right of any Bank to exercise any right
of set-off or counterclaim it may have and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness hereunder. Each of the Borrower and the Guarantors agrees, to the
fullest extent it may effectively do so under applicable law, that any holder of
a participation in a Note, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of set-off or counterclaim and other rights
with respect to such participation as fully as if such
82
<PAGE>
holder of a participation were a direct creditor of the Borrower or such
Guarantor, as the case may be, in the amount of such participation.
SECTION 11.05. Amendments and Waivers. Any provision of this Agreement or
the Notes may be amended or waived if, but only if, such amendment or waiver is
in writing and is signed by the Borrower, New Valero (if not the Borrower) and
the Required Banks (and, if the rights or duties of the Administrative Agent,
the Syndication Agent or the Issuing Bank are affected thereby, by it); provided
that no such amendment or waiver shall, unless signed by all the Banks, (i)
increase or decrease the Commitment of any Bank (except for a ratable decrease
in the Commitments of all Banks) or subject any Bank to any additional
obligation, (ii) reduce the principal of or rate of interest on any Loan or any
Unpaid Drawing or any fees hereunder, (iii) postpone the date fixed for any
payment of principal of or interest on any Loan or any Unpaid Drawing or any
fees hereunder or for termination of any Commitment, (iv) extend the Letter of
Credit Termination Date or (except as expressly contemplated by Section 3.02)
the expiry date of any Letter of Credit or (v) change this Section 11.05 or the
percentage of the Commitments or of the aggregate unpaid principal amount of the
Notes, or the number of Banks, which shall be required for the Banks or any of
them to take any action under this Section or any other provision of this
Agreement.
SECTION 11.06. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided that, except as
contemplated by Section 4.03, the Borrower may not assign or otherwise transfer
any of its rights under this Agreement without the prior written consent of all
Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "PARTICIPANT") participating interests in its Commitment or
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Administrative Agent, such Bank shall remain responsible for
the performance of its obligations hereunder, and the Borrower and the
Administrative Agent shall continue to deal solely and directly with such Bank
in connection with such Bank's rights and obligations under this Agreement. Any
agreement pursuant to which any Bank may grant such a participating interest
shall provide that such Bank shall retain the sole right and responsibility to
enforce the obligations of the Borrower hereunder including, without limitation,
the right to approve any amendment, modification or waiver of any provision of
this Agreement; provided that such participation agreement may provide that such
Bank will not agree to any modification, amendment or waiver of this Agreement
described in clause (i), (ii), (iii) or (iv) of Section 11.05 without the
consent of the Participant. The Borrower agrees that each Participant shall, to
the extent provided in its participation
83
<PAGE>
agreement, be entitled to the benefits of Article 10 with respect to its
participating interest. An assignment or other transfer which is not permitted
by subsection (c) or (d) below shall be given effect for purposes of this
Agreement only to the extent of a participating interest granted in accordance
with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "ASSIGNEE") all, or a proportionate part (equivalent to an
initial Commitment of not less than $5,000,000 or such lesser amount as may be
acceptable to the Borrower and the Administrative Agent), of all, of its rights
and obligations under this Agreement and the Notes, and such Assignee shall
assume such rights and obligations, pursuant to an Assignment and Assumption
Agreement in substantially the form of Exhibit G hereto executed by such
Assignee and such transferor Bank, with (and subject to) the subscribed consent
of the Borrower, which shall not be unreasonably withheld, the Issuing Bank and
the Administrative Agent; provided that if an Assignee is an affiliate of such
transferor Bank, no such consent shall be required; and provided further that
such assignment may, but need not, include rights of the transferor Bank in
respect of outstanding Money Market Loans. Upon execution and delivery of such
instrument and payment by such Assignee to such transferor Bank of an amount
equal to the purchase price agreed between such transferor Bank and such
Assignee, such Assignee shall be a Bank party to this Agreement and shall have
all the rights and obligations of a Bank with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), the transferor Bank, the Administrative Agent
and the Borrower shall make appropriate arrangements so that, if required, a new
Note is issued to the Assignee. In connection with any such assignment, the
transferor Bank shall pay to the Administrative Agent an administrative fee for
processing such assignment in the amount of $2,500. If the Assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall deliver to the Borrower and the Administrative Agent certification as
to exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 10.04.
(d) Any Bank may at any time assign all or any portion of its rights under
this Agreement and its Note to a Federal Reserve Bank. No such assignment shall
release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights shall
be entitled to receive any greater payment under Section 10.03 or 10.04 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent
84
<PAGE>
or by reason of the provisions of Section 10.02, 10.03 or 10.04 requiring such
Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
SECTION 11.07. Collateral. Each of the Banks represents to the
Administrative Agent, the Syndication Agent and each of the other Banks that it
in good faith is not relying upon any "MARGIN STOCK" (as defined in Regulation U
and Regulation G) as collateral in the extension or maintenance of the credit
provided for in this Agreement.
SECTION 11.08. Governing Law; Submission to Jurisdiction. This Agreement
and each Note shall be governed by and construed in accordance with the laws of
the State of New York. The parties hereto hereby (i) submit to the nonexclusive
jurisdiction of the United States District Court for the Southern District of
New York and of any New York State court sitting in New York City for purposes
of all legal proceedings arising out of or relating to this Agreement or the
transactions contemplated hereby and (ii) irrevocably waive, to the fullest
extent permitted by law, any objection which they may now or hereafter have to
the laying of the venue of any such proceeding brought in such a court and any
claim that any such proceeding brought in such a court has been brought in an
inconvenient forum; provided, however, that nothing in this Section is intended
to waive the right of any party to remove any such action or proceeding
commenced in any such New York State court to an appropriate New York Federal
court to the extent the basis for such removal exists under applicable law.
SECTION 11.09. Counterparts; Integration. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement constitutes the entire agreement and understanding among the
parties hereto and supersedes any and all prior agreements and understandings,
oral or written, relating to the subject matter hereof.
SECTION 11.10. WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE
ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT
TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
85
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
VALERO ENERGY CORPORATION
By _____________________________________
Name:
Title:
530 McCullough Avenue
San Antonio, TX 78215
Facsimile number: 210-246-3494
VALERO REFINING AND MARKETING
COMPANY
By _____________________________________
Name:
Title:
530 McCullough Avenue
San Antonio, TX 78215
Facsimile number: 210-246-3494
86
<PAGE>
$47,250,000 MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By _____________________________________
Name:
Title:
$47,250,000 BANK OF MONTREAL
By _____________________________________
Name:
Title:
$37,500,000 BANK OF TOKYO-MITSUBISHI,
LTD.
By _____________________________________
Name:
Title:
$37,500,000 BANKBOSTON, N.A.
By _____________________________________
Name:
Title:
87
<PAGE>
$37,500,000 BANQUE NATIONALE DE
PARIS, HOUSTON AGENCY
By _____________________________________
Name:
Title:
$37,500,000 BHF-BANK
ATIENGESELLSCHAFT
By _____________________________________
Name:
Title:
By _____________________________________
Name:
Title:
$37,500,000 CIBC INC.
By _____________________________________
Name:
Title:
$37,500,000 CREDIT LYONNAIS NEW YORK
BRANCH
By _____________________________________
Name:
Title:
88
<PAGE>
$37,500,000 THE FIRST NATIONAL BANK OF
CHICAGO
By _____________________________________
Name:
Title:
$37,500,000 THE FUJI BANK, LIMITED
By _____________________________________
Name:
Title:
$37,500,000 ROYAL BANK OF CANADA
By _____________________________________
Name:
Title:
$37,500,000 SOCIETE GENERALE
By _____________________________________
Name:
Title:
89
<PAGE>
$37,500,000 TORONTO DOMINION (TEXAS),
INC.
By _____________________________________
Name:
Title:
$28,000,000 BARCLAYS BANK PLC
By _____________________________________
Name:
Title:
$28,000,000 CHRISTIANIA BANK, NEW YORK
BRANCH
By _____________________________________
Name:
Title:
By _____________________________________
Name:
Title:
90
<PAGE>
$28,000,000 DEN NORSKE BANK ASA
By _____________________________________
Name:
Title:
By _____________________________________
Name:
Title:
$28,000,000 GUARANTY FEDERAL BANK,
F.S.B.
By _____________________________________
Name:
Title:
$28,000,000 THE INDUSTRIAL BANK OF
JAPAN, LIMITED, NEW YORK
BRANCH
By _____________________________________
Name:
Title:
$28,000,000 THE SUMITOMO BANK, LIMITED
By _____________________________________
Name:
Title:
91
<PAGE>
$20,000,000 THE BANK OF NOVA SCOTIA
By _____________________________________
Name:
Title:
$20,000,000 CAISSE NATIONALE DE CREDIT
AGRICOLE
By _____________________________________
Name:
Title:
$20,000,000 THE DAI-ICHI KANGYO BANK,
LTD.
By _____________________________________
Name:
Title:
$20,000,000 THE FROST NATIONAL BANK
By _____________________________________
Name:
Title:
92
<PAGE>
$20,000,000 MELLON BANK, N.A.
By _____________________________________
Name:
Title:
$20,000,000 THE MITSUI TRUST AND
BANKING COMPANY,
LIMITED
By _____________________________________
Name:
Title:
$20,000,000 THE SANWA BANK, LIMITED,
DALLAS AGENCY
By _____________________________________
Name:
Title:
$20,000,000 UNION BANK OF SWITZERLAND,
HOUSTON AGENCY
By _____________________________________
Name:
Title:
By _____________________________________
Name:
Title:
93
<PAGE>
- -----------------
Total Commitments
$835,000,000
=================
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Administrative Agent
By _____________________________________
Name:
Title:
60 Wall Street
New York, New York 10260-0060
Attention:
Fax:
BANK OF MONTREAL, as Syndication Agent and Issuing Bank
By _____________________________________
Name:
Title:
700 Louisiana Avenue, Suite 4400
Houston, Texas 77002
Attention:
Fax:
94
<PAGE>
PRICING SCHEDULE
The "EURO-DOLLAR MARGIN", "FACILITY FEE RATE" and "LETTER OF CREDIT RATE" for
any day are the respective percentages set forth below in the applicable row
under the column corresponding to the Status that exists on such day:
<TABLE>
<CAPTION>
=======================================================================================================
Status Level I Level II Level III Level IV Level V Level VI Level VII
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Euro-Dollar 0.2100% 0.225% 0.300% 0.500% 0.875% 1.000% 2.000%
Margin
- -------------------------------------------------------------------------------------------------------
Facility Fee Rate 0.0900% 0.125% 0.150% 0.250% 0.375% 0.500% 0.500%
- -------------------------------------------------------------------------------------------------------
Letter of Credit
Rate
Performance 0.1050% 0.1125% 0.1500% 0.2500% 0.4375% 0.5000% 1.0000%
Financial 0.2100% 0.2250% 0.3000% 0.5000% 0.8750% 1.0000% 2.0000%
=======================================================================================================
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings (subject to the last paragraph of this Schedule):
"LEVEL I STATUS" exists at any date if, at such date, the Borrower's
long-term debt is rated at least BBB+ by S&P or at least Baa1 by Moody's.
"LEVEL II STATUS" exists at any date if, at such date, (i) the Borrower's
long-term debt is rated at least BBB by S&P or at least Baa2 by Moody's and (ii)
Level I Status does not exist.
"LEVEL III STATUS" exists at any date if, at such date, (i) the Borrower's
long-term debt is rated at least BBB- by S&P or at least Baa3 by Moody's and
(ii) neither Level I Status nor Level II Status exists.
"LEVEL IV STATUS" exists at any date if, at such date, (i) the Borrower's
long-term debt is rated at least BB+ by S&P or at least Ba1 by Moody's and (ii)
none of Level I Status, Level II Status and Level III Status exists.
"LEVEL V STATUS" exists at any date if, at such date, (i) the Borrower's
long-term debt is rated at least BB by S&P or at least Ba2 by Moody's and (ii)
none of Level I Status, Level II Status, Level III Status and Level IV Status
exists.
"LEVEL VI STATUS" exists at any date if, at such date, (i) the Borrower's
long-term debt is rated at least BB- by S&P and at least Ba3 by Moody's and (ii)
95
<PAGE>
none of Level I Status, Level II Status, Level III Status, Level IV Status and
Level V Status exists.
"LEVEL VII STATUS" exists at any date if, at such date, no other Status
exists.
"STATUS" refers to the determination of which of Level I Status, Level II
Status, Level III Status, Level IV Status, Level V Status, Level VI Status or
Level VII Status exists at any date.
The credit ratings to be utilized for purposes of this Schedule are those
assigned to the senior unsecured long-term debt securities of the Borrower
without third-party credit enhancement, and any rating assigned to any other
debt security of the Borrower shall be disregarded. The rating in effect at any
date is that in effect at the close of business on such date.
So long as the Borrower is rated at least BB- by S&P and at least Ba3 by
Moody's, if Borrower is split-rated and the ratings differential is one level,
the higher of the two ratings will apply (e.g., BBB/Baa3 results in Level II
Status). If the Borrower is split-rated and the ratings differential is more
than one level, the average of the two ratings (or the higher of two
intermediate ratings) shall be used (e.g., BBB-/Ba1 results in Level III Status,
as does BBB/Ba2).
Notwithstanding the foregoing, for each day prior to the date on or after
the Assumption Date on which the Borrower receives a long-term debt rating, the
Status shall be (i) Level V if on or prior to such day, the Preferred Stock
Redemption shall have been consummated requiring cash outlays in excess of
$7,000,000 or (ii) Level IV if clause (i) is not applicable.
96
<PAGE>
EXHIBIT A
NOTE
New York, New York
, 1997
For value received, [NAME OF BORROWER], a Delaware corporation (the
"BORROWER"), promises to pay to the order of [NAME OF BANK] (the "BANK"), for
the account of its Applicable Lending Office, the unpaid principal amount of
each Loan made by the Bank to New Valero pursuant to the Credit Agreement
referred to below on the last day of the Interest Period relating to such Loan.
The Borrower promises to pay interest on the unpaid principal amount of each
such Loan on the dates and at the rate or rates provided for in the Credit
Agreement. All such payments of principal and interest shall be made in lawful
money of the United States in Federal or other immediately available funds at
the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New
York, New York.
All Loans made by the Bank, the respective types and maturities thereof
and all repayments of the principal thereof shall be recorded by the Bank and,
if the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding may be endorsed by the Bank on the schedule attached
hereto, or on a continuation of such schedule attached to and made a part
hereof; provided that the failure of the Bank to make any such recordation or
endorsement shall not affect the obligations of the Borrower hereunder or under
the Credit Agreement.
This note is one of the Notes referred to in the Credit Agreement dated as
of May 1, 1997 among Valero Energy Corporation, Valero Refining and Marketing
Company, the banks listed on the signature pages thereof, Morgan Guaranty Trust
Company of New York, as Administrative Agent, and Bank of Montreal, as
Syndication Agent and Issuing Bank (as the same may be amended
A-1
<PAGE>
from time to time, the "CREDIT AGREEMENT"). Terms defined in the Credit
Agreement are used herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the prepayment hereof and the acceleration
of the maturity hereof.
[NAME OF BORROWER]
By ________________________
Name:
Title:
A-2
<PAGE>
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
- --------------------------------------------------------------------------------
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
A-3
<PAGE>
EXHIBIT B
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York
(the "ADMINISTRATIVE AGENT")
From: [Name of Borrower] (the "BORROWER")
Re: Credit Agreement (the "CREDIT AGREEMENT") dated as of May 1, 1997,
among Valero Energy Corporation, Valero Refining and Marketing
Company, the Banks listed on the signature pages thereof, the
Administrative Agent, and Bank of Montreal, as Syndication Agent and
Issuing Bank
We hereby give notice pursuant to Section 2.03 of the Credit
Agreement that we request Money Market Quotes for the following proposed Money
Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount/1/ Interest Period/2/
$
Such Money Market Quotes should offer a Money Market
[Margin] [Absolute Rate]. [The applicable base rate is the London Interbank
Offered Rate.]
- --------
/1/ Amount must be $1,000,000 or a larger multiple of $1,000,000.
/2/ Not less than one month (LIBOR Auction) or not less than 7 days
(Absolute Rate Auction), subject to the provisions of the definition of Interest
Period.
B-1
<PAGE>
Terms used herein have the meanings assigned to them in the Credit
Agreement.
[NAME OF BORROWER]
By ________________________
Name:
Title:
B-2
<PAGE>
EXHIBIT C
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes to [Name of Borrower] (the
"BORROWER")
Pursuant to Section 2.03 of the Credit Agreement dated as of May 1,
1997 among Valero Energy Corporation, Valero Refining and Marketing Company, the
Banks parties thereto, the undersigned, as Administrative Agent, and Bank of
Montreal, as Syndication Agent and Issuing Bank, we are pleased on behalf of New
Valero to invite you to submit Money Market Quotes to New Valero for the
following proposed Money Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
$
Such Money Market Quotes should offer a Money Market
[Margin] [Absolute Rate]. [The applicable base rate is the London Interbank
Offered Rate.]
Please respond to this invitation by no later than [2:00 P.M.]
[11:30 A.M.] (New York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By ______________________
Authorized Officer
C-1
<PAGE>
EXHIBIT D
Form of Money Market Quote
To: Morgan Guaranty Trust Company of New York,
as Administrative Agent
Re: Money Market Quote to [Name of Borrower] (the "BORROWER")
In response to your invitation on behalf of New Valero dated
_____________, 19__, we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank:
-----------------------------
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the following principal
amounts, for the following Interest Periods and at the following rates:
Principal Interest Money Market
Amount** Period*** [Margin****] [Absolute Rate*****]
$
$
[Provided, that the aggregate principal amount of Money Market Loans for
which the above offers may be accepted shall not exceed
$____________.]**
- ----------
* As specified in the related Invitation.
** Principal amount bid for each Interest Period may not exceed principal amount
requested. Specify aggregate limitation if the sum of the individual offers
exceeds the amount the Bank is willing to lend. Bids must be made for $1,000,000
or a larger multiple of $1,000,000.
D-1
<PAGE>
(notes continued on following page)
We understand and agree that the offer(s) set forth above, subject
to the satisfaction of the applicable conditions set forth in the Credit
Agreement dated as of May 1, 1997 among Valero Energy Corporation, Valero
Refining and Marketing Company, the Banks listed on the signature pages thereof,
Bank of Montreal as Syndication Agent and Issuing Bank and yourselves, as
Administrative Agent, irrevocably obligates us to make the Money Market Loan(s)
for which any offer(s) are accepted, in whole or in part.
Very truly yours,
[NAME OF BANK]
Dated:_______________ By:__________________________
Authorized Officer
- ----------
*** Not less than one month or not less than 7 days, as specified in the related
Invitation. No more than five bids are permitted for each Interest Period.
**** Margin over or under the London Interbank Offered Rate determined for the
applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%)
and specify whether "PLUS" or "MINUS".
***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%).
D-2
<PAGE>
EXHIBIT E-1
OPINION OF
COUNSEL FOR THE OBLIGORS
[Closing Date]
To the Banks and the Administrative Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am General Counsel and Executive Vice President of Valero Energy
Corporation ("OLD VALERO") and Valero Refining and Marketing Company ("NEW
VALERO", and together with Old Valero, the "OBLIGORS") and am furnishing this
opinion in connection with the Credit Agreement (the "CREDIT AGREEMENT") dated
as of May 1, 1997 among Old Valero, New Valero, the banks listed on the
signature pages thereof, Morgan Guaranty Trust Company of New York, as
Administrative Agent, and Bank of Montreal, as Syndication Agent and Issuing
Bank. Terms defined in the Credit Agreement are used herein as therein defined.
This opinion is being rendered to you at the request of my client pursuant to
Section 4.01(c) of the Credit Agreement.
I have examined (i) an executed copy of the Credit Agreement and the Notes
of Old Valero and (ii) originals or copies, certified or otherwise identified to
my satisfaction, of such documents, corporate records, certificates of public
officials and other instruments and have conducted such other investigations of
fact and law as I have deemed necessary or advisable for purposes of this
opinion.
Upon the basis of the foregoing, I am of the opinion that:
E1-1
<PAGE>
1. Each Obligor is a corporation duly incorporated, validly existing and
in good standing under the laws of its jurisdiction of incorporation and has all
corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
2. The execution, delivery and performance by each Obligor of the Credit
Agreement and by Old Valero of its Notes are within such Obligor's corporate
powers, have been duly authorized by all necessary corporate action, require no
action by or in respect of, or filing with, any governmental body, agency or
official (except for any reports required to be filed by such Obligor with the
Securities and Exchange Commission (or any successor thereto) pursuant to the
Securities Exchange Act of 1934) and do not contravene, or constitute a default
under, any provision of applicable law or regulation or of the certificate of
incorporation or by-laws of such Obligor or of any agreement, judgment,
injunction, order, decree or other instrument binding upon such Obligor or any
of its Subsidiaries or result in the creation or imposition of any Lien on any
asset of such Obligor or any of its Subsidiaries.
3. The Credit Agreement constitutes a valid and binding agreement of each
Obligor and each Note of Old Valero constitutes a valid and binding obligation
of Old Valero, in each case enforceable in accordance with its terms, except as
the same may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and by general principles of equity.
4. Except as disclosed in the Old Valero Form 10-K, there is no action,
suit or proceeding pending against, or to the best of my knowledge threatened
against, Old Valero or any of its Subsidiaries before any court or arbitrator or
any governmental body, agency or official, in which there is a reasonable
possibility of an adverse decision which could reasonably be expected to
materially adversely affect the business, consolidated financial position or
consolidated results of operations of Old Valero and its Consolidated
Subsidiaries, considered as a whole, or which in any manner draws into question
the validity of the Credit Agreement or the Notes.
5. Each of Old Valero's Subsidiaries is a corporation, partnership or
other legal entity duly organized, validly existing and is in good standing in
each jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification and where the failure to so qualify could
reasonably be expected to have a material adverse effect on the business,
financial position or results of operations of such Borrower and its
Subsidiaries, taken as a whole. Each of Old Valero's Subsidiaries has all legal
powers and all governmental licenses, authorizations, consents and approvals
required to own its assets and to
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carry on its business as now conducted and where the failure to have any such
legal, licenses, authorizations, consents or approvals could reasonably be
expected to have a material adverse effect on the business, financial position
or results of operations of Old Valero and its Subsidiaries, taken as a whole.
I am a member of the Bar of the State of Texas and the foregoing opinion
is limited to the laws of the State of Texas, the federal laws of the United
States and the General Corporation Law of the State of Delaware. I have assumed
for the purposes of providing my opinion in paragraph 3 that the laws of the
State of New York are the same as the laws of the State of Texas.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by any other person without my prior written consent.
Very truly yours,
E1-3
<PAGE>
EXHIBIT E-2
OPINION OF
COUNSEL FOR NEW VALERO
[Assumption Date]
To the Banks and the Administrative Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am General Counsel of Valero Refining and Marketing Company ("NEW
VALERO") and am furnishing this opinion in connection with the Credit Agreement
(the "CREDIT AGREEMENT") dated as of May 1, 1997 among Valero Energy
Corporation, New Valero, the banks listed on the signature pages thereof, Morgan
Guaranty Trust Company of New York, as Administrative Agent, and Bank of
Montreal, as Syndication Agent and Issuing Bank. Terms defined in the Credit
Agreement are used herein as therein defined. This opinion is being rendered to
you at the request of my client pursuant to Section 4.01(c) of the Credit
Agreement.
I have examined (i) an executed copy of each Financing Document and (ii)
originals or copies, certified or otherwise identified to my satisfaction, of
such documents, corporate records, certificates of public officials and other
instruments and have conducted such other investigations of fact and law as I
have deemed necessary or advisable for purposes of this opinion.
Upon the basis of the foregoing, I am of the opinion that
1. Each Obligor and each Guarantor is a corporation, partnership or other
legal entity duly organized, validly existing and in good standing under the
laws of
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its jurisdiction of organization and has all legal powers and all material
licenses, authorizations, consents and approvals required to carry on its
business as now conducted.
2. The execution, delivery and performance by each Obligor and Guarantor
of the Financing Documents to which it is a party are within its legal powers,
have been duly authorized by all necessary legal action, require no action by or
in respect of, or filing with, any governmental body, agency or official (except
for any reports required to be filed by such Obligor or Guarantor with the
Securities and Exchange Commission (or any successor thereto) pursuant to the
Exchange Act) and do not contravene, or constitute a default under (i) any
provision of any agreement binding upon New Valero or its Subsidiaries under
which Debt may be incurred, (ii) the material terms of any other material
agreement, judgment, injunction, order, decree or other instrument binding upon
New Valero or any of its Subsidiaries or (iii) result in the creation of
imposition of any Lien on any assets of New Valero or any of its Subsidiaries.
3. Upon the effectiveness of the Valero Assignment Agreement in accordance
with its terms, each Financing Document will constitute a valid and binding
obligation of each Obligor or Guarantor party thereto, in each case enforceable
in accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, or similar laws affecting creditors' rights generally and by general
principles of equity.
4. Except as disclosed in the Old Valero Form 10-K or as may have been
disclosed to the banks in writing prior to the execution or delivery of the
Credit Agreement, there is no action, suit or proceeding pending against, or to
the best of my knowledge threatened against, New Valero or any of its
Subsidiaries before any court or arbitrator or any governmental body, agency or
official, in which there is a reasonable possibility of an adverse decision
which could reasonably be expected to materially adversely affect the business,
consolidated financial position or consolidated results of operations of New
Valero and its Consolidated Subsidiaries, considered as a whole, or which in any
manner draws into question the validity of the Credit Agreement or the Notes.
I am a member of the Bar of the State of Texas and the foregoing opinion
is limited to the laws of the State of Texas, the federal laws of the United
States and the General Corporation Law of the State of Delaware. I have assumed
for the purposes of providing my opinion in paragraph 3 that the laws of the
State of New York are the same as the laws of the State of Texas. I express no
opinion on the effect of Section 548 of the United States Bankruptcy Code or
comparable
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provisions of state law on the conclusion stated in paragraph 3 above as to the
Subsidiary Guarantee Agreement.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by any other person without my prior written consent.
Very truly yours,
E2-3
<PAGE>
EXHIBIT F-1
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE ADMINISTRATIVE AGENT
[Closing Date]
To the Banks and the Administrative Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
We have participated in the preparation of the Credit Agreement (the
"CREDIT AGREEMENT") dated as of May 1, 1997 among Valero Energy Corporation, a
Delaware corporation ("OLD VALERO"), Valero Refining and Marketing Company ("NEW
VALERO" and, together with Old Valero, the "OBLIGORS"), the banks listed on the
signature pages thereof (the "BANKS"), Morgan Guaranty Trust Company of New
York, as Administrative Agent (the "ADMINISTRATIVE AGENT"), and Bank of
Montreal, as Syndication Agent and Issuing Bank, and have acted as special
counsel for the Administrative Agent for the purpose of rendering this opinion
pursuant to Section 4.01(d) of the Credit Agreement. Terms defined in the Credit
Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates of public
officials and other instruments and have conducted such other investigations of
fact and law as we have deemed necessary or advisable for purposes of this
opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The execution, delivery and performance by each Obligor of the Credit
Agreement and by Old Valero of its Notes are within such Obligor's corporate
powers and have been duly authorized by all necessary corporate action.
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2. The Credit Agreement constitutes a valid and binding agreement of each
Obligor and each Note of Old Valero constitutes a valid and binding obligation
of Old Valero, in each case enforceable in accordance with its terms, except as
the same may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and by general principles of equity.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York, the federal laws of the
United States of America and the General Corporation Law of the State of
Delaware. In giving the foregoing opinion, we express no opinion as to the
effect (if any) of any law of any jurisdiction (except the State of New York) in
which any Bank is located which limits the rate of interest that such Bank may
charge or collect.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by any other person without our prior written consent.
Very truly yours,
F1-2
<PAGE>
EXHIBIT F-2
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE ADMINISTRATIVE AGENT
[Assumption Date]
To the Banks and the Administrative Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
We have participated in the preparation of the Credit Agreement (the
"CREDIT AGREEMENT") dated as of May 1, 1997 among Valero Energy Corporation, a
Delaware corporation ("OLD VALERO"), Valero Refining and Marketing Company ("NEW
VALERO and, together with Old Valero, the "BORROWERS"), the banks listed on the
signature pages thereof (the "BANKS"), Morgan Guaranty Trust Company of New
York, as Administrative Agent (the "ADMINISTRATIVE AGENT"), and Bank of
Montreal, as Syndication Agent and Issuing Bank, and have acted as special
counsel for the Administrative Agent for the purpose of rendering this opinion
pursuant to Section 4.01(d) of the Credit Agreement. Terms defined in the Credit
Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates of public
officials and other instruments and have conducted such other investigations of
fact and law as we have deemed necessary or advisable for purposes of this
opinion.
Upon the basis of the foregoing, we are of the opinion that, upon the
effectiveness of the Valero Assignment Agreement in accordance with its terms,
each of the Credit Agreement and the Valero Assignment Agreement will constitute
a valid and binding agreement of New Valero, and each Note of New Valero will
constitute a valid and binding obligation of New Valero, in each case
enforceable in accordance with its terms, except as the same may be limited by
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bankruptcy, insolvency or similar laws affecting creditors' rights generally and
by general principles of equity.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York, the federal laws of the
United States of America and the General Corporation Law of the State of
Delaware. In giving the foregoing opinion, we express no opinion as to the
effect (if any) of any law of any jurisdiction (except the State of New York) in
which any Bank is located which limits the rate of interest that such Bank may
charge or collect.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by any other person without our prior written consent.
Very truly yours,
F2-2
<PAGE>
EXHIBIT G
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of _________, 19__ among [ASSIGNOR] (the "ASSIGNOR"),
[ASSIGNEE] (the "ASSIGNEE"), VALERO ENERGY CORPORATION ("OLD VALERO"), VALERO
REFINING AND MARKETING COMPANY ("NEW VALERO") MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Administrative Agent (the "ADMINISTRATIVE AGENT") and BANK OF
MONTREAL, as Issuing Bank (the "ISSUING BANK").
W I T N E S E T H
WHEREAS, this Assignment and Assumption Agreement (the "AGREEMENT")
relates to the Credit Agreement dated as of May 1, 1997 among Old Valero, New
Valero, the Assignor and the other Banks party thereto, as Banks, the
Administrative Agent, the Syndication Agent party thereto and the Issuing Bank
(the "CREDIT AGREEMENT");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Loans to the Borrower in an aggregate principal amount at any
time outstanding not to exceed $__________;
WHEREAS, Committed Loans made to the Borrower by the Assignor under the
Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the rights
of the Assignor under the Credit Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $__________ (the "ASSIGNED AMOUNT"),
together with a corresponding portion of its outstanding Committed Loans, and
the Assignee proposes to accept assignment of such rights and assume the
corresponding obligations from the Assignor on such terms;
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<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Credit Agreement.
SECTION 2. Assignment. The Assignor hereby assigns and sells to the
Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount, and the Assignee hereby accepts such assignment
from the Assignor and assumes all of the obligations of the Assignor under the
Credit Agreement to the extent of the Assigned Amount, including the purchase
from the Assignor of the corresponding portion of the principal amount of the
Committed Loans made by the Assignor outstanding at the date hereof. Upon the
execution and delivery hereof by the Assignor, the Assignee, the Borrower, the
Issuing Bank and the Administrative Agent and the payment of the amounts
specified in Section 3 required to be paid on the date hereof (i) the Assignee
shall, as of the date hereof, succeed to the rights and be obligated to perform
the obligations of a Bank under the Credit Agreement with a Commitment in an
amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor
shall, as of the date hereof, be reduced by a like amount and the Assignor
released from its obligations under the Credit Agreement to the extent such
obligations have been assumed by the Assignee. The assignment provided for
herein shall be without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
date hereof in Federal funds the amount heretofore agreed between them. It is
understood that commitment and/or facility fees accrued to the date hereof are
for the account of the Assignor and such fees accruing from and including the
date hereof are for the account of the Assignee. Each of the Assignor and the
Assignee hereby agrees that if it receives any amount under the Credit Agreement
which is for the account of the other party hereto, it shall receive the same
for the account of such other party to the extent of such other party's interest
therein and shall promptly pay the same to such other party.
[SECTION 4. Consent of the Borrower and the Administrative Agent. This
Agreement is conditioned upon the consent of the Borrower, the Issuing Bank and
the Administrative Agent pursuant to Section 11.06(c) of the Credit Agreement.
The execution of this Agreement by New Valero, the Issuing Bank and the
Administrative Agent is evidence of this consent. Pursuant to Section 11.06(c)
the Borrower agrees to execute and deliver a Note payable to the order of the
Assignee to evidence the assignment and assumption provided for herein.]
