<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-56599
THE INFORMATION CONTAINED HEREIN IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE DELIVERED WITHOUT THE DELIVERY OF A FINAL PROSPECTUS
SUPPLEMENT AND ACCOMPANYING PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS PROHIBITED.
SUBJECT TO COMPLETION, DATED MARCH 1, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 30, 1998)
VALERO LOGO VALERO ENERGY CORPORATION
$300,000,000
% Notes due
Interest payable and
ISSUE PRICE: %
The Notes will mature on . Interest will accrue from ,
1999. Valero may redeem the Notes in whole or in part at any time at the
redemption prices described on page S-21. The Notes will be issued in minimum
denominations of $1,000 increased in multiples of $1,000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus Supplement or the Prospectus. Any
representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS VALERO
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note % % %
- ---------------------------------------------------------------------------------------------------------
Total $ $ $
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Notes will not be listed on any national securities exchange. Currently,
there is no public market for the Notes.
It is expected that delivery of the Notes will be made to investors on or about
, 1999.
J.P. MORGAN & CO.
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY DEAN WITTER
, 1999
<PAGE> 2
No person is authorized to give any information or to make any representations
other than those contained or incorporated by reference in this Prospectus
Supplement or the Prospectus, and, if given or made, such information or
representations must not be relied upon as having been authorized. This
Prospectus Supplement and the Prospectus do not constitute an offer to sell or
the solicitation of an offer to buy any securities other than the securities
described in this Prospectus Supplement or an offer to sell or the solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful. Neither the delivery of this Prospectus Supplement or
the Prospectus, nor any sale made hereunder and thereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
or incorporated by reference herein or therein is correct as of any time
subsequent to the date of such information.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company................................................. S-3
Capitalization.............................................. S-5
Ratio of Earnings to Fixed Charges.......................... S-5
Use of Proceeds............................................. S-5
Selected Consolidated Financial Data........................ S-6
Management's Discussion and Analysis........................ S-9
Business.................................................... S-15
Description of the Notes.................................... S-21
Underwriting................................................ S-23
Validity of the Notes....................................... S-24
Information Regarding Forward-Looking Statements............ S-24
PROSPECTUS
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 3
Forward-Looking Statements.................................. 3
The Company................................................. 4
Recent Developments......................................... 4
Use of Proceeds............................................. 4
Ratio of Earnings to Fixed Charges.......................... 5
Risk Factors................................................ 5
Description of the Debt Securities.......................... 5
Description of the Common Stock............................. 12
Description of the Preferred Share Purchase Rights.......... 13
Description of the Preferred Stock.......................... 15
Description of the Depositary Shares........................ 18
Plan of Distribution........................................ 22
Legal Opinions.............................................. 23
Experts..................................................... 23
</TABLE>
S-2
<PAGE> 3
THE COMPANY
GENERAL
Valero Energy Corporation is one of the United States' largest independent
petroleum refiners and marketers, and the largest on the Gulf Coast. With the
May 1, 1997 acquisition of Basis Petroleum, Inc. and the September 16, 1998
acquisition of Mobil Oil Corporation's Paulsboro, New Jersey refinery, the
Company currently owns and operates five refineries in Texas, Louisiana and New
Jersey with a combined throughput capacity of approximately 735,000 barrels per
day ("BPD"). The Company principally produces premium, environmentally clean
products such as reformulated gasoline, low-sulfur diesel and oxygenates. The
Company also produces a substantial slate of middle distillates, jet fuel and
petrochemicals. The Company markets its products in 31 states and selected
export markets.
Unless otherwise required by the context, the term "Valero" as used herein
refers to Valero Energy Corporation, and the term "Company" refers to Valero and
its consolidated subsidiaries. Valero's principal executive offices are located
at One Valero Place, San Antonio, Texas, 78212 and its telephone number is (210)
370-2000.
RESTRUCTURING
Valero was incorporated in Delaware in 1981 under the name Valero Refining and
Marketing Company and became a publicly held corporation on July 31, 1997. Prior
to July 31, 1997, Valero was a wholly owned subsidiary of Valero Energy
Corporation ("Energy"). Energy was engaged in both the refining and marketing
business and the natural gas related services business. On July 31, 1997, Energy
spun off Valero to Energy's stockholders by distributing all of the common stock
of Valero (the "Distribution"). Immediately after the Distribution, Energy, with
its remaining natural gas related services business, merged (the "Merger") with
a wholly owned subsidiary of PG&E Corporation ("PG&E"). The Distribution and the
Merger are collectively referred to as the "Restructuring." Upon completion of
the Restructuring, Valero's name was changed from Valero Refining and Marketing
Company to Valero Energy Corporation and its common stock was listed for trading
on the New York Stock Exchange under the symbol "VLO."
BASIS ACQUISITION
Effective May 1, 1997, Energy acquired all of the outstanding common stock of
Basis Petroleum, Inc. ("Basis"), a wholly owned subsidiary of Salomon Inc
("Salomon"). The primary assets acquired with Basis included three refineries
located in Texas City, Texas (the "Texas City Refinery"), Houston, Texas (the
"Houston Refinery") and Krotz Springs, Louisiana (the "Krotz Springs Refinery")
(collectively, the "Basis Refineries") and an extensive wholesale marketing
business. At the time of their acquisition, these refineries had a combined
total throughput capacity in excess of 300,000 BPD. Prior to the Restructuring,
Energy transferred the stock of Basis to Valero. As a result, Basis was a part
of the Company at the time it was spun off to Energy's stockholders pursuant to
the Restructuring.
ACQUISITION OF MOBIL'S PAULSBORO, NEW JERSEY REFINERY
On September 16, 1998, Valero Refining Company-New Jersey ("VRC-NJ"), a wholly
owned subsidiary of Valero, purchased substantially all of the assets related to
Mobil Oil Corporation's ("Mobil") 155,000 BPD refinery in Paulsboro, New Jersey
(the "Paulsboro Refinery") and assumed certain of its liabilities. The purchase
price was $228 million plus approximately $107 million representing the value of
inventories and certain other items acquired in the transaction. The purchase
price was paid in cash from borrowings under the Company's committed bank credit
facility. In addition, Mobil is entitled to receive payments in any of the five
years following the acquisition if certain average refining margins during any
of such years exceed a specified level. Any payments under this earn-out
arrangement are limited to $20 million in any year and $50 million in the
aggregate.
S-3
<PAGE> 4
As part of the acquisition, the Company and Mobil signed long-term agreements
for the Paulsboro Refinery to supply Mobil's adjacent lube oil blending and
packaging facility with fuels and lubricant basestocks and for Mobil to provide
high-quality crude feedstocks to the Paulsboro Refinery. In addition, the
Company and Mobil signed long-term agreements for the Paulsboro Refinery to
supply portions of Mobil's marketing operations with light products at
market-related prices.
The acquisition of the Paulsboro Refinery increased the Company's total
throughput capacity by approximately 25%, improved the Company's geographic
diversity by providing better access to Northeast markets and diversified the
Company's product mix through the Paulsboro Refinery's production of high-
margin products such as lubricants and asphalt.
S-4
<PAGE> 5
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company as
of December 31, 1998, and on a pro forma basis adjusted to give effect to this
offering and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction with
Valero's Consolidated Financial Statements, including the notes thereto,
incorporated by reference into the Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt............................................. $ 160.0 $ 160.0
Long-term debt.............................................. 822.3 822.3
-------- --------
Total debt................................................ 982.3 982.3
Total stockholders' equity.................................. 1,085.3 1,085.3
-------- --------
Total capitalization........................................ $2,067.6 $2,067.6
======== ========
Total debt to total capitalization ratio.................... 47.5% 47.5%
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------
1998 1997 1996 1995 1994
- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
(a) 4.08x 1.74x 2.61x 1.69x
</TABLE>
- ---------------
(a) For year ended December 31, 1998, earnings were insufficient to cover fixed
charges by $80.6 million. Such deficiency was due primarily to a $170.9
million pre-tax charge to earnings to write down the carrying amount of the
Company's refinery inventories to market value. Excluding the effect of the
inventory write-down, the ratio of earnings to fixed charges would have been
2.68x.
For purposes of computing the above ratio, earnings consist of consolidated
income from continuing operations before income taxes and fixed charges
(excluding capitalized interest), with certain other adjustments. Fixed charges
consist of total interest, whether expensed or capitalized, amortization of debt
expense and premiums or discounts related to outstanding indebtedness, and
one-third (the proportion deemed representative of the interest factor) of
rental expense.
The Company paid no dividends on preferred stock with respect to its continuing
operations during the periods indicated; therefore, the ratio of earnings to
combined fixed charges and preferred stock dividends is the same as the ratio of
earnings to fixed charges.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Notes
(estimated to be approximately $ , after deducting the Underwriters'
discount and offering expenses) to repay borrowings under the Company's
revolving bank credit facility due November 28, 2002. As of December 31, 1998,
the Company's weighted average interest rate on the debt to be refinanced was
approximately 6.1%. In September 1998, the Company borrowed approximately $335
million under its revolving bank credit facility to purchase the Paulsboro
Refinery and associated inventory and properties.
S-5
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented below for the two
years ended December 31, 1998 has been derived from the historical consolidated
financial statements of the Company, which have been audited by Arthur Andersen
LLP, independent auditors. The following financial information should be read in
conjunction with the historical consolidated financial statements and notes
thereto of the Company, which are incorporated in the Prospectus by reference.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments....................... $ 11,199 $ 9,935
Receivables, less allowance for doubtful accounts of
$1,150 (1998) and $1,275 (1997)........................ 283,456 366,315
Inventories............................................... 316,405 369,355
Current deferred income tax assets........................ 4,851 17,155
Prepaid expenses and other................................ 23,799 26,265
---------- ----------
639,710 789,025
---------- ----------
PROPERTY, PLANT AND EQUIPMENT -- including construction in
progress of $179,136 (1998) and $66,636 (1997), at cost... 2,572,190 2,132,489
Less: Accumulated depreciation............................ 612,847 539,956
---------- ----------
1,959,343 1,592,533
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS........................... 126,611 111,485
---------- ----------
$2,725,664 $2,493,043
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt........................................... $ 160,000 $ 122,000
Accounts payable.......................................... 283,183 414,305
Accrued expenses.......................................... 54,561 60,979
---------- ----------
497,744 597,284
---------- ----------
LONG-TERM DEBT.............................................. 822,335 430,183
---------- ----------
DEFERRED INCOME TAXES....................................... 210,389 256,858
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES...................... 109,909 49,877
---------- ----------
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -- 150,000,000 shares
authorized; issued 56,314,798 (1998) and 56,136,032
(1997) shares.......................................... 563 561
Additional paid-in capital................................ 1,112,726 1,110,654
Retained earnings (Accumulated deficit)................... (17,618) 47,626
Treasury stock, 378,130 (1998) and -0- (1997) shares, at
cost................................................... (10,384) --
---------- ----------
1,085,287 1,158,841
---------- ----------
$2,725,664 $2,493,043
========== ==========
</TABLE>
S-6
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING REVENUES.......................................... $5,539,346 $5,756,220
---------- ----------
COSTS AND EXPENSES:
Cost of sales and operating expenses...................... 5,271,473 5,426,438
Write-down of inventories to market value................. 170,929 --
Selling and administrative expenses....................... 69,482 53,573
Depreciation expense...................................... 78,660 65,175
---------- ----------
Total............................................. 5,590,544 5,545,186
---------- ----------
OPERATING INCOME (LOSS)..................................... (51,198) 211,034
LOSS ON INVESTMENT IN PROESA JOINT VENTURE.................. -- --
OTHER INCOME, NET........................................... 586 6,978
INTEREST AND DEBT EXPENSE:
Incurred.................................................. (37,819) (44,150)
Capitalized............................................... 5,340 1,695
---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES..................................................... (83,091) 175,557
INCOME TAX EXPENSE (BENEFIT)................................ (35,800) 63,789
---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................... (47,291) 111,768
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAX EXPENSE (BENEFIT) OF $(8,889) (1997) AND $24,389
(1996), RESPECTIVELY...................................... -- (15,672)
---------- ----------
NET INCOME (LOSS)........................................... (47,291) 96,096
Less: Preferred stock dividend requirements and redemption
premium................................................ -- 4,592
---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $ (47,291) $ 91,504
========== ==========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations..................................... $ (.84) $ 2.16
Discontinued operations................................... -- (.39)
---------- ----------
Total............................................. $ (.84) $ 1.77
========== ==========
Weighted average common shares outstanding (in
thousands)............................................. 56,078 51,662
EARNINGS (LOSS) PER SHARE OF COMMON STOCK -- ASSUMING
DILUTION:
Continuing operations..................................... $ (.84) $ 2.03
Discontinued operations................................... -- (.29)
---------- ----------
Total............................................. $ (.84) $ 1.74
========== ==========
Weighted average common shares outstanding (in
thousands)............................................. 56,078 55,129
DIVIDENDS PER SHARE OF COMMON STOCK......................... $ .32 $ .42
</TABLE>
S-7
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations.................. $ (47,291) $ 111,768
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by continuing
operations:
Depreciation expense................................... 78,660 65,175
Amortization of deferred charges and other, net........ 47,889 27,252
Write-down of inventories to market value.............. 170,929 --
Loss on investment in Proesa joint venture............. -- --
Changes in current assets and current liabilities...... (46,179) (32,113)
Deferred income tax expense (benefit).................. (31,700) 32,827
Changes in deferred items and other, net............... (6,483) (8,264)
--------- -----------
Net cash provided by continuing operations........ 165,825 196,645
Net cash provided by discontinued operations...... -- 24,452
--------- -----------
Net cash provided by operating activities......... 165,825 221,097
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Continuing operations.................................. (165,507) (69,284)
Discontinued operations................................ -- (52,674)
Deferred turnaround and catalyst costs.................... (56,346) (10,860)
Purchase of Paulsboro Refinery............................ (335,249) --
Acquisition of Basis Petroleum, Inc....................... -- (355,595)
Earn-out payment in connection with Basis acquisition..... (10,325) --
Other..................................................... 1,159 1,693
--------- -----------
Net cash used in investing activities............. (566,268) (486,720)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net.......................... 38,000 155,088
Long-term borrowings...................................... 538,434 1,530,809
Long-term debt reduction.................................. (147,000) (1,217,668)
Special spin-off dividend, including intercompany note
settlement............................................. -- (214,653)
Common stock dividends.................................... (17,953) (21,031)
Preferred stock dividends................................. -- (5,419)
Issuance of common stock.................................. 6,677 59,054
Purchase of treasury stock................................ (16,451) (9,293)
Redemption of preferred stock............................. -- (1,339)
--------- -----------
Net cash provided by financing activities.............. 401,707 275,548
--------- -----------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS......... 1,264 9,925
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF
PERIOD.................................................... 9,935 10
--------- -----------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD........ $ 11,199 $ 9,935
========= ===========
</TABLE>
S-8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following analysis should be read in conjunction with Valero's Consolidated
Financial Statements, including the notes thereto, incorporated by reference
herein. Those statements in the Management's Discussion and Analysis that are
not historical in nature should be deemed forward-looking statements that are
inherently uncertain. See "Information Regarding Forward-Looking Statements" on
page S-24 of the Prospectus Supplement for discussion of the factors which could
cause actual results to differ materially from those projected in such
statements.
RESTRUCTURING
As described in "The Company -- Restructuring," on July 31, 1997, Energy spun
off the Company to Energy's stockholders and merged its remaining natural gas
related services business with PG&E (collectively referred to as the
"Restructuring"). As a result of the Restructuring, the Company became a
"successor registrant" to Energy for financial reporting purposes under the
federal securities laws. Accordingly, the following Management's Discussion and
Analysis, and the consolidated financial statements incorporated by reference
herein, reflect Energy's natural gas related services business as discontinued
operations of the Company.
RESULTS OF OPERATIONS
The following tables and discussion present the results of operations of the
Company for the years ended December 31, 1998 and 1997.
FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
CHANGE
----------------
1998(1) 1997(2) AMOUNT %
----------- ---------- --------- ----
<S> <C> <C> <C> <C>
Operating revenues............................. $ 5,539,346 $5,756,220 $(216,874) (4)%
Cost of sales.................................. (4,792,665) (5,092,150) 299,485 6
Operating costs:
Cash (fixed and variable)................. (435,542) (304,683) (130,859) (43)
Depreciation and amortization............. (119,524) (92,317) (27,207) (29)
Selling and administrative expenses (including
related depreciation expense)................ (71,884) (56,036) (15,848) (28)
----------- ---------- ---------
Operating income, before inventory
write-down................................... 119,731 211,034 (91,303) (43)
Write-down of inventories to market value...... (170,929) -- (170,929) --
----------- ---------- ---------
Total operating income (loss)........ $ (51,198) $ 211,034 $(262,232) (124)
=========== ========== =========
Other income, net.............................. $ 586 $ 6,978 $ (6,392) (92)
Interest and debt expense, net................. $ (32,479) $ (42,455) $ 9,976 23
Income tax (expense) benefit................... $ 35,800 $ (63,789) $ 99,589 156
Income (loss) from continuing operations....... $ (47,291) $ 111,768 $(159,059) (142)
Loss from discontinued operations, net of
income tax benefit(3)........................ $ -- $ (15,672) $ 15,672 100
Net income (loss).............................. $ (47,291) $ 96,096 $(143,387) (149)
Net income (loss) applicable to common stock... $ (47,291) $ 91,504 $(138,795) (152)
Earnings (loss) per share of common stock
assuming dilution:
Continuing operations........................ $ (.84) $ 2.03 $ (2.87) (141)
Discontinued operations...................... -- (.29) .29 100
----------- ---------- ---------
Total................................ $ (.84) $ 1.74 $ (2.58) (148)
=========== ========== =========
Earnings before interest, taxes, depreciation
and amortization ("EBITDA").................. $ 244,523(4) $ 313,025 $ (68,502) (22)
Ratio of EBITDA to interest incurred(5)........ 6.5x 7.1x (.6)x (8)
</TABLE>
S-9
<PAGE> 10
OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
CHANGE
------------
1998(1) 1997(2) AMOUNT %
------- ------- ------ ---
<S> <C> <C> <C> <C>
Sales volumes (Mbbls per day)............................... 894 630 264 42%
Throughput volumes (Mbbls per day).......................... 579(6) 417(7) 162 39
Average throughput margin per barrel........................ $3.53(8) $4.35 $(.82) (19)
Operating costs per barrel:
Cash (fixed and variable)................................. $2.06 $2.00 $ .06 3
Depreciation and amortization............................. .57 .61 (.04) (7)
----- ----- -----
Total operating costs per barrel.................. $2.63 $2.61 $ .02 1
===== ===== =====
Charges:
Crude oils:
Sour................................................... 36% 25% 11% 44%
Heavy sweet............................................ 20 21 (1) (5)
Light sweet............................................ 11 11 -- --
----- ----- -----
Total crude oils.................................. 67 57 10 18
Residual fuel oil ("resid")............................... 11 18 (7) (39)
Other feedstocks and blendstocks.......................... 22 25 (3) (12)
----- ----- -----
Total charges..................................... 100% 100% --% --
===== ===== =====
</TABLE>
<TABLE>
Yields:
<S> <C> <C> <C> <C>
Gasoline and blending components.......................... 48% 48% --% --
Distillates............................................... 28 25 3 12
Petrochemicals............................................ 4 6 (2) (33)
Natural gas liquids ("NGLs") and naphtha.................. 6 6 -- --
Lubes and asphalts........................................ 2 -- 2 --
Other products............................................ 12 15 (3) (20)
----- ----- -----
Total yields...................................... 100% 100% --% --
===== ===== =====
</TABLE>
AVERAGE MARKET REFERENCE PRICES AND DIFFERENTIALS (U.S. GULF COAST) (DOLLARS PER
BARREL)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
CHANGE
------------
1998 1997 AMOUNT %
------ ------ ------ ---
<S> <C> <C> <C> <C>
Feedstocks:
West Texas Intermediate ("WTI") crude oil................. $14.41 $20.61 $(6.20) (30)%
WTI less sour crude oil (Arab medium)(9).................. $ 3.37 $ 3.05 $ .32 10
WTI less heavy sweet crude oil (Cabinda plus
freight)(9)............................................ $ 1.40 $ 1.08 $ .32 30
WTI less resid (Singapore plus freight)(9)................ $ 1.57 $ 2.61 $(1.04) (40)
Products:
Unleaded 87 gasoline less WTI............................. $ 2.98 $ 3.97 $ (.99) (25)
No. 2 fuel oil less WTI................................... $ 1.45 $ 1.96 $ (.51) (26)
Propylene less WTI........................................ $ 2.23 $ 8.14 $(5.91) (73)
</TABLE>
- ---------------
(1) Includes the operations of the Paulsboro Refinery commencing September 17,
1998.
(2) Includes the operations of the Texas City, Houston and Krotz Springs
refineries commencing May 1, 1997.
(3) Reflects the results of Energy's natural gas related services business for
periods prior to the Restructuring.
S-10
<PAGE> 11
(4) Excludes the $170.9 million pre-tax write-down of inventories to market
value.
(5) Interest incurred for 1997 includes $18,164 of interest on corporate debt
that was allocated to continuing operations.
(6) Includes 46 Mbbls per day related to the Paulsboro Refinery.
(7) Includes 238 Mbbls per day related to the Texas City, Houston and Krotz
Springs refineries.
(8) Excludes an $.81 per barrel reduction resulting from pre-tax write-downs of
inventories to market value of $37.7 million in the first quarter and $133.2
million in the fourth quarter.
(9) Excludes $.25 to $.50 per barrel for other delivery related costs.
General
The Company reported a net loss of $47.3 million, or $.84 per share, for the
year ended December 31, 1998 compared to income from continuing operations of
$111.8 million, or $2.03 per share, for the year ended December 31, 1997. For
the fourth quarter of 1998, the Company reported a net loss of $85.7 million, or
$1.53 per share, compared to net income of $12.4 million, or $.22 per share, for
the fourth quarter of 1997. The fourth quarter 1998 results were reduced by a
$133.2 million ($86.6 million after-tax, or $1.55 per share) non-cash write-down
in the carrying amount of the Company's refinery inventories resulting from a
significant decline in feedstock and refined product prices during the quarter.
Coupled with a $37.7 million non-cash inventory write-down in the first quarter
of 1998, full year 1998 results were reduced by non-cash inventory write-downs
totaling $170.9 million ($111.1 million after-tax, or $1.98 per share).
Excluding the effects of the inventory write-downs, fourth quarter 1998 net
income ($.9 million, or $.02 per share), and total year 1998 net income ($63.8
million, or $1.14 per share) were still well below 1997 levels due to extremely
weak refining industry fundamentals that lasted throughout most of 1998 and are
continuing into 1999. Partially offsetting the effects of such depressed
industry conditions were full year contributions in 1998 from the operations
related to the Texas City, Houston and Krotz Springs refineries acquired on May
1, 1997 and the contribution from the Paulsboro Refinery commencing September
17, 1998. Results from discontinued operations in 1997 were a loss of $15.7
million, or $.29 per share, for the seven months prior to the July 31, 1997
Restructuring. In determining earnings per share for the year ended December 31,
1997, dividends on Energy's preferred stock were deducted from income from
discontinued operations as such preferred stock was issued in connection with
Energy's natural gas related services business.
Operating Revenues
Operating revenues decreased $216.9 million, or 4%, to $5.5 billion during 1998
compared to 1997 due to a 32% decrease in the average sales price per barrel
partially offset by a 42% increase in average daily sales volumes. The
significant decrease in sales prices was attributable to an oversupply of crude
oil due to lower worldwide energy demand, particularly in Asia. These excess
crude oil supplies, combined with high refinery utilization rates and below
average demand for heating oil due to mild winter weather, resulted in a
build-up of refined product inventories, particularly distillates, and severely
depressed refined product prices. The increase in sales volumes was due
primarily to additional volumes attributable to the acquisition of the Texas
City, Houston and Krotz Springs refineries, the acquisition of the Paulsboro
Refinery, and an increase in related marketing activities.
Operating Income (Loss)
Operating income decreased $262.2 million during 1998 compared to 1997 due in
large part to the $170.9 million in inventory write-downs noted above. Excluding
the effect of the inventory write-downs, operating income decreased $91.3
million, or 43%, to $119.7 million during 1998 compared to 1997. This decrease
was due to an approximate $158 million increase in operating costs and higher
selling and administrative expenses of approximately $16 million (both including
related depreciation expense), partially offset by an approximate $83 million
increase in total throughput margins.