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<PAGE>
SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation
or warranty in connection with, and shall have no responsibility with respect
to, the solvency, financial condition, or statements of the Borrower, or the
validity and enforceability of the obligations of the Borrower in respect of the
Credit Agreement or any Note. The Assignee acknowledges that it has,
independently and without reliance on the Assignor, and based on such documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and will continue to be responsible for
making its own independent appraisal of the business, affairs and financial
condition of New Valero.
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date first above
written.
[ASSIGNOR]
By _________________________
Name:
Title:
[ASSIGNEE]
By _________________________
Name:
Title:
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<PAGE>
[VALERO ENERGY CORPORATION]
By __________________________
Name:
Title:
[VALERO REFINING AND MARKETING
COMPANY]
By __________________________
Name:
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Administrative Agent
By __________________________
Name:
Title:
BANK OF MONTREAL, as Issuing Bank
By __________________________
Name:
Title:
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<PAGE>
EXHIBIT H
[FORM OF BORROWING NOTICE]
Date ___________
Morgan Guaranty Trust Company of New York,
as agent
under the Credit Agreement
referred to below
Ladies and Gentlemen:
The undersigned (the "BORROWER") refers to the Credit Agreement dated as
of May 1, 1997 (as the same may be amended) from time to time, the "CREDIT
AGREEMENT"), among Valero Energy Corporation, Valero Refining and Marketing
Company, the Banks party thereto, Morgan Guaranty Trust Company of New York, as
Administrative Agent, and Bank of Montreal, as Syndication Agent and Issuing
Bank. Capitalized terms used but not defined herein have the meaning assigned to
such terms in the Credit Agreement. The Borrower hereby notifies you, pursuant
to Section [2.02] [2.03(f)] of the Credit Agreement, of its election to make the
following Borrowing:
1. Amount: _________________________________
2. Type of Borrowing: _________________________________
3. Date of Borrowing: _________________________________
4. Interest Period for
Fixed Rate Borrowing: _________________________________
5. Due Date: _________________________________
[NAME OF BORROWER]
By ___________________________
Name:
Title:
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<PAGE>
EXHIBIT I
FORM OF SUBSIDIARY GUARANTEE AGREEMENT
Guarantee Agreement dated as of _________, 1997 (as amended from time to
time, this "GUARANTEE") by the undersigned Subsidiaries of [Valero Energy
Corporation, formerly known as] Valero Refining and Marketing Company ("NEW
VALERO"), for the benefit of the Banks, Issuing Bank and Agents from time to
time party to the Credit Agreement (as defined below):
WHEREAS, New Valero has entered into a Credit Agreement dated as of
________________, among New Valero, [the corporation formerly known as] Valero
Energy Corporation ("OLD VALERO") and the Banks, Issuing Bank, Administrative
Agent and Syndication Agent referred to therein (as such agreement may be
amended from time to time, the "CREDIT AGREEMENT") pursuant to which New Valero
desires to borrow funds, maintain certain letters of credit outstanding on the
date hereof and obtain additional letters of credit, all on the terms and
conditions set forth therein;
WHEREAS, such Banks and the Issuing Bank are not willing to make loans or
maintain, issue or participate in letters of credit under the Credit Agreement
unless New Valero causes each of its Material Subsidiaries to guarantee New
Valero's performance of its obligations under the Credit Agreement;
NOW, THEREFORE, each of the undersigned Subsidiaries of New Valero agrees
as follows:
SECTION 1. Definitions. Terms defined in the Credit Agreement and not
otherwise defined herein have, as used herein, the respective meanings provided
for therein.
SECTION 2. Representations and Warranties. Each undersigned
Guarantor represents and warrants that:
(a) It is a corporation, partnership or other legal entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, and has all legal powers and all material governmental licenses,
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<PAGE>
authorizations, consents and approvals required to carry on its business as now
conducted.
(b) The execution, delivery and performance of this Guarantee by it are
within its legal powers, have been duly authorized by all necessary legal
action, require no action by or in respect of, or filing with, any governmental
body, agency or official and do not contravene, or constitute a default under,
any provision of applicable law or regulation or of its organizational documents
or of any agreement, judgment, injunction, order, decree or other instrument
binding upon it or any of its Subsidiaries or result in the creation or
imposition of any Lien on any asset of such Guarantor or any of its
Subsidiaries.
(c) This Guarantee constitutes a valid and binding agreement of such
Guarantor, enforceable in accordance with its terms.
SECTION 3. The Guarantee. Each Guarantor unconditionally and irrevocably
guarantees the full and punctual payment of all present and future indebtedness
and other obligations of New Valero evidenced by or arising under any Financing
Document as and when the same shall become due and payable, whether at maturity
or by declaration or otherwise, according to the terms hereof and thereof
(including any interest which accrues on any of the foregoing obligations after
the commencement of any case, proceeding or other action relating to the
bankruptcy, insolvency or reorganization of New Valero, whether or not allowed
or allowable as a claim in any such proceeding). If New Valero fails punctually
to pay any indebtedness or other obligation guaranteed hereby, each Guarantor
unconditionally agrees to cause such payment to be made punctually as and when
the same shall become due and payable, whether at maturity or by declaration or
otherwise, and as if such payment were made by New Valero.
SECTION 4. Guarantee Unconditional. Except as provided in Section 8, the
obligations of each undersigned Guarantor under this Guarantee shall be
unconditional and absolute and, without limiting the generality of the
foregoing, shall not be released, discharged or otherwise affected by:
(a) any extension, renewal, settlement, compromise, waiver or release in
respect of any obligation of New Valero or any other Guarantor under any
Financing Document by operation of law or otherwise;
(b) any modification, amendment or waiver of or supplement to any
Financing Document;
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<PAGE>
(c) any release, impairment, non-perfection or invalidity of any direct or
indirect security, or of any guarantee or other liability of any third party,
for any obligation of New Valero or any other Guarantor under any Financing
Document;
(d) any change in the corporate existence, structure or ownership of New
Valero or any of its Subsidiaries, or any insolvency, bankruptcy, reorganization
or other similar proceeding affecting New Valero or any of its Subsidiaries or
its assets, or any resulting release or discharge of any obligation of New
Valero or any of its Subsidiaries contained in any Financing Document;
(e) the existence of any claim, set-off or other rights which such
Guarantor, New Valero or any other Guarantor may have at any time against any
Bank, the Issuing Bank, any Agent or any other Person, whether or not arising in
connection with this Guarantee, provided that nothing herein shall prevent the
assertion of any such claim by separate suit or compulsory counterclaim;
(f) any invalidity or unenforceability relating to or against New Valero
or any other Guarantor for any reason of any Financing Document, or any
provision of applicable law or regulation purporting to prohibit the payment by
New Valero or any other Guarantor of any amount payable by it under any
Financing Document; or
(g) any other act or omission to act or delay of any kind by New Valero,
any Bank, the Issuing Bank, any Agent, any other Guarantor or any other Person
or any other circumstance whatsoever that might, but for the provisions of this
Section 4, constitute a legal or equitable discharge or defense to of such
Guarantor's obligations under this Guarantee.
SECTION 5. Discharge Only Upon Payment in Full; Reinstatement in Certain
Circumstances. Each undersigned Guarantor's obligations under this Guarantee
constitute a continuing guarantee and shall remain in full force and effect
until the Commitments shall have terminated and the principal of and interest on
the Notes and all other amounts payable by New Valero under the Financing
Documents shall have been paid in full. If at any time any amount payable by New
Valero under any Financing Document is rescinded or must be otherwise restored
or returned upon the insolvency, bankruptcy or reorganization of New Valero or
otherwise, each undersigned Guarantor's obligations under this Guarantee with
respect to such payment shall be reinstated at such time as though such payment
had become due but had not been made at such time.
SECTION 6. Waiver. Each undersigned Guarantor irrevocably waives
acceptance hereof, presentment, demand, protest and any notice not provided for
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<PAGE>
herein, as well as any requirement that at any time any action be taken by any
Person against New Valero or any other Person or against any security.
SECTION 7. Subrogation and Contribution. Upon making any payment hereunder
with respect to the obligations of New Valero, each undersigned Guarantor shall
be subrogated to the rights of the payee against New Valero with respect to such
payment, and shall also have a right of contribution in respect of such payment
against all other Guarantors pro rata among same based on their respective net
fair value as enterprises; provided that such Guarantor shall not enforce any
payment by way of subrogation against New Valero or contribution against any
other Guarantor so long as any Loans or Unpaid Drawings under the Credit
Agreement or any amount payable by New Valero under any Financing Document
remains unpaid.
SECTION 8. Limit of Liability. It is the desire and intent of the
undersigned Guarantors and the beneficiaries of this Guarantee that this
Guarantee be enforced to the fullest extent permissible under the laws applied
in each jurisdiction in which enforcement is sought. If and to the extent that
the obligations of any Guarantor under this Guarantee would, in the absence of
this sentence, be adjudicated to be invalid or unenforceable because of any
applicable state or federal law relating to fraudulent conveyances or transfers,
then the amount of such Guarantor's liability hereunder in respect of the
obligations of New Valero guaranteed hereunder shall be deemed to be reduced ab
initio to that maximum amount which would be permitted without causing such
Guarantor's obligations hereunder to be subject to avoidance under Section 548
of the United States Bankruptcy Code or any comparable provisions of any
applicable state law.
SECTION 9. Notices. Notices and other communications hereunder shall be
given in writing in the manner specified in or pursuant to Section 11.01 of the
Credit Agreement.
SECTION 10. Governing Law; Submission to Jurisdiction. This Guarantee
shall be governed by and construed in accordance with the laws of the State of
New York. Each Guarantor hereby (i) submits to the nonexclusive jurisdiction of
the United States District Court for the Southern District of New York and of
any New York State court sitting in New York City for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby and (ii) irrevocably waives, to the fullest extent permitted
by law, any objection which they may now or hereafter have to the laying of the
venue of any such proceeding brought in such a court and any claim that any such
proceeding brought in such a court has been brought in an inconvenient forum;
provided, however, that nothing in this Section 11 is intended to waive the
right of
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<PAGE>
any party to remove any such action or proceeding commenced in any such New York
State court to an appropriate New York Federal court to the extent the basis for
such removal exists under applicable law.
SECTION 11. WAIVER OF JURY TRIAL. EACH GUARANTOR HEREBY IRREVOCABLY WAIVES
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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<PAGE>
IN WITNESS WHEREOF, each undersigned Guarantor has caused this Guarantee
to be duly executed by its authorized officer as of the day and year first above
written.
[NAME OF GUARANTOR]
By:_________________________________
Name:
Title:
[NAME OF GUARANTOR]
By:_________________________________
Name:
Title:
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<PAGE>
EXHIBIT J
VALERO ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of ____________ among VALERO ENERGY CORPORATION ("OLD
VALERO"), VALERO REFINING AND MARKETING COMPANY ("NEW VALERO") and MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "ADMINISTRATIVE
AGENT").
W I T N E S S E T H
WHEREAS, Valero Energy Corporation, a Delaware corporation ("OLD VALERO"),
PG&E Corporation, a California corporation ("PG&E") and PG&E Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of PG&E
("MERGER SUB") have entered into an Agreement and Plan of Merger dated as of
January 31, 1997 (the "MERGER AGREEMENT"), pursuant to which Merger Sub will
merge with and into Old Valero (the "MERGER") and Old Valero will become a
wholly-owned subsidiary of PG&E; and
WHEREAS, pursuant to the Distribution Agreement (as defined in the Merger
Agreement), Old Valero and Valero Refining and Marketing Company, a Delaware
corporation and a wholly-owned subsidiary of Old Valero ("NEW VALERO"), will
consummate the transactions contemplated in Article II of the Distribution
Agreement, including the distribution as a dividend by Old Valero to its
shareholders of all capital stock of New Valero (the "SPIN-OFF"); and
WHEREAS, following the consummation of the Spin-Off and the Merger, New
Valero intends to change its name to "VALERO ENERGY CORPORATION"; and
WHEREAS, Old Valero and Salomon Inc have entered into a Purchase Agreement
dated as of April 22, 1997 (the "PURCHASE AGREEMENT"), pursuant to which Old
Valero will acquire all outstanding capital stock of Basis Petroleum Inc., a
Texas corporation ("BASIS"), all on the terms and conditions therein set forth
(the "ACQUISITION"); and
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WHEREAS, after the consummation of the Acquisition and prior to the
Spin-Off, Old Valero will contribute all outstanding capital stock of Basis to
New Valero as a contribution to capital (the "Contribution"); and
WHEREAS, Loans made to Old Valero by the Banks under the Credit Agreement
in the aggregate principal amount of $__________ are outstanding at the date
hereof; and
WHEREAS, Old Valero proposes to assign to New Valero all of the rights and
obligations of Old Valero under the Credit Agreement and New Valero proposes to
accept assignment of such rights and assume the corresponding obligations from
Old Valero on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Credit Agreement.
SECTION 2. Assignment. Old Valero hereby assigns to New Valero all of the
rights of Old Valero under the Credit Agreement and New Valero hereby accepts
such assignment from Old Valero and assumes all of the obligations of Old Valero
under the Credit Agreement, including, without limitation, the Loans. Upon the
effectiveness hereof, (i) New Valero hereby succeeds to the rights and is
obligated to perform the obligations of Old Valero under the Credit Agreement
and the Notes, and Old Valero is hereby released from all liabilities and
obligations thereunder and (ii) New Valero is the Borrower under the Credit
Agreement and Old Valero ceases to be a party thereto.
SECTION 3. Representations and Warranties. Old Valero and New Valero each
represent and warrant with respect to itself to the Administrative Agent and
each of the Banks that (i) all representations and warranties made by it in the
Credit Agreement are true on and as of the Assumption Date and (ii) all
conditions to effectiveness of the Assumption set forth in Section 4.03 of the
Credit Agreement have been satisfied.
SECTION 4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 5. Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This
J-2
<PAGE>
Agreement shall become effective in accordance with Section 4.03 of the Credit
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date first above
written.
VALERO ENERGY CORPORATION
By_________________________
Title:
VALERO REFINING AND MARKETING
COMPANY
By__________________________
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK,
as Administrative Agent
By__________________________
Title:
J-3
<PAGE>
EXHIBIT 5
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, Delaware 19899-1347
May 7, 1997
Valero Refining and Marketing Company
530 McCullough Avenue
San Antonio, Texas 98215
Ladies and Gentlemen:
You have requested our opinion in connection with the registration under
the Securities Act of 1933, as amended (the "Act") of up to 57,000,000 shares of
common stock, par value $0.01 per share (the "Common Stock"), of Valero Refining
and Marketing Company, a Delaware corporation (the "Company"), and the
associated rights (the "Rights") on Form S-1 (the "Registration Statement").
In connection with your request for our opinion, the Company has
provided to us and we have reviewed drafts of the Restated Certificate of
Incorporation of the Company (the "Restated Certificate"), the by-laws of the
Company, and the Rights Agreement (the "Rights Agreement") between the Company
and Harris Trust and Savings Bank (the "Rights Agent") relating to the Rights.
We have not reviewed any other documents or agreements of or relating to the
Company in connection with your request, and we have assumed that nothing
contained in any such document that we have not
<PAGE>
Valero Refining and Marketing Company
May 7, 1997
Page 2
reviewed is contrary to or inconsistent with the opinions expressed herein. We
have also assumed the conformity to original documents of all documents
submitted to us as copies and the conformity to final documents of all documents
submitted to us as drafts.
We have assumed the following facts in connection with the opinion
rendered herein: Valero Energy Corporation, a Delaware corporation ("Valero"),
currently holds all of the outstanding shares of Common Stock, which shares were
duly and validly authorized and issued. The Company will duly authorize and file
the Restated Certificate with the Secretary of State of Delaware (the "Secretary
of State"), and, following the effectiveness of such filing, duly authorize and
file with the Secretary of State a certificate that of amendment (the
"Amendment") to the Restated certificate will cause all of the then-outstanding
shares of the Common Stock to be subdivided into a number of shares of Common
Stock (the "Shares") equal to the number of then-outstanding shares of the
Common Stock of Valero (the "Valero Common Stock"). In connection therewith, the
Company and the Rights agent will duly authorize, execute and deliver the Rights
Agreement and the Company will cause one Right to be distributed to Valero for
each of the Shares following the effectiveness of the Amendment. The Board of
Directors of Valero will then duly declare and pay a dividend (the "Dividend")
consisting of one Share and one associated Right for each outstanding share of
Valero Common Stock. We have assumed that Valero will have sufficient surplus,
as that term is used in
<PAGE>
Valero Refining and Marketing Company
May 7, 1997
Page 3
Section 154 of the Delaware General Corporation Law, to declare and pay the
Dividend.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is out opinion that, following the payment of the
Dividend, including the distribution of certificates in proper form representing
the Shares and the Rights to the holders of Valero Common Stock, the Shares will
be validly issued, fully paid and -non assessable and the Rights will be duly
and validly authorized by all necessary corporate action.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Validity of
Securities" in the Prospectus. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section
7, of the Act.
Very truly yours
/s/ Morris, Nichols, Arsht & Tunnell
<PAGE>
EXHIBIT 10.1
VALERO REFINING AND MARKETING COMPANY
EXECUTIVE INCENTIVE BONUS PLAN
ADOPTED APRIL 23, 1997
<PAGE>
EXECUTIVE INCENTIVE BONUS PLAN
TABLE OF CONTENTS
-----------------
Section Page
- ------- ----
I Definitions...................................................... 1
II Participation.................................................... 2
III Bonus Determination.............................................. 2
IV Bonus Amounts.................................................... 2
V Bonus Payouts.................................................... 3
VI Administration................................................... 4
<PAGE>
INTRODUCTION
The Valero Refining and Marketing Company Executive Incentive Bonus Plan
(hereinafter referred to as the "Plan") was established for the purpose of
providing bonus compensation to key employees of Valero Refining and Marketing
Company and its subsidiaries (hereinafter collectively referred to as the
"Company"). The Company intends and desires to create individual performance
incentive by providing bonus compensation awards based upon individual
contributions to Company profitability by key employees. Such bonus
compensation is intended to encourage levels of individual performance that will
assure continued Company profitability. It is further intended that when added
to other forms of compensation the bonus compensation awards will result in
total compensation to key employees in amounts seen as competitive when Company
performance is compared to peer organizations.
SECTION I - DEFINITIONS
---------- -----------
The masculine gender, where appearing in the Plan will be deemed to include
the feminine gender and the singular may include the plural, unless the context
clearly indicates the contrary.
1.1 "Bonus Targets" shall mean the dollar value of an award established to
represent a normal or average bonus payment determined through survey analysis.
1.2 "Committee" shall mean the Compensation Committee who shall administer
the Plan.
1.3 "Company" shall include Valero Refining and Marketing Company and any
Affiliated Company.
1.4 "Compensation Committee" shall mean the Compensation Committee of the
Board of Directors of Valero Refining and Marketing Company.
1.5 "Fair Market Value" shall mean the average of the "high" and "low"
reported sales price per share of the Company's common stock as reported in the
New York Stock Exchange--Composite Transactions listing as of the relevant
measuring date, or if there are no sales on the New York Stock Exchange on that
measuring date, then as of the next following day on which there were sales.
1.6 "Key Employee(s)" shall mean any person employed by the Company having
responsibilities that impact Company operations and activities.
1.7. "Participant" means an employee who is designated pursuant to Section
2.1 as a participant in the Plan.
1.8 "Peer Organizations" shall mean those entities, designated from time
to time, with which the Company competes for employee talent and/or business
markets.
1.9 "Performance Measures" shall mean financial or operational statistical
indicators, designated from time to time, with which the level of success of
Company operations can be identified.
1
<PAGE>
1.10 "Salary Range Midpoints" shall mean the established dollar value,
adjusted from time to time, that represents the median of a range of dollar
values assigned to separately identifiable jobs within the Company through the
Company's adopted system of job evaluation and pricing.
SECTION II - PARTICIPATION
-------------
2.1 The Compensation Committee shall determine from recommendations
submitted by the Chief Executive Officer, from time to time, those key employees
of the company who are to be participants (Participants) in the Plan.
Participants shall be restricted to key employees of the Company having major
responsibility for directing Company operations and activities.
2.2 The Designation of employees of the Company as Participants under the
Plan shall be in the sole discretion of the Compensation Committee, and no
employee of the Company will have the right to require the Committee to make him
or her a Participant or to allow him or her to remain a Participant under the
Plan.
SECTION III - BONUS DETERMINATION
-------------------
3.1 The Compensation Committee shall determine, based upon a review of
various Company financial, operational or other performance measures, the
suitability of the payment of bonuses.
3.11 Company performance measures used by the Committee to determine
appropriateness of bonus payments will be selected by the Committee and may
vary from time to time.
3.12 Selected Company performance measures may be compared to similar
measures of peer organizations or compared to past Company results.
3.13 The Committee may approve the payment of bonuses when the review
of performance measures indicates Company operating results are at levels
that demonstrate improved or continued outstanding investment return to
stakeholders of the Company.
3.2 Annual reviews of Company performance measures and a determination of
bonus payments shall be conducted by the Committee.
3.21 The Committee may, from time to time, consider bonus payments
more frequently than annually in instances whereby outstanding individual
performance by key employee(s) warrant recognition.
3.3 The Compensation Committee may declare and allocate, and the Company
may pay, bonuses prior to the end of the plan year based on the estimated or
expected financial performance of the Company for such plan year.
SECTION IV - BONUS AMOUNTS
-------------
4.1 The Compensation Committee shall establish bonus targets for various
positions within the Company relative to position accountability, job knowledge,
problem solving requirements, and reporting relationship.
2
<PAGE>
4.11 Each bonus target shall be calculated using a percent of the
established Salary Range Midpoints of the positions occupied by
participants.
4.12 Percents used in calculating bonus targets shall be determined
through comparative analyses of bonuses paid to employees of peer
organizations who utilize similar compensation methodologies and through
analysis of the position hierarchy of the Company, so as to establish bonus
targets competitive with industry practice by job size.
4.2 Established bonus targets will be used as guidelines by the Chief
Executive Officer of the Company to recommend, from time to time, incentive
bonus awards for key employees to the Committee.
4.21 The established bonus target shall act as the norm for a range
of possible bonus awards.
4.22 Based upon an evaluation of Company financial performance and
individual contribution to Company performance, the Chief Executive Officer
of the Company will determine if recommended bonus awards shall be less
than, equal to or greater than the established bonus target.
4.3 Based upon recommendations furnished the Committee by the Chief
Executive Officer of the Company and results of Company performance measure
comparisons the Committee shall approve, delete or adjust recommended bonus
awards.
SECTION V - BONUS PAYOUTS
-------------
5.1 Payment of bonuses shall occur as soon as practicable after Committee
approval or on a date as directed by the Committee.
5.2 Bonuses payable under the Plan shall be in the form of cash to be paid
in a single lump-sum or in part or in whole in common stock of the Company.
5.3 With respect to Plan bonuses payable in part or in whole in shares of
common stock of the Company ("Shares"), a Participant may pay all or part of the
amount of any taxes required to be collected or withheld by the Company upon
payment of the Participant's bonus (the "Tax Payment") by electing, before the
time of payment of the bonus, to have the Company withhold from the number of
Shares otherwise deliverable under the bonus a number of Shares having a Fair
Market Value on the date of the bonus not exceeding the amount of the Tax
Payment.
5.4 The Committee may approve the payment of bonuses to be deferred and
paid in whole at a later date or in installments over a period of time. The
length of time of deferral or installment period will be determined at the
discretion of the Committee.
3
<PAGE>
SECTION VI - ADMINISTRATION
--------------
6.1 This Plan shall be administered by the Compensation Committee so long
as the Compensation Committee is composed solely of two or more "Non-Employee
Directors" (as defined in Rule 16b-3 under the Exchange Act). In the event the
Compensation Committee shall fail to meet the foregoing criteria, then
additional or different persons shall be appointed by the Board of Directors for
purposes of administering this Plan so that the committee administering this
Plan shall be composed solely of two or more Non-Employee Directors.
6.2 The Compensation Committee is empowered to:
6.21 Make all determinations and computations concerning the amounts
to which any Participant or his beneficiary is entitled under the Plan;
6.22 Determine all questions relating to the eligibility of
Participants;
6.23 Make rules and regulations for the administration of the Plan
which are not inconsistent with the terms and provisions hereof;
6.24 Construe all terms, provisions, conditions and limitations of
the Plan in good faith. All such determinations shall be final and
conclusive on all parties at interest;
6.25 Make equitable adjustments for any mistakes or errors in the
administration of the Plan during the Plan Year or the preceding Plan Year,
and all such actions or determinations made by the Compensation Committee
in good faith shall not be subject to review;
6.26 Select, employ and compensate from time to time consultants,
accountants, attorneys and other agents and employees as the Compensation
Committee may deem necessary or advisable for the proper and efficient
administration of the Plan.
6.3 The foregoing list of express powers is not intended to be either
complete or exclusive, but the Compensation Committee shall, in addition, have
such powers, whether or not expressly authorized, that it may deem necessary,
desirable, advisable or proper for the supervision and administration of the
Plan. Except as otherwise specifically provided herein, the decision or
judgment of the Compensation Committee on any question arising hereunder in
connection with the exercise of any of its powers shall be final, binding and
conclusive upon all parties concerned.
6.4 The Compensation Committee shall have the responsibility of
authorizing payment to each eligible Participant and directing that such payment
be disbursed by the Company.
6.5 The Board of Directors may, at any time, amend or terminate the Plan.
Such amendments or terminations may be made without the consent of the
Participants.
4
<PAGE>
EXHIBIT 10.2
VALERO REFINING AND MARKETING COMPANY
EXECUTIVE STOCK INCENTIVE PLAN
Adopted April 23, 1997
<PAGE>
TABLE OF CONTENTS
SECTION 1. PURPOSE. .............................................. 1
SECTION 2. DEFINITIONS. .......................................... 1
SECTION 3. ADMINISTRATION. ....................................... 3
SECTION 4. SHARES AND OTHER PROPERTY AVAILABLE FOR AWARDS. ....... 4
Shares Available ................................................ 4
----------------
Sources of Shares Deliverable Under Awards ....................... 4
------------------------------------------
Adjustments ...................................................... 4
-----------
Share Counting .................................................. 5
--------------
SECTION 5. ELIGIBILITY. .......................................... 6
SECTION 6. AWARDS. ............................................... 6
Options ......................................................... 6
-------
Exercise Price .................................................. 6
--------------
Incentive Stock Options ......................................... 6
-----------------------
Stock Appreciation Rights ....................................... 6
-------------------------
Grant Price ...................................................... 6
-----------
Other Terms and Conditions ...................................... 6
--------------------------
Restricted Stock ................................................ 6
----------------
Dividends ....................................................... 7
----------
Registration .................................................... 7
------------
Forfeiture ....................................................... 7
----------
Performance Awards .............................................. 7
------------------
Payment of Performance Awards .................................... 8
-----------------------------
Stock Compensation .............................................. 8
------------------
Other Stock-Based Awards ......................................... 8
------------------------
Exercise of Option or SAR Awards ................................. 8
--------------------------------
Notice ........................................................... 8
------
Payment .......................................................... 8
-------
Tax Payment Election ............................................ 8
--------------------
Payment with Stock .............................................. 9
------------------
Valuation ....................................................... 9
----------
Rights as Stockholder ........................................... 9
---------------------
Certain Awards under the VEC ESIP ................................ 9
---------------------------------
General .......................................................... 10
-------
Grants ........................................................... 10
------
Forms of Payment by Company ...................................... 10
---------------------------
Limits on Transfer ............................................... 10
------------------
i
<PAGE>
Term of Awards .................................................. 11
--------------
Share Certificates .............................................. 11
------------------
Delivery of Shares or Other Securities and Payment of Consideration 11
-------------------------------------------------------------------
Termination of Employment ........................................ 11
-------------------------
Award Agreements ................................................. 12
----------------
Deferral of Receipt .............................................. 12
-------------------
SECTION 7. AMENDMENT AND TERMINATION. ............................ 12
Amendments to the Plan .......................................... 12
----------------------
Amendments to Awards ............................................ 13
--------------------
Unusual or Nonrecurring Events .................................. 13
------------------------------
SECTION 8. CHANGE OF CONTROL. ..................................... 13
Effect ........................................................... 13
------
Defined .......................................................... 13
-------
Actions of Committee ............................................. 14
--------------------
SECTION 9. GENERAL PROVISIONS. ................................... 14
No Rights to Awards .............................................. 14
-------------------
Delegation ....................................................... 14
----------
Withholding ...................................................... 15
-----------
No Limit on Other Compensation Arrangements ...................... 15
-------------------------------------------
No Right to Employment ........................................... 15
----------------------
Governing Law .................................................... 15
-------------
Severability .................................................... 15
------------
NYSE Listing and Other Laws and Regulations ...................... 15
-------------------------------------------
No Trust or Fund Created ......................................... 15
------------------------
No Fractional Shares ............................................. 15
--------------------
Headings ......................................................... 16
--------
Construction ..................................................... 16
------------
SECTION 10. EFFECTIVE DATE OF THE PLAN. .......................... 16
SECTION 11. TERM OF THE PLAN. .................................... 16
ii
<PAGE>
EXECUTIVE STOCK INCENTIVE PLAN
SECTION 1. PURPOSE.
The purposes of this Executive Stock Incentive Plan (the "Plan") are to
promote the interests of the Company and its stockholders by (i) attracting and
retaining executive personnel and other key employees of the Company and its
affiliates; (ii) motivating these employees by using performance-related
incentives to achieve longer range performance goals; and (iii) enabling these
employees to participate in the long-term growth and financial success of the
Company.
SECTION 2. DEFINITIONS.
As used in the Plan, the following terms shall have the meanings set forth
below:
(a) "Affiliate" shall mean (i) any entity that, directly or through one or more
intermediaries, is controlled by the Company and (ii) any entity in which
the Company has a significant equity interest, as determined by the
Committee.
(b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock,
Performance Award, Stock Compensation Award or Other Stock-Based Award.
(c) "Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Change of Control" is defined in Section 8(b) of the Plan.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time.
(g) "Committee" or "Compensation Committee" shall mean the Compensation
Committee of the Board as further described in Section 3 of the Plan.
(h) "Company" shall mean Valero Refining and Marketing Company, a Delaware
corporation incorporated in 1981 under the name "Saber Energy, Inc." and
expected to be renamed "Valero Energy Corporation" following the
Distribution.
(i) "Distribution Agreement" shall mean the Agreement and Plan of Distribution,
entered into between VEC and the Company, in connection with the
transactions contemplated by the Merger Agreement. "Distribution" and "Time
of Distribution" shall have the meanings specified in the Distribution
Agreement.
(j) "Employee" shall mean any employee of the Company or of any Affiliate.
(k) "EBA" shall mean the Employee Benefits Agreement, entered into between the
Company and VEC, in connection with the transactions contemplated by the
Merger Agreement.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
1
<PAGE>
(m) "Exercise Notice" is defined in Section 6(h) of the Plan.
(n) "Fair Market Value" shall mean the average of the "high" and "low" reported
sales price per Share (as reported in the NYSE - Composite Transactions
listing) as of the relevant measuring date, or if there are no sales on the
NYSE on that measuring date, then as of the next following day on which
there were sales.
(o) "Incentive Stock Option" shall mean an option granted under Section 6(a) of
the Plan that is intended to meet the requirements of Section 422 of the
Code or any successor provision thereto.
(p) "Merger Agreement" shall mean the Agreement and Plan of Merger, dated as of
January 31, 1997, between VEC, PG&E Corporation and PG&E Acquisition
Corporation.
(q) "Non-Qualified Stock Option" shall mean an option granted under Section 6(a)
of the Plan that is not intended to be an Incentive Stock Option.
(r) "Notice Date" is defined in Section 6(h) of the Plan.
(s) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
(t) "Other Stock-Based Award" shall mean any right granted under Section 6(f) of
the Plan.
(u) "Participant" shall mean any Employee granted an Award under the Plan.
(v) "Performance Award" shall mean any right granted under Section 6(d) of the
Plan.
(w) "Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or
political subdivision thereof or other entity.
(x) "Ratio" shall mean the amount obtained by dividing the average of the daily
high and low trading prices on the New York Stock Exchange ("NYSE") for the
VEC Common Stock on each of the 15 trading days prior to the ex-dividend
date for the Distribution by the average of the daily high and low trading
prices on the NYSE for the Company's Shares on each of the 15 trading days
beginning with either (a) in the event the Company's Shares trade on a
"when-issued" basis prior to the Time of Distribution, the ex-dividend date
for the Distribution, or (b) in the event the Company's Shares do not trade
on a "when-issued" basis prior to the Time of the Distribution, the Time of
Distribution.