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Total throughput margins increased due primarily to four additional months of
operations in 1998 versus 1997 related to the Texas City, Houston and Krotz
Springs refineries, and the inclusion of the Paulsboro Refinery commencing with
its acquisition. Although total throughput margins increased, the average
throughput margin per barrel declined $.82, or 19%, due in large part to the
fact that the newly-acquired refineries normally realize a lower per-barrel
margin (but also lower per-barrel operating costs) than that realized by the
Corpus Christi Refinery. Also contributing to an increase in total throughput
margins was a significant improvement in feedstock discounts relative to WTI due
to improved sweet and sour crude differentials and enhanced feedstock processing
flexibility, particularly at the Corpus Christi Refinery, partially offset by
lower discounts on resid. However, this feedstock benefit was more than offset
by (i) lower gasoline and distillate margins resulting primarily from the
factors noted above under "Operating Revenues," and (ii) significantly lower
petrochemical margins and other factors as discussed below. The net negative
effect on throughput margins resulting from the changes in gasoline and
distillate margins and feedstock discounts was somewhat offset by a benefit from
hedging activities related to such products and feedstocks under the Company's
price risk management program. In 1998, the Company's hedging activities
resulted in a benefit to total throughput margins of approximately $17 million,
while in 1997, the effect of hedging activities on throughput margins was
slightly negative. The decline in petrochemical margins noted above which
substantially reduced total throughput margins resulted from depressed demand
for petrochemical feedstocks due to the Asian economic crisis. Total throughput
margins were also reduced by lower margins from the Clear Lake Methanol Plant.
With regard to operating costs, approximately $38 million ($33 million cash cost
and $5 million depreciation and amortization), or 24%, of the total operating
cost increase was attributable to the Paulsboro Refinery acquired in September
1998, while $92 million, or 58%, of the increase was attributable to the four
additional months of operations during the 1998 period for the Texas City,
Houston and Krotz Springs refineries. The remainder of the increase in operating
costs was attributable to an increase in amortization of deferred turnaround and
catalyst costs for the Texas City, Houston and Corpus Christi refineries
resulting from various turnarounds and catalyst change-outs as described in
"Business," an increase in cash costs for injected catalyst at those same
refineries resulting from the use of lower-cost/reduced-quality feedstocks,
higher catalyst costs at the Corpus Christi Refinery resulting primarily from
shorter than expected catalyst life, and higher salary costs. Selling and
administrative expenses increased due primarily to the three and one-half months
of operations for the Paulsboro Refinery and to the four additional months of
operations for the Texas City, Houston and Krotz Springs refineries during 1998.
Other Income
Other income, net, decreased by $6.4 million to $.6 million during 1998 compared
to 1997 due primarily to lower results from the Company's 20% equity interest in
the Javelina off-gas processing plant in Corpus Christi due primarily to lower
petrochemical and other product prices, partially offset by lower natural gas
feedstock costs.
Net Interest and Debt Expense
Net interest and debt expense decreased $10 million, or 23%, to $32.5 million
during 1998 compared to 1997 due primarily to the inclusion in the 1997 period
of allocated interest expense related to corporate debt that was subsequently
assumed by PG&E pursuant to the Restructuring on July 31, 1997 and to a
reduction in average interest rates. The decrease in net interest and debt
expense resulting from these factors was partially offset by an increase in bank
borrowings due primarily to the acquisition of the Paulsboro Refinery.
Income Tax Expense (Benefit)
Income taxes decreased from a $63.8 million expense in 1997 to a $35.8 million
benefit in 1998 due primarily to the significant decrease in pre-tax results
from continuing operations and, to a lesser extent, to the recognition in 1998
of $5.8 million related to a research and experimentation tax credit.
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Discontinued Operations
The loss from discontinued operations in 1997 of $15.7 million (net of an income
tax benefit of $8.9 million), or $.29 per share, reflected the net loss of
Energy's natural gas related services business for the seven months ended July
31, 1997, prior to consummation of the Restructuring.
OUTLOOK
In the fourth quarter of 1998, refining margins fell to 15-year lows due to
several negative factors that simultaneously affected the industry. These
factors, which led to significant increases in refined product inventories and
put extreme downward pressure on refined product prices, included:
- Warm winter weather which reduced demand for distillates and resulted in
excess distillate inventories.
- Continuation of the Asian economic crisis which has significantly reduced
the growth in worldwide oil and light product demand, including
petrochemicals.
- Failure of the industry to curtail crude oil production rates, which,
combined with continued growth of non-OPEC production and lower growth in
worldwide energy demand, resulted in a worldwide surplus of crude oil.
- High refinery utilization rates in the U.S., resulting from low crude oil
prices and strong gasoline demand, which, combined with weak export
markets, resulted in higher gasoline inventories.
These depressed margin conditions have continued into 1999 for gasoline and
heating oil. U.S. Gulf Coast margins on gasoline and heating oil in January 1999
averaged $1.29 and $.53, respectively, and continued to deteriorate in February,
averaging $.77 and $(.16), respectively, for the month through February 23,
which are substantially below historical levels. Combined with a turnaround of
the heavy oil cracker and related units at the Company's Corpus Christi Refinery
for approximately 35 days beginning January 8, the Company currently expects to
incur a significant net loss in the first quarter of 1999.
Although only marginal improvements in margins are expected in the near-term,
the Company estimates margins will improve longer-term based on several factors.
These factors include:
- A healthy U.S. economy resulting in a projected 2% growth in gasoline
demand in 1999.
- An increase in demand for low-sulfur diesel and jet fuel.
- Expected ample supplies of sour crude oil at favorable discounts.
- Belief that margins for petrochemical feedstocks, essentially trading at
gasoline blend value, have reached a natural floor.
- Current high number of refinery turnarounds, which should help reduce
refined product inventory levels.
- Refinery production cuts by several independent refiners, including the
Company's cut-back of production at its Houston, Corpus Christi and Krotz
Springs refineries, and expected slowdown in additions to industry refining
capacity due to poor margin conditions, both of which should also help
reduce market supplies.
- Signs of increased demand for crude oil in Asia.
Beyond 1999, the Company anticipates a moderate improvement in refining margins
due to tightening U.S. refining capacity. Increased demand for light products is
expected to outpace capacity additions due to slow growth in capacity additions
resulting from poor margins experienced in recent years. In addition, changes in
gasoline specifications as a result of Phase II RFG in the year 2000 will reduce
production capability in the industry. Excess conversion capacity resulting from
new conversion projects in the early to
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mid-1990's has now been fully absorbed. Any such projects currently planned will
not keep pace with an expected increase in the supply of heavy crudes resulting
from increased Middle East and Latin American production. As a result, the
spread between light and heavy crudes is expected to increase.
Domestic gasoline demand, which increased 2.5% in 1997, 2% in 1998, and is up
almost 4% thus far in 1999, is expected to continue to improve due to a strong
economy and the trend in recent years toward less fuel-efficient vehicles.
Demand for RFG is expected to continue to improve as a result of increased
demand in areas currently designated as non-attainment and more cities across
the United States "opting in" to the federal RFG program. Worldwide, demand for
clean-burning fuels, such as RFG, is expected to continue to increase resulting
from the worldwide movement to reduce lead and certain other pollutants and
contaminants in gasoline. The increasing demand for clean-burning fuels should
sustain a strong demand for oxygenates such as MTBE.
Certain initiatives have been presented in California and Maine which would
restrict or potentially ban the use of MTBE as a gasoline component. If MTBE
were to be restricted or banned, the Company believes that its MTBE-producing
facility could be modified to produce other gasoline blendstocks or other
petrochemicals for a minimal capital investment.
The Company expects a continuation of the recent industry consolidations through
mergers and acquisitions, making for a more competitive business environment
while providing the Company with opportunities to expand its operations. As
refining margins merit, the Company expects to continue making capital
improvements at its refinery facilities to increase, among other things,
throughput capacity, conversion capability, operational efficiency, and
feedstock flexibility. The majority of such capital improvements are anticipated
to be performed during scheduled maintenance turnarounds.
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BUSINESS
GENERAL
The Company owns and operates five refineries having a combined total throughput
capacity of approximately 735,000 BPD. The following table lists the location of
each of the Company's refineries and each refinery's feedstock throughput
capacity.
<TABLE>
<CAPTION>
REFINERY FEEDSTOCK THROUGHPUT CAPACITY IN BPD
- -------- ------------------------------------
<S> <C>
Corpus Christi, Texas.................................. 205,000
Texas City, Texas...................................... 180,000
Paulsboro, New Jersey.................................. 155,000
Houston, Texas......................................... 115,000
Krotz Springs, Louisiana............................... 80,000
</TABLE>
The diversity of the Company's refineries allows it to process a wide slate of
feedstocks including medium sour crude oils and heavy sweet crudes, both of
which can typically be purchased at a discount to West Texas Intermediate, a
benchmark crude oil. The primary feedstocks for the Company's Gulf Coast
refineries are medium sour crude oil, heavy and light sweet crude oil, and
high-sulfur atmospheric residual fuel oil ("resid"). Since 1997, the aggregate
throughput capacity of the Gulf Coast refineries has been increased to
approximately 580,000 BPD from roughly 480,000 BPD immediately after the
acquisition of the Basis Refineries, principally through (i) upgrading and
reconfiguration improvements undertaken by the Company at the Basis Refineries,
(ii) efforts to optimize feedstock selection in order to capitalize on the
reconfiguration of the Basis Refineries, and (iii) modifications to the
hydrodesulfurization unit at the Corpus Christi Refinery. The Company has the
ability to capitalize on the diverse feedstock capabilities of its Gulf Coast
refineries by transferring up to 35,000 BPD of intermediate feedstocks such as
deasphalted oil ("DAO") and atmospheric tower bottoms ("ATB") from the Texas
City Refinery to the Houston and/or Corpus Christi Refineries which are able to
more effectively produce light products from DAO and ATBs. During 1998, the
Company's refineries operated at approximately 94% of capacity, exclusive of
scheduled turnarounds.
Corpus Christi Refinery
The Corpus Christi Refinery is situated on 254 acres along the Corpus Christi
Ship Channel. The Corpus Christi Refinery specializes in processing primarily
heavy crude oil and resid into premium products, such as reformulated gasoline
("RFG"). The Corpus Christi Refinery can produce approximately 120,000 BPD of
gasoline and gasoline-related products, 38,000 BPD of middle distillates and
35,000 BPD of other products such as chemicals, asphalt and propane. The Corpus
Christi Refinery can produce all of its gasoline as RFG and all of its diesel
fuel as low-sulfur diesel. The Corpus Christi Refinery has substantial
flexibility to vary its mix of gasoline products to meet changing market
conditions.
The Corpus Christi Refinery's primary operating units include an 81,000 BPD
heavy oil cracker ("HOC"), an 82,000 BPD hydrodesulfurization unit ("HDS"), a
36,000 BPD hydrocracker and a 36,000 BPD reformer complex. It also operates
certain units which produce oxygenates* such as MTBE (methyl tertiary butyl
ether) and TAME (tertiary amyl methyl ether). The MTBE facility can produce
approximately 17,700 BPD of MTBE from butane and methanol feedstocks and the
MTBE/TAME unit converts light olefin streams produced by the refinery's HOC into
MTBE and TAME. These two units enable the Corpus Christi Refinery to produce
approximately 23,000 BPD of oxygenates, which are blended into the Company's own
gasoline production or sold separately. Substantially all of the methanol
feedstocks required for the production of oxygenates at the Corpus Christi
Refinery can normally be
- ---------------
* "Oxygenates" are liquid hydrocarbon compounds containing oxygen. Gasoline that
contains oxygenates usually has lower carbon monoxide emissions than
conventional gasoline. MTBE is an oxygen-rich, high-octane gasoline blendstock
produced by reacting methanol and isobutylene, and is used to manufacture
oxygenated and reformulated gasolines. TAME, like MTBE, is an oxygen- rich,
high-octane gasoline blendstock.
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provided by a methanol plant in Clear Lake, Texas owned by a joint venture
between a Valero subsidiary and Hoechst Celanese Chemical Group, Inc. (the
"Clear Lake Methanol Plant"). In January 1997, a mixed xylene fractionation
facility, which recovers the mixed xylene stream from the Corpus Christi
Refinery's reformate stream, was placed into service at the refinery. The
fractionated xylene is sold into the petrochemical feedstock market for use in
the production of paraxylene when market conditions are favorable. These units
and related facilities diversify the Corpus Christi Refinery's operations,
giving this refinery the flexibility to pursue potentially higher-margin product
markets.
The Company completed a scheduled turnaround of certain of the Corpus Christi
Refinery's major refining units in the first quarter of 1998. Modifications made
during the 1998 turnaround increased throughput capacity by 10,000 to 15,000
BPD, depending upon the type of feedstocks utilized. In addition, the HDS unit
was modified during 1998 and early 1999 to allow for the processing of up to
50,000 BPD of high sulfur crude oil, thereby increasing the Corpus Christi
Refinery's feedstock flexibility. The Corpus Christi Refinery experienced two
significant unscheduled shutdowns of its HOC during the first and third
quarters. Both shutdowns related to expander reliability issues which were
resolved during the first quarter 1999 turnaround. To date in 1999, maintenance
turnarounds have been completed for the HOC (during which its capacity was
increased by 4,000 BPD), the HDS unit, the hydrocracker, the reformer unit, and
certain other units. Except for the maintenance turnaround completed in the
first quarter of 1999 and a catalyst change in the HDS unit likely to occur in
the second quarter of 1999, no other turnarounds are scheduled during 1999 at
the Corpus Christi Refinery.
Texas City Refinery
The Texas City Refinery is capable of refining lower-value, medium sour crudes
into a slate of gasolines, low-sulfur diesels and distillates, including home
heating oil, kerosene and jet fuel. The Texas City Refinery typically produces
approximately 55,000 BPD of gasoline and 55,000 BPD of distillates. The Texas
City Refinery can provide approximately 35,000 BPD of intermediate feedstocks
such as DAO and ATBs to the Corpus Christi Refinery and/or the Houston Refinery.
The Texas City Refinery typically receives its feedstocks and ships product by
tanker via deep water docking facilities along the Texas City Ship Channel, and
also has access to the Colonial, Explorer and TEPPCO pipelines for distribution
of its products.
The Texas City Refinery's primary operating units include a 160,000 BPD crude
distillation complex and a 52,000 BPD fluid catalytic cracking unit ("FCC
Unit"). During the latter part of 1996, a 78,000 BPD Residfiner (which improves
the cracking characteristics of the feedstocks for the FCC Unit), and a 40,000
BPD Residual Oil Supercritical Extraction unit ("ROSE") (which recovers DAO from
the vacuum tower bottoms for feed to the FCC Unit) were placed in service at the
Texas City Refinery. These units significantly enhanced this refinery's
feedstock flexibility and product diversity.
During 1998, the Texas City Refinery experienced unscheduled downtime at its
Residfiner, primarily due to an unreliable supply of hydrogen from a third-party
supplier. In late 1998, the Company entered into an agreement with other
third-party suppliers for back-up supplies of a portion of the Texas City
Refinery's hydrogen needs. The Company expects to enter into additional
agreements in 1999 that will improve the reliability of hydrogen supplied to the
Texas City Refinery. A scheduled turnaround was completed on the Residfiner in
April 1998 and a catalyst change for this unit is also anticipated in 1999.
Except for the Residfiner catalyst change, no other significant turnarounds are
planned for 1999.
Paulsboro Refinery
The Paulsboro Refinery processes primarily medium sour and heavy sour crudes
into a wide slate of gasoline and distillates, including home heating oil,
lubricants and asphalt. The Paulsboro Refinery typically produces 65,000 BPD of
gasoline and 55,000 BPD of distillates, along with 12,000 BPD of lubricant
basestocks. Major units at the Paulsboro Refinery include a 105,000 BPD
lubricants crude unit, a 50,000 BPD fuels crude unit, a 48,000 BPD FCC Unit, a
25,500 BPD delayed coking unit and a 12,000 BPD lubricants plant. Feedstocks and
refined products are typically transported via the Company's
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<PAGE> 17
facilities along the Delaware River or through the refinery's access to the
Colonial pipeline, which allows products to be sold into the New York Harbor
market.
Pursuant to a crude oil supply contract entered into between Mobil and the
Company at the time of the acquisition, Mobil agreed to provide the Paulsboro
Refinery with approximately 100,000 BPD of lubricant-quality, medium sour
feedstocks under a ten-year contract, subject to extension under certain
circumstances. Substantially all of the Paulsboro Refinery's light products are
purchased by Mobil at market-related prices for its retail distribution network.
In addition, Mobil and the Company signed a long-term agreement for the
Paulsboro Refinery to supply Mobil with fuels and lubricant basestocks to its
adjacent lubricants blending and packaging facility.
During the fourth quarter of 1998, the turnaround of the coker unit was
completed. The Paulsboro Refinery also experienced unscheduled processing rate
reductions and unit downtime in the fourth quarter. No significant turnarounds
are scheduled for 1999.
Houston Refinery
The Houston Refinery is capable of processing heavy sweet or medium sour crude
oil and can produce approximately 54,000 BPD of gasoline and 37,000 BPD of
distillates. It operates an 85,000 BPD crude distillation complex and a 61,000
BPD FCC Unit. The refinery typically receives its feedstocks via tanker at deep
water docking facilities along the Houston Ship Channel. This facility also has
access to major product pipelines, including the Colonial, Explorer and TEPPCO
pipelines.
The Houston Refinery experienced three unplanned shutdowns of its FCC Unit
during the second and fourth quarters of 1998. During these shutdowns, certain
reliability improvements were made to the regenerator, the power train and
emission control devices. No significant turnarounds at the Houston Refinery are
currently planned for 1999.
Krotz Springs Refinery
The Krotz Springs Refinery processes primarily local, light Louisiana sweet
crude oil and can produce approximately 34,000 BPD of gasoline and 38,000 BPD of
distillates. The refinery is geographically located to benefit from access to
upriver markets on the Mississippi River and it has docking facilities along the
Atchafalaya River sufficiently deep to allow barge and light ship access. The
facility is also connected to the Colonial pipeline for product transportation
to the Southeast and Northeast. This refinery was built during the 1979-1982
time period making it, like the Corpus Christi Refinery, a relatively new
facility compared to other Gulf Coast refineries. Primary units include an
80,000 BPD crude distillation complex, a 31,000 BPD FCC Unit and a 12,000 BPD
reformer complex. This refinery also benefits from recently added
MTBE/polymerization and isomerization units.
In December 1998, the Krotz Springs Refinery's principal operating units were
down for a major maintenance turnaround. As a result of modifications to the FCC
Unit, its capacity was increased to 31,000 BPD and its light products conversion
capacity was increased by 3%. A turnaround of the reformer complex is currently
anticipated in the latter part of 1999.
MARKETING
The Company's product slate is presently comprised of approximately 90% premium
products such as gasoline and related components, distillates, lubricants and
chemicals. The Company sells refined products under spot and term contracts to
bulk and truck rack customers at over 180 locations in 31 states throughout the
United States and selected export markets in Latin America. Primarily as a
result of the Basis acquisition on May 1, 1997 and the Paulsboro Refinery
acquisition, total product sales volumes increased from approximately 630,000
BPD during 1997 to approximately 1,000,000 BPD during the fourth quarter of
1998. Sales volumes include amounts produced at the Company's refineries and
amounts purchased from third parties and resold in connection with the Company's
marketing activities. Substantially all of the light products from the Paulsboro
Refinery are sold to Mobil at market-related
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<PAGE> 18
prices pursuant to long-term agreements. Currently, the Company markets
approximately 150,000 BPD of gasoline and distillates through truck rack
facilities. The principal purchasers of the Company's products from truck racks
have been wholesalers and jobbers in the Northeast, Southeast, Midwest and Gulf
Coast. Other sales are made to large oil companies and gasoline distributors and
transported by pipeline, barges and tankers. With its access to the Gulf of
Mexico and the Atlantic Ocean, the Company's refineries are able to ship refined
products throughout the world. Interconnects with common-carrier pipelines give
the Company the flexibility to sell products in most major geographic regions of
the United States. No single purchaser of the Company's products accounted for
more than 10% of total sales during 1998.
Approximately 70,000 BPD of the Company's RFG production is under contract to
supply gasoline marketers in Texas and the Northeast with RFG at market-related
prices. The Company also sells RFG into the spot market. When market conditions
are favorable, the Company can supply CARB Phase II gasoline to West Coast
markets under the California Air Resources Board's gasoline program. The Company
expects demand for RFG to continue to improve as a result of increased demand in
areas currently designated as non-attainment and more cities across the United
States "opting in" to the federal RFG program. For further discussion, see
"Factors Affecting Operating Results" below and "Outlook" under "Management's
Discussion and Analysis."
FEEDSTOCK SUPPLY
The Company's refinery acquisitions and capital improvements since 1997 have
expanded and diversified the slate of feedstocks which the Company can process.
Prior to these acquisitions, the Company's primary feedstock was resid processed
at the Corpus Christi Refinery, representing 50-70% of total feedstocks.
Approximately 60% of the Company's feedstock slate is now comprised of medium
sour crude oil and heavy sweet crude oil, while high-sulfur resid purchases
comprise less than 5% of total feedstocks. The remaining feedstocks are
primarily intermediates, light sweet crude oil, methanol and butane.
The Company has term feedstock contracts totaling approximately 380,000 BPD, or
approximately 55% of its total feedstock requirements. The Company's long-term
supply arrangement with Mobil comprises approximately 100,000 BPD of this
amount. The remainder of its feedstock requirements are purchased on the spot
market. The term agreements include contracts to purchase feedstocks from
various foreign national oil companies, including certain Middle Eastern
suppliers, and various domestic integrated oil companies.
In connection with the Restructuring, the Company entered into several contracts
with its former affiliates, including a 10-year term contract under which a
former affiliate is to supply approximately 50% of the butane required to
operate the MTBE facilities at Corpus Christi and natural gasoline for blending.
The Company obtains approximately 80% of its total methanol requirements for all
of its refineries through its 50% joint venture interest in the Clear Lake
Methanol Plant.
The Company owns feedstock and refined product storage facilities and leases
feedstock and refined product storage facilities in various locations. The
Company believes its storage facilities are generally adequate for its refining
and marketing operations.
FACTORS AFFECTING OPERATING RESULTS
The Company's earnings and cash flow from operations are primarily affected by
the relationship between refined product prices and the prices for crude oil and
other feedstocks. The cost to acquire feedstocks and the price for which refined
products are ultimately sold depends on numerous factors beyond the Company's
control, including the global, national and regional supply and demand for crude
oil, gasoline, diesel, heating oil and other refined products which in turn are
dependent upon, among other things, weather, the availability of imports, the
economies and production levels of foreign suppliers, the marketing of
competitive fuels, political affairs and the extent of governmental regulation.
Feedstock and refined product prices are affected by other factors, such as
product pipeline capacity, local market conditions and the operating levels of
competing refineries. Crude oil costs and the price of refined
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<PAGE> 19
products have historically been subject to wide fluctuation. Installation of
additional refinery crude distillation and upgrading facilities, price
volatility, international political and economic developments and other factors
beyond the control of the Company are likely to continue to play an important
role in refining industry economics. The Company is aware, for example, of
additional capacity of up to 200,000 BPD from a refinery in Good Hope, Louisiana
which may become operational in 1999. These factors can impact, among other
things, the level of inventories in the market resulting in price volatility and
margin compression. Moreover, the industry typically experiences seasonal
fluctuations in demand for refined products, such as for gasoline during the
summer driving season and for home heating oil during the winter in the
Northeast. The recent warmer than normal winters in the Northeast have resulted
in reduced demand, unusually high inventories and lower prices for heating oil.
A large portion of the Company's feedstock supplies are secured under term
contracts. There is no assurance of renewal of such contracts upon their
expiration or that economically equivalent substitute supply contracts can be
secured. The Company's feedstock supplies from international producers are
loaded aboard chartered vessels and are subject to the usual maritime hazards.
If the Company's foreign sources of crude oil or access to the marine system for
delivering crude oil were curtailed, the Company's operations could be adversely
affected. In addition, the loss of, or an adverse change in the terms of,
certain of its feedstock supply agreements or the loss of sources or means of
delivery of its feedstock supplies, could adversely affect the Company's
operating results. The volatility of prices and quantities of feedstocks that
may be purchased on the spot market or pursuant to term contracts could also
have a material adverse effect on operating results.
Because the Company manufactures a significant portion of its gasoline as RFG
and can produce approximately 26,000 BPD of oxygenates, certain federal and
state clean-fuel programs significantly affect the operations of the Company and
the markets in which it sells its refined products. In the future, the Company
cannot control or with certainty predict the effect of such clean-fuel programs
on the cost to manufacture, demand for or supply of refined products. Presently,
the EPA's oxygenated fuel program under the Clean Air Act requires that areas
designated "nonattainment" for carbon monoxide use gasoline that contains a
prescribed amount of clean burning oxygenates during certain winter months.
Additionally, the EPA's RFG program under the Clean Air Act requires year-round
usage of RFG in areas designated "extreme" or "severe" nonattainment for ozone.
In addition to these nonattainment areas, approximately 44 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. In 1998, St. Louis and Kansas City, Missouri "opted-in" to
the federal RFG program. Phase II of the federal RFG program is expected to
become effective in 2000, further restricting the acceptable levels of nitrous
oxides, volatile organic compounds and toxics in gasoline. In order to meet the
new restrictions, refiners will necessarily need to reduce the sulfur and
aromatics content of gasoline and reduce its vapor pressure.