(y) "Restricted Stock" shall mean any Share, prior to the lapse of restrictions
thereon, granted under Section 6(c) of the Plan.
(z) "Rights Agreement" shall mean the Rights Agreement, dated as of June 18,
1997, between the Company and Harris Trust and Savings Bank, as Rights
Agent.
(aa) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the
Exchange Act, or any successor rule or regulation thereto as in effect from
time to time.
2
<PAGE>
(bb) "SAR" or "stock appreciation right" shall mean the right, subject to the
provisions of this Plan, to receive a payment in cash equal to the
difference between the specified exercise price of the SAR and the Fair
Market Value of one Share.
(cc) "SEC" shall mean the Securities and Exchange Commission.
(dd) "Settlement Date" is defined in Section 6(h) of the Plan.
(ee) "Share" or "Shares" shall mean the common stock of the Company, $0.01 par
value, and other securities or property that may become the subject of
Awards or become subject to Awards pursuant to an adjustment made under
Section 4(b) of the Plan.
(ff) "Stock Compensation" shall mean any right granted under Section 6(e) of the
Plan.
(gg) "Tax Payment" is defined in Section 6(h) of the Plan.
(hh) "VEC" shall mean Valero Energy Corporation, a Delaware corporation
incorporated in 1955 under the name "Coastal States Gas Producing Company"
and, at the date hereof, the parent company of the Company.
(ii) "VEC Common Stock" shall mean the Common Stock, $1.00 par value, of VEC.
SECTION 3. ADMINISTRATION.
The Plan shall be administered by a committee composed solely of two or more
"Non-Employee Directors" (as defined in Rule 16b-3) of the Company, which
Committee shall be, except as hereinafter set forth, the Compensation Committee.
In the event that the membership of the Compensation Committee shall fail to
meet the foregoing criteria, then additional or different members of the Board
of Directors shall be appointed by the Board to act for purposes of
administering this Plan so that the committee administering this Plan shall
consist solely of two or more "Non-Employee Directors." Subject to the terms of
the Plan and applicable law, and in addition to other express powers and
authorizations conferred on the Committee by the Plan, the Committee shall have
authority to:
(i) designate Participants;
(ii) determine the type or types of Awards to be granted to an eligible
Employee;
(iii) determine the number of Shares to be covered by, or with respect to
which payments, rights, or other matters are to be calculated in
connection with, Awards;
(iv) determine the terms and conditions of any Award and any subsequent
amendments thereto;
(v) determine to what extent and under what circumstances Awards may be
settled or exercised in cash, Shares, other securities, other Awards or
other property, or canceled, forfeited, or suspended, and the method or
methods by which Awards may be settled, exercised, canceled, forfeited,
or suspended;
(vi) determine to what extent and under what circumstances any amount
payable (in whatever form) with respect to an Award may be deferred
either automatically or at the election of the holder thereof or the
Committee;
3
<PAGE>
(vii) provide for the acceleration of any time period relating to the
vesting, exercise or realization of any Award so that the Award may be
exercised or realized in full on or before a date fixed by the
Committee; the Committee may, in its discretion, include other
provisions and limitations in any Award Agreement as the Committee may
deem equitable and in the best interests of the Company;
(viii) interpret and administer the Plan and any instrument or agreement
relating to the Plan, including Award Agreements.
(ix) establish, amend, suspend, or waive any rules or regulations regarding
the Plan, and appoint any agent the Committee shall deem appropriate
for the proper administration of the Plan; and
(x) make any other determination and take any other action that the
Committee deems necessary or desirable for the administration of the
Plan. Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations, and other decisions with
respect to the Plan or any Award shall be within the sole discretion of
the Committee, may be made at any time, and shall be final, conclusive,
and binding upon all Persons, including the Company, any Affiliate, any
Participant, any holder or beneficiary of any Award, any stockholder of
the Company and any Employee.
SECTION 4. SHARES AND OTHER PROPERTY AVAILABLE FOR AWARDS.
(a) Shares Available. Subject to adjustment as provided in Section 4(c), the
number of Shares with respect to which Awards may be granted under the Plan
shall be 2,500,000. Not more than 1,000,000 of the Shares available for Awards
shall be issued as Restricted Stock. The maximum aggregate number of Shares
that may be awarded to any one Participant during any calendar year shall not
exceed 500,000 such Shares.
(b) Sources of Shares Deliverable Under Awards. Any Shares delivered
pursuant to an Award may consist, in whole or in part, of authorized and
unissued Shares or treasury Shares.
(c) Adjustments. (i) If all or any portion of an Award vests or is
exercised subsequent to any stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, spin-off or separation, reorganization,
liquidation or other similar event (any one of which being hereafter referred to
as a "Reorganization Event"), as a result of which shares or other securities of
any class or rights shall be issued in respect of outstanding Shares, or Shares
shall be changed into the same or a different number of shares of the same or
another class or classes or other securities, the person exercising or otherwise
entitled to such Award shall receive, except as may be otherwise determined by
the Committee:
(A) for the aggregate price payable upon such exercise of an Option, or upon
vesting of an Award (other than an Option) denominated in Shares (i) the
aggregate number and class of shares, rights or other securities for
which a recognized market exists, and (ii) a cash amount equal to the
fair market value (as reasonably determined by the Committee) on such
exercise or vesting date of any other property (other than regular cash
dividend payments) and of any shares, rights or other securities for
which no recognized market exists, which, if Shares (as authorized at the
date of the granting of such Award) had been acquired at the date of
granting of the Award for the same aggregate price (on the basis of the
price per share, if any, provided in the Award) and had not been disposed
of, such person or persons would be
4
<PAGE>
holding at the time of such exercise or vesting as a result of such
acquisition and any such Reorganization Event, and
(B) a cash amount upon the exercise of any SARs equal to the difference
between the aggregate grant price of such SARs and the aggregate of (i)
the fair market value, on the exercise date of any whole shares, rights
or other securities for which a recognized market exists, and (ii) the
fair market value (as reasonably determined by the Committee) on such
date of any other property (other than regular cash dividend payments)
which the holder of a number of Shares equal to the number of such SARs,
if such Shares had been purchased at the date of granting of such SARs
and not otherwise disposed of, would be holding at the time of exercise
of such SARs as a result of such purchase and any such Reorganization
Event;
provided, however, that no fractional Share, fractional right or other
fractional security shall be issued upon any such exercise or vesting, and
the aggregate price paid shall be appropriately reduced to reflect any
fractional Share, fractional right or other fractional security not issued;
and provided further, however, that if the exercise or vesting of any Award
subsequent to any Reorganization Event would, pursuant to clause (a) of this
Section 4(c)(i), require the delivery of shares, rights or other securities
which the Company is not then authorized to issue or which in the sole
judgment of the Committee cannot be issued without undue effort or expense,
the person exercising or vesting in such Award shall receive, in lieu of such
shares, rights or other securities, a cash payment equal to the Fair Market
Value on the exercise or vesting date, as the case may be, as reasonably
determined by the Committee, of such shares, rights or other securities. For
purposes of applying the provisions of this Plan, the Preference Share
Purchase Rights distributed to stockholders of the Company pursuant to the
Rights Agreement shall be deemed not to have been distributed until the
Distribution Date (as defined in the Rights Agreement).
(ii) In the event of any change in the number of Shares outstanding
resulting from a Reorganization Event, the aggregate number and class of Shares
remaining available to be awarded under this Plan shall be that number and class
which a person, to whom an Award had been granted for all of the available
Shares under this Plan on the date preceding such change, would be entitled to
receive as provided in Section 4(c)(i).
(iii) Upon the occurrence of any Reorganization Event, the Committee
shall be entitled (but shall not be required) to determine that new Award
Agreements shall be entered into with Participants reflecting such event.
(d) Share Counting. For purposes of determining at any time the number of
Shares that remain available for grant under this Plan, the number of Shares
then authorized pursuant to Section 4 of the Plan shall be (i) decreased by the
"gross" number of Shares issued pursuant to exercised Awards, (ii) decreased by
the "gross" number of Shares issuable pursuant to outstanding unexercised
Awards, and (iii) increased by the difference between the "gross" number of
Shares issuable and the "net" number of Shares actually issued pursuant to
exercised Awards. As used herein, the "gross" number of Shares refers to the
maximum number of Shares that may be issued upon the exercise of an Award. The
"net" number of Shares refers to the net number of Shares actually issued to an
Award holder upon exercise of an Award, after reducing the "gross" number of
Shares by the number of Shares tendered back to the Company in payment of the
Award's exercise price or for the satisfaction of any Tax Payment obligation.
If a Participant shall forfeit, voluntarily surrender or otherwise permanently
lose his or her right to exercise an Award under any provision of this Plan or
otherwise, or if any Award shall terminate
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or expire pursuant to its terms, the Shares subject to the Award shall once
again be available to be awarded and sold under this Plan pursuant to a new
Award granted hereunder.
SECTION 5. ELIGIBILITY.
Any Employee who is (i) not a member of the Committee, and either (ii) an
executive officer of the Company or an executive officer of a subsidiary of the
Company, or (iii) a key employee of the Company or of a subsidiary of the
Company designated as such by the Committee, shall be eligible to be designated
a Participant by the Committee.
SECTION 6. AWARDS.
(a) Options. In determining that an eligible Employee shall be granted an
Option, the Committee shall determine, subject to the provisions of the Plan,
the number of Shares to be covered by each Option, the purchase price therefor
and the conditions and limitations applicable to the exercise of the Option,
including the following terms and conditions and any additional terms and
conditions not inconsistent with the provisions of the Plan as the Committee
shall determine.
(i) Exercise Price. The purchase price per Share purchasable under an
Option shall be determined by the Committee at the time each Option is granted;
provided, that the purchase price per Share shall not be less than 100% of Fair
Market Value on the date of such grant.
(ii) Incentive Stock Options. The terms of any Incentive Stock Option
granted under the Plan shall comply in all respects with the provisions of
Section 422 of the Code, or any successor provision, and any regulations
promulgated thereunder.
(b) Stock Appreciation Rights. Subject to the provisions of the Plan, in
determining that an eligible Employee shall be awarded SARs, the Committee
shall determine the number of Shares to be covered by each SAR Award, the grant
price thereof and the conditions and limitations applicable to the exercise
thereof. SAR Awards shall be payable in cash or in stock, as determined by the
Committee, and may be granted in tandem with another Award, in addition to
another Award, or freestanding and unrelated to another Award. SARs granted in
tandem with or in addition to another Award may be granted either at the same
time as the other Award or at a later time.
(i) Grant Price. The grant price (strike price) of an SAR shall be
determined by the Committee, provided, that the grant price shall not be less
than 100% of Fair Market Value on the date of such grant.
(ii) Other Terms and Conditions. Subject to the terms of the Plan and
any applicable Award Agreement, the Committee shall determine, at or after the
grant of an SAR, the term, methods of exercise, and any other terms and
conditions of any SAR.
(c) Restricted Stock. Subject to the provisions of the Plan, in determining
that an eligible Employees shall be awarded Restricted Stock, the Committee
shall determine the number of Shares of Restricted Stock to be granted to each
Participant, the duration of the restriction period during which, and the
conditions under which, the Restricted Stock may be forfeited to the Company,
and the other terms and conditions of the Awards.
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(i) Dividends. Unless otherwise determined by the Committee, a
Restricted Stock Award shall provide for the payment of dividends during its
restriction period. Dividends paid on Restricted Stock may be paid directly to
the Participant, may be subject to risk of forfeiture, or may be subject to
transfer restrictions during any period established by the Committee, all as
determined by the Committee in its discretion.
(ii) Registration. Any Restricted Stock may be evidenced in any manner
deemed appropriate by the Committee, including book-entry registration or the
issuance of stock certificates. If any stock certificate is issued with respect
to Restricted Stock, the certificate shall be registered in the name of the
Participant and may bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to the Restricted Stock. The
Participant shall be entitled to exercise all voting rights with respect to the
Restricted Stock during the restriction period.
(iii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of a Participant's employment (as determined under criteria
established by the Committee) for any reason during the applicable restriction
period, all unvested Restricted Stock shall be forfeited by the Participant to
the Company without compensation therefor. However, when the Committee finds
that a waiver would be in the best interests of the Company, the Committee may
waive in whole or in part any or all remaining restrictions with respect to the
Restricted Stock held by the Participant whose employment is terminating.
(iv) Issuance of Shares. Unrestricted Shares, evidenced in any manner as
the Committee shall deem appropriate, shall be nonforfeitable and shall be
issued to the Participant promptly after the applicable restrictions have lapsed
or otherwise terminated or been satisfied.
(d) Performance Awards. The Committee shall have authority to determine the
Employees who may receive a Performance Award, which shall consist of a right,
(A) denominated or payable in cash, Shares, other securities or other property
(including Restricted Stock), and (B) that shall confer on the holder thereof,
rights valued at an amount determined by the Committee and payable to or
exercisable by the holder thereof, in whole or in part, upon the achievement of
prescribed performance goals during prescribed performance periods as the
Committee shall establish.
(i) Terms and Conditions. Performance Awards shall be based upon (i)
achievement of a specified performance goal or goals established by the
Committee, and (ii) certification by the Committee prior to payment that the
previously established performance goal(s) has been met. Performance goals under
the Plan shall be based upon any one or a combination of (i) the total
stockholder return ("TSR") of the Company during a specified performance period,
either individually or in comparison with the TSR achieved by a specified group
of other companies (a "Target Group") approved by the Committee, (ii) the
Company's return on equity ("ROE") during a specified period, either
individually or in comparison with the ROE achieved by a Target Group , (iii)
the Company's return on investment ("ROI") during a specified period, either
individually or in comparison with the ROI achieved by a Target Group, (iv) the
Company's earnings per Share during a specified period, or (v) the Company's
final or average stock price compared with the stock price for an earlier
specified date or period. For a given performance period, "TSR" means the (a)
the final stock price at the end of the performance period, plus (b) the
dividends paid during the performance period, divided by (c) the stock price at
the beginning of the performance period. In addition to specifying the
performance goal(s) to be achieved during any performance period, the Committee
shall also specify the length of the
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performance period(s), the number of Shares subject to any Performance Award and
the amount of any payment or transfer to be made pursuant to any Performance
Award.
(ii) Payment of Performance Awards. When earned, Performance Awards may
be paid in a lump sum or in installments following the close of the performance
period or, in accordance with procedures established by the Committee, on a
deferred basis.
(e) Stock Compensation. The Committee shall have authority to pay in Shares
all or any portion of the amounts payable under any compensation program of the
Company. The number and type of Shares to be distributed in lieu of the cash
compensation applicable to any Award, as well as the terms and conditions of any
bonus awards, shall be determined by the Committee.
(f) Other Stock-Based Awards. The Committee is hereby authorized to grant to
eligible Employees an "Other Stock-Based Award", which shall consist of a right
(i) that is not an Award or right described in Section 6(a), (b), (c),
(d), or (e) above and
(ii) that is denominated or payable in, valued in whole or in part by
reference to, or otherwise based on or related to, Shares (including securities
convertible into Shares), as are deemed by the Committee to be consistent with
the purposes of the Plan; provided, that any such rights must comply, to the
extent deemed desirable by the Committee, with Rule 16b-3 and applicable law.
Subject to the terms of the Plan and any applicable Award Agreement, the
Committee shall determine the terms and conditions of any Other Stock-Based
Award.
(g) Exercise of Option or SAR Awards.
(i) Notice. Unless otherwise prescribed by the Committee, Awards may be
exercised only by written notice of exercise (the "Exercise Notice"), in the
form prescribed by the Committee, delivered to the Company to the Financial
Benefit Plan Administration Manager or other Company official administering the
Plan, and signed by the Participant or the representative or transferee thereof.
The date on which the Exercise Notice is delivered to the Company shall be the
"Notice Date." The Exercise Notice shall specify a date (the "Settlement
Date"), not less than five business days nor more than ten business days
following the Notice Date, upon which the Shares or other rights shall be issued
or transferred to the Participant (or other person entitled to exercise the
Award) and the Award's exercise price shall be paid to the Company.
(ii) Payment. Unless otherwise prescribed by the Committee, on the
Settlement Date, the person exercising an Award shall tender to the Company full
payment for the Shares or other rights with respect to which the Award is
exercised, together with an additional amount equal to the amount of any taxes
required to be collected or withheld by the Company in connection with the
exercise of the Award (the "Tax Payment").
(iii) Tax Payment Election. Subject to the approval of the
Committee, and to any rules and limitations as the Committee may adopt, a person
exercising an Award may make the Tax Payment in whole or in part by electing, at
or before the time of exercise of the Award, either (a) to have the Company
withhold from the number of Shares otherwise deliverable a number of Shares
whose Fair Market Value equals the Tax Payment, or (b) to deliver certificates
for other Shares owned by the person exercising the Award, endorsed in blank
with appropriate signature guarantee, having a Fair Market
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Value equal to the amount otherwise to be collected or withheld. Following any
election to withhold Shares or deliver other Shares to make a Tax Payment, the
Committee shall have sole discretion to approve or disapprove the election at
any time prior to the Settlement Date. If the election is disapproved, the Tax
Payment shall be made in cash, or in any combination of cash and Shares as the
Committee may direct. If the Committee shall fail to disapprove the election
prior to the Settlement Date, the election will be deemed approved.
(iv) Payment with Stock. Subject to approval by the Committee, a person
exercising an Award for the receipt of Shares may pay for the Shares by
tendering to the Company other Shares legally and beneficially owned by that
person at the time of the exercise of the Award. If approved by the Committee,
this method of exercise may include use of a procedure whereby a person
exercising an Award may request that Shares received upon exercise of a portion
of an Award be automatically applied to satisfy the exercise price for
additional and increasingly larger portions of the Award. The certificate(s)
representing any Shares tendered in payment of an Award's exercise price must be
accompanied by a stock power duly executed with appropriate signature
guarantees. The Committee may, in its sole discretion, refuse any tender of
Shares in which case the Company shall promptly redeliver the Shares to the
person exercising the Award and notify the person of the refusal as soon as
practicable. In this event, the person may either (a) tender to the Company on
the Settlement Date the cash amount required to pay for the Award's Shares, or
(b) rescind the Exercise Notice. If the person elects to rescind his or her
Exercise Notice, the person may again (subject to the other terms of this Plan)
deliver an Exercise Notice with respect to the Award at any time prior to its
expiration date.
(v) Valuation. Any calculation with respect to a Participant's income,
required tax withholding or other matters required to be made by the Company
upon the exercise of an Award shall be made using the Fair Market Value of the
Shares on the Notice Date, whether or not the Exercise Notice is delivered to
the Company before or after the close of trading on that date, unless otherwise
specified by the Committee.
(vi) Rights as Stockholder. Except as provided in Section 6(c) of this
Plan, until the issuance of the stock certificate(s) for Shares purchased
hereunder (as evidenced by the appropriate entry on the books of the Company or
any authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a stockholder of the Company shall exist with
respect to such Shares, notwithstanding the exercise of any Award. No
adjustment will be made for a dividend or other rights for which the record date
is prior to the date the stock certificates evidencing such Shares are issued,
except as otherwise provided in this Plan.
(h) Certain Awards under the VEC ESIP.
(i) Pursuant to the terms of the Merger Agreement, EBA and VEC's
Executive Stock Incentive Plan (the "VEC ESIP"), certain stock options
previously awarded by VEC under the VEC ESIP will, at the Time of Distribution,
be automatically converted into options to purchase Shares under the Plan. Each
such VEC option that is outstanding and unexercised immediately prior to the
Time of Distribution and is held by a person who, immediately before the Time of
Distribution, is a VRM Participant (as such term is defined in the EBA), or
their respective beneficiaries and dependents, shall be converted in accordance
with the EBA into Options to purchase Shares under the Plan. Each such VEC
option eligible to be replaced by a Option under this Plan shall be replaced
with an Option with respect to a number of Shares equal to the number of shares
of VEC Common Stock subject to such VEC option immediately before such
replacement, multiplied by the Ratio, rounded up to the nearest
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whole share as necessary, and having a per-share exercise price equal to the
per-share exercise price of such VEC option immediately before such replacement,
divided by the Ratio (rounded down to the nearest whole cent as necessary). The
other terms and conditions of any such VEC option, including the vesting and
termination dates thereof, shall remain unchanged, except as may be necessary to
conform to the provisions of the Plan or as otherwise may be determined by the
Committee.
(ii) Pursuant to the terms of the VEC ESIP and of certain Performance
Awards made under the VEC ESIP by the Compensation Committee of VEC's Board of
Directors on January 22, 1997, certain Performance Awards previously made by VEC
with respect to VEC Common Stock that are outstanding immediately prior to the
Time of Distribution will be, at the Time of Distribution, automatically
converted into Performance Awards with respect to Shares under the Plan. Each
such VEC Performance Award eligible to be replaced by a Performance Award under
the Plan shall be replaced with a Performance Award with respect to a number of
Shares equal to the number of shares of VEC Common Stock subject to such VEC
Performance Award immediatly before such replacement, multiplied by the Ratio,
rounded up to the nearest whole share as necessary. The other terms and
conditions of any such VEC Performance Award, to include the performance
period(s) and vesting dates thereof, shall remain unchanged, except as may be
necessary to conform to the provisions of the Plan or as may otherwise be
determined by the Committee; provided however, that (i) the Target Group with
respect to which TSR is determined shall be limited to those companies within
the VEC Target Group that are primarily engaged in the refining and marketing
business, as determined by the Committee, and (ii) the initial date of each
performance period with respect to which TSR is determined shall be modified so
as to be the initial trading date for the Company's Shares used in determining
the Ratio.
(i) General.
(i) Grants. Awards may be granted, in the discretion of the Committee,
either alone or in addition to, in tandem with, or in substitution for any other
Award granted under the Plan or any award granted under any other plan of the
Company or any Affiliate. Awards granted in addition to or in tandem with other
Awards or awards granted under any other plan of the Company or any Affiliate
may be granted either at the same time as or at a different time from the grant
of other Awards or awards. The Committee may make the grant of any award
subject to prior stockholder approval of the Plan, but any Award so granted by
the Committee shall then be contingent upon stockholder approval of the Plan.
(ii) Forms of Payment by Company. Subject to the terms of the Plan and
of any applicable Award Agreement, payments or transfers to be made by the
Company or an Affiliate upon the grant, exercise or payment of an Award may be
made in any form as the Committee shall determine, including cash, Shares, other
securities, other Awards or other property, or any combination thereof, and may
be made in a single payment or transfer, in installments, or on a deferred
basis, in each case in accordance with rules and procedures established by the
Committee. These rules and procedures may include, without limitation,
provisions for the payment or crediting of reasonable interest on installment or
deferred payments.
(iii) Limits on Transfer. Each Award, and each right under any
Award, shall be exercisable only by the Participant during the Participant's
lifetime, or if permissible under applicable law, (i) by the Participant's
beneficiary, (ii) by an immediate family member as a transferee receiving the
Award pursuant to a gift, or (iii) by any transferee authorized by the
Committee. Without prior written approval from the Committee, no Award and no
right under any Award may be assigned, pledged, sold or
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otherwise transferred or encumbered by a Participant otherwise than as provided
in this paragraph or by will or by the laws of descent and distribution and any
purported assignment, pledge, sale, transfer or encumbrance shall be void and
unenforceable against the Company or any Affiliate.
(iv) Term of Awards. The term of each Award shall be for the period
determined by the Committee; provided, that in no event shall the term of any
Incentive Stock Option exceed a period of 10 years from the date of its grant.
(v) Share Certificates. All certificates for Shares or other securities
of the Company or any Affiliate delivered under the Plan pursuant to any Award
or the exercise thereof shall be subject to (i) all stop transfer orders and
other restrictions as the Committee may deem advisable under the Plan, (ii) the
rules, regulations, and other requirements of the SEC and any stock exchange
upon which the Shares or other securities are then listed, (iii) and any
applicable federal or state laws. The Committee may cause a legend or legends
to be put on any stock certificates to make appropriate reference to applicable
restrictions.
(vi) Delivery of Shares or Other Securities and Payment of Consideration.
No Shares or other securities shall be delivered pursuant to any Award until
payment in full of any amount required to be paid pursuant to the Plan or the
applicable Award Agreement is received by the Company. Payment may be made in
any form or method prescribed by the Committee, including cash, Shares, other
securities, other Awards or other property, or any combination thereof, provided
that the combined value, as determined by the Committee, of all cash and cash
equivalents and the Fair Market Value of any Shares or other property tendered
to the Company as of the date of such tender, is at least equal to the full
amount required to be paid.
(vii) Termination of Employment.
(A) Except as otherwise provided in the Plan, or otherwise determined by
the Committee on the date of grant and included in the Award Agreement, an
Award vests to and/or may be exercised by a Participant only while the
Participant is and has continually been since the date of the grant of the
Award an Employee. If a Participant's employment with the Company is
voluntarily terminated by the Participant (other than through retirement,
death or disability), or is terminated by the Company for "cause," then (i)
that portion of any Award which has not vested on or prior to such date of
termination shall be automatically forfeited, and (ii) all vested but
unexercised Awards previously granted to that Participant under the Plan
shall automatically lapse and be forfeited 30 days following the date of the
Participant's termination of employment. If a Participant's employment is
terminated by the Company other than for "cause" (as determined by the
Committee pursuant to rules of uniform application), then all unexercised
Awards previously granted to the Participant (including that portion of any
Award that may vest after termination of employment) shall automatically
lapse and be forfeited by the Participant 90 days after termination of
employment unless the Award is exercised or becomes nonforfeitable during
such 90 day period.
(B) If a Participant's employment is terminated because of retirement,
death or disability (with the determination of disability to be made within
the sole discretion of the Committee), any unexercised Award held by the
Participant shall remain outstanding according to the Award's original terms;
alternatively, the Committee or, except with respect
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to a Participant subject to Section 16 under the Exchange Act, the Chief
Executive Officer of the Company, may prescribe new or additional terms for
the vesting, exercise or realization of the Award. Absent any determination
by the Committee or the Chief Executive Officer to the contrary, any
unexercised Award held by a Participant whose employment is terminated
because of retirement, death or disability shall vest or become exercisable
according to the Award's original terms.
(C) In connection with the termination of any Participant from employment
with the Company, the Chief Executive Officer of the Company is authorized to
determine which, if any, of the foregoing provisions of this clause (vii)
shall apply, such determination to be binding upon the Company.
(viii) Award Agreements. Awards shall be evidenced by Award
Agreements having terms and conditions, not inconsistent with the Plan, as
prescribed by the Committee. Award Agreements need not be uniform.
(ix) Deferral of Receipt. By filing a written request with the Committee
or the Company not later than December 31st of any calendar year, a Participant
may elect to defer receipt of all or any portion of any stock to be awarded
pursuant to a Restricted Stock award, Performance Award or Other Stock-Based
Award which, absent such election, the Participant would be entitled to receive
during the calendar year following the Participant's request (hereafter referred
to as the "Deferred Award"). The Deferred Award will be delivered to the
Participant on January 2nd of the second calendar year following the calendar
year in which the deferral election is made. Successive elections may be made
with respect to the same Deferred Award to defer from year to year the receipt
of such Deferred Award. Each Participant shall be solely responsible for
determining the personal income tax effect of making any deferral election; the
Company makes no representation that such election shall have the effect of
deferring receipt of any income attributable to the Deferred Award for federal
income tax purposes.
SECTION 7. AMENDMENT AND TERMINATION.
Except to the extent prohibited by applicable law and unless otherwise expressly
provided in an Award Agreement or in the Plan:
(a) Amendments to the Plan. The Committee or the Board may amend, suspend,
or terminate the Plan without the consent of any stockholder, Participant, other
holder or beneficiary of an Award, or other Person; provided that
notwithstanding any other provision of the Plan or any Award Agreement, without
the approval of the stockholders of the Company no amendment, suspension, or
termination may be made that would:
(i) materially increase the total number of Shares available for Awards
under the Plan (except as provided in Section 4) or materially increase the
benefits accruing to Participants under the Plan; or
(ii) permit Awards encompassing rights to purchase Shares to be granted
with a per Share grant, exercise or purchase price of less than the Fair Market
Value of a Share on the grant thereof.
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(b) Amendments to Awards. The Committee may waive any conditions or rights
under, amend any terms of, or alter any Award theretofore granted, provided that
no change in any Award shall reduce the benefit accruing to any Participant
without the consent of the Participant.
(c) Unusual or Nonrecurring Events. The Committee is hereby authorized to
make adjustments in the terms, conditions, and criteria of Awards in recognition
of unusual or nonrecurring events (including the events described in Section
4(c) of the Plan) affecting the Company, any Affiliate, or the financial
statements of the Company or any Affiliate, or in recognition of changes in
applicable laws, regulations, or accounting principles, whenever the Committee
determines that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan. Notwithstanding the foregoing, with respect to any Award
intended to qualify as performance-based compensation under Section 162(m) of
the Code, no adjustment shall be authorized to the extent the adjustment would
cause the Award to fail to qualify unless otherwise determined by the Committee
to be in the best interest of the Company.
SECTION 8. CHANGE OF CONTROL.
(a) Effect. If a Change of Control shall occur, each Award held by a
Participant pursuant to the Plan shall remain in full force and effect until the
earlier of (i) the expiration date of the Award, or (ii) 90 days following the
Participant's date of termination of employment with the Company.
(b) Defined. A Change of Control shall be deemed to occur when:
(i) the stockholders of the Company approve any agreement or transaction
pursuant to which: (A) the Company will merge or consolidate with any other
Person (other than a wholly owned subsidiary of the Company) and will not be the
surviving entity (or in which the Company survives only as the subsidiary of
another entity); (B) the Company will sell all or substantially all of its
assets to any other Person (other than a wholly owned subsidiary of the
Company); or (C) the Company will be liquidated or dissolved; or
(ii) any "person" or "group" (as these terms are used in Section 13(d)
and 14(d) of the Exchange Act) other than the Company, any subsidiary of the
Company, any employee benefit plan of the Company or its subsidiaries, or any
entity holding Shares for or pursuant to the terms of such employee benefit
plans, is or becomes an "Acquiring Person" as defined in the Rights Agreement
(or any successor Rights Agreement) (or, if no Rights Agreement is then in
effect, such person or group acquires or holds such number of shares as, under
the terms and conditions of the most recent such Rights Agreement to be in force
and effect, would have caused such person or group to be an "Acquiring Person"
thereunder); or
(iii) any "person" or "group" shall commence a tender offer or exchange
offer for 30% or more of the Shares then outstanding, or for any number or
amount of Shares which, if the tender or exchange offer were to be fully
subscribed and all Shares for which the tender or exchange offer is made were to
be purchased or exchanged pursuant to the offer, would result in the acquiring
person or group directly or indirectly beneficially owning 50% or more of the
Shares then outstanding; or
(iv) individuals who, as of any date, constitute the Board (the
"Incumbent Board") thereafter cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director whose election, or nomination for election by the Company's
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stockholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a person or group other than the Board; or
(v) the occurrence of the Distribution Date (as defined in the Rights
Agreement); or
(vi) any other event determined by the Board or the Committee to
constitute a "Change of Control" hereunder.
(c) Actions of Committee. In addition to the Committee's authority set forth
in Section 7(c) of the Plan, in order to maintain the Participants' rights in
the event of any Change of Control, the Committee, as constituted before the
Change of Control, is hereby authorized, and has sole discretion, as to any
Award, either at the time the Award is made hereunder or any time thereafter, to
take any one or more of the following actions:
(i) provide for the acceleration of any time periods relating to the
vesting, exercise or realization of the Award so that the Award may be exercised
or realized in full on or before a date fixed by the Committee;
(ii) provide for the purchase of any Award, upon the Participant's
request, for an amount of cash equal to the amount that could have been attained
upon the exercise of the Award or realization of the Participant's rights in the
Award had the Award been currently exercisable or payable;
(iii) adjust any outstanding Award as the Committee deems appropriate
to reflect the Change of Control; or
(iv) cause any outstanding Award to be assumed, or new rights substituted
therefor, by the acquiring or surviving corporation after the Change of Control.
The Committee may in its discretion include other provisions and limitations in
any Award Agreement as it may deem equitable and in the best interests of the
Company.
SECTION 9. GENERAL PROVISIONS.
(a) No Rights to Awards. No Employee, Participant or other Person shall have
any claim to be granted any Award. The Committee is not required to treat
uniformly the Employees, Participants, or holders or beneficiaries of Awards
when making grants of Awards under the Plan. The terms and conditions of Awards
are not required to be the same with respect to each recipient.
(b) Delegation. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company or any
Affiliate, or to a committee of such officers or managers, the authority,
subject to the terms and limitations the Committee shall determine, to grant
Awards to, or to cancel, modify or waive rights with respect to, or to amend,
suspend, or terminate Awards held by, Employees who are not deemed "officers" or
"directors" of the Company for purposes of Section 16 of the Exchange Act, or
who are otherwise not subject to Section 16.