MTBE margins are affected by the price of 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 growth in gasoline demand as well as additional "opt-ins"
by certain areas into the EPA clean fuels programs should continue to increase
the demand for MTBE. However, initiatives have been presented in California and
Maine which would restrict or potentially ban the use of MTBE as a gasoline
component. If MTBE were to be restricted or banned, the Company believes that
its major MTBE-producing facilities could be modified to produce other gasoline
blendstocks or other petrochemicals.
Because the Company's refineries are generally more complex than many
conventional refineries and are designed principally to process heavy and/or
sour crude oils, including resid, its operating costs per barrel are generally
higher than those of most conventional refiners. But because the Company's
primary feedstocks usually sell at discounts to benchmark crude oil, it has been
generally able to recover its higher operating costs and generate higher margins
than many conventional refiners that use lighter crude oil as their principal
feedstock. Moreover, through recent acquisitions, improvements in technology and
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<PAGE> 20
modifications to its operating units, the Company has improved its flexibility
to process different types of feedstocks, including heavy crude oils. The
Company expects its primary feedstocks to continue to sell at a discount to
benchmark crude oil, but is unable to predict future relationships between the
supply of and demand for its feedstocks.
In April 1995, six major oil refiners filed a lawsuit against Unocal Corporation
("Unocal") in Los Angeles, California seeking a determination that Unocal's
claimed patent on certain gasoline compositions was invalid and unenforceable.
The Company was not a party to this litigation. Unocal's claimed patent covers a
substantial portion of the reformulated gasoline compositions required by the
CARB Phase II regulations that went into effect in March 1996. In 1997, a
federal court jury upheld the validity of Unocal's patent and awarded Unocal
royalty damages based on infringement of the patent. The case is on appeal, but
no decision has been reached. If the Company were required to pay a royalty on
the compositions claimed by Unocal's patents, such amounts could affect the
operating results of the Company and alter the blending economics for
compositions not covered by the patent. The Company is unable to predict the
validity or effect of any claimed Unocal patent.
S-20
<PAGE> 21
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes supplements the
description in the accompanying Prospectus of the general terms and provisions
of the Debt Securities (as defined in the Prospectus), to which description
reference is hereby made.
GENERAL
The Notes will be limited to $300 million aggregate principal amount and will
mature on . The Notes will be issued in fully registered form only in
minimum denominations of $1,000 increased in multiples of $1,000.
Interest on the Notes will accrue at a rate of % per annum and will be
payable semi-annually on and , beginning , 1999,
to the persons in whose names the Notes are registered at the close of business
on and preceding the respective interest payment dates,
except that interest payable at maturity shall be paid to the same persons to
whom principal of the Notes is payable.
The Notes will constitute a series of Debt Securities to be issued under an
Indenture dated as of December 12, 1997 (as amended and in effect, the
"Indenture"), between Valero and The Bank of New York, as Trustee, the terms of
which are more fully described in the accompanying Prospectus. The Notes and any
future Debt Securities issued under the Indenture will be unsecured obligations
of Valero and will rank on a parity with all other unsecured and unsubordinated
indebtedness of Valero. The Indenture does not limit the aggregate principal
amount of Debt Securities that may be issued thereunder and provides that Debt
Securities may be issued thereunder from time to time in one or more additional
series. The Indenture does not limit Valero's ability to incur additional
indebtedness.
The Notes will not be subject to any sinking fund.
OPTIONAL REDEMPTION
The Notes will be redeemable, in whole or in part, at the option of Valero at
any time at a redemption price equal to the greater of (i) 100% of the principal
amount of such Notes, and (ii) as determined by the Quotation Agent (as defined
below), the sum of the present values of the remaining scheduled payments of
principal and interest thereon (not including any portion of such payments of
interest accrued as of the date of redemption) discounted to the date of
redemption on a semi-annual basis (assuming a 360-day year consisting of twelve
30-day months) at the Adjusted Treasury Rate (as defined below) plus basis
points plus, in each case, accrued interest thereon to the date of redemption.
"Adjusted Treasury Rate" means, with respect to any date of redemption, the rate
per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such date of redemption.
"Comparable Treasury Issue" means the United States Treasury security selected
by the Quotation Agent as having a maturity comparable to the remaining term of
the Notes to be redeemed that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the remaining term of such Notes.
"Comparable Treasury Price" means, with respect to any date of redemption, (i)
the average of the Reference Treasury Dealer Quotations for such date of
redemption, after excluding the highest and lowest such Reference Treasury
Dealer Quotations, or (ii) if the Trustee obtains fewer than three such
Reference Treasury Dealer Quotations, the average of all such Reference Treasury
Dealer Quotations.
"Quotation Agent" means the Reference Treasury Dealer appointed by Valero.
"Reference Treasury Dealers" means (i) each of J.P. Morgan Securities Inc.,
Credit Suisse First Boston Corporation and Morgan Stanley & Co. Incorporated and
their respective successors; provided, however,
S-21
<PAGE> 22
that if any of the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), Valero shall
substitute therefor another Primary Treasury Dealer; and (ii) any other Primary
Treasury Dealer selected by Valero.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any date of redemption, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third Business Day preceding such date of redemption.
Notice of any redemption will be mailed at least 30 days but not more than 60
days before the date of redemption to each holder of the Notes to be redeemed.
Unless Valero defaults in payment of the redemption price, on and after the date
of redemption, interest will cease to accrue on the Notes or portions thereof
called for redemption.
SAME-DAY SETTLEMENT AND PAYMENT
The Notes will trade in the same-day funds settlement system of The Depository
Trust Company (the "Depositary") until maturity or until Valero issues the Notes
in definitive form. The Depositary will therefore require secondary market
trading activity in the Notes to settle in immediately available funds. Valero
can give no assurance as to the effect, if any, of settlement in immediately
available funds on trading activity in the Notes.
BOOK-ENTRY SYSTEM
Upon issuance, all Notes of a series will be represented by one or more fully
registered global securities (the "Global Security"). The Global Security will
be deposited with, or on behalf of, the Depositary and registered in the name of
a nominee of the Depositary. See "Description of the Debt Securities -- Global
Security" in the Prospectus.
S-22
<PAGE> 23
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated , Valero has agreed to sell to each of the
Underwriters named below, severally, and each of the Underwriters has severally
agreed to purchase, the principal amount of the Notes set forth opposite its
name below:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT OF NOTES
- ----------- ---------------
<S> <C>
J.P. Morgan Securities Inc.................................. $
Credit Suisse First Boston Corporation......................
Morgan Stanley & Co. Incorporated...........................
------------
Total..................................................... $
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, if the
Underwriters take any of the Notes, then the Underwriters are obligated to take
and pay for all of the Notes.
The Notes are a new issue of securities with no established trading market and
will not be listed on any national securities exchange. The Underwriters have
advised Valero that they intend to make a market for the Notes, but they have no
obligation to do so and may discontinue market making at any time without
providing notice. No assurance can be given as to the liquidity of any trading
market for the Notes.
The Underwriters initially propose to offer part of the Notes directly to the
public at the offering prices described on the cover page and part to certain
dealers at a price that represents a concession not in excess of % of the
principal amount of the Notes. Any Underwriter may allow, and any such dealer
may reallow, a concession not in excess of % of the principal amount of the
Notes to certain other dealers. After the initial offering of the Notes, the
Underwriters may from time to time vary the offering price and other selling
terms.
Valero has also agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments which the Underwriters may be required to make in
respect of any such liabilities.
In connection with the offering of the Notes, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot in connection with the
offering of the Notes, creating a syndicate short position. In addition, the
Underwriters may bid for, and purchase, Notes in the open market to cover
syndicate short positions or to stabilize the price of the Notes. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the Notes in the offering of the Notes, if the syndicate repurchases previously
distributed Notes in syndicate covering transactions, stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the Notes above independent market levels. The Underwriters are not required
to engage in any of these activities, and may end any of them at any time.
Expenses associated with this offering, to be paid by Valero, are estimated to
be $ .
In the ordinary course of their respective businesses, the Underwriters and
their affiliates have engaged, and may in the future engage, in commercial
banking or investment banking transactions with Valero and its affiliates or
performed other financial services for all or any part of them. Morgan Guaranty
Trust Company of New York, an affiliate of J.P. Morgan Securities Inc., is a
lender under the Company's revolving credit facility and will receive a portion
of the proceeds from this offering.
S-23
<PAGE> 24
VALIDITY OF THE NOTES
The validity of the Notes will be passed upon for Valero by Jay D. Browning,
Secretary and Managing Attorney, Corporate Law for Valero. Mr. Browning is an
employee of Valero and at February 25, 1999 beneficially owned 2,402.19 shares
of the Company's common stock (including shares held under employee benefit
plans) and held options under employee stock option plans of the Company to
purchase an additional 25,212 shares of the Company's common stock. None of such
shares or options were granted in connection with the offering of the Notes.
Certain legal matters in connection with the Notes will be passed upon for the
Underwriters by Baker & Botts, L.L.P., Houston, Texas.
INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS
The discussion in the Prospectus and this Prospectus Supplement contains certain
estimates, predictions, projections and other "forward-looking statements"
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934) 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 the Company'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 the Company'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: renewal or satisfactory
replacement of the Company's feedstock arrangements as well as market, political
or other forces generally affecting the pricing and availability of refinery
feedstocks and refined products; accidents or other unscheduled shutdowns
affecting the Company's, its suppliers' or its customers' pipelines, plants,
machinery or equipment; 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; cancellation of or failure to implement planned capital
projects and realize the various assumptions and benefits projected for such
projects; the failure to avoid or correct a material Year 2000 problem,
including internal problems or problems encountered by third parties; state and
federal environmental, economic, safety and other policies and regulations, any
changes therein, and any legal or regulatory delays or other factors beyond the
Company's control; weather conditions affecting the Company's operations or the
areas in which the Company's products are marketed; 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 federal or state legislation which may adversely affect the
Company's business or operations; and changes in the credit ratings assigned to
the Company's debt securities and trade credit. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the foregoing. The Company
undertakes no obligation to publicly release 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.
S-24
<PAGE> 25
$600,000,000
VALERO ENERGY CORPORATION
DEBT SECURITIES
COMMON STOCK
PREFERRED STOCK
DEPOSITARY SHARES
Valero Energy Corporation (the "Company") may offer and issue from time to
time up to $600,000,000 aggregate principal amount of its securities consisting
of (i) one or more series of debentures, notes or other unsecured evidences of
indebtedness (the "Debt Securities"), (ii) shares of its Common Stock, par value
$.01 per share ("Common Stock"), (iii) shares of its Preferred Stock, par value
$.01 per share ("Preferred Stock") and (iv) shares of Preferred Stock
represented by depositary shares (the "Depositary Shares"). The Debt Securities,
Common Stock, Preferred Stock and Depositary Shares (collectively, the
"Securities") may be offered, separately or together, in amounts, at prices and
on terms to be set forth in one or more supplements to this Prospectus (each a
"Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Common Stock, any initial
public offering price, (ii) in the case of Preferred Stock, the specific title
and stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price, (iii) in the case of
Depositary Shares, the fractional share of Preferred Stock represented by each
Depositary Share and (iv) in the case of Debt Securities, the specific title,
series, aggregate principal amount, maturity, rate (or manner of calculation
thereof) and time of payment of interest, form (which may be registered or
bearer or certificated or global), authorized denominations, terms for
redemption at the option of the Company or repayment at the option of the
holder, terms for sinking fund payments, covenants and any initial public
offering price.
See "Risk Factors" on page 5 for a discussion of Certain Factors that
should be considered in connection with an investment in the securities offered
hereby.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, Securities covered by
such Prospectus Supplement.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "VLO." Any Common Stock offered will be listed, subject to notice of
issuance, on such exchange.
The Company may sell Securities to or through underwriters, and also may
sell Securities directly to other purchasers or through dealers or agents. The
Prospectus Supplement will set forth the names of any underwriters, dealers or
agents involved in the sale of Securities, the amounts, if any, to be purchased
by underwriters, the compensation, if any, of such underwriters, dealers or
agents and the net proceeds to the Company from the sale of such Securities less
attributable issuance expense. See "Plan of Distribution."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is June 30, 1998
<PAGE> 26
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission (the "Commission"). These securities may not
be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of any offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT DO
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THOSE TO WHICH THEY RELATE. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER OR UNDER THE PROSPECTUS SUPPLEMENT SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH IN THIS PROSPECTUS OR THE PROSPECTUS SUPPLEMENT OR IN THE
AFFAIRS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES SINCE THE RESPECTIVE DATES OF
THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements, and other information with the
Commission. Such reports, proxy statements, and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the public reference facilities maintained by the Commission
at the New York Regional Office, Seven World Trade Center, 13th Floor, New York,
New York 10048 and the Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such materials may be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains
a site on the World Wide Web at http://www.sec.gov that contains reports,
proxies and information statements and other information regarding registrants
(including the Company) that file electronically. In addition, documents filed
by the Company may be inspected at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005, on which exchange the Common Stock of
the Company is listed.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
securities offered hereby. This Prospectus omits certain of the information
contained in the Registration Statement, as permitted by the Commission's rules
and regulations. Reference is made to the Registration Statement and to the
exhibits relating thereto for further information with respect to the Company
and the securities offered hereby. Any statements contained herein concerning
the provisions of any document are not necessarily complete, and in each
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
2
<PAGE> 27
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference into this Prospectus its
Annual Report on Form 10-K for the year ended December 31, 1997, its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, its Proxy Statement
dated March 20, 1998 for the 1998 Annual Meeting of Stockholders and its
Registration Statement on Form 8-A dated July 9, 1997, as amended by Form 8-A
dated July 17, 1997.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14, or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the termination of the offering made hereby shall be deemed
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus and the
Prospectus Supplement to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus or the Prospectus Supplement.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
exhibits expressly incorporated by reference into the information that this
Prospectus incorporates). Written requests should be directed to: Investor
Relations, Valero Energy Corporation, P.O. Box 500, San Antonio, Texas
78292-0500 (telephone 210-370-2139).
FORWARD-LOOKING STATEMENTS
Statements in this Prospectus and any Prospectus Supplement (including the
documents incorporated by reference) concerning the Company which are (a)
projections of revenues, earnings, earnings per share, capital expenditures or
other financial items, (b) statements of plans and objectives for future
operations, including acquisitions, (c) statements of future economic
performance, or (d) statements of assumptions or estimates underlying or
supporting the foregoing are "forward-looking statements" (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) 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 the Company'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 the Company'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: renewal or satisfactory replacement of the
Company's feedstock arrangements as well as market, political or other forces
generally affecting the pricing and availability of refinery feedstocks and
refined products; accidents or other unscheduled shutdowns affecting the
Company's, its suppliers' or its customers' pipelines, plants, machinery or
equipment; 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; ability to implement planned capital projects and realize the various
assumptions and benefits projected for such projects; state and federal
environmental, economic, safety and other policies and regulations, any changes
therein, and any legal or regulatory delays or other factors beyond the
Company's control; weather conditions affecting the Company's operations or the
areas in which the Company's products are marketed; 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 federal or state legislation; and changes in the credit ratings
assigned to the Company's debt securities and trade credit. Certain of these
risk factors are more fully discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and Form 10-Q for the quarter ended
March 31, 1998. The Company undertakes no obligation to publicly release 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.
3
<PAGE> 28
THE COMPANY
The Company is one of the five largest independent petroleum refiners and
marketers in the U.S. and is the largest on the Gulf Coast. The Company, through
its subsidiaries, owns and operates four petroleum refineries, three in Texas at
Corpus Christi, Texas City, and Houston, and one in Louisiana at Krotz Springs,
with a combined throughput capacity of approximately 565,000 barrels per day.
The Company, through its subsidiaries, also markets refined products in 31
states and selected export markets.
The Company was incorporated in Delaware in 1981 under the name Valero
Refining and Marketing Company. Prior to July 31, 1997, the Company was a wholly
owned subsidiary of Valero Energy Corporation ("Old Valero"). On July 31, 1997,
pursuant to an agreement and plan of distribution between Old Valero and the
Company, Old Valero spun off the Company to Old Valero's stockholders by
distributing all of the Company's common stock on a share for share basis to
holders of record of Old Valero common stock at the close of business on such
date. Immediately after such distribution, Old Valero merged its natural gas
related services business with a wholly owned subsidiary of PG&E Corporation
(the completion of such distribution and merger is collectively referred to as
the "Restructuring"). In connection with the Restructuring, the Company's name
was changed from Valero Refining and Marketing Company to Valero Energy
Corporation and the Company's stock was registered with the Commission and
listed for trading on the New York Stock Exchange.
The Company has its principal executive offices at 7990 I.H. 10 West, San
Antonio, Texas, 78230 and its telephone number is (210) 370-2000.
RECENT DEVELOPMENTS
On May 21, 1998, the Company and Mobil Oil Corporation ("Mobil") signed an
exclusive letter of intent for the proposed purchase by the Company of Mobil's
155,000 barrels-per-day ("BPD") refinery in Paulsboro, New Jersey ("Paulsboro
Refinery"), for $228 million plus an estimated $108 million for inventories and
other working capital items. The Company anticipates financing the acquisition
with cash provided from the Company's existing bank credit facilities. The
acquisition is expected to close by August 1, 1998, subject to satisfactory
completion of the due diligence review, execution of definitive agreements and
satisfaction of legal and regulatory requirements.
After acquiring the Paulsboro Refinery, the Company will own and operate
five refineries in the Gulf Coast and Northeast regions of the country with
total throughput capacity of more than 700,000 BPD, making the Company the
second largest independent refining company in the United States.
USE OF PROCEEDS
The Securities may be offered by the Company from time to time when the
Company determines that market conditions are favorable. Unless otherwise
indicated in the applicable Prospectus Supplement, the net proceeds from the
sale of the Securities will be added to the Company's funds and used for general
corporate purposes, including the repayment of existing indebtedness, financing
of capital projects, additions to working capital and funding acquisitions of
properties in related businesses. The Company expects that it will raise
additional funds from time to time, as needed, through equity or debt
financings, including borrowings under bank credit agreements.
4
<PAGE> 29
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the periods indicated:
<TABLE>
<CAPTION>
- ------------------ -------------------------------------
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
- ------------------ -------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
(a) 4.08x 1.74x 2.61x 1.69x 1.50x
</TABLE>
(a) For the three months ended March 31, 1998, earnings were insufficient to
cover fixed charges by $8.2 million. Such deficiency was due primarily to a
$37.7 million pre-tax charge to earnings to write down the carrying amount
of the Company's refinery inventories to market value. Excluding the effect
of the inventory write-down, the ratio of earnings to fixed charges would
have been 3.61x.
For the purposes of computing the above ratio, earnings consist of
consolidated income from continuing operations before income taxes and fixed
charges (excluding capitalized interest), with certain other adjustments. Fixed
charges consist of total interest, whether expensed or capitalized, amortization
of debt expense and premiums or discounts related to outstanding indebtedness,
and one-third (the proportion deemed representative of the interest factor) of
rental expense.
The Company paid no dividends on preferred stock with respect to its
continuing operations during the periods indicated; therefore, the ratio of
earnings to combined fixed charges and preferred stock dividends is the same as
the ratio of earnings to fixed charges.
RISK FACTORS
The Securities to be offered hereby may involve a high degree of risk. Such
risks will be set forth in the Prospectus Supplement relating to such Security.
In addition, certain risk factors, if any, relating to the Company's business
will be set forth in a Prospectus Supplement.
DESCRIPTION OF THE DEBT SECURITIES
The following description of the Debt Securities sets forth certain general
terms and provisions of the Debt Securities to which any Prospectus Supplement
may relate. The particular terms of the Debt Securities offered by any
Prospectus Supplement (the "Offered Securities") and the extent, if any, to
which such general provisions may apply to the Offered Securities will be
described in the Prospectus Supplement relating to such Offered Securities. The
Offered Securities may contain any terms and provisions not inconsistent with
the Indenture (hereinafter defined).
The Debt Securities are to be issued in one or more series (each such
series a "Series") under an Indenture dated as of December 12, 1997, to be
supplemented by one or more supplemental indentures (the "Indenture"), between
the Company and The Bank of New York, a New York banking corporation, as Trustee
(the "Trustee"). Section references in parentheses below are to sections in the
Indenture. Wherever particular sections or defined terms of the Indenture are
referred to, such sections or defined terms are incorporated herein by reference
as part of the statement made, and the statement is qualified in its entirety by
such reference. The following statements are summaries of certain provisions
contained in the Indenture. The Indenture is included as an exhibit to the
Registration Statement.
GENERAL
The Indenture does not limit the amount of Debt Securities which can be
issued thereunder and provides that debt securities of any Series may be issued
thereunder up to the aggregate principal amount which may be authorized from
time to time by the Company. The Indenture does not limit the amount of other
indebtedness or securities which may be issued by the Company. All Debt
Securities will be unsecured and
5
<PAGE> 30
will not rank below any other unsecured indebtedness of the Company. The Trustee
will authenticate and deliver Debt Securities executed and delivered to it by
the Company as set forth in the Indenture.
Reference is made to the Prospectus Supplement for the following and other
possible terms of each Series of the Offered Securities in respect of which this
Prospectus is being delivered: (i) the title of the Offered Securities; (ii) any
limit upon the aggregate principal amount of the Offered Securities; (iii) if
other than 100% of the principal amount, the percentage of their principal
amount at which the Offered Securities will be offered; (iv) the date or dates
on which the principal of the Offered Securities will be payable (or method of
determination thereof); (v) the rate or rates (or method of determination
thereof) at which the Offered Securities will bear interest, if any, the date or
dates from which any such interest will accrue and on which such interest will
be payable, and the record dates for the determination of the holders to whom
interest is payable; (vi) if other than as set forth herein, the place or places
where the principal of and interest, if any, on the Offered Securities will be
payable; (vii) the price or prices at which, the period or periods within which
and the terms and conditions upon which Offered Securities may be redeemed, in
whole or in part, at the option of the Company; (viii) the obligation, if any,
of the Company to redeem, repurchase or repay Offered Securities, whether
pursuant to any sinking fund or analogous provisions or pursuant to other
provisions set forth therein or at the option of a holder thereof; (ix) the
events of default or covenants relating to the Offered Securities, to the extent
different from or in addition to those described herein; (x) whether the Offered
Securities will be issued in certificated and/or book-entry form; (xi) whether
the Offered Securities will be in registered or bearer form and the
denominations thereof; (xii) if applicable, the terms of any right to convert
Debt Securities into shares of Common Stock of the Company or other securities
or property; and (xiii) any other terms or conditions not inconsistent with the
provisions of the Indenture.
Unless otherwise provided in the Prospectus Supplement relating to any
Offered Securities, principal and interest, if any, will be payable, and the
Debt Securities will be transferable and exchangeable, at the office or offices
or agency maintained by the Company for such purposes, provided that payment of
interest on the Debt Securities will be paid at such place of payment by check
mailed to the persons entitled thereto at the addresses of such persons
appearing on the Security Register. Interest on the Debt Securities will be
payable on any interest payment date to the persons in whose name the Debt
Securities are registered at the close of business on the record date with
respect to such interest payment date.
Unless otherwise set forth in the Prospectus Supplement, Debt Securities
may be issued only in fully registered form, without coupons, in minimum
denominations of $1,000 and any integral multiple thereof. Debt Securities may
be exchanged for an equal aggregate principal amount of Debt Securities of the
same Series and date of maturity in such authorized denominations as may be
requested upon surrender of the Debt Securities at an agency of the Company
maintained for such purpose and upon fulfillment of all other requirements of
such agent. No service charge will be made for any transfer or exchange of the
Debt Securities, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
(Section 305).
Debt Securities will bear interest at a fixed rate or a floating rate. Debt
Securities bearing no interest or interest at a rate which, at the time of
issuance, is below the prevailing market rate, will be sold at a discount below
their stated principal amount. Special United States federal income tax
considerations applicable to any such discounted Debt Securities or to certain
Debt Securities issued at par which are treated as having been issued at a
discount for United States federal income tax purposes will be described in the
applicable Prospectus Supplement.
The Indenture requires the annual filing by the Company with the Trustee of
a certificate as to compliance with all conditions and covenants contained in
the Indenture. (Section 1005).
The Company will comply with Section 14(e) under the Exchange Act, and any
other tender offer rules under the Exchange Act which may then be applicable, in
connection with any obligation of the Company to purchase Offered Securities at
the option of the holders thereof. Any such obligations applicable to a Series
of Debt Securities will be described in the Prospectus Supplement relating
thereto.
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GLOBAL SECURITY
The Company anticipates that upon issuance, each Series of Debt Securities
will be represented by a single global security (the "Global Security") which
will be deposited with, or on behalf of, a depositary located in the United
States (the "Depositary") and will be registered in the name of the Depositary
or a nominee of the Depositary. The Company anticipates that the following
provisions will apply to all depositary arrangements.