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(c) Withholding. The Company or any Affiliate is hereby authorized to
withhold from any Award, from any payment due or transfer made under any Award
or under the Plan or from any compensation or other amount owing to a
Participant the amount (in cash, Shares, other securities, other Awards or other
property) of any applicable withholding taxes with respect to an Award, its
exercise, the lapse of restrictions thereon, payment or transfer under an Award
or under the Plan, and to take any other action necessary in the opinion of the
Company to satisfy all obligations for the payment of the taxes.
(d) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect any other compensation arrangements.
(e) No Right to Employment. The grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the Company or
any Affiliate. Further, the Company or an Affiliate may at any time dismiss a
Participant from employment, free from any liability or any claim under the
Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.
(f) Governing Law. The validity, construction, and effect of the Plan and
any rules and regulations relating to the Plan shall be determined in accordance
with the laws of the State of Texas and applicable federal law.
(g) Severability. If any provision of the Plan or any Award is or becomes or
is deemed to be invalid, illegal, or unenforceable in any jurisdiction as to any
Person or Award, or would disqualify the Plan or any Award under any law deemed
applicable by the Committee, such provision shall be construed or deemed amended
to conform to applicable laws, or if it cannot be construed or deemed amended
without, in the determination of the Committee, materially altering the intent
of the Plan or the Award, such provision shall be stricken as to such
jurisdiction, Person or Award and the remainder of the Plan and any such Award
shall remain in full force and effect.
(h) NYSE Listing and Other Laws and Regulations. Notwithstanding anything to
the contrary contained in this Plan, in any Award, or any Award Agreement or
other agreement entered into under this Plan, the grant or making of any Award
shall be conditional and shall be granted or awarded subject to acceptance of
the shares of Common Stock deliverable pursuant to the Award for listing on the
NYSE. The Committee may refuse to issue or transfer any Shares or other
consideration under an Award if, acting in its sole discretion, it determines
that the issuance or transfer of the Shares or other consideration might violate
any applicable law or regulation, violate any regulation for admission or
trading on the NYSE, or entitle the Company to recover any consideration or
proceeds under Section 16 of the Exchange Act, and any payment tendered to the
Company by a Participant, other holder or beneficiary in connection with the
exercise of such Award shall be promptly refunded.
(i) No Trust or Fund Created. Neither the Plan nor any Award shall create or
be construed to create a trust or separate fund of any kind or any fiduciary
relationship between the Company or any Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company or any Affiliate pursuant to an Award, such right shall be no
greater than the right of any unsecured general creditor of the Company or any
Affiliate.
(j) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash, other securities, or other property shall
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be paid or transferred in lieu of any fractional Shares or whether fractional
Shares or any rights thereto shall be canceled, terminated, or otherwise
eliminated.
(k) Headings. Headings are given to the Sections and subsections of the Plan
solely as a convenience to facilitate reference. The headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
(l) Construction. Use of the term "including" in this Plan shall be
construed to mean "including but not limited to."
SECTION 10. EFFECTIVE DATE OF THE PLAN.
The Plan shall be effective April 23, 1997.
SECTION 11. TERM OF THE PLAN.
No Award shall be granted under the Plan later than 10 years after approval of
the Plan by the Board. However, unless otherwise expressly provided in the Plan
or in an applicable Award Agreement, any Award theretofore granted may extend
beyond that date, and the authority of the Board or the Committee to amend,
suspend, or terminate any such Award or to waive any conditions or rights under
any such Award shall extend beyond that date.
16
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EXHIBIT 10.3
VALERO REFINING AND MARKETING COMPANY
============================
STOCK OPTION PLAN
Adopted April 23, 1997
============================
<PAGE>
VALERO REFINING AND MARKETING COMPANY
STOCK OPTION PLAN
Page
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1. Introduction and Statement of Purpose................................... 1
2. Definitions............................................................. 1
3. Granting of Options and SARs to Employees............................... 3
3.1. Selection of Participants......................................... 3
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3.2. Exclusion of Committee Members.................................... 3
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3.3. No Right to Participate........................................... 3
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3.4. Certain Options Granted Under Prior VEC Stock Option Plans........ 3
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3.5. Determination of Option Provisions................................ 3
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3.6. Option Shares and SARs Available for Grant........................ 3
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3.7. Limitations Regarding Option Price and Strike Price............... 4
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3.8. Limitation Regarding Option Period................................ 4
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3.9. Option Agreements................................................. 4
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3.10 Provisions Regarding Prospective Employees........................ 4
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4. Exercise of Options and SARs............................................ 5
4.1. Exercise of Options............................................... 5
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4.2. Automatic Exercise of SARs, Settlement Price for SARs............. 5
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4.3. Exercise Procedure................................................ 5
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4.4. Payment for SARs.................................................. 6
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4.5. Payment with Common Stock......................................... 6
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4.6. Rights as Stockholder............................................. 6
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4.7 Effect of Termination and Forfeiture.............................. 6
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4.8 Effect of Leave of Absence........................................ 7
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4.9 Effect of Disability.............................................. 8
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4.10 Effect of Retirement or Death..................................... 8
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4.11 Exercise Following Termination, Retirement, Disability or Death... 8
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4.12 Effect of Change of Control....................................... 8
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5. Adjustments Upon Changes In Capitalization.............................. 9
5.1. Securities Received Upon Exercise................................. 9
---------------------------------
5.2. Adjustment of Option Shares Available............................ 10
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6. Administration......................................................... 10
6.1. Plan Administered by Committee................................... 10
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6.2. Powers of the Committee.......................................... 10
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6.3. Express Powers not Exclusive..................................... 11
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<PAGE>
7. Miscellaneous Provisions............................................... 11
7.1. Nonassignability................................................. 11
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7.2. Investment Letter................................................ 11
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7.3. Representatives of the Participant............................... 12
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7.4. Responsibility for Taxes......................................... 12
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7.5. Employment Not Guaranteed........................................ 12
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7.6. Gender, Singular and Plural...................................... 12
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7.7. Captions......................................................... 12
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7.8. Validity......................................................... 12
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7.9. Notice........................................................... 12
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7.10 NYSE Listing..................................................... 12
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7.11 Inconsistency.................................................... 12
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8. Amendment and Termination of Plan and Option Agreements................ 13
8.1. Amendments and Termination....................................... 13
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8.2. Effect of Amendment or Termination............................... 13
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8.3 Cancellation of Options.......................................... 13
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9. Claims................................................................. 13
9.1. Filing of Claims................................................. 13
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9.2. Review of Denial................................................. 13
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<PAGE>
1. Introduction and Statement of Purpose.
This Stock Option Plan (the "Plan") of Valero Refining and Marketing Company
is established for the purpose of giving additional incentive to Key Employees
of the Company by creating an opportunity for capital accumulation. It is
intended that the benefits available under this Plan, when added to other
benefits payable to these Key Employees, will furnish total compensation that is
competitive in the industries in which the Company conducts its business and in
which the Company competes for employees. This Plan sets forth the basis for the
eligibility of Employees to participate in the Plan and the terms and conditions
regulating participation. The Plan provides for the grant of Options to purchase
Common Stock of Valero and stock appreciation rights ("SARs") which are
automatically exercised upon the exercise of an Option. The Options granted
under the Plan are and are intended to be "non-qualified" options under the
Internal Revenue Code of 1986, as amended.
2. Definitions.
For the purposes of this Plan, the following terms shall have the meanings
stated below unless a different meaning is plainly required by the context or
such term is otherwise defined herein.
(a) "Board of Directors" shall mean the Board of Directors of Valero.
(b) "Change of Control" shall have the meaning specified in Paragraph 4.12.
(c) "Committee" shall mean the persons administering this Plan from time to
time pursuant to Paragraph 6.1.
(d) "Common Stock" shall mean the common stock, par value $0.01 per share,
of Valero.
(e) "Company" shall mean Valero and its subsidiaries, and any successor or
successors to such entities.
(f) "Distribution Agreement" shall mean the Agreement and Plan of
Distribution, entered into between VEC and Valero, in connection with
the transactions contemplated by the Merger Agreement. "Distribution"
and "Time of Distribution" shall have the meanings specified in the
Distribution Agreement.
(g) "EBA" shall mean the Employee Benefits Agreement, entered into between
Valero and VEC, in connection with the transactions contemplated by the
Merger Agreement.
(h) "Employee" shall mean any person employed by the Company, including
officers and directors of the Company within the meaning of Section
16(a) of the Exchange Act, but shall include a director only if also
employed by the Company on a full-time basis.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended and in effect from time to time.
(j) "Exercise Date" -- see Paragraph 4.3.
(k) "Expiration Date" -- see Paragraph 3.5.
(l) "Exercise Notice" -- see Paragraph 4.3.
(m) "Key Employee" shall mean any key Employee or prospective Employee of
the Company having responsibility for planning the Company's
operations, controlling or managing its business activities, or
advising the management of the Company with respect to its operations
and business activities. The determination of "Key Employees" for
purposes of determining eligibility for participation in this Plan, and
the determination of "key employees" for purposes of applying any New
York Stock Exchange Rule or determining eligibility for participation
in any other stock option plan of the Company, need not be consistent.
(n) "Merger Agreement" shall mean the Agreement and Plan of Merger, dated
as of January 31, 1997, between VEC, PG&E Corporation and PG&E
Acquisition Corporation.
(o) "Option" or "Options" shall mean an option or options granted pursuant
to this Plan to purchase shares of Common Stock.
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(p) "Option Agreement" shall mean a written agreement entered into between
Valero and a Participant pursuant to Paragraph 3.9.
(q) "Option Price" -- see Paragraph 3.5.
(r) "Option Share" shall mean one share of Common Stock purchased or which
may be purchased pursuant to an Option.
(s) "Participant" shall mean a Key Employee who is eligible to be granted
an Option under this Plan.
(t) "Plan" -- see Paragraph 1.
(u) "Preference Share Purchase Right" shall mean one of the rights
distributed pursuant to the Rights Agreement to purchase 1/100 share of
the Junior Participating Preferred Stock, Series I, of Valero.
(v) "Ratio" shall mean the amount obtained by dividing the average of the
daily high and low trading prices on the New York Stock Exchange for
the VEC Common Stock on each of the 15 trading days prior to the ex-
dividend date for the Distribution by the average of the daily high and
low trading prices on the New York Stock Exchange for the Company's
shares of Common Stock on each of the 15 trading days beginning with
either (a) in the event the Common Stock trades on a "when-issued"
basis prior to the Time of Distribution, the ex-dividend date for the
Distribution, or (b) in the event the Common Stock does not trade on a
"when-issued" basis prior to the Time of the Distribution, the Time of
Distribution.
(w) "Rights Agreement" shall mean that certain Rights Agreement, dated as
of June 18, 1997, between Valero and Harris Trust and Savings Bank, as
Rights Agent, as amended and in effect from time to time.
(x) "Restricted Optionee" shall mean any person who is a "director" or
"officer" of Valero within the meaning of Section 16(a) of the Exchange
Act, together with any person who is the beneficial owner of more than
10 percent of any class of equity security of Valero registered under
Section 12 of the Exchange Act.
(y) "SAR" or "stock appreciation right" shall mean the right, subject to
the provisions of this Plan, to receive a payment in cash equal to the
difference between the specified Strike Price of the SAR and the price
of one share of the Common Stock at the time specified in Paragraph
4.2.
(z) "SEC" shall mean the Securities and Exchange Commission.
(aa) "Settlement Date" -- see Paragraph 4.3.
(bb) "Strike Price" shall mean the price per share of the Common Stock,
determined pursuant to Paragraph 3.7, from which the appreciation (if
any) with respect to an SAR shall be calculated.
(cc) "Tax Payment" -- see Paragraph 4.3.
(dd) "Time of Distribution" -- see "Distribution Agreement."
(ee) "Valero" shall mean Valero Refining and Marketing Company, a Delaware
corporation incorporated in 1981 under the name Saber Energy, Inc.and
expected to be renamed Valero Energy Corporation following the
Distribution.
(ff) "VEC" shall mean Valero Energy Corporation, a Delaware corporation
incorporated in 1955 under the name Coastal States Gas Producing
Company and expected to be merged with a subsidiary of PG&E Corporation
pursuant to the Merger Agreement.
(gg) "VEC Common Stock" shall mean the Common Stock, $1.00 par value, of
VEC.
(hh) "VEC Option Plans" shall mean the following stock option plans
previously adopted by VEC: the VEC Stock Option Plan No. 3, the VEC
Stock Option Plan No. 4, and the VEC Stock Option Plan No. 5.
(ii) "VRM Participant" shall have the same meaning as given in the EBA.
2
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3. Granting of Options and SARs to Employees.
3.1. Selection of Participants. The Committee may grant Options to
purchase a specified number of Option Shares to Key Employees of the Company
selected by the Committee in its sole and absolute discretion to become
Participants. At or subsequent to the time that an Option is granted to a Key
Employee by the Committee, the Committee may grant to that Key Employee a number
of SARs not exceeding the number of Option Shares that may be purchased pursuant
to such Option, provided, that no SARs shall be granted with respect to Option
Shares that have theretofore been purchased by a Participant or to any
Participant who, subsequent to the date of grant of such Option, is no longer an
Employee. Subject to the full and final authority of the Committee to
administer the Plan and select Participants, the granting of Options and SARs
and the selection of Participants may be based on recommendations made by the
Chief Executive Officer of Valero.
3.2. Exclusion of Committee Members. No member of the Committee, while so
serving, may be granted Options or SARs. However, a Participant who has been
granted an Option or SARs under this Plan prior to serving on the Committee may,
during such term of service, continue to hold any Options and SARs and may
exercise any such Options and SARs and hold the Option Shares acquired upon the
exercise of any such Options, subject to the provisions of this Plan.
3.3. No Right to Participate. No Employee or prospective Employee of the
Company shall have the right to require the Company or the Committee to make him
or her a Participant under this Plan.
3.4. Certain Options Granted Under Prior VEC Stock Option Plans. Pursuant
to the terms of the Merger Agreement, the EBA and the VEC Option Plans, certain
stock options previously awarded by VEC under the VEC Option Plans will be
automatically converted at the Time of Distribution into Options to purchase
Options Shares under this Plan. Each such VEC option that is outstanding and
unexercised immediately prior to the Time of Distribution and is held by a
person who, immediately before the Time of Distribution, is a VRM Participant,
or their respective beneficiaries and dependents, shall be converted in
accordance with the EBA into Options to purchase Option Shares under this Plan.
Each such VEC option eligible to be replaced by a Option under this Plan shall
be replaced with an Option with respect to a number of Option Shares equal to
the number of shares of VEC Common Stock subject to such VEC option immediately
before such replacement, multiplied by the Ratio, rounded up to the nearest
whole share as necessary, and having a per-share exercise price equal to the
per-share exercise price of such VEC option immediately before such replacement,
divided by the Ratio (rounded down to the nearest whole cent as necessary). The
other terms and conditions of any such VEC option, including the vesting and
termination dates thereof, shall remain unchanged, except as may be necessary to
conform to the provisions of the Plan or as otherwise may be determined by the
Committee.
3.5. Determination of Option Provisions. When granting Options, the
Committee shall designate the number of Option Shares the Employee may purchase
under the Option, a date upon which the Option will automatically expire (unless
an earlier termination date is established pursuant to Paragraph 8.3; the
earlier of such dates being referred to herein as the "Expiration Date"), the
price per share at which the Option Shares may be purchased (the "Option
Price"), and the remaining terms and conditions of the Option. If the Committee
determines to grant SARs to the grantee or holder of an Option, the Committee
shall designate the number of SARs granted and any terms and conditions
pertaining thereto.
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3.6. Option Shares and SARs Available for Grant. (A) Subject to the
provisions of Paragraphs 4.7 and 5, the maximum number of shares of Common Stock
that may be optioned under this Plan shall be 2,000,000 shares. In addition, the
number of shares available to be optioned under this Plan may from time to time
be increased by such number of additional shares as the Committee may deem
necessary. However, in no event shall the total number of shares optioned and
sold under this Plan equal or exceed 20 percent of the "voting power
outstanding," as defined in the NYSE's Company Manual, Paragraph 312. Shares of
Common Stock optioned and sold under this Plan (and any rights or other
securities sold or delivered in accordance with Paragraph 5.1) may be either
authorized but unissued securities or reacquired (treasury) securities.
(B) Subject to the provisions of Paragraphs 4.7 and 5, the maximum
number of SARs that may be granted under this Plan shall be equal to the maximum
number of shares of Common Stock that may be optioned and sold under this Plan.
(C) During the term of this Plan, Valero will at all times reserve and
keep available, or have authorized but unissued, shares of Common Stock
sufficient to satisfy the requirements of this Plan. The inability of Valero to
obtain, from any regulatory body having jurisdiction, any authority deemed by
Valero's counsel to be necessary to the lawful issuance and sale of Common Stock
hereunder, shall relieve the Company of any liability in respect of the
nonissuance or sale of such Common Stock as to which such requisite authority
shall not have been obtained.
3.7. Limitations Regarding Option Price and Strike Price. The Option
Price for any Option Share shall be as specified by the Committee in its sole
discretion, but shall not be less than (a) the closing sales price per share of
Common Stock as reported in the New York Stock Exchange - Composite Transactions
listing in The Wall Street Journal or such other listing or quotation medium as
the Committee may later designate (the "Transactions Listing") for the New York
Stock Exchange (the "NYSE") trading day immediately preceding such date, or if
there are no sales on such date, on the next preceding day on which there were
sales, or (b) in the event that the Common Stock is not listed for trading on
the NYSE, an amount determined in accordance with standards adopted by the
Committee. The Strike Price at which an SAR is granted shall be equal to the
Option Price of the Option Shares to which such SAR is related.
3.8. Limitation Regarding Option Period. The Plan shall continue
indefinitely. However, no Option granted under this Plan shall have a stated
Expiration Date that is more than 10 years and 30 days following its date of
grant. Subject to the provisions of Paragraph 4.11, an Option and any
associated SARs shall lapse and be automatically forfeited upon the earlier of
the Expiration Date (i) as set forth in the Option Agreement pursuant to which
such Option and any associated SARs are granted, or (ii) as established pursuant
to Paragraph 8.3, unless an Exercise Notice is delivered to Valero on or before
the Expiration Date.
3.9. Option Agreements. Options and SARs shall be evidenced by Option
Agreements having such terms and provisions, not inconsistent with this Plan, as
the Committee deems advisable. Option Agreements need not be uniform. Promptly
following each determination by the Committee to grant an Option or SARs to a
Key Employee, the Committee shall cause Valero to enter into an appropriate
Option Agreement (or, in the case of a grant only of SARs, an amendment to an
existing Option Agreement) with such Key Employee. No Key Employee or other
person claiming by, through or under a Key Employee shall be entitled to
exercise any Option or SAR until an appropriate Option Agreement (or amendment
thereto) shall have been executed by Valero and the Key Employee. In the event
that a Key Employee of the Company is granted an Option or SARs by the Committee
but for any reason, including but not limited to death or disability, does not
actually enter into a fully executed Option Agreement (or appropriate amendment
thereto) with Valero, such Key Employee shall not be deemed a Participant with
respect to such Option or SARs and neither such Key Employee nor any person
claiming by, through or under such Key Employee shall be entitled under any
circumstances to exercise such Option or SARs.
3.10 Provisions Regarding Prospective Employees. If a prospective
Employee of the Company is granted an Option or SARs pursuant to this Plan prior
to actually commencing employment with the Company but for any reason,
including, but not limited to, death or total and permanent disability, does not
actually commence employment with the Company, such person shall not be deemed a
Participant for any
4
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purpose of this Plan and neither such person nor any person claiming by, through
or under such person shall be entitled under any circumstances to exercise such
Option or SARs. Upon actually commencing employment with the Company, such a
prospective Key Employee will then be deemed a Participant for all purposes of
this Plan, and will then, but only then, be deemed solely for purposes of this
Plan to have been continually employed by the Company from the date of grant of
the Option to the date of commencement of employment.
4. Exercise of Options and SARs.
4.1. Exercise of Options. Any Option and any associated SARs shall be
exercisable at such time and in such amounts, either as to all of the Option
Shares covered thereby or in installments, as is provided in the Participant's
Option Agreement or as may otherwise be provided in this Plan. An installment
option may allow the purchase of all or any part of the Option Shares on a
specified installment date or dates, and the subsequent purchase of any
unpurchased Option Shares after such installment date(s) and through the
Expiration Date. However, no Option may be exercised with respect to a
fractional share.
4.2. Automatic Exercise of SARs, Settlement Price for SARs. SARs may not
be exercised except simultaneously with the exercise of an Option. A
Participant or other person exercising an Option shall be deemed to have
automatically exercised on the Exercise Date that number of related SARs equal
to the number of Option Shares purchased, not exceeding the lesser of (a) the
number of related SARs held by the Participant, or (b) the number of SARs then
permitted to be exercised under the Participant's Option Agreement. When a
Participant holds fewer related SARs than the number of Option Shares to which
his or her Option pertains, the Committee may adopt policies, or include terms
in the Participant's Option Agreement, that permit or require the Participant to
exercise such SARs during or after specified periods, or in conjunction with the
exercise of a certain portion of an Option, or that permit the Participant to
determine, with any restrictions as the Committee may prescribe, the timing of
exercise of the SARs. SARs shall be settled on the basis of the daily average
sales price of the Common Stock on the Exercise Date.
4.3. Exercise Procedure. Options and SARs may be exercised only by
written notice of exercise (the "Exercise Notice"), in such form as the
Committee may prescribe, delivered to Valero's Stock Benefit Plan Administration
department at Valero's principal business office and signed by the Participant
or other person specified herein as being entitled to exercise the same. The
date on which the Exercise Notice is delivered to Valero shall be the "Exercise
Date." The Exercise Notice for Options Shares shall specify a date (the
"Settlement Date"), not less than five business days nor more than ten business
days following the Exercise Date, upon which the Option Shares shall be issued
to the Participant (or other person entitled to exercise the Option) and the
Option Price shall be paid to Valero. Subject to the provisions of Paragraph
3.6(A), on the Settlement Date the person exercising an Option shall tender to
Valero full payment for the Option Shares with respect to which the Option is
exercised, together with an additional amount equal to the amount of all taxes
required to be collected or withheld by the Company in connection with the
exercise of the Option (the "Tax Payment"); provided, however, that when related
SARs are exercised at the same time an Option is exercised, the Tax Payment
shall be reduced by withholding the amount thereof, to the extent possible, from
the cash payment otherwise payable by the Company to the Participant as the
result of the exercise of such SARs. Subject to the prior approval or
disapproval of the Committee, and to such rules and limitations as it may adopt,
if no related SARs are exercised the Tax Payment may also be made in whole or in
part by (a) withholding from the number of shares otherwise deliverable to the
person exercising the Option a number of shares whose fair market value equals
the Tax Payment or (b) delivering certificates for other shares of Common Stock
owned by the person exercising the Option, endorsed in blank with appropriate
signature guarantee, having a fair market value equal to the amount otherwise to
be collected or withheld. All calculations with respect to a Participant's
income, required tax withholding or other matters required to be made by the
Company upon the exercise of an Option shall be made using the average sales
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<PAGE>
price of the Common Stock on the Exercise Date, whether or not the Exercise
Notice is delivered to Valero before or after the close of trading on such date,
unless otherwise specified by the Committee. All calculations made with respect
to a Participant's income, required tax withholding or other matters made upon
exercise of an SAR shall be made using the price at which such SAR is settled,
unless otherwise specified by the Committee.
4.4. Payment for SARs. SARs shall be paid or settled only in cash.
Payment for SARs shall be made on the Settlement Date.
4.5. Payment with Common Stock. Subject to approval of the Committee, a
person exercising an Option may pay for Option Shares by tendering to Valero
other shares of Common Stock legally and beneficially owned by that person at
the time of the exercise of an Option. Subject to approval of the Committee, a
person exercising an Option may also pay for Option Shares by delivering a
notarized affidavit, in such form as the Committee may prescribe, certifying as
to such person's legal and beneficial ownership of shares of Common Stock held
either in such person's name or in "street name" and, in the case of shares held
in such person's name, providing the certificate number(s) for such shares; if
such method of payment is approved and utilized, the number of shares issued
upon exercise of the Option shall be reduced by the number of shares represented
by such affidavit. If approved by the Committee, either such method of exercise
may include use of a procedure whereby a person exercising an Option may request
that shares received upon exercise of a portion of an Option be automatically
applied to satisfy the exercise price for additional and increasingly larger
portions of the Option. The certificate(s) representing any shares of Common
Stock tendered in payment of the Option Price must be accompanied by a stock
power duly executed with appropriate signature guarantees. Shares of Common
Stock tendered in payment of the Option Price (including shares represented by
an affidavit) shall be valued at the daily average sales price of the Common
Stock on the Exercise Date, determined as specified in Paragraph 4.2 above. The
Committee may, in its sole and absolute discretion, refuse any tender of shares
of Common Stock, in which case it shall promptly deliver the shares of Common
Stock back to the person exercising the Option. In that event, the person may
either (a) tender to Valero on the Settlement Date the cash amount required to
pay for the Option Shares, or (b) rescind the Exercise Notice. If such person
elects to rescind the Exercise Notice, he or she may again (subject to the
provisions of this Plan relating to the termination, forfeiture, lapse or
expiration of Options) deliver an Exercise Notice with respect to such Option
Shares (and any related SARs) at any time prior to the Expiration Date of the
Options.
4.6. Rights as Stockholder. Until the issuance of the stock
certificate(s) for Option Shares purchased hereunder (as evidenced by the
appropriate entry on the books of Valero or of a duly authorized transfer agent
of Valero), no right to vote or receive dividends or any other rights as a
stockholder of Valero shall exist with respect to such Option Shares,
notwithstanding the exercise of any Option. No adjustment will be made for a
dividend or other rights for which the record date is prior to the date that
stock certificates evidencing such shares of Common Stock are issued, except as
otherwise provided under Paragraph 5.
4.7 Effect of Termination and Forfeiture. (A) Except as provided in
Paragraphs 4.11 and 4.12, an Option (and any associated SARs) may be exercised
by a Participant only while he or she is and has continually been, since the
date of the grant of the Option, an Employee of the Company. In the event a
Participant's employment with the Company is voluntarily terminated by the
Participant (other than through retirement) or is terminated by the Company
under circumstances involving willful misconduct or criminal activity by the
Participant, then, except as provided in Paragraph 4.11, all Options (and any
associated SARs) previously awarded to the Participant hereunder and not yet
exercised in accordance with Paragraph 4.3 shall automatically lapse and be
forfeited as of the date of the Participant's termination. If a Participant's
employment is terminated by retirement, death or disability, or by the Company
(except under circumstances involving willful misconduct or criminal activity by
the Participant), the provisions of Paragraph 4.11 shall
6
<PAGE>
apply. Except as set forth in the following sentence, if a Participant shall
forfeit, voluntarily surrender or otherwise permanently lose his right to
exercise an Option or SARs under any provision of this Plan or otherwise, or if
any Option shall terminate or expire pursuant to its terms, the Option Shares
subject to such Option shall once more be available to be optioned and sold
under this Plan pursuant to a new Option granted hereunder, and any associated
SARs shall again be available for grant hereunder.
(B) In the case of any termination of employment (whether voluntary or
involuntary, disability related, retirement or otherwise), the Committee or,
except with respect to a Restricted Optionee, the Chief Executive Officer of
Valero shall be entitled (but shall not be required) to permit the Participant
to exercise, for a period not to exceed 90 days, all or part of the
Participant's Options (and any associated SARs) that, at the date of termination
of employment, were exercisable pursuant to the Participant's Option
Agreement(s) and the provisions of the Plan and remained unexercised. In
addition, the Committee or, except with respect to a Participant who is a
Restricted Optionee at the date of such Option Agreement amendment, the Chief
Executive Officer of Valero may, in connection with any Participant's
termination of employment with the Company, (i) authorize any existing Option
Agreement of such Participant to remain in full force and effect under its
existing terms and conditions (including its existing vesting schedule) or such
amended terms and conditions as the Committee or the Chief Executive Officer
shall approve, and/or (ii) authorize amendments to any existing Option Agreement
(or a new Option Agreement superseding any prior Option Agreement) between
Valero and such Participant removing and/or modifying any or all of the then
present or future restrictions, conditions and/or limitations (whether arising
under such Option Agreement or this Plan) on the exercise of the Options (and
any associated SARs) previously granted to such Participant; provided that no
authorization or amendment (or new Option Agreement) shall increase the
aggregate number of Options granted to any Participant. Any action referred to
in the preceding two sentences shall be taken by the Committee or Chief
Executive Officer of Valero, if at all, not later than six months following the
Participant's effective date of termination.
(C) In cases of ambiguity in connection with the termination of any
Participant from employment with the Company, the Chief Executive Officer of the
Company is authorized to determine which, if any, of the provisions of this
Article 4 shall apply to such termination of employment, such determination to
be binding upon the Company.
4.8 Effect of Leave of Absence. A Participant who commences a leave of
absence shall thereupon be suspended from participation in this Plan during the
leave of absence. During a period of suspension from this Plan, a Participant
cannot exercise any Option or any associated SARs that would, but for this
provision, vest during such period of suspension, provided however, that such
Participant shall be entitled to exercise any Options or SARs that become
exercisable pursuant to Paragraph 4.12 during the period of suspension. A
Participant, while suspended, may exercise an Option (and any related SARs) with
respect to any portion which vested prior to the first day of such suspension;
however, such Option Shares must be purchased prior to the Expiration Date of
the Option. Notwithstanding the foregoing provisions of this Paragraph 4.8, the
Committee, in its sole and absolute discretion, may determine at any time before
or after the commencement of such leave of absence that the commencement of such
leave of absence will be treated as a termination of employment for purposes of
the Plan. If the Committee so determines, the Committee shall so notify the
Participant and specify a date, not less than 10 days following such
notification, by which the Participant must deliver an Exercise Notice with
respect to any Option Shares which the Participant is then entitled to purchase
and exercise any related SARs that may then be exercised. Options and SARs not
exercised by the Participant by such date shall be forfeited. The Committee
may, in its sole and absolute discretion, change or modify the exercise dates or
other terms of any Option or SARs held by a Participant who commences a leave of
absence which were not vested at the commencement of such leave of absence.
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<PAGE>
4.9 Effect of Disability. The total and permanent disability of a
Participant shall terminate the participation of such Participant in this Plan
subject to the conditions set forth in Paragraph 4.11. The Committee shall
determine whether a Participant is totally and permanently disabled for purposes
of this Plan and when such disability (if any) commenced, and such
determinations by the Committee shall be conclusive and binding on the
Participant and all persons claiming by, through or under such Participant.
These determinations shall be made on the basis of medical reports and other
evidence satisfactory to the Committee and in accordance with a uniform,
nondiscriminatory policy applied by the Committee, but such determinations shall
not be binding on the Company or any Participant with respect to any other
employee benefit or other plan or insurance policy, and need not be consistent
with any determinations made under any such plan or insurance policy.
4.10 Effect of Retirement or Death. The retirement or death of a
Participant shall terminate, effective on the date of such retirement or death,
the participation of such Participant in this Plan subject to the conditions set
forth in Paragraph 4.11. For purposes of this Plan, a Participant shall be
deemed to have retired when the Participant retires under the provisions of the
pension plan for Employees of Valero or any other, similar pension plan of the
Company providing benefits to such Participant. In the case of a Participant
who is not a participant in such a plan, retirement shall be deemed to occur
when the Participant retires from the service of the Company.
4.11 Exercise Following Termination, Retirement, Disability or Death. If
a Participant's employment is terminated because of retirement, death or
disability (with the determination of disability to be made within the sole
discretion of the Committee), any unexercised Option or SAR held by the
Participant shall remain outstanding according to its original terms;
alternatively, the Committee or, except with respect to a Participant subject to
Section 16 under the Exchange Act, the Chief Executive Officer of the Company,
may prescribe new or additional terms for the vesting, exercise or realization
of the Option or SAR. Absent any determination by the Committee or the Chief
Executive Officer to the contrary, any unexercised Option or SAR held by a
Participant whose employment is terminated because of retirement, death or
disability shall vest or become exercisable according to the Option or SAR's
original terms.
4.12 Effect of Change of Control. (A) As used herein, the term "Change of
Control" shall mean each occurrence of any one or more of the following events:
(i) the stockholders of Valero approve any agreement or transaction
pursuant to which: (A) the Company will merge or consolidate with any other
Person (other than a wholly owned subsidiary of the Company) and will not be
the surviving entity (or in which the Company survives only as the subsidiary
of another entity); (B) the Company will sell all or substantially all of its
assets to any other Person (other than a wholly owned subsidiary of the
Company); or (C) the Company will be liquidated or dissolved; or
(ii) any "person" or "group" (as these terms are used in Section 13(d)
and 14(d) of the Exchange Act) other than the Company, any subsidiary of the
Company, any employee benefit plan of the Company or its subsidiaries, or any
entity holding Common Stock for or pursuant to the terms of such employee
benefit plans, is or becomes an "Acquiring Person" as defined in the Rights
Agreement (or any successor Rights Agreement) (or, if no Rights Agreement is
then in effect, such person or group acquires or holds such number of shares
as, under the terms and conditions of the most recent such Rights Agreement to
be in force and effect, would have caused such person or group to be an
"Acquiring Person" thereunder); or
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<PAGE>
(iii) any "person" or "group" shall commence a tender offer or
exchange offer for 30% or more of the shares of Common Stock then outstanding,
or for any number or amount of Common Stock which, if the tender or exchange
offer were to be fully subscribed and all shares for which the tender or
exchange offer is made were to be purchased or exchanged pursuant to the
offer, would result in the acquiring person or group directly or indirectly
beneficially owning 50% or more of the Common Stock then outstanding; or
(iv) individuals who, as of any date, constitute the Board of
Directors (the "Incumbent Board") thereafter cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director whose election, or nomination for election by
Valero's stockholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a person or group other than the Board;
or
(v) the occurrence of the Distribution Date (as defined in the Rights
Agreement); or
(vi) any other event determined by the Board of Directors or the
Committee to constitute a "Change of Control" hereunder.
(B) Notwithstanding the provisions of Paragraph 4.7, in the event
that a Change of Control shall occur, each Option (and any SARs) held by a
Participant pursuant to the Plan shall remain exercisable until the earlier of
(i) the Expiration Date of the Option, or (ii) 90 days following the
Participant's date of termination of employment.
5. Adjustments Upon Changes In Capitalization.
5.1. Securities Received Upon Exercise. If all or any portion of an
Option or SAR is exercised subsequent to any stock dividend, rights
distribution, split-up, recapitalization, exchange of shares, merger,
consolidation, spin-off, reorganization, or liquidation, as a result of which
shares or other securities of any class or rights shall be issued in respect of
outstanding shares of Common Stock or shares of Common Stock shall be changed
into the same or a different number of shares of the same or another class or
other securities (hereafter "Reorganization Event"), the person exercising such
Option or SAR shall receive, (a) for the aggregate price payable upon such
exercise of such Option, (i) the aggregate number and class of shares, rights or
other securities for which a recognized market exists, and (ii) a cash amount
equal to the fair market value on such date, as reasonably determined by the
Committee, of any other property (other than regular cash dividend payments) and
of any shares, rights or other securities for which no recognized market exists,
which, if shares of Common Stock (as authorized at the date of the granting of
such Option) had been purchased at the date of granting of the Option for the
same aggregate price (on the basis of the price per share provided in the
Option) and had not been disposed of, such person or persons would be holding at
the time of such exercise as a result of such purchase and any such
Reorganization Event, and (b) a cash amount upon the exercise of the SARs equal
to the difference between the aggregate Strike Price of such SAR and the
aggregate of (i) the average sales price, on the date provided in Paragraph 4.2
hereof, as the case may be, of any whole shares or units of Common Stock, rights
or other securities for which a recognized market exists, and (ii) the fair
market value on such date, as reasonably determined by the Committee, of any
other property (other than regular cash dividend payments) which the holder of a
number of shares of Common Stock equal to the number of such SARs, if such
shares had been purchased at the date of granting of such SARs and not otherwise
disposed of, would be holding at the time of exercise of such SARs as a result
of
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<PAGE>
such purchase and any such Reorganization Event; provided, however, that no
fractional share of Common Stock, fractional right or other fractional security
shall be issued upon any such exercise, and the aggregate price paid shall be
appropriately reduced to reflect any fractional share of Common Stock,
fractional right or other fractional security not issued; and provided further,
however, that if the exercise of any Option subsequent to any Reorganization
Event would, pursuant to clause (a) of this Paragraph 5.1, require the delivery
of shares, rights or other securities that Valero is not then authorized to
issue or that in the sole judgment of the Committee cannot be issued without
undue effort or expense, the person exercising the Option shall receive, in lieu
of such shares, rights or other securities, a cash payment equal to the fair
market value on the Exercise Date, as reasonably determined by the Committee, of
such shares, rights or other securities. For purposes of applying the provisions
of this Plan, the Preference Share Purchase Rights distributed pursuant to the
Rights Agreement shall be deemed not to have been distributed until the
Distribution Date (as defined in the Rights Agreement).
5.2. Adjustment of Option Shares Available. In the event of any change
in the number of shares of Common Stock outstanding resulting from a
Reorganization Event, (a) the aggregate number and class of shares of Common
Stock remaining available to be optioned under this Plan shall be that number
and class which a person, to whom an Option had been granted for all of the
available shares of Common Stock under this Plan on the date preceding such
change, would be entitled to receive as provided in Paragraph 5, and (b) the
aggregate number of SARs remaining available under this Plan shall be determined
pursuant to the formula B/A (C) wherein:
a = the number of Option Shares available to be optioned under this Plan
immediately prior to such change,
b = the number of Option Shares available to be optioned under this Plan
immediately following such change, and
c = the number of SARs available for grant under this Plan immediately
prior to such change.
Upon the occurrence of any Reorganization Event, the Committee shall be
entitled (but shall not be required) to determine that new Option Agreements
shall be entered into with Participants reflecting the Reorganization Event.
6. Administration.
6.1. Plan Administered by Committee. This Plan shall be administered by
a committee composed solely of two or more "Non-Employee Directors" (as defined
in Rule 16b-3 under the Exchange Act) of Valero, which committee shall, except
as hereinafter set forth, be the Compensation Committee, as appointed and
constituted from time to time by the Board of Directors. In the event that the
membership of the Compensation Committee shall fail to meet the foregoing
criteria, then additional or different members of the Board of Directors shall
be appointed by the Board of Directors to act for purposes of administering this
Plan so that the Committee administering this Plan shall consist solely of two
or more "Non-Employee Directors."
6.2. Powers of the Committee. In connection with its administration of
this Plan, the Committee is empowered to:
(a) Make all determinations and computations concerning the selection of
Participants, the granting of Options and SARs, the pricing thereof
and the number of Option Shares to be optioned, and SARs to be
granted, to each Participant;
(b) Cause Valero to enter into Option Agreements with Participants;
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<PAGE>
(c) With the consent of the Participant, enter into agreements amending
any Option Agreement to grant SARs thereunder, change the Option Price
or Expiration Date of any Option, the Strike Price of any SAR or any
other term or condition thereof, or to terminate any such Option
Agreement;
(d) Make rules and regulations for the administration of the Plan not
inconsistent with the terms and provisions of this Plan, including
rules providing for the accelerated exercise of Options and SARs in
such circumstances as the Committee may deem appropriate;
(e) Construe all terms, provisions, conditions and limitations of the Plan
in good faith, and adopt amendments to the Plan;
(f) Make equitable adjustments for any mistakes or errors in the
administration of this Plan or deemed by the Committee to be necessary
as the result of any unusual situation or any ambiguity in the Plan;
(g) Select, employ and compensate, from time to time, consultants,
accountants, attorneys and other agents and employees as the
Compensation Committee may deem necessary or advisable for the proper
and efficient administration of this Plan.
6.3. Express Powers not Exclusive. The foregoing list of express powers
granted to the Committee upon the adoption of this Plan is not intended to be
either complete or exclusive, but the Committee shall have, in addition to the
specific powers granted by this Plan, such powers that it may deem necessary,
desirable, convenient or appropriate for the supervision and administration of
this Plan. Except as otherwise specifically provided herein, the decisions or
judgment of the Committee on any question or claim arising hereunder shall be
final, binding and conclusive upon the Participants and all persons claiming by,
through or under a Participant.
7. Miscellaneous Provisions.
7.1. Nonassignability. Without prior written approval from the
Committee, no Options, SARs, or any other security, right or interest granted
under this Plan shall be transferable by the Participant other than pursuant to
a will of the Participant or the laws of descent and distribution, and no
Participant or other person claiming by, through or under a Participant shall
have any right to sell, assign, transfer, pledge, anticipate, mortgage or
otherwise encumber, transfer, hypothecate or convey in advance of actual receipt
any Option Shares, SARs, or any cash amounts or other shares, rights or
securities (if any) payable hereunder, or any part thereof, all of which are,
and all rights in and to which are, hereby expressly declared to be
nonassignable and nontransferable; any such purported sale, assignment or
conveyance without the Committee's prior approval shall be void and of no force
or effect. No Option Shares, SARs, and no part of any cash amounts or other
shares, rights or securities payable hereunder (if any) shall, prior to actual
payment or delivery, be subject to seizure or sequestration for the payment of
any debts, judgments, alimony or separate maintenance owed by a Participant, or
other person claiming by, through or under a Participant, or be transferable by
operation of law in the event of bankruptcy or insolvency, except as required by
law. The designation of a beneficiary shall not constitute a transfer hereunder.
7.2. Investment Letter. As a condition to the exercise of any portion of
an Option, the Committee, the General Counsel or the Corporate Secretary may
require the person exercising such Option to represent and warrant to Valero at
the time of any such exercise that the Option Shares are being purchased only
for investment and without any present intention to sell or distribute such
Option Shares, if, in the opinion of counsel for Valero, such representation is
required or desirable under the Securities Act of 1933 or any other applicable
state, federal or local law, regulation or rule of any governmental agency. The
Committee, the General Counsel or the Corporate Secretary may require such
person to execute and deliver to Valero an appropriate investment letter
containing representations and warranties of the type generally described above.
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<PAGE>
7.3. Representatives of the Participant. Neither the Company, its
officers, directors, employees, or agents, nor any member of the Committee shall
bear any liability to the estate of, or to any spouse, beneficiary, legatee or
heir of a Participant, or to the Participant, or to any other person, for
authorizing an heir, beneficiary, executor, legatee, administrator, guardian or
legal representative of a Participant, or an individual or entity who is
represented as such, to exercise an Option or SAR or for issuing the Option
Shares purchased pursuant to the exercise of any Option, or for making any cash
payment (or for withholding any Tax Payment from any cash payment) relating to
any SAR granted under this Plan.
7.4. Responsibility for Taxes. All taxes payable with respect to income
to a Participant resulting from the exercise of an Option or SARs granted
hereunder shall be the sole responsibility of the Participant, not of the
Company or Valero, whether or not Valero or the Company shall have withheld or
collected from the Participant any sums required to be withheld or collected in
respect of such income, and whether or not any sums withheld or collected shall
be sufficient to provide for any such taxes.
7.5. Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed to create a contract of employment or
to give any Participant any right to be retained in the employ of the Company or
to serve or continue to serve as an officer or director of Valero or any
subsidiary of Valero.
7.6. Gender, Singular and Plural. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, or neuter, as the
identity of the person or persons may require. As the context may require, the
singular may be read as the plural and the plural as the singular.
7.7. Captions. The captions of the Paragraphs of this Plan are for
convenience only and shall not control or affect the meaning or construction of
any of its provisions.
7.8. Validity. In the event any provision of this Plan is held invalid,
void, or unenforceable, the same shall not affect, in any respect whatsoever,
the validity of any other provision of this Plan.
7.9. Notice. Any notice, statement, decision or communication required
or permitted to be given under this Plan shall be sufficient if in writing and
hand delivered, or sent by registered or certified mail, if to the Company, to
the principal office of Valero, directed to the attention of the Corporate
Secretary of Valero, and if to a Participant or other person, to the address of
the Participant or other person as it shall appear on the books of the Company.
Any such notice shall be deemed given as of the date of delivery or, if delivery
is made by mail, as of the third day following the date shown on the postmark on
receipt for registration or certification.
7.10 NYSE Listing. Notwithstanding anything to the contrary contained in
this Plan, in any Option grant, or any agreement entered into hereunder, any
grant made under this Plan shall be conditional and shall be entered into or
granted, as the case may be, subject to acceptance of the Option Shares for
listing on the NYSE. No such agreement entered into under this Plan or any
Option grant made under this Plan shall create any obligation in the Company
prior to such acceptance. If the Option Shares ultimately are not accepted for
such listing, then any and all such agreements theretofore entered into shall
thereupon terminate and shall be void and of no force or effect, no Option
Shares shall be required to be issued thereunder.
7.11 Inconsistency. In the event of any conflict or inconsistency
between the provisions of this Plan and the provisions of any Option Agreement,
the provisions of this Plan shall control.
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8. Amendment and Termination of Plan and Option Agreements.
8.1. Amendments and Termination. The Board of Directors or the
Committee, without approval of the Participants but subject to Paragraph 8.2,
may amend this Plan from time to time. The Board of Directors or the Committee,
without approval of the Participants but subject to Paragraph 8.2, may at any
time terminate this Plan.
8.2. Effect of Amendment or Termination. Any amendment or termination of
this Plan may not materially adversely affect Options or SARs already granted.
If any termination or amendment materially adversely affects Options or SARs
already granted, then such Options and SARs shall, subject to Paragraph 8.3,
remain in full force and effect as if this Plan had not been so amended or
terminated. If the Board of Directors or the Committee deems it appropriate or
is advised by counsel that stockholder approval is required, the amendment or
termination of this Plan shall be submitted to the stockholders of Valero for
approval.
8.3 Cancellation of Options. Any other provision of this Plan to the
contrary notwithstanding, if either (a) the Option Price of any Option shall on
any NYSE trading day equal or exceed 125 percent of the closing sales price per
share of the Common Stock (determined as provided in Paragraph 3.7), or (b) out
of any period of 120 consecutive NYSE trading days the Option Price of any
Option shall exceed the closing sales price per share of the Common Stock
(determined as provided in Paragraph 3.7) on any 80 or more of such days, then
the Committee, in its sole discretion, may unilaterally cancel and terminate
such Option, the related Option Agreement and any associated SARs. Upon such
Committee determination, the Expiration Date of such Option, Option Agreement,
and SARs shall be at the close of business on the date of such determination.
The Committee shall cause notification of cancellation to be sent to the
Participant (or other person entitled to exercise such Option), but failure to
send or any delay in sending notice shall not nullify, delay, or otherwise
affect cancellation. No compensation shall be paid or payable to any
Participant (or other person entitled to exercise such Option), or other person
claiming by, through or under a Participant, in respect of any cancellation. If
an Option, the related Option Agreement, and any associated SARs, shall be
terminated and canceled pursuant to the provisions of this Paragraph 8.3, the
Option Shares and any associated SARs subject to such Option (to the extent not
theretofore exercised) shall once more be available to be optioned and sold
under this Plan pursuant to a new Option granted hereunder. No Participant with
respect to whom an Option and any associated SARs has been canceled pursuant to
this Paragraph 8.3 shall have any right, whether by virtue of such cancellation
or otherwise, to require the Company or the Committee to grant a new Option to
him under this Plan or any other stock option plan of the Company.
9. Claims.
9.1. Filing of Claims. A Participant or other person claiming to have
been denied any benefit or right provided under this Plan shall have the right
to file a written claim with the Committee. All claims shall be submitted on a
form provided by the Committee, which shall be signed by the claimant and shall
be considered filed on the date the claim is received by the Committee. The
claim will be reviewed and a written decision will be rendered by a member of
the Committee designated by the Committee for such purpose within 90 days
following receipt of the claim.
9.2. Review of Denial. Within 90 days after receipt of a notice of any
denial of benefits, the claimant or his authorized representative may request,
in writing, to appear before the full Committee for a review of his or her
claim. The Committee in its discretion may elect to grant the Participant's
request to personally appear before the Committee. Any decision of the
Committee thereafter to deny benefits shall be in writing and shall include the
specific reasons for the decision and references to relevant Plan provisions on
which
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the decision is based. The decision of the Committee shall be final, conclusive
and binding upon the Participant or other claimant and all persons claiming by,
through or under such claimant.
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EXHIBIT 10.4
VALERO REFINING AND MARKETING COMPANY
RESTRICTED STOCK PLAN
FOR
NON-EMPLOYEE DIRECTORS
Adopted April 23, 1997
<PAGE>
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
TABLE OF CONTENTS
Page
------
1. PURPOSE AND EFFECTIVE DATE OF PLAN................................... 1
-----------------------------------
2. CERTAIN DEFINITIONS.................................................. 1
-------------------
3. SHARES SUBJECT TO THE PLAN........................................... 2
--------------------------
4. ELIGIBILITY.......................................................... 2
-----------
5. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS................................ 3
-------------------------------------
6. ADMINISTRATION OF THE PLAN........................................... 4
--------------------------
7. RESTRICTIONS APPLICABLE TO RESTRICTED SHARES......................... 5
--------------------------------------------
8. FORFEITURE; COMPLETION OF RESTRICTION PERIOD......................... 8
--------------------------------------------
9. ADJUSTMENT IN EVENT OF CHANGES IN COMMON STOCK....................... 8
----------------------------------------------
10. NON-ALIENATION OF BENEFITS........................................... 8
--------------------------
11. APPOINTMENT OF ATTORNEY-IN-FACT...................................... 9
-------------------------------
12. WITHHOLDING TAXES.................................................... 9
-----------------
13. AMENDMENT AND TERMINATION OF PLAN.................................... 10
---------------------------------
14. EXECUTION OF AGREEMENT............................................... 10
----------------------
15. GOVERNMENT AND OTHER REGULATIONS..................................... 10
--------------------------------
16. NO RIGHT TO RENOMINATION............................................. 10
------------------------
17. NON-EXCLUSIVITY OF PLAN.............................................. 11
-----------------------
18. GOVERNING LAW........................................................ 11
-------------
19. MISCELLANEOUS PROVISIONS............................................. 11
------------------------
i
<PAGE>
1. PURPOSE AND EFFECTIVE DATE OF PLAN.
----------------------------------
The purpose of this Plan is to supplement the compensation paid to
Outside Directors, to increase their proprietary interest in the Company, to
attract and retain persons of outstanding caliber to serve as Directors of the
Company and to enhance their identification with the interests of the Company's
stockholders by grants of Common Stock. The Plan shall become effective (the
"Effective Date") on the first full trading day of the Common Stock on the New
York Stock Exchange ("NYSE") after the date when Valero Energy Corporation
("VEC") distributes all of the Common Stock of the Company to the stockholders
of VEC immediately prior to the merger of VEC with a subsidiary of PG&E
Corporation. Bonus Shares awarded under the Plan shall be in addition to, and
shall not replace, any cash or other compensation arrangement available to
Outside Directors.
2. CERTAIN DEFINITIONS.
-------------------
(a) "Annual Meeting" shall mean the annual meeting of stockholders
for election of directors of the Company. In the event of any adjournment
of any such meeting, the date on which the inspectors appointed for such
meeting declare directors to have been elected shall be deemed the
meeting date for purposes of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Common Stock" shall mean the Common Stock, par value $0.01 per
share, of the Company, including a Preference Share Purchase Right.
(d) "Company" shall mean Valero Energy Corporation, a Delaware
corporation.
(e) "Compensation Committee" shall mean the Compensation Committee of
the Board of Directors of the Company.
(f) "Employee Director" shall mean a member of the Board who is an
employee of the Company or any subsidiary of the Company.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "Fair Market Value" shall mean the average of the high and low
sales prices of the Common Stock on a Grant Date (or if Common Stock was
not traded on such day, the first day following the Grant Date on which
Common Stock was traded) as reported in the Wall Street Journal under the
NYSE Composite Transactions listing.
(i) "Grant Date" shall mean the date on which Shares are awarded to
an Outside Director pursuant to Paragraph 5.
(j) "Mandatory Retirement Policy" shall mean the policy set forth in
Article II, Section 1, of the By-laws of the Company, or any successor
policy.
(k) "Outside Director" shall mean a member of the Board who is not an
employee of the Company or any subsidiary of the Company.
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(l) "Plan" shall mean this Valero Refining and Marketing Company
Restricted Stock Plan for Non-Employee Directors.
(m) "Preference Share Purchase Rights" shall have the meaning
specified in Paragraph 7(f)(v).
(n) "Restriction Period" shall mean the period of time, as specified
in Paragraph 8, applicable to Restricted Shares granted under the Plan.
(o) "Restricted Shares" or "Shares" shall mean shares of Common Stock
granted to an Outside Director pursuant to Paragraph 5.
(p) "Restricted Shares Agreement" shall mean the agreement described
in Paragraph 5.
(q) "Retained Distributions" shall mean distributions which are
retained by the Company pursuant to Paragraph 7(e)(ii).
(r) "Subsidiary of the Company" shall mean any corporation,
partnership or other entity in which the Company owns, directly or
indirectly, a controlling interest.
3. SHARES SUBJECT TO THE PLAN.
--------------------------
(a) Subject to the provisions of Paragraphs 9 and 19(d) below, the
maximum aggregate number of shares of Common Stock that may be granted under the
Plan shall be 100,000 Shares; provided however, that any Shares granted under
the Plan which are forfeited pursuant to the terms of the Plan or otherwise
surrendered shall again become available for grant under the Plan. Shares
withheld by the Company, or delivered to the Company, to pay taxes pursuant to
Paragraph 12 shall not be available for additional grants under the Plan.
(b) The Shares may be, in whole or in part, authorized but unissued
shares of Common Stock or shares of Common Stock previously issued and
outstanding and reacquired by the Company.
(c) The Company shall not be required to issue fractional Shares, and in
lieu thereof any fractional Shares shall be rounded to the next higher number of
whole Shares.
(d) The Company shall have no obligation to register the Shares with the
Securities and Exchange Commission, either prior to or after being granted to an
Outside Director.
4. ELIGIBILITY.
-----------
The only persons eligible to participate in the Plan shall be Outside
Directors. An Employee Director who retires from employment with the Company or
any Subsidiary of the Company shall be (without further action by the Committee)
eligible to participate in the Plan and shall be entitled to receive a grant of
Restricted Stock immediately upon the commencement of his or her service as an
Outside Director.
2
<PAGE>
5. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS.
-------------------------------------
(a) Each person who is an Outside Director as of the Effective Date
and who was a non-employee director of Valero Energy Corporation immediately
prior to the Effective Date shall receive a grant of Restricted Shares under
this Plan (calculated pursuant to Paragraph 5(b)) on the date of the next Annual
Meeting on which such Outside Director would have received an additional grant
of restricted shares as determined by applying to that person the terms of
Section 5(c) (attached hereto as Schedule A) of the Valero Energy Corporation
1990 Restricted Stock Plan for Non-Employee Directors had that plan continued in
force without the occurrence of any Change of Control.
(b) Each person who is first elected or appointed an Outside Director
after the Effective Date (or who is eligible for an additional grant of
Restricted Shares pursuant to Paragraph 5(a) or 5(c)) shall be automatically
granted on the date so elected or appointed the number of Restricted Shares
determined by dividing the sum of $54,000 by the Fair Market Value of a share of
the Common Stock on such Grant Date; provided however, that if any such Outside
Director would not be eligible for reelection to an additional term as a
Director of the Company at the end of his term due to the Mandatory Retirement
Policy (or shall have advised the Board that he does not intend to seek
reelection at the end of such term), such Outside Director shall, in lieu of
such amount, be automatically granted the number of Restricted Shares determined
by dividing the sum set forth below by the Fair Market Value of a share of the
Common Stock on such Grant Date:
Number of Annual Meetings Scheduled
to Occur Prior to the Annual Meeting
at Which Such Outside Director's Value of
Term of Office Ends Restricted Shares Granted
------------------------------------ -------------------------
None $18,000
One $36,000
Two $54,000
For purposes of applying the foregoing provision, the Annual Meeting
at which a Director is elected or appointed shall be excluded in
determining the appropriate number of Annual Meetings.
(c) Each Outside Director who has previously received a grant of
Restricted Shares under the Plan and who is reelected for an additional term as
an Outside Director at, or whose term of office otherwise continues following
the date of, any Annual Meeting on which all such Restricted Shares have become
fully vested pursuant to Paragraph 7 shall thereupon receive an additional
automatic grant of Restricted Shares in accordance with Paragraph 5(b); provided
however, that if the Restriction Period with respect to such Restricted Shares
has ended due solely to a Change of Control of the Company, such Outside
Director shall not be eligible to receive an additional grant of Restricted
Shares until the date of the Annual Meeting upon which, had such Change of
Control not occurred, such Outside Director would otherwise have become eligible
to receive such an additional grant.
(d) The value of any Restricted Shares granted pursuant to Paragraphs
5(a), 5(b) or 5(c) above shall be adjusted for grants made in calendar years
subsequent to 1997 as follows: the dollar amount of each grant during any
calendar year after 1997 will be adjusted using the prior year's applicable
grant amount (e.g., either $18,000, $36,000 or $54,000 for 1997) as a base
amount and adjusting such preceding year's applicable base amount for projected
inflation following the grant date by multiplying such base amount by a fraction
in which the numerator is the annual average Consumer Price Index-U
3
<PAGE>
("CPI-U") in the Survey of Current Business published by the United States
Department of Commerce, Bureau of Economic Analysis, for such preceding year and
the denominator is the CPI-U for the second immediately preceding year. In the
event that CPI-U is not available at the date a grant is required to be made
pursuant to the foregoing provisions, such grant shall be made as soon as such
information is available, but the dates of which such Restricted Stock shall
vest pursuant to Paragraph 8 shall be determined as if such grant were made on
the date otherwise required hereunder.
(e) The proper officers of the Company shall promptly cause the Company
to enter into an agreement ("Restricted Share Agreement") with each Outside
Director granted Restricted Shares pursuant to this Paragraph 5, and shall cause
the Company to issue such Restricted Shares, all without further action by the
Company, the Board, the Compensation Committee or the Special Committee. Each
Outside Director receiving an automatic grant of Restricted Shares pursuant to
this Paragraph 5 is referred to herein as a "Participant." The execution and
delivery of a Restricted Shares Agreement shall be a condition precedent to the
issuance of Restricted Shares to a Participant.
6. ADMINISTRATION OF THE PLAN.
--------------------------
(a) Except as otherwise set forth herein, the Plan shall be administered
by the Compensation Committee, as appointed and constituted from time to time by
the Board so long as the Compensation Committee is composed solely of two or
more "Non-Employee Directors" (as defined in Rule 16b-3 under the Exchange Act).
In the event the Compensation Committee shall fail to meet the foregoing
criteria, then additional or different persons shall be appointed by the Board
of Directors for purposes of administering this Plan so that the committee
administering this Plan shall be composed solely of two or more Non-Employee
Directors.
(b) In connection with its administration of this Plan, the Compensation
Committee is empowered to:
(i) Make rules and regulations for the administration of the Plan
that are not inconsistent with the terms and provisions of this Plan;
(ii) Construe all terms, provisions, conditions and limitations of
the Plan in good faith, and adopt amendments to the Plan;
(iii) Make equitable adjustments for any mistakes or errors in the
administration of this Plan or deemed to be necessary as the result of any
unusual situation or any ambiguity in the Plan;
(iv) Select, employ and compensate, from time to time, consultants,
accountants, attorneys and other agents and employees as the Compensation
Committee may deem necessary or advisable for the proper and efficient
administration of this Plan.
(c) The foregoing list of express powers granted to the Compensation
Committee upon the adoption of this Plan is not necessarily intended to be
either complete or exclusive, and the Compensation Committee shall, in addition
to the specific powers granted by this Plan, have such powers not inconsistent
with the Plan or Rule 16b-3, whether or not expressly authorized herein, which
it may deem necessary, desirable, advisable, proper, convenient or appropriate
for the supervision and administration of this Plan. Except as otherwise
specifically provided herein, the decisions and
4
<PAGE>
judgment of the Compensation Committee on any question or claim arising
hereunder shall be final, binding and conclusive upon the Participants and all
persons claiming by, through or under a Participant.
(d) Notwithstanding the foregoing, the Compensation Committee shall have
no authority to exercise discretion with respect to the selection of any Outside
Director as a Participant in the Plan, the determination of the number of
Restricted Shares that are allocated to any such Outside Director or the terms
or conditions of any such allocation, and shall have no authority to amend any
provision of the Plan relating to eligibility for participation in the Plan, the
amount or timing of grants under the Plan or the imposition or removal of
restrictions on the vesting of Restricted Shares.
(e) Distributions of Shares may, as the Compensation Committee shall in
its sole discretion determine, be made from authorized but unissued shares or
from treasury or reacquired shares.
7. RESTRICTIONS APPLICABLE TO RESTRICTED SHARES.
--------------------------------------------
(a) All Restricted Shares granted pursuant to Paragraph 5 of the Plan
shall be subject to the risk of forfeiture and the certificates representing
such Restricted Shares shall contain the restrictive legend set forth in
Paragraph 7(c) below during the applicable Restriction Period. The Restriction
Period for each grant of Restricted Shares shall commence as of the Grant Date.
(b) The Restriction Period for any Restricted Shares previously issued
to an Outside Director shall end and the Restricted Shares and any related
Retained Distributions shall become nonforfeitable on the earlier of any of the
following events:
(i) The date an Outside Director ceases to be a Director of the
Company by reason of the Mandatory Retirement Policy;
(ii) The date an Outside Director completes his tenure as a Director
of the Company as provided in the By-laws of the Company and declines to
stand for reelection;
(iii) The date an Outside Director, having been nominated for and
agreed to stand for reelection, is not reelected by the stockholders of
the Company to serve as a member of the Board;
(iv) The date of the death of an Outside Director;
(v) The date an Outside Director certifies in writing to the Company
that he is resigning as a member of the Board due to medical or health
reasons which render such Outside Director unable to continue to serve as
a member of the Board;
(vi) Subject to the provisions of and definitions contained in
Paragraph 7(f), the occurrence of a Change of Control of the Company; or
(vii) The date specified in Paragraph 7(g).
(c) Restricted Shares, when issued, will be represented by a stock
certificate or certificates registered in the name of the Outside Director to
whom such Restricted Shares shall have been granted.
5
<PAGE>
Each such certificate and any securities constituting Retained Distributions
shall bear a legend in substantially the following form:
"The shares represented by this certificate are subject to the terms
and conditions (including forfeiture and restrictions against transfer)
contained in the Valero Refining and Marketing Company Restricted Stock
Plan for Non-Employee Directors. A copy of such Plan is on file with the
Corporate Secretary of Valero Refining and Marketing Company."
(d) Each certificate shall be deposited by the Outside Director with the
Treasurer, Corporate Secretary, Stock Plan Administrator or Transfer Agent of
the Company, together with stock powers or other instruments of assignment, each
endorsed in blank, which will permit transfer to the Company of all or any
portion of the Restricted Shares and any securities constituting Retained
Distributions that shall be forfeited or that shall not become nonforfeitable in
accordance with the Plan.
(e) Restricted Shares shall constitute issued and outstanding shares of
Common Stock for all corporate purposes. The Outside Director will have the
right to vote such Restricted Shares, to receive and retain all regular cash
dividends paid on such Restricted Shares and to exercise all other rights,
powers and privileges of a holder of Common Stock with respect to such
Restricted Shares, with the exception that:
(i) the Outside Director will not be entitled to delivery of the
stock certificate or certificates representing such Restricted Shares
until the Restriction Period applicable to such shares or a portion
thereof shall have expired and unless all other vesting requirements with
respect thereto shall have been fulfilled;
(ii) other than cash dividends and rights to purchase stock which
might be distributed to shareholders of the Company, the Company will
retain custody of all distributions ("Retained Distributions") made or
declared with respect to Restricted Shares (and such Retained
Distributions will be subject to the same restrictions, terms and
conditions as are applicable to the Restricted Shares with respect to
which they were made, paid or declared) until such time, if ever, as the
Restriction Period applicable to the Restricted Shares with respect to
which such Retained Distributions shall have been made, paid or declared
shall have expired, and such Retained Distributions shall not bear
interest or be segregated in separate accounts;
(iii) upon the breach of any restrictions, terms or conditions
provided in the Plan with respect to any Restricted Shares or Retained
Distributions, such Restricted Shares and any related Retained
Distributions shall thereupon be automatically forfeited.