Upon the issuance of the Global Security, the Depositary or its nominee
will credit on its book-entry registration and transfer system the respective
principal amounts of the individual Debt Securities represented by the Global
Security to the accounts of persons that have accounts with such Depositary
("Participants"). Such accounts shall be designated by the underwriters, if any.
Ownership of beneficial interests in the Global Security will be limited to
Participants or persons that may hold interests through Participants. Ownership
of beneficial interests in the Global Security will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
the Depositary or its nominee (with respect to interests of Participants) and
the records of Participants (with respect to interests of persons who hold
through Participants). The laws of some states require that certain purchasers
of securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer or pledge beneficial interests in the
Global Security. So long as the Depositary, or its nominee, is the registered
owner of the Global Security, the Depositary or the nominee, as the case may be,
will be considered the sole owner or holder of the Debt Securities represented
by the Global Security for all purposes under the Indenture.
Payments of principal of (and premium, if any) and interest (if any) on
individual Debt Securities represented by the Global Security registered in the
name of the Depositary or its nominee and notices required under the Indenture
will be made or delivered to the Depositary or its nominee, as the case may be,
as the registered owner of the Global Security. None of the Company, the
Trustee, any paying agent, or the securities registrar for such Debt Securities
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interest of the Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests or to assure that notices are forwarded to
beneficial owners.
The Company expects that the Depositary, upon receipt of any payment of
principal, premium or interest in respect of the Global Security, will
immediately credit Participants' accounts with payments in amounts proportionate
to their respective beneficial interest in the principal amount of the Global
Security as shown on the records of the Depositary. Payments by Participants to
owners of beneficial interests in the Global Security held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants. However, the Company has no control over the practices of the
Depositary or the Participants and there can be no assurance that these
practices will not change.
If the Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by the Company within 60
days, the Company will issue Debt Securities in definitive registered form in
exchange for the Global Security. In addition, the Company may at any time and
in its sole discretion determine not to have any Debt Securities of a series
represented by one or more Global Securities and, in such event, will issue Debt
Securities in definitive registered form in exchange for the Global Security for
such Series. Further, if the Company so specifies with respect to the Debt
Securities of a Series, an owner of a beneficial interest in the Global Security
may, on terms acceptable to the Company, the Trustee and the Depositary, receive
Debt Securities in definitive registered form in exchange for such beneficial
interests. In any such instance, an owner of a beneficial interest in the Global
Security will be entitled to physical delivery of Debt Securities in definitive
registered form equal in principal amount to such beneficial interest. (Sections
301 and 305).
Except as provided above, owners of beneficial interests in the Global
Security will not be entitled to receive physical delivery of Debt Securities in
definitive form and will not be considered the holders thereof for any purposes
under the Indenture. Accordingly, each person owning a beneficial interest in a
Global Security
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for a Series of Debt Securities must rely on the procedures of the Depositary
and, if such person is not a Participant, on the procedures of the Participant
through which such person owns its interest, to exercise any rights of a holder
of such securities under the Indenture. The Depositary may grant proxies and
otherwise authorize participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a holder
is entitled to give or take under the Indenture. The Company understands that
under existing industry practices, in the event that the Company requests any
action of holders or that an owner of a beneficial interest in the Global
Security desires to give or take any action to which a holder is entitled to
give or take under the Indenture, the Depositary would authorize the
Participants holding the relevant beneficial interests to give or take such
action, and such Participants would authorize beneficial owners owning through
such Participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
CERTAIN COVENANTS OF THE COMPANY
Certain Definitions. The following terms are defined substantially as
follows in Section 101 of the Indenture and are used herein as so defined. For
the purposes of the following terms, all items shall be determined in accordance
with generally accepted accounting principles, unless otherwise indicated.
"Consolidated Net Tangible Assets" means the total amount of assets shown
on a consolidated balance sheet of the Company and its Subsidiaries, prepared in
accordance with generally accepted accounting principles, less (i) all current
liabilities (except current maturities of long-term debt and notes payable) and
(ii) goodwill and other intangible assets included on such balance sheet.
"Funded Debt" means any indebtedness for money borrowed, created, issued,
incurred, assumed or guaranteed which would, in accordance with generally
accepted accounting principles, be classified as long-term debt, but in any
event including all indebtedness for money borrowed, whether secured or
unsecured, maturing more than one year, or extendible at the option of the
obligor to a date more than one year, after the date of determination thereof
(excluding any amount thereof included in current liabilities).
"Mortgages" means mortgages, liens, pledges, security interests or other
encumbrances.
"Principal Property" means any refinery or refinery-related asset,
distribution facility or other real property of the Company or any of its
Subsidiaries which has a net book value exceeding 2.5% of Consolidated Net
Tangible Assets, but not including (1) any property which in the opinion of the
Company is not material to the total business conducted by the Company as an
entirety or (2) any portion of a particular property which is similarly found
not to be material to the use or operation of such property.
"Subsidiary" means (i) any corporation of which at the time of
determination the Company and/or one or more Subsidiaries owns or controls
directly or indirectly more than 50% of the shares of Voting Stock, (ii) any
general partnership, joint venture, business trust or similar entity, of which
at the time of determination the Company and/or one or more Subsidiaries owns or
controls directly or indirectly more than 50% or the outstanding partnership or
similar interests and (iii) any limited partnership of which the Company or any
of its Subsidiaries is a general partner.
Limitations on Mortgages. The Company covenants in the Indenture that when
any Debt Securities are outstanding it will not, subject to certain exceptions,
create or assume any Mortgages upon any of the Company's receivables or other
assets or any asset, stock or indebtedness of any Subsidiary unless such Debt
Securities are secured equally and ratably with (or prior to) such indebtedness
for as long as such indebtedness is so secured. Such exceptions to this covenant
include (but are not limited to) the following: (a) subject to certain
limitations, any Mortgage created to secure all or part of the purchase price of
any property or to secure a loan made to finance the acquisition of the property
described in such Mortgage; (b) subject to certain limitations, any Mortgage
existing on any property at the time of the acquisition thereof (whether
acquired directly or indirectly through the purchase of the entity that owns the
asset) or created not later than 12 months thereafter, or Mortgages created in
connection with the construction or repair of any of the Company's property or
created within 12 months thereafter; (c) any mechanic's or materialmen's lien or
any lien related to workmen's compensation or other insurance, and lease
deposits and other deposits arising in
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the ordinary course of business; (d) any Mortgage arising by reason of deposits
with or the giving of any form of security to any governmental agency (including
for taxes and other governmental charges); (e) any judgment lien the execution
of which has been stayed or which has been adequately appealed and secured; (f)
any Mortgage incidental to the conduct of the Company's business which was not
incurred in connection with the borrowing of money or the obtaining of advances
or credit and which does not materially interfere with the conduct of the
Company's business; (g) any intercompany Mortgage; (h) any Mortgage created to
secure indebtedness and letter of credit reimbursement obligations incurred in
connection with the extension of working capital financing; (i) any Mortgage
existing on the date of the Indenture; (j) subject to an aggregate limit of $60
million, any Mortgage on cash, cash equivalents, options or futures positions
and other account holdings securing derivative obligations or otherwise incurred
in connection with margin accounts with brokerage or commodities firms; and (k)
subject to an aggregate limit of 10% of the Company's Consolidated Net Tangible
Assets, any Mortgages not otherwise permitted by any of the other exceptions set
forth in the Indenture. (Section 1101).
Limitations on Sale and Leaseback Transactions. The Indenture provides that
neither the Company nor any Subsidiary may enter into any sale/leaseback
transactions with regard to any Principal Property, providing for the leasing
back to the Company or a Subsidiary by a third party for a period of more than
three years of any asset which has been or is to be sold or transferred by the
Company or such Subsidiary to such third party or to any other person.
Transactions of this nature are permitted, however, under the following
circumstances: (i) the Company would be entitled, pursuant to the "Limitations
on Mortgages" covenant described above, to incur indebtedness secured by a
Mortgage on the property to be leased, without equally and ratably securing the
Debt Securities then outstanding, (ii) the Company during or immediately after
the expiration of 120 days after the effective date of such sale/leaseback
transaction (whether made by the Company or a Subsidiary) applies to the
voluntary retirement of Funded Debt an amount equal to the value of such
transaction (as such amount may be reduced pursuant to the terms of the
Indenture), or (iii) the Company during or immediately after the expiration of
120 days after the effective date of such sale/leaseback transaction applies an
amount equal to the value of the transaction to the purchase of another
Principal Property asset. In addition, subject to a limit (on an aggregated
basis with indebtedness secured by liens not otherwise permitted by the
limitations on mortgages covenant described above) of 10% of the Company's
Consolidated Net Tangible Assets, the Indenture permits the Company to enter
into sale/leaseback transactions not otherwise permitted by the express
provisions of the Indenture. (Section 1102).
Consolidation, Merger and Certain Sales of Assets. The Indenture does not
contain any covenant that restricts the Company's ability to merge or
consolidate with or into any other corporation, sell or convey all or
substantially all of its assets to any person, firm or corporation or otherwise
engage in restructuring transactions; provided (i) that the successor
corporation (if not the Company) is a U.S. corporation and it expressly assumes
the due and punctual payment of the Debt Securities then outstanding and the due
and punctual performance and observance of all of the covenants and conditions
of the Indenture, and (ii) there is no event of default immediately following
such transaction. (Section 801).
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture with respect to
Debt Securities of any series: (i) failure to pay principal of or any premium on
any Debt Security of that series when due and payable; (ii) failure to pay any
interest on any Debt Security of that series when due and payable, and the
continuation of the default for 30 days; (iii) failure to deposit any sinking
fund payment or analogous obligation in respect of any Debt Security of that
series when due; (iv) failure to perform any other covenant, or breach of any
warranty, of the Company in the Indenture (other than a covenant or warranty
included in the Indenture solely for the benefit of a series of Debt Securities
other than such series), continued for 60 days after written notice is given or
received as provided in the Indenture; (v) certain events of bankruptcy,
insolvency, or reorganization; (vi) failure to pay at final maturity (after the
expiration of any applicable grace periods) or upon the declaration of
acceleration of payment of indebtedness for borrowed money of the Company or any
Subsidiary in excess of $25 million, if such indebtedness is not discharged, or
such acceleration is not annulled, within 10 days after written notice; and
(vii) any other Event of Default provided with respect to Debt
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<PAGE> 34
Securities of that series. If any Event of Default with respect to Debt
Securities of any series at any time outstanding occurs and is continuing,
either the Trustee or the holders of at least 25% in aggregate principal amount
of the outstanding Debt Securities of that series (or such lesser amounts as may
be provided in the Debt Securities of that series) may declare the principal
amount of all the Debt Securities of that series to be due and payable
immediately. At any time after a declaration or occurrence of acceleration with
respect to Debt Securities of any series has been made, but before a judgment or
decree based on acceleration has been obtained, the holders of a majority in
aggregate principal amount of outstanding Debt Securities of that series may,
under certain circumstances, rescind and annul the acceleration. (Sections 501
and 502).
The Indenture provides that, subject to the duty of the Trustee during the
continuance of an Event of Default to act with the required standard of care,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders unless the
holders have offered to the Trustee reasonable indemnity. Subject to such
provisions for the indemnification of the Trustee, the holders of a majority in
aggregate principal amount of the outstanding Debt Securities of any series will
have the right to direct the time, method, and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee, with respect to the Debt Securities of that
series. The Company is required to furnish the Trustee annually with a statement
of the performance by the Company of certain of its obligations under the
Indenture and of any default in such performance.
MODIFICATION AND WAIVER
The Indenture provides that the Company and the Trustee may enter into
supplemental indentures (which conform to the provisions of the Trust Indenture
Act of 1939) without the consent of the holders in order to, among other things:
(i) secure any Debt Securities; (ii) evidence the assumption by a successor
Person of the obligations of the Company; (iii) add further covenants for the
protection of the holders or additional events of default; (iv) cure any
ambiguity or correct any inconsistency in the Indenture, so long as such action
will not adversely affect the interests of the holders; (v) establish the form
or terms of Debt Securities of any series; and (vi) evidence the acceptance of
appointment by a successor trustee. (Section 901).