(f) A "Change of Control" as used herein, shall be deemed to occur when:
(i) the stockholders of the Company approve any agreement or
transaction pursuant to which: (A) the Company will merge or consolidate
with any other person (other than a wholly owned subsidiary of the
Company) and will not be the surviving entity (or in which the Company
survives only as the subsidiary of another entity); (B) the Company will
sell all or substantially all of its assets to any other person (other
than a wholly owned subsidiary of the Company); or (C) the Company will
be liquidated or dissolved; or
6
<PAGE>
(ii) any "person" or "group" (as these terms are used in Section
13(d) and 14(d) of the Exchange Act) other than the Company, any subsidiary
of the Company, any employee benefit plan of the Company or its
subsidiaries, or any entity holding Common Stock for or pursuant to the
terms of such employee benefit plans, is or becomes an "Acquiring Person"
as defined in the Rights Agreement dated June 18, 1997 ("Rights Agreement")
between the Company and Harris Trust and Savings Bank (or any successor
Rights Agreement) (or, if no Rights Agreement is then in effect, such
person or group acquires or holds such number of shares as, under the terms
and conditions of the most recent such Rights Agreement to be in force and
effect, would have caused such person or group to be an "Acquiring Person"
thereunder); or
(iii) any "person" or "group" shall commence a tender offer or
exchange offer for 30% or more of the shares of Common Stock then
outstanding, or for any number or amount of shares which, if the tender or
exchange offer were to be fully subscribed and all shares for which the
tender or exchange offer is made were to be purchased or exchanged pursuant
to the offer, would result in the acquiring person or group directly or
indirectly beneficially owning 50% or more of the shares of Common Stock
then outstanding; or
(iv) individuals who, as of any date, constitute the Board (the
"Incumbent Board") thereafter cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office occurs
as a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation
of proxies or consents by or on behalf of a person or group other than the
Board; or
(v) the occurrence of the Distribution Date (as defined in the
Rights Agreement); or
(vi) any other event determined by the Board or the Committee to
constitute a "Change of Control" hereunder.
(g) Except as otherwise provided herein, the Restriction Period shall
terminate as follows: In the case of each Outside Director receiving a
grant of Restricted Shares pursuant to Paragraph 5(b) or 5(c), the
Restriction Period shall terminate on the date of each Annual Meeting to
occur following the Grant Date with respect to that number of Shares that
had a Fair Market Value on the Grant Date of $18,000 (such amount to be
subject to adjustment in the same manner as set forth in Paragraph 5(d)).
7
<PAGE>
8. FORFEITURE; COMPLETION OF RESTRICTION PERIOD.
--------------------------------------------
(a) If an Outside Director ceases to be a member of the Board for any
reason other than as set forth in Paragraph 7(b), then all Restricted Shares and
all Retained Distributions with respect thereto issued to such Outside Director
and to which the Restriction Period still applies shall be forfeited to the
Company and the Outside Director shall not have any rights (including dividend
and voting rights) with respect to such forfeited Restricted Shares and Retained
Distributions.
(b) Upon the completion of the Restriction Period with respect to all or
any portion of an Outside Director's Restricted Shares, and the satisfaction of
any other applicable restrictions, terms and conditions, such Restricted Shares
and any Retained Distributions with respect to such Restricted Shares shall
become nonforfeitable. The Company shall promptly thereafter issue and deliver
to the Outside Director new stock certificates or instruments representing such
Restricted Shares and Retained Distributions registered in the name of the
Outside Director or, if deceased, his or her legatee, personal representative or
distributee, which do not contain the legend set forth in Paragraph 7(c);
provided, however, (i) such new stock certificates may be required to bear a
restrictive legend, indicating that such shares have not been registered under
the Securities Act of 1933, if determined to be appropriate by counsel for the
Company, and (ii) the Company may require, as a condition precedent to the
issuance of any such certificates, that the Outside Director, or other person
receiving such certificates, execute and deliver to the Company a letter, in a
form satisfactory to counsel for the Company, to the general effect that such
shares are being acquired by such person for investment only and not with a view
to distribution.
9. ADJUSTMENT IN EVENT OF CHANGES IN COMMON STOCK.
----------------------------------------------
In the event of a recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation, liquidation or other
similar event, the aggregate number and class of Restricted Shares and other
securities or property available for grant under the Plan shall be automatically
adjusted so that the total number of shares of Common Stock or other securities
or property issuable under the Plan immediately following such event shall be
the number of shares of Common Stock and other securities or property which, had
all remaining shares of Common Stock available under the Plan been granted to a
single holder immediately prior to such event, would be held or received by such
holder immediately following such event.
10. NON-ALIENATION OF BENEFITS.
--------------------------
No Shares, Retained Distributions, or other rights or benefits under the
Plan or any Restricted Shares Agreement shall be subject, prior to the end of
any applicable Restriction Period or other restrictive period, to anticipation,
alienation, sale, assignment, hypothecation, pledge, exchange, transfer,
encumbrance or charge (other than by will or the laws of descent and
distribution), and any such attempt to anticipate, alienate, sell, assign,
hypothecate, pledge, exchange, transfer, encumber or charge the same shall be
void. No Shares, Retained Distributions, or other rights or benefits under the
Plan shall in any manner be liable for or subject to the debts, contracts,
liabilities or torts of the person entitled to such right or benefit. If any
Outside Director or other person claiming by, through or under an Outside
Director hereunder should attempt to anticipate, alienate, sell, assign,
hypothecate, pledge, exchange, transfer, encumber or charge any Shares, Retained
Distributions, or any right or benefit hereunder, prior to the end of any
applicable Restriction Period or other restrictive period, then such Restricted
Shares
8
<PAGE>
and related Retained Distributions shall be automatically forfeited and such
rights or benefits shall cease and terminate.
11. APPOINTMENT OF ATTORNEY-IN-FACT.
-------------------------------
Upon the issuance of any Restricted Shares and the delivery by an Outside
Director of the stock power referred to in Paragraph 7(d) hereof, such Outside
Director shall be deemed to have appointed the Company, acting through its
Corporate Secretary, its successors and assigns, the attorney-in-fact of the
Outside Director, with full power of substitution, for the purpose of carrying
out the provisions of this Plan and taking any action and executing any
instruments which such attorney-in-fact may deem necessary or advisable to
accomplish the purposes hereof, which appointment as attorney-in-fact shall be
irrevocable and coupled with an interest. The Company as attorney-in-fact for
the Outside Director may, in the name and stead of the Outside Director, make
and execute all conveyances, assignments and transfers of the Restricted Shares
and Retained Distributions deposited with the Company pursuant to the Plan and
the Outside Director hereby ratifies and confirms all that the Company, as said
attorney-in-fact, shall do by virtue thereof. Nevertheless, the Outside
Director shall, if so requested by the Company, execute and deliver to the
Company all such instruments as may, in the judgement of the Company, be
advisable for the purpose.
12. WITHHOLDING TAXES.
-----------------
(a) At the time any Restricted Shares become nonforfeitable under the
Plan (or, if at the time of receipt the recipient shall not be subject to
taxation with respect to such Shares, at such later date as such recipient
becomes subject to taxation with respect to such Shares; whichever such date is
applicable being referred to herein as the "tax date"), the recipient shall make
a cash payment to the Company equal to the amount required by applicable
provisions of law to be withheld by the Company in connection with federal
income tax, F.I.C.A. and all other federal, state and local taxes in respect of
such Shares (or such greater amount as the recipient shall elect to have
withheld in respect of such taxes; whichever such amount is applicable being
referred to herein as the "tax amount"); provided, that subject to the prior
approval of the Committee, the recipient may elect that all or any portion of
the tax amount be collected by withholding from the number of Shares otherwise
to be delivered to the recipient that number of Shares having a Fair Market
Value on the tax date equal to all or any portion of the amount otherwise to be
collected subject to any limitations prescribed by applicable law, in all cases,
only that number of whole Shares the Fair Market Value of which does not exceed
the tax amount shall be withheld or delivered and the recipient shall make a
cash payment to the Company equal to any excess amount to be withheld or
collected. In lieu of the foregoing withholding procedure, a recipient, subject
to the prior approval of the Committee, may satisfy the tax withholding or
collection requirement by delivering to the Company on the tax date certificates
for other shares of Common Stock already owned by the recipient, endorsed in
blank with appropriate signature guarantee, having a Fair Market Value on the
tax date equal to the tax amount. Any and all taxes payable with respect to
income of a Participant or other recipient resulting from the grant or issuance
of any Shares hereunder shall be the sole responsibility of the Participant or
other recipient, not of the Company, whether or not the Company shall have
withheld or collected from the Participant any sums required to be so withheld
or collected in respect of such income, and whether or not any sums so withheld
or collected shall be sufficient to provide for any such taxes. The
determination of any tax resulting from the award or vesting of Shares or from
cash or other distributions with respect to Shares or Retained Distributions
shall be the sole responsibility of the Participant.
9
<PAGE>
(b) To the extent permitted under the Internal Revenue Code of 1986, as
amended, an Outside Director granted Restricted Shares may elect (which, apart
from any other notice required by law, shall require that the Outside Director
notify the Company of such election at the time it is made) within 30 days after
the Grant Date to include in gross income for Federal income tax purposes an
amount equal to the Fair Market Value of such Shares at the Grant Date.
13. AMENDMENT AND TERMINATION OF PLAN.
---------------------------------
Subject to the provisions of Paragraph 6(d), the Compensation Committee
may at any time terminate, modify or amend the Plan as it shall deem advisable.
Notwithstanding the foregoing, shareholder approval shall be obtained for any
action with respect to the Plan to the extent required by applicable state or
federal rules, regulations or laws. No termination or amendment of the Plan
shall adversely affect the rights of any Outside Director under any grant
previously made.
14. EXECUTION OF AGREEMENT.
----------------------
Each grant hereunder shall be contingent upon the execution by the
Outside Director of a Restricted Shares Agreement pursuant to which such Outside
Director shall agree in writing to the terms and conditions set forth in this
Plan or by counsel to the Company in order to comply with the federal or state
securities laws or other legal requirements.
15. GOVERNMENT AND OTHER REGULATIONS.
--------------------------------
Notwithstanding any other provisions of the Plan, the obligations of the
Company with respect to Restricted Shares or Retained Distributions shall be
subject to all applicable laws, rules and regulations, and such approvals by any
governmental agencies as may be required or deemed appropriate by the Company.
The Company reserves the right to delay or restrict, in whole or in part, the
issuance or delivery of Common Stock pursuant to any grants of Restricted Shares
or Retained Distributions under the Plan until such time as:
(a) any legal requirements or regulations shall have been met relating
to the issuance of such Restricted Shares or Retained Distributions or to
their registration, qualification or exemption from registration or
qualification under the Securities Act of 1933 or any applicable state
securities law; and,
(b) satisfactory assurances shall have been received that such
Restricted Shares, when delivered, will be duly listed on the NYSE.
16. NO RIGHT TO RENOMINATION.
------------------------
Nothing in the Plan or in any grant shall confer upon any Director the
right be nominated for reelection to the Board.
10
<PAGE>
17. NON-EXCLUSIVITY OF PLAN.
-----------------------
Neither the adoption of the Plan by the Compensation Committee nor any
submission of the Plan to the stockholders of the Company for approval shall be
construed as creating any limitations on the power of the Compensation Committee
or the Board to adopt such other incentive arrangements as it may deem
desirable, including, without limitation, the awarding of Common Stock otherwise
than under the Plan, and such arrangements as may be either generally acceptable
or applicable in specific cases.
18. GOVERNING LAW.
-------------
The Plan shall be governed by, and construed in accordance with, the laws
of the State of Texas.
19. MISCELLANEOUS PROVISIONS.
------------------------
(a) Except as to automatic grants to Outside Directors pursuant to
Paragraph 5 hereof, no employee or other person shall have any claim or right to
be granted Shares under this Plan.
(b) The expenses of the Plan shall be born by the Company.
(c) By accepting any grant under the Plan, each Outside Director and
each personal representative or beneficiary and each other person claiming by,
through or under such Outside Director shall be conclusively deemed to have
indicated his acceptance and ratification of, and consent to, any action taken
under the Plan by the Company, the Board or the Compensation Committee.
(d) Notwithstanding anything to the contrary contained in this Plan or
any agreement entered into hereunder, any Restricted Shares Agreement or other
agreement entered into under this Plan and any Restricted Shares grant made
under this Plan shall be conditional and shall be entered into or granted, as
the case may be, subject to acceptance of the Shares for listing on the NYSE. No
such agreement entered into under this Plan or any Restricted Shares grant made
under this Plan shall create any obligation in the Company prior to such
acceptance. If the Shares ultimately are not accepted for such listing, then any
and all such agreements theretofore entered into shall thereupon terminate and
shall be void and of no force or effect, no Restricted Shares shall be required
to be issued thereunder and any Restricted Shares theretofore issued shall be
immediately surrendered by each Participant or other holder thereof to the
Company for cancellation.
(e) Each grant of Restricted Shares to any person serving at the Grant
Date as a Director shall be in consideration of past services of the
Participant. Each grant of Restricted Shares to a person who was not serving as
a Director prior to the Grant Date shall be in consideration of such person's
agreement to stand for election as or be considered for appointment as a
director and to serve as such if so elected or appointed. Each such grant shall
be deemed to constitute a conclusive finding by the Board that such services or
agreement, as applicable, have a value equal to or in excess of the value of
such Restricted Shares, and constitute payment in full therefor. All authorized
and unissued shares issued as Restricted Shares in accordance with the Plan
shall be fully paid and nonassessable shares and free from preemptive rights. No
Restricted Shares shall be issued for consideration having a value less than the
par value of the Common Stock.
Schedule A
----------
Section 5(c) from the Valero Energy Corporation 1990 Restricted Stock
Plan for Non-Employee Directors
5. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS
-------------------------------------
***
(c) Each Outside Director who has previously received a grant of
Restricted Shares under the Plan and who is reelected for an additional term as
an Outside Director at, or whose term of office otherwise continues following
the date of, any Annual Meeting on which all such Restricted Shares have become
fully vested pursuant to Paragraph 7 shall thereupon receive an additional
automatic grant of Restricted Shares in accordance with Paragraph 5(b);
provided however, that if the Restriction Period with respect to such Restricted
- ----------------
Shares has ended due solely to a Change of Control of the Company, such Outside
Director shall not be eligible to receive an additional grant of Restricted
Shares until the date of the Annual Meeting upon which, had such Change of
Control not occurred, such Outside Director would otherwise have become eligible
to receive such an additional grant.
11
<PAGE>
EXHIBIT 10.5
--------------------------------
VALERO REFINING AND MARKETING COMPANY
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Adopted April 23, 1997
--------------------------------
<PAGE>
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE AND EFFECTIVE DATE. The Non-Employee Director Stock Option
Plan (the "Plan") of Valero Refining and Marketing Company, a Delaware
corporation (the "Company"), is for the benefit of members of the board of
directors of the Company who, at the time of their service, are not employees of
the Company or any of its subsidiaries ("Non-Employee Directors"), but are
persons who have made or are expected to make a significant contribution to the
continued growth of the Company by providing them with an additional incentive
through an increase in their proprietary interest in the success of the Company,
thereby encouraging them to continue in their present capacity. The Plan shall
become effective on the first full trading day of the Company's common stock,
$0.01 par value, on the New York Stock Exchange after the date when Valero
Energy Corporation ("VEC") distributes all of the common stock of the Company to
the stockholders of VEC immediately prior to the merger of VEC with a subsidiary
of PG&E Corporation (the "Effective Date"). No Options shall be granted
pursuant to the Plan after April 23, 2007.
2. ADMINISTRATION. (a) Except as otherwise set forth herein, the Plan
shall be administered by the Compensation Committee ("Committee") as appointed
and constituted from time to time by the Board of Directors of the Company. If
the Committee is not composed solely of two or more "Non-Employee Directors" (as
defined in Rule 16b-3 under the Exchange Act) of the Company, then such
additional or different persons shall be appointed by the Board of Directors to
act for purposes of administering this Plan so that the committee administering
this Plan shall be composed solely of two or more "Non-Employee Directors."
(b) In connection with its administration of this Plan, the Committee is
empowered to:
(i) Make rules and regulations for the administration of the Plan which
are not inconsistent with the terms and provisions of this Plan;
(ii) Construe all terms, provisions, conditions and limitations of the
Plan in good faith, and adopt amendments to the Plan;
(iii) Make equitable adjustments for any mistakes or errors in the
administration of this Plan or deemed to be necessary as the result of any
unusual situation or any ambiguity in the Plan;
(iv) Select, employ and compensate, from time to time, consultants,
accountants, attorneys and other agents and employees as the Committee may
deem necessary or advisable for the proper and efficient administration of the
Plan.
(c) The foregoing list of express powers granted to the Committee upon the
adoption of this Plan is not necessarily intended to be either complete or
exclusive, and the Committee shall, in addition to the specific powers granted
by this Plan, have such powers not inconsistent with the Plan or Rule 16b-3,
whether or not expressly authorized herein, which it may deem necessary,
desirable, advisable, proper, convenient or appropriate for the supervision and
administration of this Plan. Except as otherwise specifically provided herein ,
the decisions and judgment of the Committee on any question or claim arising
hereunder shall be final, binding and conclusive upon the Participants and all
persons claiming by, through or under a Participant.
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(d) Notwithstanding the foregoing, the Committee shall have no authority to
exercise discretion with respect to the selection of any Non-Employee Director
as a Participant in the Plan, the determination of the number of options
("Options") that are allocated to any such Non-Employee Director or the terms or
conditions of any such allocation, and shall have no authority to amend any
provision of the Plan relating to eligibility for participation in the Plan, the
amount or timing of grants under the Plan or the imposition or removal of
restrictions on the vesting of Options.
3. OPTION SHARES. The stock subject to the Options and other provisions
of the Plan shall be shares of the Company's Common Stock, $0.01 par value (the
"Common Stock"). The total amount of the Common Stock with respect to which
Options may be granted shall not exceed in the aggregate 200,000 shares. The
class and aggregate number of shares which may be subject to the Options granted
under this Plan shall be subject to adjustment under Section 15. The shares
issued upon the exercise of Options may be treasury shares or authorized but
unissued shares. If an outstanding Option expires or is terminated for any
reason, the shares of Common Stock allocable to the unexercised portion of that
Option may again be subject to an Option under the Plan.
4. GRANT OF OPTIONS.
(a) Directors on the Effective Date of this Plan.
For so long as this Plan is in effect and shares are available for
the grant of Options hereunder, on the date of the annual meeting of directors
each year beginning in 1998 (the "Annual Meeting"), there shall be granted to
each person who is a Non-Employee Director on the Effective Date of this Plan
and on the date of such Annual Meeting, an Option to purchase 1,000 shares of
Common Stock at a per share Option Price equal to the fair market value of a
share of the Company's Common Stock on such date (such number of shares being
subject to the adjustments provided in Section 15 of this Plan).
(b) Directors Elected after the Effective Date of this Plan.
(i) For so long as this Plan is in effect and shares are available for
the grant of Options hereunder, each person who shall first become a Non-
Employee Director after the Effective Date of this Plan shall be granted, on
the date of his or her election, an Option to purchase 5,000 shares of Common
Stock at a per share Option Price equal to the fair market value of a share of
Common Stock on such date (such number of shares being subject to the
adjustments provided in Secti on 15 of this Plan).
(ii) For so long as this Plan is in effect and shares are available for
the grant of Options hereunder, at the Annual Meeting each year beginning in
the year after the year of his or her first election as a Non-Employee
Director, there shall be granted to each person who shall become a Non-
Employee Director after the Effective Date of this Plan, and is a Non-Employee
Director on the date of such Annual Meeting, an Option to purchase 1,000
shares of Common Stock at a per share Option Price equal to the fair market
value of a share of Common Stock on such date (such number of shares being
subject to the adjustments provided in Section 15 of this Plan).
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5. ELIGIBILITY. The individuals who shall be eligible to participate in
the Plan shall be those individuals who are members of the Board of Directors of
the Company who, at the time of a grant hereunder, are not employees of the
Company or an Affiliate (as defined in Section 11 below). An employee-director
who retires from employment with the Company or an Affiliate shall be (without
further action by the Committee) eligible to participate in the Plan and shall
be entitled to receive the Option grants described in Section 4(b) immediately
upon commencement of his or her service as a Non-Employee Director.
6. OPTION PRICE. The price at which a share subject to an Option may be
purchased pursuant to an Option granted under this Plan (the "Option Price")
shall be its Fair Market Value on the date the Option is granted. The Fair
Market Value of a share of Common Stock shall be the average of the "high" and
"low" sales prices of a share of Common Stock on that date as reported by the
principal national securities exchange on which the Common Stock is listed if
the Common Stock is listed on a national securities exchange, or the average of
the bid and asked price of a share of Common Stock on that date as reported in
the NASDAQ listing if the Common Stock is not listed on a national securities
exchange. If no closing price or quotes are reported on that date or if, in the
discretion of the Committee, another means of determining the Fair Market Value
of a share of stock on that date is necessary or advisable, the Committee may
provide for another means for determining the Fair Market Value.
7. DURATION OF OPTIONS. No Option shall be exercisable after the
expiration of 10 years from the date the Option is granted.
8. AMOUNT EXERCISABLE.
8A. All initial Options granted pursuant to Sections 4(a)(i) and 4(b)(i)
shall vest and become exercisable as follows:
(a) On the first anniversary of the date the Option was granted (the "Date
of Grant"), the Option may be exercised with respect to up to one-third of the
shares subject to the Option;
(b) After each succeeding anniversary of the Date of Grant, the Option may
be exercised with respect to up to an additional one-third of the shares subject
to the Option, so that after the expiration of the third anniversary of the Date
of Grant the Option shall be exercisable in full.
8B. Each subsequent Option granted pursuant to Sections 4(a)(ii) and
4(b)(ii) may be exercised, so long as it is valid and outstanding, from time to
time in part or as a whole, after the expiration of six months following the
date of grant.
8C. Notwithstanding the preceding provisions of this Section 8, if a Non-
Employee Director shall be retired in good standing from the Board of Directors
for reason of age or disability under the then established rules of the Company,
all Options not already vested shall become fully vested and immediately
exercisable by the retiring Non-Employee Director.
8D. (a) In the event of any Change of Control, each Option granted
under this Plan, not theretofore forfeited or terminated and held as of the date
of a Change of Control shall upon occurrence of the Change of Control
immediately become vested or exercisable with respect to all of the shares
granted thereunder and will remain exercisable for the remainder of the original
term of the Option.
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(b) A "Change of Control" shall be deemed to occur when:
(i) the stockholders of the Company approve any agreement or transaction
pursuant to which: (A) the Company will merge or consolidate with any other
entity (other than a wholly owned subsidiary of the Company) and will not be
the surviving entity (or in which the Company survives only as the subsidiary
of another entity); (B) the Company will sell all or substantially all of its
assets to any other entity (other than a wholly owned subsidiary of the
Company); or (C) the Company will be liquidated or dissolved; or
(ii) any "person" or "group" (as these terms are used in Section 13(d) and
14(d) of the Exchange Act) other than the Company, any subsidiary of the
Company, any employee benefit plan of the Company or its subsidiaries, or any
entity holding Common Stock for or pursuant to the terms of such employee
benefit plans, is or becomes an "Acquiring Person" as defined in the Rights
Agreement dated June 18, 1997 ("Rights Agreement") between the Company and
Harris Trust and Savings Bank (or any successor Rights Agreement) (or, if no
Rights Agreement is then in effect, such person or group acquires or holds
such number of shares as, under the terms and conditions of the most recent
such Rights Agreement to be in force and effect, would have caused such person
or group to be an "Acquiring Person" thereunder); or
(iii) any "person" or "group" shall commence a tender offer or exchange
offer for 30% or more of the shares of Common Stock then outstanding, or for
any number or amount of shares which, if the tender or exchange offer were to
be fully subscribed and all shares for which the tender or exchange offer is
made were to be purchased or exchanged pursuant to the offer, would result in
the acquiring person or group directly or indirectly beneficially owning 50%
or more of the shares of Common Stock then outstanding; or
(iv) individuals who, as of any date, constitute the Board (the "Incumbent
Board") thereafter cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual becoming a director whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a person or group other than the Board; or
(v) the occurrence of the Distribution Date (as defined in the Rights
Agreement); or
(vi) any other event determined by the Board or the Committee to constitute
a "Change of Control" hereunder.
9. EXERCISE OF OPTIONS.
(a) Unless otherwise prescribed by the Committee, Options may be exercised
only by written notice of exercise (the "Exercise Notice"), in the form
prescribed by the Committee, delivered to the Company to the Stock Option Plan
administrator, and signed by the Participant or other person acting on behalf of
the Participant. The date on which the Exercise Notice is delivered to the
Company shall be the "Notice Date." The Exercise Notice shall specify a date
(the "Settlement Date"), not less than five business days nor more than ten
business days following the Notice Date, upon which the shares or other
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rights shall be issued or transferred to the Participant (or other person
entitled to exercise the Option) and the Option's exercise price shall be paid
to the Company.
(b) Unless otherwise prescribed by the Committee, on the Settlement Date,
the person exercising an Option shall tender to the Company full payment for the
shares or other rights with respect to which the Award is exercised, together
with an additional amount, in cash, certified check, cashier's check or bank
draft approved by the Company, equal to the amount of any taxes required to be
collected or withheld by the Company in connection with the exercise of the
Option (the "Tax Payment").
(c) Subject to any rules and limitations as the Committee may adopt, a
person exercising an Option may make the Tax Payment in whole or in part by
electing, at or before this time of exercise of the Option, either (i) to have
the Company withhold from the number of shares otherwise deliverable a number of
shares whose Fair Market Value equals the Tax Payment, or (ii) to deliver
certificates for other shares owned by the person exercising the Option,
endorsed in blank with appropriate signature guarantee, having a Fair Market
Value equal to the amount otherwise to be collected or withheld. If the
Committee shall fail to disapprove the election prior to the Settlement Date,
the election will be deemed approved.
(d) Subject to any rules and limitations as the Committee may adopt, a
person exercising an Option for the receipt of shares may pay for the shares by
tendering to the Company other shares of Company Common Stock legally and
beneficially owned by that person at the time of the exercise of the Options.
This method of exercise may include use of a procedure whereby a person
exercising an Option may request that shares received upon exercise of a portion
of an Option be automatically applied to satisfy the exercise price for
additional and increasingly larger portions of the Option. The certificate(s)
representing any shares tendered in payment of an Option's exercise price must
be accompanied by a stock power duly executed with appropriate signature
guarantees. The Committee may, in its sole discretion, refuse any tender of
shares in which case the Company shall promptly redeliver the shares to the
person exercising the Option and notify the person of the refusal as soon as
practicable. In this event, the person may either (i) tender to the Company on
the Settlement Date the cash amount required to pay for the Option shares, or
(ii) rescind the Exercise Notice. If the person elects to rescind his or her
Exercise Notice, the person may again (subject to the other terms of this Plan)
deliver an Exercise Notice with respect to the Option at any time prior to its
expiration date.
(e) Any calculation with respect to a participant's income, required tax
withholding or other matters required to be made by the Company upon the
exercise of an Option shall be made using the Fair Market Value of the shares on
the Notice Date, whether or not the Exercise Notice is delivered to the Company
before or after the close of trading on that date, unless otherwise specified by
the Committee.
10. TRANSFERABILITY OF OPTIONS. Without prior written approval from the
Committee, Options shall not be transferable by the optionee except by will or
under the laws of descent and distribution, and shall be exercisable, during the
optionee's lifetime, only by the optionee.
11. FORFEITURES. Notwithstanding any other provision of this Plan, if the
Committee finds by a majority vote, that the optionee, before or after
termination of his capacity as a Non-Employee Director of the Company or any
subsidiary corporation, limited partnership or other entity controlling, or
controlled by, or under common control with the Company (an "Affiliate"),
committed fraud, embezzlement, theft, commission of felony, or proven dishonesty
in the course of his relationship to the Company and/or its Affiliates which
conduct damaged the Company or its Affiliates, or disclosed trade secrets of the
Company or its Affiliates, then any outstanding Options which have not been
exercised by optionee shall be forfeited. The decision of the Committee will be
final.
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12. REQUIREMENTS OF LAWS AND REGULATIONS. The Company shall not be
required to sell or issue any shares under any Option if issuing the shares
shall constitute a violation by the optionee or the Company of any provisions of
any law or regulation of any governmental authority. Notwithstanding anything
to the contrary contained in this Plan or any agreement entered into hereunder,
any Option Agreement or other agreement entered into under this Plan and any
grant made under this Plan shall be conditional and shall be entered into or
granted, as the case may be, subject to acceptance of the option shares for
listing on the NYSE. Each Option granted under this Plan shall be subject to
the requirements that, if at any time the Company or the Committee shall
determine that the listing, registration or qualification of the shares upon any
securities exchange or under any state or federal law of the United states or of
any other country or governmental subdivision, or the consent or approval of any
governmental regulatory body, or investment or other representations, are
necessary or desirable in connection with the issue or purchase of shares
subject to an Option, that Option shall not be exercised in whole or in part
unless the listing, registration, qualification, consent, approval or
representations shall have been effected or obtained free of any conditions not
acceptable to the Company. Any determination in this connection by the
Committee shall be final. If the shares issuable on exercise of an Option are
not registered under the Securities Act of 1933, the Company may imprint on the
certificate for those shares the following legend or any other legend which
counsel for the Company considers necessary or advisable to comply with the
Securities Act of 1933 or other applicable state or federal securities laws or
regulations:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities laws of
any state and may not be sold or transferred except upon registration or
upon receipt by the Company of an opinion of counsel satisfactory to the
Company, in form and substance satisfactory to the Company, that
registration is not required for a sale or transfer."
The Company will endeavor to register any securities covered by this Plan under
the Securities Act of 1933 (as now in effect or as later amended) and, if any
shares are registered, the Company may remove any legend on certificates
representing those shares. The Company shall not be obligated to take any other
affirmative action in order to cause the exercise of an Option or the issuance
of shares under the Option to comply with any law or regulation or any
governmental authority.
13. NO RIGHTS AS STOCKHOLDER. No optionee shall have rights as a
stockholder with respect to shares covered by his Option until the date a stock
certificate is issued for the shares. Except as provided in Section 15, no
adjustment for dividends, or other matters shall be made if the record date is
prior to the date the certificate is issued.
14. NO OBLIGATION TO RETAIN OPTIONEE. The granting of any Option shall
not impose upon the Company or any of its subsidiaries any obligation to retain
or continue to retain any optionee in his capacity as a Non-Employee Director.
The right of the Company, the directors or the stockholders of the Company or of
any subsidiary of the Company to terminate any optionee shall not be diminished
or affected by reason of the fact that one or more Options have been or will be
granted to him.
15. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalization, reorganization or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Common Stock or the rights of the Common Stock, or the dissolution
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
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If all or any portion of an Option is exercised subsequent to any stock
dividend, rights distribution, split-up, recapitalization, exchange of shares,
merger, spin-off, reorganization or liquidation ("Reorganization Event"), as a
result of which securities of any class or rights shall be issued in respect of
outstanding shares of Common Stock or shares of Common Stock shall be changed
into the same or a different number of shares of the same or another class of
other securities, the person so exercising such Option shall receive, for the
aggregate price payable upon the exercise of such Option, (i) the aggregate
number and class of shares, rights or other securities for which a recognized
market exists, and (ii) a cash amount equal to the fair market value on such
date, as reasonably determined by the Committee, of any other property (other
than regular cash dividend payments) and of any shares, rights or other
securities for which no recognized market exists, which, if shares of Common
Stock (as authorized at the date of the granting of such Option) had been
purchased at the date of granting of the Option for the same aggregate price (on
the basis of the price per share provided in the Option) and had not been
disposed of, such person or persons would be holding at the time of such
exercise as a result of such purchase and any such Reorganization Event;
provided, however, that no fractional share of Common Stock, fractional right or
other fractional security shall be issued upon any such exercise, and the
aggregate price paid shall be appropriately reduced to reflect any fractional
share of Common Stock, fractional right or other fractional security not issued;
and provided further, however, that if the exercise of any Option subsequent to
any Reorganization Event would, pursuant to this Section 15, require the
delivery of shares, rights or other securities which the Company is not then
authorized to issue or which in the sole judgment of the Committee cannot be
issued without undue effort or expense, the person exercising such Option shall
receive, in lieu of such shares, rights or other securities, a cash payment
equal to the fair market value on the Exercise Date, as reasonably determined by
the Committee, of such shares, rights or other securities. For purposes of
applying the provisions of this Plan, the Preference Share Purchase Rights
distributed to stockholders of record of the Company pursuant to the Rights
Agreement, or any successor rights, shall be deemed not to have been distributed
until the Distribution Date (as defined in the Rights Agreement or any successor
agreement).
In the event of any change in the number of shares of Common Stock
outstanding resulting from a Reorganization Event, the aggregate number and
class of shares of Common Stock remaining available to be optioned under this
Plan shall be that number and class which a person, to whom an Option had been
granted for all of the available shares of Common Stock under this Plan on the
date preceding such change as provided in Section 3 would be entitled to receive
upon exercise of such Option following such change. Upon the occurrence of any
Reorganization Event, the Committee shall be entitled (but shall not be
required) to determine that new Option Agreements (or amendments to the existing
Option Agreements) shall be entered into with Participants reflecting such stock
dividend or other event.
Except as expressly provided before in this Plan, the issue by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe for shares, or upon
conversion of shares or obligations of the Company convertible into shares or
other securities, shall not affect, and no adjustment by reason of it shall be
made with respect to, the number or price of shares of Common Stock then subject
to outstanding Options.
16. AMENDMENT OR TERMINATION OF PLAN. The Board of Directors may modify,
revise or terminate this Plan at any time. However, without the further
approval of the holders of at least a majority of the outstanding shares of
voting stock, or if the provisions of the corporate charter, by-laws or
applicable state law prescribe a greater degree of stockholder approval for this
action, without the degree of stockholder approval thus required, the Board of
Directors may not (a) change the aggregate number of shares which may be issued
under Options pursuant to the provisions of this Plan; (b) reduce the Option
Price permitted for options; (c) change the class of persons eligible to receive
options; (d) extend the term
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during which an Option may be exercised or the termination date of the Plan; or
(e) materially increase any other benefits accruing to the Non-Employee
Directors under the Plan or materially modify the requirements as to eligibility
for participation in the Plan unless the Board of Directors shall have obtained
an opinion of legal counsel to the effect that stockholder approval of the
amendment is not required by law or the applicable rules and regulations of, or
any agreement with, any national security exchange on which the Common Stock is
listed or if the Common Stock is not listed, the rules and regulations of, or
any agreement with, the National Association of Securities Dealers, Inc., or in
order to make available to the optionee with respect to any Option granted under
the Plan, the benefits of Rule 16b-3 under the Securities Exchange Act of 1934
or any similar or successor rule. In addition, the terms of the Plan relating to
the number of shares that may be subject to an Option, the times at which
Options are to be granted, and the means by which the Option Price for the
Options granted is to be determined shall not be amended more than once every
six months, other than to comport with the changes in the Internal Revenue Code
of 1986, the Employee Retirement Income Security Act or the rules under either
of those laws. All Options granted under this Plan shall be subject to the terms
and provisions of this Plan and any amendment, modification or revision of this
Plan shall be deemed to amend, modify or revise all Options outstanding under
this Plan at the time of the amendment, modification or revision.
17. WRITTEN AGREEMENT. Each Option granted under this Plan shall be
embodied in a written option agreement, which shall be subject to the terms and
conditions prescribed above, and shall be signed by the optionee and by the
appropriate officer of the Company for and in the name and on behalf of the
Company. Each option agreement shall contain any other provisions that the
Committee in its discretion shall deem advisable if they do not conflict with
the terms of this Plan.
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EXHIBIT 10.6
EXECUTIVE SEVERANCE AGREEMENT
AGREEMENT between Valero Energy Corporation, a Delaware corporation (the
"Corporation"), and William E. Greehey, (the "Executive"), WITNESSETH.
WHEREAS, the Compensation Committee (the "Committee") of the Board of
Directors (the "Board") of the Corporation has recommended, and the Board has
approved, the Corporation entering into severance agreements with key executives
of the Corporation and its subsidiaries; and
WHEREAS, the Executive is a key executive of the Corporation or one of its
subsidiaries and has been selected by the Board as a key executive to be offered
a severance agreement with the Corporation; and
WHEREAS, should the Corporation receive any proposal from a third person
concerning a possible business combination with, or acquisition of equity
securities, of, the Corporation, the Board believes it imperative that the
Corporation and the Board be able to rely upon the Executive to continue in his
position, and that the Corporation be able to receive and rely upon his advice,
if it requests it, as to the best interests of the Corporation and its
shareholders without concern that he might be distracted by the personal
uncertainties and risks created by such a proposal; and
WHEREAS, should the Corporation receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposals, advise management and the Board as to whether such
proposals would be in the best interests of the Corporation and its
shareholders, and to take such other actions as the Board might determine to be
appropriate;
NOW, THEREFORE, to assure the Corporation that it will have the continued
dedication of the Executive and the availability of his advice and counsel
notwithstanding the possibility, threat, or occurrence of a bid to take over
control of the Corporation, and to induce the Executive to remain in the employ
of the Corporation, and for other good and valuable consideration, the
Corporation and the Executive agree as follows:
1. SERVICES DURING CERTAIN EVENTS. In the event a third person begins a
tender or exchange offer, circulates a proxy to shareholders, or takes over
steps to effect a Change of Control (as hereafter defined), the Executive agrees
that he will not voluntarily leave the employ of the Corporation, and will
render the services contemplated in the recitals to this Agreement, until the
third person has abandoned or terminated his efforts to effect a Change of
Control or until a Change of Control has occurred.
2. TERMINATION AFTER CHANGE OF CONTROL. In the event the Executive's
employment with the Corporation (including its subsidiaries) terminates for any
reason (either voluntary or involuntary, other than as a consequence of his
death or disability, or of his retirement at or after
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normal retirement date under the Corporation's retirement plans) within two
years after a Change of Control of the Corporation.
A. LUMP SUM CASH PAYMENT. On or before the Executive's last day of
employment with the Corporation, the Corporation will pay to the Executive
as compensation for services rendered to the Corporation a lump sum cash
amount (subject to any applicable payroll or other taxes required to be
withheld) calculated by adding the amounts specified in paragraph (i)
below:
(i) SALARY PLUS INCENTIVE COMPENSATION. Three times the highest
compensation (including only base salary, bonuses, and other incentive
compensation, if any paid or payable to the Executive by the
Corporation with respect to any 12 consecutive month period during the
three years ending with the date of the Executive's termination. In
the event there are fewer than 36 whole or partial months remaining
from the date of the Executive's termination to his normal retirement
date, the amount calculated in this paragraph will be reduced by
multiplying it by a fraction the numerator of which is the number of
whole or partial months so remaining to his normal retirement date and
the denominator of which is 36;
B. SPECIAL RETIREMENT BENEFITS. The Executive shall receive "Special
Retirement Benefits" as provided herein, so that the total retirement
benefits he receives will equal the retirement benefits he would have
received had he continued in the employ of the Corporation for three years
following his termination (or until his normal retirement date, whichever
is earlier). There benefits will include all ancillary benefits, such as
early retirement and survivor rights and benefits available at retirement,
as well as benefits (if any) under the Supplemental Executive Retirement
Plan ("SERP") for any successor or substitute plan or plans of the
Corporation. If the Executive's credited service with the Corporation plus
three years would result in vested benefits, and/or eligibility for
ancillary benefits under the Corporation's pension plans, the amount
payable to the Executive or his beneficiaries hereunder shall equal the
excess of the amount specified in paragraph (i) over that in (ii) below:
(i) The total retirement benefits that would be paid to the
Executive or his beneficiaries, if the three years (or the period to
his normal retirement date, if less) following his termination are
added to his credited service under the Corporation's pension plans
(including the SERP or any successor or substitute plan or plans of
the Corporation), and his final average compensation is the same as
his actual average compensation (including the amount specified in
Paragraph A. (i) as compensation for services rendered to the
Corporation in the year of his termination);
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(ii) The total retirement benefits payable to the Executive or
his beneficiaries under the Corporation's pension plans (including the
SERP or any successor plans of the Corporation).
All these Special Retirement Benefits are provided on an unfunded basis and
are not intended to meet the qualification requirements of Section 401 of
the Internal Revenue Code. All Special Retirement Benefits shall be
payable solely from the general assets of the Corporation or its
appropriate affiliate.
C. OTHER PROVISIONS.
(i) INSURANCE OR OTHER SPECIAL BENEFITS. The Executive's
participation in the life, accident and health insurance plans of the
Corporation, and in fringe benefits provided the Executive prior to
the Change of Control or his termination, shall be continued, or
equivalent benefits provided, by the Corporation, at no direct cost to
him, for a period of three years from the date of his employment
terminates (or until his normal retirement date, whichever is sooner).
(ii) RELOCATION ASSISTANCE. Should the Executive move his
residence in order to pursue other business opportunities within two
years of his termination, he will be reimbursed for any expenses
incurred in that relocation (including taxes payable on the
reimbursement) which are not reimbursed by another employer. Benefits
under this provision will include the assistance in selling the
Executive's home which was customarily provided by the Corporation to
transferred executives prior to the Change of Control.
(iii) THRIFT AND OTHER PLANS. The Executive's participation in
the Corporation's Thrift, Employee Stock Ownership, Pension or other
applicable plans of the Corporation or any of its subsidiaries shall
continue only through the last day of this employment. Any
terminating distributions and/or vested rights under such Plans shall
be governed by the terms of the respective Plans.
D. DEFINITION OF CHANGE OF CONTROL. For the purposes of this
Agreement, a "Change of Control" shall be deemed to have taken place if:
(i) a third person, including a "group" as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, becomes the beneficial owner of shares
of the Corporation having 20% or more of the total number of votes that may
be cast for the election of directors of the Corporation; or (ii) as the
result of, or in connection with, any cash tender or exchange offer, merger
or other business combination, sale of assets or contested election, or any
combination of the foregoing transactions (a "Transaction"), the persons
who were directors of the Corporation before the Transaction shall cease to
constitute a majority of the Board of Directors of the Corporation or any
successor to the Corporation.
Page 3
<PAGE>
3. ACCELERATION OF OPTIONS AND RIGHTS IN CERTAIN EVENTS. Stock options
("options") and stock appreciation or similar rights ("rights") granted to the
Executive by the Corporation under the Corporation's Stock Option Plan No. 1 or
Non-qualified Stock Option Plan No. 2, or any other stock option or stock
appreciation plan adopted by the Corporation will be exercisable in full for a
period of 30 days (i) following the date of Change of Control of the Corporation
or (ii) commencing on the date of approval by the Corporation's shareholder of
an agreement providing for a merger in which the Corporation will not remain an
independent publicly owned corporation or a consolidation or a sale or other
disposition of all or substantially all the assets of the Corporation, provided
that no option or right shall be exercisable by directors or officers of the
Corporation within six months after the date of grant, or after the termination
date, of such option or right.
4. REMOVAL OF RESTRICTIONS ON STOCK GRANTS. Stock previously granted to
the Executive by the Corporation under the Corporation's Restricted Stock bonus
Plan will have all restrictions removed immediately following the date of Change
of Control of the Corporation or commencing on the date of approval by the
Corporation's shareholders of an agreement providing for a merger in which the
Corporation will not remain an independent publicly owned corporation or a
consolidation or a sale or other disposition of all or substantially all the
assets of the Corporation.
5. GENERAL.
A. INDEMNIFICATION. If litigation shall be brought to enforce or
interpret any provision contained herein, the Corporation, to the extent
permitted by applicable law and the Corporation's Restated Certificate of
Incorporation, hereby indemnifies the Executive for his reasonable
attorneys' fees and disbursements incurred in such litigation and hereby
agrees to pay pre-judgement interest on any money judgement obtained by the
Executive, calculated at the "prime rate" of interest announced by
Continental Illinois National Bank and Trust Company of Chicago as being in
effect from time to time, from the date that payment(s) to him should have
been made in accordance with the provisions of this Agreement.
B. PAYMENT OBLIGATIONS ABSOLUTE. The Corporation's obligation to pay
the Executive the compensation and other amounts specified herein and to
make the arrangements provided herein shall be absolute and unconditional
and shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right
which the Corporation may have against him or anyone else. All amounts
payable by the Corporation hereunder shall be paid without notice or
demand. Each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whoever may be entitled thereto, for any
reason whatsoever.
Page 4
<PAGE>
C. CONTINUING OBLIGATIONS. The Executive shall retain in confidence
any confidential information known to him concerning the Corporation and
its subsidiaries an their respective businesses so long as such information
is not publicly disclosed.
D. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Executive and his estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by the Executive.
E. SEVERABILITY. Any provision in this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability
without invalidating or affecting the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
F. CONTROLLING LAW. This Agreement shall in all respects be governed
by, and construed in accordance with, the laws of the State of Texas.
G. TERMINATION. This Agreement shall terminate if the Board
determines that the Executive is no longer a key executive and so notifies
the Executive; except that such determination shall not be made, and if
made shall have no effect, (i) within two years after the Change of Control
in question or (ii) during any period of time when the Corporation has
knowledge that any third person has taken steps reasonably calculated to
effect a Change of Control until, in the opinion of the Board, the third
person has abandoned or terminated his efforts to effect a Change of
Control. Any decision by the Board that the third person has abandoned or
terminated his efforts to effect a Change of Control shall be conclusive
and binding on the Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
----
of , 19 .
--------------- ---
---------------------------------------------
Executive
VALERO ENERGY CORPORATION
By:__________________________________________
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<PAGE>
EXHIBIT 10.7
EXHIBIT 10.07
SCHEDULE OF EXECUTIVE SEVERANCE AGREEMENTS
The following have executed Executive Severance Agreements substantially in
the same form as the agreement described in Exhibit 10.06 to the Valero
Refining and Marketing Company Form 10.
Employee
-------------------------
Edward C. Benninger
E. Baines Manning
<PAGE>
EXHIBIT 10.8
INDEMNITY AGREEMENT
This Agreement is made effective as of the ______ day of ____________, 1997,
between VALERO ENERGY CORPORATION (FORMERLY VALERO REFINING AND MARKETING
COMPANY), a Delaware corporation (the "Corporation"), and the undersigned
WILLIAM E. GREEHEY ("Agent") with reference to the following facts.
The Agent is currently serving as a Director and/or Officer of the Corporation
at the request of the Corporation and the Corporation wishes the Agent to
continue in such capacity. The Agent is willing, under certain circumstances,
to continue in such capacity.
In addition to the indemnification to which the Agent is entitled pursuant to
the By-Laws, as amended (the "By-Laws"), and Restated Certificate of
Incorporation of the Corporation, and as additional consideration for the
Agent's service, the Corporation has obtained at its expense directors' and
officers' liability insurance protecting the Agent in connection with such
service. However, such insurance may be subject to cancellation and does not
fully protect Agent with respect to the advancement of expenses.
The Agent has indicated that he/she does not regard the indemnities available
under the Corporation's By-Laws and Restated Certificate of Incorporation, as
amended, and such insurance as adequate to protect him/her against the risks
associated with service to the Corporation.
In order to induce the Agent to continue to serve as a Director and/or Officer
of the Corporation and in consideration for his/her continued service, the
Corporation hereby agrees to indemnify the Agent as follows:
1. The Corporation will pay on behalf of the Agent, and the Agent's executors,
administrators or assigns, to the fullest extent permitted by the provisions of
the General Corporation Law of the State of Delaware, or by any amendment
thereof or other statutory provisions authorizing or permitting such
indemnification which is adopted after the date hereof, any amount which the
Agent is or becomes legally obligated to pay because of any claim or claims made
against the Agent because of any act or omission or neglect or breach of duty,
including any actual or alleged error or misstatement or misleading statement,
which the Agent commits or suffers while acting in the Agent's capacity as a
Director or Officer of the Corporation or, at the request of the Corporation, as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, other enterprise or employee benefit plan (a "Designated
Entity") and solely because of the Agent's being or acting in such capacity. In
the event the Agent shall be a director or officer of any corporation, 35% or
more of the common stock or other voting securities of which are owned, directly
or indirectly, by the Corporation, it shall be presumed conclusively that the
Agent is so acting at the request of the Corporation. The payments which the
Corporation will be obligated to make hereunder shall include, inter alia,
damages, judgments, settlements and costs, costs of investigation (excluding
salaries of officers or employees of the Corporation) and costs of defense of
legal, arbitral, or administrative actions, suits, claims, proceedings or
investigations (whether civil, criminal or investigative in nature) and appeals
therefrom, and costs of attachment, appeal or similar bonds; provided, however,
that the Corporation shall not be obligated to make any payments
<PAGE>
hereunder (including payment of any fines or other obligations or fees imposed
by law or otherwise) which it is prohibited by applicable law from paying.
2. If a claim under this Agreement is not paid by the Corporation, or on its
behalf, within forty-five days after a written claim has been received by the
Corporation, the Agent or other claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim (including reasonable attorneys fees).
3. In the event of payment under this Agreement, the Corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Agent, who shall execute all papers reasonably required and shall, at the
expense of the Corporation, do everything that may be reasonably necessary to
secure such rights, including the execution of such documents reasonably
necessary to enable the Corporation effectively to bring suit to enforce such
rights.
4. The Corporation shall not be liable under this Agreement to make any
payment in connection with any claim made against the Agent:
(a) for which payment is actually made under a valid and collectible insurance
policy, except in respect of any excess beyond the amount of payment under
such policy;
(b) for which the Agent has been indemnified by the Corporation otherwise than
pursuant to this Agreement, except in respect of any excess beyond the
amount of payment under such other indemnification;
(c) based upon or attributable to the Agent gaining in fact (as established in
a final and binding judgment or other adjudication of such issue) any
material personal profit or advantage to which he/she was not legally
entitled;
(d) for an accounting of profits made from the purchase or sale by the Agent of
securities of the Corporation pursuant to Section 16(b) of the Securities
and Exchange Act of 1934, as amended, and the rules and regulations
promulgated by the Securities and Exchange Commission thereunder;
(e) brought about or contributed to by the knowingly fraudulent, deliberately
dishonest or willful misconduct of the Agent; provided however, that
notwithstanding the foregoing, the Agent shall be protected under this
Agreement as to any claims upon which suit may be brought against Agent by
reason of any such alleged misconduct, unless a judgment or other final
adjudication thereof adverse to the Agent shall establish that Agent
committed (i) acts of active and deliberate fraud, dishonesty or misconduct
(ii) with actual fraudulent, dishonest or willful purpose and intent, (iii)
which acts were material to the cause of action so adjudicated; or
(f) with respect to any action, suit, claim, proceeding or investigation to
which Agent and the Corporation (or a Designated Entity, as hereinafter
defined, or other subsidiary or affiliate of the Corporation) are both
parties, if the Agent has not fully cooperated in the joint defense thereof
and the Corporation (or such other entity) is materially prejudiced
thereby.
2
<PAGE>
The Corporation shall advance costs and expenses (including reasonable
attorneys' fees) incurred by Agent in connection with any claim described in
clauses (a) through (e) above, in accordance with paragraph 7 hereof, unless the
determination specified in such paragraph 7 is made.
Except as expressly set forth above or otherwise expressly limited herein, the
parties intend, and this Agreement shall be construed, to provide
indemnification to the Agent to the fullest extent permitted by applicable law.
5. The Agent shall give to the Corporation notice in writing as soon as
practicable of any claim made against him/her for which indemnity will or could
be sought under this Agreement. Notice to the Corporation shall be directed to
Valero Energy Corporation, 530 McCullough Avenue, San Antonio, TX 78215
Attention: General Counsel (or such other address as to the Corporation shall
designate in writing to the Agent); notice shall be deemed received if sent by
prepaid mail properly addressed, the date of such notice being the date
postmarked. In addition, the Agent shall give the Corporation such information
and cooperation as it may reasonably require and as shall be within the Agent's
power. However, failure to give any such notice, information or cooperation
shall relieve Corporation of its obligation hereunder only to the extent it is
materially prejudiced thereby.
6. With respect to any such claim, action, suit, proceeding or investigation
as to which Agent notifies Corporation of the commencement thereof:
(a) Corporation will be entitled to participate therein at its own expense; and
(b) Except as otherwise provided below, to the extent that it may wish,
Corporation jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof, with counsel satisfactory
to Agent. After receipt of notice from Corporation to Agent of its
election to so assume the defense thereof, Corporation will not be liable
to Agent under this Agreement for any legal or other expenses subsequently
incurred by Agent in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Agent
shall have the right to employ his/her own counsel in such action, suit,
proceeding or investigation but the fees and expenses of such counsel
incurred after notice from Corporation of its assumption of the defense
thereof shall be at the expense of Agent unless (i) the employment of
counsel by Agent has been authorized by Corporation, (ii) Agent shall have
reasonably concluded that there may be a conflict of interest between
Corporation and Agent in the conduct of the defense of such action, or
(iii) Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
counsel employed by Agent shall be at the expense of Corporation.
Corporation shall not be entitled to assume the defense of any action,
suit, proceeding or investigation brought by or on behalf of Corporation or
as to which Agent shall have made the conclusion provided for in (ii)
above.
(c) Corporation shall not be liable to indemnify Agent under this Agreement for
any amounts paid in settlement of any action or claim effected without its
written consent. Corporation shall not settle any action or claim in any
manner which would impose any penalty or limitation on Agent without
Agent's written consent. Neither Corporation nor Agent will unreasonably
withhold their consent to any proposed settlement.
3
<PAGE>
7. Except as limited by paragraph 6 hereof, costs and expenses (including
attorneys' fees) incurred by the Agent in defending or investigating any claim,
action, suit, proceeding or investigation shall be paid by the Corporation in
advance of the final disposition of such matter, and Agent hereby undertakes to
repay any such advances in the event but only to the extent that it is
ultimately determined that the Agent is not entitled to indemnification therefor
under the terms of this Agreement. Notwithstanding the foregoing or any other
provision of this Agreement, no advance shall be made by the Corporation if a
determination is reasonably and promptly made by the Board of Directors by a
majority vote of a quorum of disinterested directors, or (if such a quorum is
not obtainable or, even if obtainable, a quorum of disinterested directors so
directs) by independent legal counsel, that, based upon the facts known to the
Board or counsel at the time such determination is made, either (a) it is more
likely than not that in a judgment or other final adjudication it will
ultimately be determined that the Agent is not entitled to indemnification under
the terms of this Agreement or (b) in the case of any action, suit, claim,
proceeding or investigation to which the Agent and the Corporation (or a
Designated Entity or other subsidiary or affiliate of the Corporation) are both
parties, the Agent has not fully cooperated in the joint defense thereof and the
Corporation (or such entity) has been materially prejudiced thereby.
8. If the Agent is deceased and is entitled to indemnification or advancement
of expenses under any provision of this Agreement, the Corporation shall
indemnify Agent's estate and Agent's spouse, heirs, administrator and executors
against, and the Corporation shall, and does hereby, agree to assume any and all
expenses (including attorneys' fees), penalties and fines actually and
reasonably incurred by or for the Agent or the Agent's estate, in connection
with the investigation, defense, settlement or appeal of any such action, suit,
proceeding or investigation. Further, when requested in writing by the spouse
of Agent and/or the heirs, executors or administrators of Agent's estate, the
Corporation shall provide appropriate evidence of Corporation's agreement set
out herein, to indemnify Agent against and to itself assume such costs,
liabilities and expenses.
9. If Agent is entitled under any provision of this Agreement to
indemnification by the Corporation for some or a portion of the expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the Agent in the investigation, defense,
appeal or settlement of such suit, action, claim, proceeding or investigation
but not, however, for all of the total amount thereof, the Corporation shall
nevertheless indemnify the Agent for the portion thereof to which the Agent is
entitled.
10. The termination of any action, suit, claim, proceeding or investigation
which is covered by this Agreement by judgment, order, settlement or conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption for the purposes of this Agreement that the Agent did not
act in good faith.
11. This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one instrument.
12. This indemnification and advance payment of expenses as provided by any
provision to this Agreement shall not be deemed exclusive of any other rights to
which Agent may be entitled in any capacity under any provision of law, the
Restated Certificate of Incorporation, as amended, and
4
<PAGE>
By-Laws, this or other agreement, policy of insurance, vote of stockholders or
disinterested directors, or otherwise. All agreements and obligations of
Corporation contained herein shall continue during the period Agent is a
Director, Officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of another
corporation, joint venture, trust or other enterprise) and shall continue
thereafter so long as Agent shall be subject to any possible claim or
threatened, pending or completed action, suit, claim, proceeding or
investigation, whether, civil, criminal or investigative, by reason of the fact
that Agent was a Director or Officer of Corporation or serving in any other
capacity referred to herein.
13. This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware (exclusive of the conflict-of-laws rule thereof).
14. This Agreement shall be binding upon all successors and assigns of the
Corporation (including any transferee of all or substantially all of its assets
and any successor by merger or operation of law) and shall inure to the benefit
of the heirs, personal representatives and estate of Agent.
15. If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever, (i) the validity,
legality and enforceability of the remaining provisions of this Agreement
(including without limitation, all portions of any paragraphs of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
are not themselves invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby, and (ii) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, all portions of any
paragraph of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be duly
executed and signed effective as of the day and year first above written.
VALERO ENERGY CORPORATION
By:
_______________________________________
AGENT
_______________________________________
[Agent]
5
<PAGE>
EXHIBIT 10.9
SCHEDULE OF INDEMNITY AGREEMENTS
The following will execute Indemnity Agreements substantially in the same
form as the agreement described in Exhibit 10.08 to the Valero Refining and
Marketing Company Form 10.
Employee
-------------------------
Edward C. Benninger
Ronald K. Calgaard
Robert G. Dettmer
A. Ray Dudley
Ruben M. Escobedo
John D. Gibbons
Gregory C. King
James L. Johnson
Lowell H. Lebermann
E. Baines Manning
Stan L. McLelland
Susan Kaufman Purcell
<PAGE>
EXHIBIT 10.10
INCENTIVE BONUS AGREEMENT
AGREEMENT dated as of ________, 1997 ("Agreement") between Valero Refining
and Marketing Company, a Delaware corporation (the "Corporation"), and Gregory
C. King (the "Executive"),
WITNESSETH:
WHEREAS, for the reasons more fully set forth in the minutes of the
Compensation Committee (the "Committee") of the Board of Directors of the
Corporation, the Committee has approved the execution, delivery and performance
by the Corporation of incentive bonus agreements, substantially in the form of
this Agreement, between the Corporation and certain officers and other key
executives of the Corporation and its subsidiaries, including the Executive;
WHEREAS, should the Corporation become involved in any situation leading to
a Transaction (as hereinafter defined), the management of the Corporation has
determined that Executive is a key employee who would be essential to the
completion of such Transaction and that, in addition to Executive's regular
duties, Executive may be called upon to assist in the assessment of any third-
party or internal proposals, advise management and the Board as to whether such
proposals would be in the best interests of the Corporation and its shareholders
and participate in successfully completing any Transaction;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders in
connection with the completion of any Transaction, and to
<PAGE>
induce the Executive to remain in the employ of the Corporation and/or its
designated subsidiaries, and for other good and valuable consideration,
Corporation and Executive agree as follows:
1. Services During Certain Events.
------------------------------
A. In the event that the Corporation publicly announces (or privately
advises Executive that the Board has so determined) that the Corporation will
solicit or consider proposals leading to a Transaction, Executive agrees that he
or she will not voluntarily leave the employ of the Corporation or its
subsidiaries, and will render the services contemplated in the recitals to this
Agreement and in any employment agreement between the Corporation and Executive,
until the earlier of (i) such date as the Corporation has abandoned or
terminated efforts to effect a Transaction, or (ii) 30 days following written
notice to the Corporation of such termination of employment.
B. The provisions of Paragraph 1.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of such announcement
(or advice) and, following such announcment (or advice), may terminate
employment prior to the date specified in Paragraph 1.A through retirement,
total and permanent disability, or for Good Reason. For purposes of this
Agreement, "Good Reason" means (i) the occurrence of any event or circumstance
which, if occurring following a Transaction, would render Executive's
termination of employment "involuntary" (as defined in Paragraph 2.H), or (ii) a
breach (other than an insubstantial failure which is remedied by the Corporation
promptly after receipt of notice thereof from the Executive) by the Corporation
of any provision of this Agreement.
2. Incentive Bonus Payment.
-----------------------
A. In the event that, within two years following the date of this
Agreement, a Transaction occurs, then, except as set forth in Paragraph 2.C.,
the Corporation will pay to Executive or to
2
<PAGE>
Executive's estate (in addition to any base salary, bonuses, incentive
compensation, severance payments, expenses, vacation, benefits, benefit plan
distributions and other amounts which would otherwise be payable to Executive,
to the extent not theretofore paid), as compensation for services rendered to
the Corporation, a cash amount (subject to any applicable payroll or other taxes
required to be withheld) equal to one (1) times Executive's highest annual rate
of compensation in effect at any time during the 36-month period ending on the
date of such Transaction, such payment to be made in accordance with Paragraph
2.B. As used herein, "annual rate of compensation" shall mean the aggregate
regular base salary paid or payable to Executive by the Corporation with respect
to any period of 12 consecutive months.
B. The cash amount payable to Executive pursuant to Section 2.A. shall be
due and payable in the following increments:
(i) 60% on the date on which a Transaction is consummated; and
(ii) 40% on the date which is six months following the date specified
in Paragraph 2.B(i) above.
In the event that Executive's employment with the Corporation or its
subsidiaries (or, if Executive accepts employment with a Divested Entity, then
with such Divested Entity or its subsidiaries) is terminated prior to any of the
dates specified above, and payment to Executive is not otherwise excused
pursuant to Paragraph 2.C. below, then on Executive's Termination Date, the
Corporation shall pay to Executive the remaining amounts which Executive would
have been entitled to receive had he remained in the employ of the Corporation
or a Divested Entity until such dates and which have not theretofore been paid.
3
<PAGE>
C. The foregoing provisions of this Paragraph 2 notwithstanding,
Executive shall not be entitled to receive, and the Corporation and, if
applicable, the Divested Entity shall not be obligated to make, the payments
specified in Paragraphs 2.A and 2.B if either:
(i) Executive's employment terminates prior to the occurrence of the
Transaction, unless such termination of employment results from Executive's
death or total and permanent disability; or
(ii) The payment is to be made under Paragraph 2.B(ii) and Executive's
termination of employment occurs following the occurrence of the
Transaction under any one of more of the following circumstances:
(a) Executive's termination of employment is "voluntary;"
(b) Executive is terminated by his or her employer company for
or "cause";
(c) Executive retires under the Corporation's Pension Plan (or,
if Executive is then an employee of a Divested Entity or its
subsidiaries, under such entity's similar tax-qualified pension plan);
or
(iii) in connection with a Divestiture, Executive is offered but
declines to accept Qualifying Employment with the Divested Entity or its
subsidiaries. As used herein, "Qualifying Employment" shall mean any
position, with a principal place of employment in the United States, as a
full-time, regular employee of the Divested Entity or one of its
subsidiaries, wherein (a) Executive's base salary is at least equal to
Executive's base salary immediately prior to the Divestiture, (b)
Executive's benefits (to include, without limitation, medical,
prescription, dental, disability, employee life, group life, accidental
death and travel
4
<PAGE>
accident insurance plans and programs, vacation benefits, retirement
benefits, participation in stock option, restricted stock and other
employee stock plans, and participation in executive incentive bonus
programs) are substantially comparable with the benefits to which Executive
was entitled prior to the Divestiture, and (c) if Executive is required to
relocate to a new principal place of employment, Executive is reimbursed
for all expenses reasonably incurred in such relocation (including taxes
payable on such reimbursement and on such gross-up payment; costs of
packing, moving and unpacking household goods; reasonable expenses of
travel, meals and lodging in moving to the new location; reasonable costs
of temporary living expenses at the new location; and assistance in selling
Executive's home commensurate with the assistance customarily provided by
the Corporation to transferred executives prior to the Divestiture,
including acquisition of such home by the Corporation at an appraised fair
market value).
D. Definition of Termination Date. For the purpose of this Agreement,
------------------------------
"Termination Date" shall mean Executive's last day of employment with any of the
Corporation or any of its subsidiaries, or with a Divested Entity or any of its
subsidiaries, as the case may be.
E. Definition of Transaction. For the purpose of this Agreement, a
-------------------------
"Transaction" shall mean and include any one of more of the following events;
provided that, prior thereto, such event has been recommended or approved by a
majority of the Board of Directors of the Corporation or of a duly authorized
committee thereof:
(i) consummation of a reorganization, merger or consolidation
involving the Corporation (other than a transaction solely involving one or
more subsidiaries of the
5
<PAGE>
Corporation), or the sale, transfer, or other disposition of all or
substantially all of the assets of the Corporation; or
(ii) Acquisition by any individual, entity or group of beneficial
ownership of sufficient shares of common stock or other securities of the
Corporation such that, but for such prior approval and any concurrent
redemption of the Corporation's Preference Share Purchase Rights or other
actions which may be taken to cause such person or group not to become an
Acquiring Person, would cause such individual, entity or group to become an
"Acquiring Person" within the meaning of that certain Rights Agreement,
dated as of October 26, 1995 between Valero Energy Corporation and Harris
Trust and Savings Bank, as Rights Agent; or
(iii) Consummation of a Divestiture; or
(iv) any other event determined by the Board of Directors of the
Corporation or a duly authorized committee thereof to constitute a
"Transaction" hereunder.
F. Definitions of Divestiture and Divested Entity. For purposes of this
----------------------------------------------
Agreement, the term "Divestiture" shall mean and include any transaction or
series of transactions (including, without limitation, any spin-off, split-off,
merger or other business combination, or sale, lease, capital contribution,
contractual dedication or other transfer or disposition of securities or assets)
pursuant to which all or a majority of either (i) the assets ("Natural Gas
Assets") constituting the natural gas and natural gas liquids business as now
conducted by Valero Natural Gas Company and its subsidiary corporations and
partnerships, or (ii) the assets ("Refining Assets") constituting the refining
and marketing business as now conducted by Valero Refining and Marketing Company
and its subsidiary corporations, are directly or indirectly owned or controlled
by one or more
6
<PAGE>
corporations, partnerships, limited liability companies, joint ventures or other
persons or entities which are not wholly owned subsidiaries of Valero Energy
Corporation (referred to herein as a "Divested Entity"). As used herein, the
term "control" (and with correlative meaning, the terms "controlled,"
"controlling" and "controlled by") shall mean the possession, directly or
indirectly, of the power to direct, cause the direction of or influence the
management and policies of a person or entity, whether through the ownership of
voting securities, by contract or otherwise.
G. Definition of "cause". As used herein, "cause" shall mean (i)
---------------------
Executive's conviction of a crime under federal or state law (excluding a
misdemeanor offense not involving moral turpitude), or (ii) Executive's gross
and deliberate disregard of Executive's duties and responsibilities, as
reasonably determined by the Board of Directors of the Corporation (or, if
Executive becomes an employee of a Divested Entity, the Board of Directors of
such Divested Entity) after written notice of such failure and the failure or
refusal by Executive to correct such failure within 10 days from the date notice
is given, or (iii) the continued material impairment of Executive's ability to
fulfill his responsibilities as a result of alcoholism or drug dependency after
written notice of such material impairment and the failure to correct such
impairment with 45 days from the date notice is given or such longer period as
may be required under applicable law.
H. Definitions of "voluntary"/involuntary". In the event that Executive
---------------------------------------
ceases to be an employee of the Corporation, a Divested Entity or their
respective subsidiaries after (i) Executive's base salary is reduced to an
amount below the base salary pertaining immediately prior to the Transaction, or
(ii) Executive's benefits (to include, without limitation, medical,
prescription, dental, disability, employee life, group life, accidental death
and travel accident insurance plans and programs, vacation benefits, retirement
benefits, participation in stock option, restricted stock and
7
<PAGE>
other employee stock plans, and participation in executive incentive bonus
programs) are reduced so as not to be at least substantially comparable with the
benefits to which Executive was entitled prior to the Transaction, or (iii)
Executive is required to relocate to a new principal place of employment under
circumstances in which Executive would not be reimbursed for all expenses
reasonably incurred in such relocation (including taxes payable on such
reimbursement and on such gross-up payment; costs of packing, moving and
unpacking household goods; reasonable expenses of travel, meals and lodging in
moving to the new location; reasonable costs of temporary living expenses at the
new location; and assistance in selling Executive's home commensurate with the
assistance customarily provided by the Corporation to transferred executives
prior to the Transaction, including acquisition of such home by the Corporation
at an appraised fair market value), then such termination of employment shall be
deemed for all purposes of this Agreement to be "involuntary." If Executive's
termination of employment is not "involuntary," as defined above, and does not
arise from death, total and permanent disability, retirement or from the
circumstances described in Paragraph 2.C(ii)(b), then such termination of
employment is deemed to be "voluntary" for all purposes of this Agreement. In
addition, if the Executive is offered, but declines to accept, Qualifying
Employment with a Divested Entity or its subsidiaries, and Executive is
subsequently terminated (other than as a result of death, total and permanent
disability or retirement) from employment with the Corporation and its
subsidiaries, then Executive's termination of employment will be deemed to be
"voluntary" for all purposes of this Agreement.
3. Excess Amounts.
--------------
A. Excise Taxes. Anything in this Agreement to the contrary
------------
notwithstanding, in the event any payment or distribution by the Corporation to
or for the benefit of Executive (whether paid
8
<PAGE>
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code")
(such excise tax, including any interest or penalties incurred with respect
thereto, being referred to herein as the "Excise Tax"), then the amount payable
to the Executive pursuant to Paragraphs 2.A and 2.B hereof shall be reduced to
such amount (the "Reduced Payment") but not below zero, such that the receipt of
the Executive of the Reduced Payment and all other payments and distributions
pursuant to this Agreement would not give rise to any Excise Tax.
B. No Duplication. Subject to the terms and conditions hereof, if
--------------
Executive has received the payments specified in Paragraph 2 for one
Transaction, Executive shall not be entitled to receive a payment under this
Agreement from the Corporation or a Divested Entity for any subsequent
Transaction. This limitation shall not be construed to prevent Executive from
receiving any payment from the Corporation or a Divested Entity under any
separate agreement, contract or arrangement.
C. Overpayments and Underpayments. All determinations required to be
------------------------------
made under Paragraph 3.A shall be made by the Corporation, which shall provide
detailed supporting calculations to the Executive no later than the date on
which such payment is due. As a result of uncertainty in the application of
Section 280G of the Code at the time of the initial determination hereunder, it
is possible that payments will have been made by the Corporation which should
not have been made ("Overpayment") or that additional payments, which will not
have been made by the Corporation could have been made ("Underpayment"), in each
case, consistent with the calculations required to be made hereunder. In the
event that an Overpayment has been made, any such Overpayment shall be treated
for all purposes as a loan to the Executive which the Executive
9
<PAGE>
shall repay to the Corporation together with interest at the applicable Federal
rate provided for in Section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by the Executive to the Corporation (or if paid by the
Executive to the Corporation shall be returned to the Executive) if and to the
extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Code. In the event that an Underpayment has occurred,
any such Underpayment shall be promptly paid by the Corporation to or for the
benefit of the Executive together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code.
4. General.
-------
A. Indemnification. If litigation shall be brought to enforce or
---------------
interpret any provision contained herein, the Corporation, to the fullest extent
permitted by applicable law, hereby agrees to indemnify Executive for reasonable
attorneys' fees and disbursements incurred by Executive in such litigation
(including any appellate proceedings, and regardless of whether or not such
litigation is ultimately resolved in favor of Executive), and hereby agrees to
pay pre-judgement interest on any money judgement obtained by Executive,
calculated at the "prime rate" of interest announced by Morgan Guaranty Trust
Company of New York, New York as being in effect from time to time, from the
date that payment(s) to Executive should have been made in accordance with the
provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to pay
----------------------------
Executive the compensation and other amounts specified herein and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against Executive or anyone else. All amounts payable by the Corporation
10
<PAGE>
hereunder shall be paid without notice or demand. Each and every payment made
hereunder by the Corporation shall be final and the Corporation will not seek to
recover all or any part of such payment from Executive or from whoever may be
entitled thereto, for any reason whatsoever, excluding manifest error.
Executive shall not be required to mitigate the amount of any payment provided
for in this Agreement by seeking other employment or otherwise, nor shall the
amount of any payment provided for in this Agreement be reduced by any
compensation earned by Executive as a result of employment by another employer,
by retirement benefits, by offset against any amount claimed to be owing by
Executive to the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to the
----------
benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights arising
hereunder may be assigned or pledged by Executive. In the event of a
Divestiture, the Corporation shall cause each Divested Entity to execute and
deliver to Executive a written instrument, in form reasonably satisfactory to
Executive, whereby such Divested Entity shall assume, jointly and severally with
the Corporation, the obligations of the Corporation hereunder, provided that no
such assumption shall operate to release the Corporation from any liability
hereunder.
D. Severability. Any provision in this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11
<PAGE>
E. Controlling Law and Interpretation. This Agreement shall in all
----------------------------------
respects be governed by, and construed in accordance with, the laws of the State
of Texas. In the event that the interpretation or application of any provision
of this Agreement is determined in any proceeding to be ambiguous or uncertain,
the parties expressly intend and agree that such ambiguity or uncertainty shall
be resolved in favor of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
--------------------------------
Gregory C. King
VALERO REFINING AND MARKETING COMPANY
By:
--------------------------------
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EXHIBIT 10.11
SCHEDULE OF INCENTIVE BONUS AGREEMENTS
The following will execute Incentive Bonus Agreements substantially in the
same form as the agreement described in Exhibit 10.10 to the Valero
Refining and Marketing Company Form 10.
Employee
-------------------------
John D. Gibbons
<PAGE>
EXHIBIT 10.12
MANAGEMENT STABILITY AGREEMENT
AGREEMENT dated as of ________, 1997 ("Agreement") between Valero Refining
and Marketing Company, a Delaware corporation (the "Corporation"), and Gregory
C. King (the "Executive"),
WITNESSETH:
WHEREAS, for the reasons more fully set forth in the minutes of the
Executive Committee (the "Committee") of the Board of Directors of the
Corporation, the Committee has approved the execution, delivery and performance
by the Corporation of management retention agreements, substantially in the form
of this Agreement, between the Corporation and certain officers and other key
executives of the Corporation and its subsidiaries, including the Executive;
WHEREAS, should the Corporation become involved in any Change of Control or
Divestiture (each as hereinafter defined) situation, in addition to Executive's
regular duties, Executive may be called upon to assist in the assessment of any
third-party or internal proposals, advise management and the Board as to whether
such proposals would be in the best interests of the Corporation and its
shareholders, participate in successfully completing such transactions and to
take such other actions as the Board might determine to be appropriate;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders,
notwithstanding the possibility, threat, or occurrence of a Change of Control or
Divestiture, and to induce the Executive to remain in the employ of the
Corporation
<PAGE>
and/or its designated subsidiaries, and for other good and valuable
consideration, Corporation and Executive agree as follows:
1. Services During Certain Events.
------------------------------
A. In the event any Person (as defined in Paragraph 2.E) (i) begins a
tender or exchange offer for equity securities of the Company, (ii) or
publicly announces an intention to take or consider taking any actions
which, if consummated, would constitute a Change of Control, (iii)
circulates a stockholder consent or solicits a proxy for the election of
directors, (iv) enters into an agreement with the Corporation, the
consummation of which would result in a Change of Control, (v) becomes an
"Acquiring Person" under the Rights Agreement, dated June 18, 1997, between
the Corporation and Harris Trust and Savings Bank, as Rights Agent, or (vi)
publicly takes other steps which, if consummated, would constitute a Change
of Control, Executive agrees that he will not voluntarily leave the employ
of the Corporation or its subsidiaries, and will render the services
contemplated in the recitals to this Agreement and in any employment
agreement between the Corporation and Executive, until the earlier of (u)
such date as such Person has abandoned or terminated efforts to effect a
Change of Control, (v) sixty days following the date on which a Change of
Control has occurred or (w) thirty days following written notice to the
Corporation of such termination of employment. In the event the
Corporation determines to undertake any transaction or transactions which,
if consummated, would constitute a Divestiture, Executive agrees that he or
she will not voluntarily leave the employ of the Corporation or its
subsidiaries and will continue to render the services recited in the
preambles to this Agreement and in any employment agreement between the
Corporation and the Executive until the earlier of
2
<PAGE>
(x) such date as the Corporation has either abandoned or terminated its
efforts to effect such Divestiture, or (y) sixty days following the date on
which such Divestiture has occurred, or (z) thirty days following written
notice to the Corporation of such termination of employment.
B. The provisions of Paragraph 1.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of an event
specified in Paragraph 1.A(i)-(vi), or a determination by the Corporation
to undertake a Divestiture, as the case may be, and, following the
occurrence of any such event or a determination by the Corporation to
undertake a Divestiture, as the case may be, may terminate employment
through retirement, total and permanent disability, or for Good Reason.
For purposes of this Agreement, "Good Reason" means (i) the occurrence of
any event or circumstance which, if occurring following a Change in Control
or Divestiture, would render Executive's termination of employment
"involuntary" (as defined in Paragraph 2.H), or (ii) a breach (other than
an insubstantial failure which is remedied by the Corporation promptly
after receipt of notice thereof from the Executive) by the Corporation of
any provision of this Agreement.
2. Termination After Change of Control. In the event that, within two
years following the occurrence of a Change of Control of the Corporation or a
Divestiture, Executive's employment is terminated so that Executive is no longer
employed with any of the Corporation or its then remaining subsidiaries, or a
Divested Entity or its subsidiaries, then, except as is otherwise provided in
Paragraph 2.D below, Executive shall be entitled to receive the following
payment and other benefits:
3
<PAGE>
A. Lump Sum Cash Payment. On or before Executive's Termination Date,
the Corporation will pay to Executive (in addition to any base salary,
bonuses, incentive compensation, expenses, vacation, benefits, benefit plan
distributions and other amounts which would otherwise normally be payable
to Executive, to the extent not theretofore paid), as compensation for
services rendered to the Corporation, a lump sum cash amount (subject to
any applicable payroll or other taxes required to be withheld) equal to two
(2) times the highest annual rate of compensation in effect at any time
during the 36-month period ending on the Termination Date. As used herein,
"annual rate of compensation" shall mean the aggregate regular base salary
paid or payable to Executive by the Corporation with respect to any period
of 12 consecutive months. In the event there are fewer than 24 months
remaining from the Termination Date to Executive's normal retirement date
at age 65, the amount otherwise payable hereunder shall be reduced as
follows: the amount otherwise calculated under this Paragraph 2.A will be
multiplied by a fraction, the numerator of which is the number of days
remaining to Executive's normal retirement date and the denominator of
which is 720, and the resulting product shall be the amount payable to
Executive under this Paragraph 2.A.
B. Other Benefits.
--------------
(i) Insurance or Other Special Benefits. For two years (the
"Applicable Period") after the Termination Date, or such longer period
as may be provided by the terms of the appropriate plan, program,
practice or policy, the Corporation shall continue benefits to
Executive and/or Executive's family at least equal to those which
would have been provided to them under the welfare benefit plans,
practices, policies
4
<PAGE>
and programs provided by the Corporation (including, without
limitation, medical, prescription, dental, disability, employee life,
group life, accidental death and travel accident insurance plans and
programs) immediately prior to such termination, to the extent
applicable generally to other peer executives of the Corporation and
its affiliated companies, if the Executive's employment had not been
terminated; provided, however, that in no event shall the continued
benefits provided hereunder be less favorable, in the aggregate, than
those provided under the most favorable of such plans, practices,
policies and programs in effect for Executive at any time during the
120-day period immediately preceding the Termination Date or, if more
favorable to Executive, those provided generally at any time after the
Termination Date to other peer executives of the Corporation, its
affiliated companies or their successors. To the extent that, during
the Applicable Period, or any portion thereof, the benefits required
to be provided under this Paragraph 2.B are also required to be
provided by the Corporation under applicable provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the
Corporation may discharge such portion of its obligation hereunder by
providing such COBRA-mandated benefits, but at the Corporation's sole
cost and expense. If Executive is reemployed by another employer and
is eligible to receive medical or other welfare benefits under another
employer-provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other
plan during such applicable period of eligibility.
5
<PAGE>
(ii) Thrift and Other Plans. The Executive's participation in
the Corporation's Thrift Plan, Employee Stock Ownership Plans,
retirement plan for employees generally ("Pension Plan") or other
applicable plans of the Corporation (or, if applicable, such similar
plans as the Divested Entity may establish) shall not continue after
the Termination Date. Any terminating distributions and/or vested
rights under such plans shall be governed by the terms of the
respective plans.
C. The foregoing provisions of this Paragraph 2 notwithstanding,
Executive shall not be entitled to receive, and the Corporation and, if
applicable, the Divested Entity shall not be obligated to make, the
payments and other benefits specified in Paragraphs 2.A and 2.B above if
Executive's termination employment occurs under any one of more of the
following circumstances:
(i) Executive's termination of employment is "voluntary" (as
hereinafter defined);
(ii) Executive is terminated by his employer company for "cause"
(as hereinafter defined);
(iii) Executive's termination is a consequence of death or total
and permanent disability; or
(iv) Executive retires under the Corporation's Pension Plan (or,
if Executive is then an employee of a Divested Entity or its
subsidiaries, under such entity's similar tax-qualified pension plan).
D. Definition of Termination Date. For the purpose of this
Agreement, "Termination Date" shall mean: (i) in the case of a Change of
Control, the Executive's last
6
<PAGE>
day of employment with the Corporation or any of its subsidiaries, and (ii)
in the case of a Divestiture, the Executive's last day of employment with
any of the Corporation or any of its subsidiaries, or with a Divested
Entity or any of its subsidiaries, as the case may be.
E. Definition of Change of Control. For the purpose of this
Agreement, a "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (a) the then
outstanding shares of common stock of the Corporation (the
"Outstanding Corporation Common Stock") or (b) the combined voting
power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the
"Outstanding Corporation Voting Securities"); provided, however, that
for purposes of this subparagraph (i), the following acquisitions
shall not constitute a Change of Control: (a) any acquisition
directly from the Corporation, (b) any acquisition by the Corporation,
(c) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Corporation or any corporation or other
entity controlled by the Corporation or (d) any acquisition by any
corporation or other entity pursuant to a transaction which complies
with clauses (a), (b) and (c) of subparagraph (iii) of this Paragraph
2.E; or
(ii) Individuals who, as of the date hereof, constitute the Board
of Directors of the Corporation (the "Incumbent Board") cease for any
reason to
7
<PAGE>
constitute at least a majority of the Board; provided, however, that
any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Corporation's
shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors
or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(iii) Consummation of a reorganization, merger or consolidation,
or sale, transfer, or other disposition of all or substantially all of
the assets of the Corporation (a "Business Combination"), in each
case, unless, following such Business Combination, (a) all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly,
more than 50% of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation or other entity surviving or
resulting from such Business Combination (including, without
limitation, a corporation or other entity which as a result of such
transaction owns the Corporation or all or substantially all of the
Corporation's assets either directly or through one or more
8
<PAGE>
subsidiaries) in substantially the same proportions as their ownership
immediately prior to such Business Combination of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting
Securities, as the case may be, (b) no Person (excluding any
corporation or other entity surviving or resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Corporation or such corporation or other entity surviving or resulting
from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares
of common stock of the corporation or other entity surviving or
resulting from such Business Combination or the combined voting power
of the then outstanding voting securities of such corporation or other
entity except to the extent that such ownership existed prior to the
Business Combination and (c) at least a majority of the members of the
board of directors or other governing body of the corporation or other
entity surviving or resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the
initial agreement or of the action of the Board, providing for such
Business Combination; or
(iv) Approval by the shareholders of the Corporation of a
complete liquidation or dissolution of the Corporation; or
(v) any other event determined by the Board of Directors or the
Committee to constitute a "Change of Control" hereunder.
F. Definitions of Divestiture and Divested Entity. For purposes of
this Agreement, the term "Divestiture" shall mean and include any
transaction or series of
9
<PAGE>
transactions (including, without limitation, any spin-off, split-off,
merger or other business combination, or sale, lease, capital contribution,
contractual dedication or other transfer or disposition of securities or
assets) pursuant to which all or a majority of either (i) the assets
("Natural Gas Assets") constituting the natural gas and natural gas liquids
business as now conducted by Valero Natural Gas Company and its subsidiary
corporations and partnerships, or (ii) the assets ("Refining Assets")
constituting the refining and marketing business as now conducted by Valero
Refining and Marketing Company and its subsidiary corporations, are
directly or indirectly owned or controlled by one or more corporations,
partnerships, limited liability companies, joint ventures or other Persons
which are not wholly owned subsidiaries of Valero Energy Corporation
(referred to herein as a "Divested Entity"). As used herein, the term
"control" (and with correlative meaning, the terms "controlled,"
"controlling" and "controlled by") shall mean the possession, directly or
indirectly, of the power to direct, cause the direction of or influence the
management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
G. Definition of "cause". As used herein, "cause" shall mean (i)
Executive's conviction of a crime under federal or state law (excluding a
misdemeanor offense not involving moral turpitude), or (ii) Executive's
gross and deliberate disregard of Executive's duties and responsibilities,
as reasonably determined by the Board of Directors of the Corporation (or,
if Executive becomes an employee of a Divested Entity, the Board of
Directors of such Divested Entity) after written notice of such failure and
the failure or refusal by Executive to correct such failure within 10 days
from the date notice is given, or (iii) the continued material impairment
of Executive's ability to fulfill his responsibilities as
10
<PAGE>
a result of alcoholism or drug dependency after written notice of such
material impairment and the failure to correct such impairment with 45 days
from the date notice is given or such longer period as may be required
under applicable law.
H. Definitions of "voluntary"/involuntary". In the event that
Executive ceases to be an employee of the Corporation, a Divested Entity or
their respective subsidiaries after (i) Executive's base salary is reduced
to an amount below the base salary pertaining immediately prior to the
Change of Control or Divestiture, as the case may be, or (iii) Executive's
benefits (to include, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs, vacation benefits, retirement benefits,
participation in stock option, restricted stock and other employee stock
plans, and participation in executive incentive bonus programs) are reduced
so as not to be at least substantially comparable with the benefits to
which Executive was entitled prior to the Change of Control or Divestiture,
as the case may be, or (iii) Executive is required to relocate to a new
principal place of employment under circumstances in which Executive would
not be reimbursed for all expenses reasonably incurred in such relocation
(including taxes payable on such reimbursement and on such gross-up
payment; costs of packing, moving and unpacking household goods; reasonable
expenses of travel, meals and lodging in moving to the new location;
reasonable costs of temporary living expenses at the new location; and
assistance in selling Executive's home commensurate with the assistance
customarily provided by the Corporation to transferred executives prior to
the Change of Control or Divestiture, including acquisition of such home by
the Corporation at an appraised fair market value), then such termination
of employment shall be deemed for all
11
<PAGE>
purposes of this Agreement to be "involuntary" and Executive shall be
entitled to the benefits specified in Paragraphs 2.A and 2.B. If the
Executive's termination of employment is not "involuntary," as defined
above, and does not arise from one or more of the circumstances itemized in
Paragraph 2.C(ii) through (iv), then such termination of employment is
deemed to be "voluntary" for purposes of this Agreement.
3. Acceleration of Options and Rights in Certain Events. Stock options
("options") and stock appreciation or similar rights ("rights"), if any, granted
to Executive by the Corporation under the Corporation's Stock Option Plan and
Executive Stock Incentive Plan (collectively the "Plans") (or any other stock
option or stock appreciation rights plan adopted by the Corporation) and not
previously exercised, canceled or otherwise terminated will be exercisable in
full for a period of 90 days, or if longer, such period as is specified in such
plan, such 90 day period to commence on the earlier of (a) the date of the
Change of Control of the Corporation or the Divestiture or (b) on the date of
approval by the Corporation's shareholders of an agreement providing for a
merger or other transaction in which the Corporation will not remain an
independent publicly owned corporation or a consolidation, a sale, transfer or
other disposition of all or substantially all the assets of the Corporation or
another transaction constituting a Change of Control or Divestiture; provided
however, that no such option or right shall be exercisable after the expiration
date of such option or right.
4. Removal of Restrictions on Stock Grants. Stock previously granted to
Executive by the Corporation as restricted stock or performance shares under the
Corporation's Executive Stock Incentive Plan (or any other similar stock plan
adopted by the Corporation) will have all restrictions removed on the earlier of
(a) the date of the Change of Control of the Corporation or the Divestiture,
12
<PAGE>
or (b) on the date of approval by the Corporation's shareholders of an agreement
providing for a merger or other transaction in which the Corporation will not
remain an independent publicly owned corporation or a consolidation, a sale,
transfer or other disposition of all or substantially all the assets of the
Corporation, or another transaction constituting a Change of Control or a
Divestiture; provided, that, in the case of stock previously granted to
Executive as performance shares under the Corporation's Executive Stock
Incentive Plan (or any other similar stock plan adopted by the Corporation), the
performance period shall be deemed to have terminated on the earlier of the
dates specified in clauses (a) or (b) above, and the number of shares to which
the Executive is then entitled shall be determined in accordance with such plan.
5. Excess Amounts.
--------------
A. Excise Taxes. Anything in this Agreement to the contrary
notwithstanding, in the event any payment or distribution by the
Corporation to or for the benefit of Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise) (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code")
(such excise tax, including any interest or penalties incurred with respect
thereto, being referred to herein as the "Excise Tax"), then the lump-sum
amount payable to the Executive pursuant to Paragraph 2.A hereof shall be
reduced to such amount (the "Reduced Payment") but not below zero, such
that the receipt of the Executive of the Reduced Payment and all other
payments and distributions pursuant to this Agreement would not give rise
to any Excise Tax.
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<PAGE>
B. No Duplication. Subject to the terms and conditions hereof, if
Executive has received the lump-sum payment and other benefits specified in
Paragraph 2 for one Change of Control or Divestiture event, Executive shall
not be entitled to receive a lump-sum payment or other such benefits under
this Agreement from the Corporation or a Divested Entity for any subsequent
Change of Control or Divestiture event. In addition, if Executive receives
a lump-sum payment under this Agreement, then except as may be expressly
provided in an individual agreement between Executive and the Corporation,
Executive shall not be entitled to participate in and receive a severance
benefit under any other severance plan maintained by the Corporation for
executive officers or employees generally. The foregoing limitations shall
not be construed to prevent Executive from receiving a payment from the
Corporation or a Divested Entity under any separate agreement, contract or
arrangement.
C. Overpayments and Underpayments. All determinations required to be
made under Paragraph 6.A shall be made by the Corporation which shall
provide detailed supporting calculations to the Executive no later than the
Termination Date. As a result of uncertainty in the application of Section
280G of the Code at the time of the initial determination hereunder, it is
possible that payments will have been made by the Corporation which should
not have been made ("Overpayment") or that additional payments, which will
not have been made by the Corporation could have been made
("Underpayment"), in each case, consistent with the calculations required
to be made hereunder. In the event that an Overpayment has been made, any
such Overpayment shall be treated for all purposes as a loan to the
Executive which the Executive shall repay to the Corporation together with
14
<PAGE>
interest at the applicable Federal rate provided for in Section 7872(f)(2)
of the Code; provided, however, that no amount shall be payable by the
Executive to the Corporation (or if paid by the Executive to the
Corporation shall be returned to the Executive) if and to the extent such
payment would not reduce the amount which is subject to taxation under
Section 4999 of the Code. In the event that an Underpayment has occurred,
any such Underpayment shall be promptly paid by the Corporation to or for
the benefit of the Executive together with interest at the applicable
Federal rate provided for in Section 7872(f)(2) of the Code.
6. General.
-------
A. Indemnification. If litigation shall be brought to enforce or
interpret any provision contained herein, the Corporation, to the fullest
extent permitted by applicable law, hereby agrees to indemnify Executive
for reasonable attorneys' fees and disbursements incurred by Executive in
such litigation (including any appellate proceedings, and regardless of
whether or not such litigation is ultimately resolved in favor of
Executive), and hereby agrees to pay pre-judgement interest on any money
judgement obtained by Executive, calculated at the "prime rate" of interest
announced by Morgan Guaranty Trust Company of New York, New York as being
in effect from time to time, from the date that payment(s) to Executive
should have been made in accordance with the provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to pay
Executive the compensation and other amounts specified herein and to make
the arrangements provided herein shall be absolute and unconditional and
shall not be affected by any circumstances, including, without limitation,
any set-off, counterclaim, recoupment,
15
<PAGE>
defense or other right which the Corporation may have against Executive or
anyone else, the completion of any Change of Control or Divestiture or the
employment of Executive by any Divested Entity. All amounts payable by the
Corporation hereunder shall be paid without notice or demand. Each and
every payment made hereunder by the Corporation shall be final and the
Corporation will not seek to recover all or any part of such payment from
Executive or from whoever may be entitled thereto, for any reason
whatsoever, excluding manifest error. Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment
provided for in this Agreement be reduced by any compensation earned by
Executive as a result of employment by another employer, by retirement
benefits, by offset against any amount claimed to be owing by Executive to
the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to the
----------
benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by Executive. In the event of
a Divestiture, the Corporation shall cause each Divested Entity to (i)
execute and deliver to Executive a written instrument, in form reasonably
satisfactory to Executive, whereby such Divested Entity shall assume,
jointly and severally with the Corporation, the obligations of the
Corporation hereunder, provided that no such assumption shall operate to
release the Corporation from any liability hereunder, and (ii) deliver to
Executive an executive stability agreement between the Divested Entity and
the Executive, substantially identical to this Agreement, duly authorized
by the Board of Directors or other governing body of such Divested Entity
and executed by a duly authorized
16
<PAGE>
officer thereof, provided that no such executive stability agreement
between the Divested Entity and the Executive shall require the payment of
a severance payment or other benefits (a) in the event of a termination of
employment following a further Divestiture transaction involving the
Divested Entity, or (b) with respect to any termination of employment if
Executive has previously received a severance payment pursuant to this
Agreement as a result of such termination.
D. Severability. Any provision in this Agreement which is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability
without invalidating or affecting the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
E. Controlling Law and Interpretation. This Agreement shall in all
----------------------------------
respects be governed by, and construed in accordance with, the laws of the
State of Texas. In the event that the interpretation or application of any
provision of this Agreement is determined in any proceeding to be ambiguous
or uncertain, the parties expressly intend and agree that such ambiguity or
uncertainty shall be resolved in favor of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
------------------------------------------------
Gregory C. King
17
<PAGE>
VALERO ENERGY CORPORATION
By:_______________________________________________
Edward C. Benninger
President
18
<PAGE>
EXHIBIT 10.13
SCHEDULE OF MANAGEMENT STABILITY AGREEMENTS
The following will execute Management Stability Agreements substantially in
the same form as the agreement described in Exhibit 10.12 to the Valero
Refining and Marketing Company Form 10.
Employee
-------------------------
John D. Gibbons
<PAGE>
EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
Three Months Ended
March 31,
---------------------------
1997 1996
----------- -----------
COMPUTATION OF EARNINGS PER SHARE
ASSUMING NO DILUTION:
Net Income................................. $ 15,394 $ 19,914
Less: Preferred stock dividend
requirements.............................. (2,720) (2,841)
----------- -----------
Net income applicable to common stock...... $ 12,674 $ 17,073
=========== ===========
Weighted average number of shares
of common stock outstanding............... 44,411,705 43,748,550
=========== ===========
Earnings per share assuming no dilution.... $ .29 $ .39
=========== ===========
COMPUTATION OF EARNINGS PER SHARE
ASSUMING FULL DILUTION:
Net Income................................. $ 15,394 $ 19,914
Less: Preferred stock dividend
requirements.............................. (2,720) (2,841)
Add: Reduction of preferred stock dividends
applicable to the assumed conversion
of Convertible Preferred Stock............ 2,695 2,695
----------- -----------
Net income applicable to common
stock assuming full dilution.............. $ 15,369 19,768
=========== ===========
Weighted average number of shares
of common stock outstanding............... 44,411,705 43,748,550
Weighted average common stock
equivalents applicable to
stock options............................. 828,547 438,815
Weighted average shares issuable
upon conversion of Convertible
Preferred Stock........................... 6,381,798 6,381,798
----------- -----------
Weighted average shares used for
computation............................... 51,622,050 50,569,163
=========== ===========
Earnings per share assuming
full dilution............................. $ .30(a) $ .39(b)
=========== ===========
- ---------------------
(a) This calculation is submitted in accordance with paragraph 601(b)(11) of
Regulation S-K although it is contrary to APB Opinion No. 15 because it
produces an antidilutive result.
(b) This calculation is submitted in accordance with paragraph 601(b)(11) of
Regulation S-K although it is not required by APB Opinion No. 15 because
it results in dilution of less than 3%.
<PAGE>
EXHIBIT 21.1
EXHIBIT 21.1
VALERO REFINING AND MARKETING COMPANY
SCHEDULE OF SUBSIDIARIES
NAME OF SUBSIDIARY STATE OF ORGANIZATION
- -------------------------------------- -------------------------------
Valero Refining and Marketing Company Delaware
Valero Coal Company Delaware
Valero Corporate Services Company Delaware
Valero Javelina Company Delaware
Valero Marketing and Supply Company Delaware
Valero Mediterranean Company Delaware
Valero Mexico Company Delaware
Valero MTBE Investments Company Delaware
Valero MTBE Operating Company Delaware
Valero Producing Company Delaware
Valero Refining Company Delaware
Valero Technical Services Company Delaware
VMGA Company Texas
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 14, 1997 (except with respect to the matters discussed
in Notes 1, 2 and 3 as to which the date is May 9, 1997) on the financial
statements of Valero Energy Corporation and subsidiaries for the periods
indicated in said report (and to all references to our firm) included in or
made a part of this Registration Statement.
San Antonio, Texas
May 12, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated January 31, 1997 (except with respect to the matter discussed in
Note 15, as to which the date is March 17, 1997) on the financial statements
of Basis Petroleum, Inc. and subsidiaries for the periods indicated in said
report (and to all references to our firm) included in or made a part of this
Registration Statement.
Houston, Texas
May 12, 1997