Modifications of and amendments to the Indenture may also be made by the
Company and the Trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the outstanding Debt Securities of
each series affected by the modification or amendment; provided that no such
modification or amendment may, without the consent of the holder of each
outstanding Debt Security affected thereby, (i) change the stated maturity of
the principal of or any installment of interest on any Debt Security, (ii)
reduce the principal amount of, or any premium or interest on, any Debt
Security, (iii) reduce the amount of principal of discounted Debt Securities
payable upon acceleration of the stated maturity thereof, (iv) change the
currency of payment for any Debt Security, (v) impair the right to institute
suit for the enforcement of any payment with respect to any Debt Security, or
(vi) reduce the percentage in principal amount of outstanding Debt Securities of
any series, the consent of whose holders is required for modification or
amendment of the Indenture or for waiver of compliance with certain provisions
of the Indenture or for waiver of certain defaults. (Section 902).
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series, on behalf of all holders of Debt Securities of
that series, may waive any past default under the Indenture with respect to Debt
Securities of that series, except a default in the payment of principal, premium
or interest, or a covenant or provision that cannot be modified or amended
without the consent of the holders of each outstanding Debt Security affected
thereby. (Section 512).
DISCHARGE
The Indenture provides that the Company will be discharged from any and all
obligations in respect of any series of Debt Securities, except for certain
surviving obligations to register the transfer or exchange of the Debt
Securities and any right to receive additional amounts under the Indenture, (i)
if all Debt Securities previously authenticated and delivered under the
Indenture have been delivered to the Trustee for cancella-
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tion, or (ii) if (a) all such Debt Securities have become due and payable or
will become due and payable within one year at Stated Maturity or by redemption,
if applicable, and (b) the Company deposits with the Trustee, in trust, money in
an amount sufficient to pay the entire indebtedness of such Debt Securities on
the dates the payments are due in accordance with the terms of the Debt
Securities. To exercise the rights described in (ii) above, the Company is
required, among other things, to deliver to the Trustee an opinion of counsel
and an officers' certificate to the effect that all conditions precedent
relating to the satisfaction and discharge of the Indenture have been complied
with. (Section 401).
NOTICES
Notices to holders will be given by mail to the addresses of such holders
as they appear in the Security Register.
GOVERNING LAW
The Indenture is, and the Debt Securities will be, governed by and
construed in accordance with the laws of the State of New York.
CONCERNING THE TRUSTEE
The Bank of New York, a New York banking corporation, is the Trustee under
the Indenture, with an address at Bank of New York, Corporate Trust Office, 101
Barclay Street, Floor 21 West, New York, New York 10286. The Bank of New York
also serves as trustee in connection with a financing completed in December 1997
by the Company.
The holders of a majority in principal amount of the outstanding securities
issued under the Indenture will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that if an Event
of Default occurs (and is not cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of such person's own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of securities issued under the Indenture,
unless such holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture. The Trustee may resign at any
time or may be removed by the Company. If the Trustee resigns, is removed or
becomes incapable of acting as Trustee or if a vacancy occurs in the office of
the Trustee for any cause, a successor Trustee shall be appointed in accordance
with the provisions of the Indenture.
If the Trustee shall have or acquire any "conflicting interest" within the
meaning of the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), the Trustee shall either eliminate such interest or resign, to the extent
and in the manner provided by, and subject to the provisions of, the Trust
Indenture Act and the Indenture. The Trust Indenture Act also contains certain
limitations on the right of the Trustee, as a creditor of the company, to obtain
payment of claims in certain cases, or to realize on certain property received
by it in respect of such claims, as security or otherwise.
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DESCRIPTION OF THE COMMON STOCK
The authorized Common Stock of the Company consists of 150,000,000 shares,
par value $.01 per share. At June 1, 1998, there were 56,191,707 shares of
Common Stock issued and outstanding. The following description of the Common
Stock is subject to the detailed provisions of the Company's Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and its By-laws as currently in effect (the "Bylaws"). This description does not
purport to be complete or to give full effect to the terms of the provisions of
statutory or common law and is subject to, and qualified in its entirety by
reference to, the Certificate of Incorporation, the Bylaws, and the Rights
Agreement, dated as of July 17, 1997 between the Company and Harris Trust and
Savings Bank, as rights agent, all of which are exhibits to the Registration
Statement of which this Prospectus is a part.
After the requirements with respect to preferential dividends upon any
outstanding Preferred Stock have been met, the holders of the Common Stock shall
be entitled to receive such dividends as may be declared from time to time by
the Board of Directors. For information regarding restrictions on payments of
dividends, see the Prospectus Supplement applicable to any issuance of Common
Stock. Each share of Common Stock shall entitle the holder thereof to one vote
for each share held. At present, the Common Stock trades with the Preferred
Share Purchase Rights. See "Description of the Preferred Share Purchase Rights."
In the event of any liquidation of the Company, 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 Company
shall have been paid in full the amount to which they respectively shall be
entitled or a sum sufficient for such payment in full shall have been set apart,
the remaining net assets of the Company 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
such class of stock ranking prior to the Common Stock.
The Certificate of Incorporation of the Company provides that directors are
to be elected in three classes of as nearly an equal number as possible for
terms of three years. As a result, a person acquiring a majority of the Common
Stock may be unable to promptly gain control of the Company's Board of
Directors. In general, the Certificate of Incorporation requires the affirmative
vote of holders of at least two-thirds of the voting stock of the Company not
owned by an "interested stockholder" (the beneficial owner of 15% or more of the
Company's outstanding voting stock) prior to certain "Business Combinations" (as
defined in the Certificate of Incorporation), unless the Business Combination is
approved by the "Continuing Directors" (as defined in the Certificate of
Incorporation) or meets certain requirements regarding price and procedure or
certain other transactions involving the issuance of the securities of the
Company. The foregoing provisions may have certain anti-takeover effects in that
a person gaining voting control of the Company may be prevented from or delayed
in taking actual control. For purposes of the provision of the Certificate of
Incorporation described above, "voting stock" would mean all stock entitled to
vote in an election of directors at the time the determination is being made.
Accordingly, Preferred Stock does not constitute "voting stock" unless, at the
time the determination is being made, such Preferred Stock is entitled to vote
for the election of two directors, as described above.
The Company's Certificate of Incorporation also contains a provision that
limits the liability of the Company's directors, as permitted by the Delaware
General Corporation Law. The provision eliminates the personal liability of
directors to the Company and its stockholders for monetary damages for breaches
of their fiduciary duty of care. As a result, stockholders may be unable to
recover monetary damages against directors for negligent or grossly negligent
acts or omissions in violation of their duty of care. The provision does not
change the liability of a director for breach of his duty of loyalty to the
Company or to stockholders, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, the declaration or payment
of dividends or improper repurchases, or redemptions of the Company's stock in
violation of Delaware law or in respect of any transaction from which a director
received an improper personal benefit.
As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15%
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or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares); or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under Section 203, the restrictions described above also
do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person's becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
For purposes of Section 203, "voting stock" means stock entitled to vote
generally in elections for the board of directors.
The Common Stock has no preemptive, redemption or conversion rights.
Harris Trust and Savings Bank, Chicago, Illinois, acts as Transfer Agent
and Registrar for the Common Stock.
DESCRIPTION OF THE PREFERRED SHARE PURCHASE RIGHTS
On July 31, 1997 the Board of Directors of the Company declared a dividend
of one Preferred Share Purchase Right (the "Rights") for each outstanding share
of Common Stock to the stockholders of record on that date. In addition, the
Board determined that each authorized but then unissued share of Common Stock
issued on or after such date would also be accompanied by a Right. Except as set
forth below, each Right will entitle the registered holder to purchase from the
Company one one-hundredth of a share of 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 are set forth in the Company's Rights Agreement, dated as of July
17, 1997 between the Company and Harris Trust and Savings Bank, as rights agent
(the "Rights Agreement").
The Rights Agreement provides that, 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 the Company's Common Stock or (ii) 10
business days (or such later date as may be determined by action of the
Company's 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
Common Stock (the earlier of such dates being called the "Rights Separation
Date"), the Rights will be transferred with and only with the Company's 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 Company's 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 the Company, in each case, as described below.
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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 Company's Common
Stock or a stock dividend on the Company's Common Stock payable in the Company's
Common Stock or subdivisions, consolidations or combinations of the Company's
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 the Company's 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 the Company's Common Stock.
Each share of Junior Preferred Stock will have 100 votes, voting together with
the Company's Common Stock. Finally, in the event of any merger, consolidation
or other transaction in which the Company's Common Stock is exchanged, each
share of Junior Preferred Stock will be entitled to receive 100 times the amount
received per share of the Company's 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 the Company's Common Stock.
In the event that after the Rights Separation Date, the Company 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 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 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
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
Common Stock and prior to the acquisition by such person or group of 50% or more
of the outstanding Common Stock, the Company's 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 Common Stock, or one
one-hundredth of a share of Junior Preferred Stock (or of a share of a class or
series of 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 the Company,
be evidenced by depositary
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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
Common Stock, the Company's 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 Company's 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 Company's 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 Common Stock 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 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.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's 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
Company's Board since the Rights may be redeemed by the Company at the
redemption price prior to the time that a person or group has acquired
beneficial ownership of 15% or more of the Common Stock.
The foregoing summary of certain terms of the Rights is qualified in its
entirety by reference to the Rights Agreement, a form of which was filed as an
exhibit to the Company's Registration Statement on Form S-8 (File No. 333-31709,
July 21, 1997).
DESCRIPTION OF THE PREFERRED STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Preferred Stock,
par value $.01 per share, of which no Preferred Stock was outstanding at the
date hereof. Subject to the limitations prescribed by the Certificate of
Incorporation, the Board of Directors is authorized to fix the number of shares
constituting each series of Preferred Stock and the designations and powers,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including such provisions
as may be desired concerning voting, redemption, dividends, dissolution or the
distribution of assets, conversion or exchange, and such other subjects or
matters as may be fixed by resolution of the Board of Directors.
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. Certain other terms of a particular series of Preferred Stock will
be described in the Prospectus Supplement relating to that series. If so
indicated in the Prospectus Supplement, the terms of any such series may differ
from the terms set forth below. The description of certain provisions of the
Preferred Stock set forth below and in any Prospectus Supplement does not
purport to be complete and is in all respects subject to and qualified in its
entirety by reference to the applicable provisions of the Company's Certificate
of Incorporation and Bylaws and any applicable certificate of designations
supplementary to the Certificate of Incorporation designating terms of a series
of Preferred Stock which will be filed with the Commission in connection with
the offering of such series of Preferred Stock.
The issuance of Preferred Stock could adversely affect the voting power,
dividend rights and other rights of holders of Common Stock. Issuance of
Preferred Stock also could, depending on the terms of such issue,
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either impede, delay, prevent or facilitate a merger, tender offer or change in
control of the Company. Although the Board of Directors is required to make a
determination as to the best interests of the stockholders of the Company when
issuing Preferred Stock, the Board could act in a manner that would discourage
an acquisition attempt or other transaction that some, or a majority, of the
stockholders might believe to be in the best interests of the Company or in
which stockholders might receive a premium for their shares over the then
prevailing market price. Management believes that the availability of Preferred
Stock will provide the Company with increased flexibility in structuring
possible further financing and acquisitions and in meeting other needs that
might arise.
TERMS
The Preferred Stock offered hereby will be issued in one or more series.
The Preferred Stock will, when issued, be fully paid and nonassessable by the
Company and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the particular
series of Preferred Stock offered thereby for specific terms, including: (i) the
title and stated value of such Preferred Stock; (ii) the number of shares of
such Preferred Stock offered, the liquidation preference per share and the
offering price of such Preferred Stock; (iii) the dividend rate(s), period(s)
and/or payment date(s) or method(s) of calculation thereof applicable to such
Preferred Stock; (iv) the date from which dividends on such Preferred Stock
shall accumulate, if applicable; (v) the procedures for any auction and
remarketing, if any, for such Preferred Stock; (vi) the provision for a sinking
fund, if any, for such Preferred Stock; (vii) the provision for redemption, if
applicable, of such Preferred Stock; (viii) any listing of such Preferred Stock
on any securities exchange; (ix) the terms and conditions, if applicable, upon
which such Preferred Stock will be convertible into Common Stock of the Company,
including the conversion price (or manner of calculation thereof); (x) whether
interests in such Preferred Stock will be represented by Depositary Shares; (xi)
any other specific terms, preferences, rights, limitations or restrictions of
such Preferred Stock; (xii) a discussion of federal income tax considerations
applicable to such Preferred Stock; (xiii) the relative ranking and preferences
of such Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the Company; and (xiv) any limitations on issuance
of any series of Preferred Stock ranking senior to or on a parity with such
series of Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the Company.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock of the Company, and to all equity securities ranking
junior to such Preferred Stock; (ii) on a parity with all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank on a parity with the Preferred Stock; and (iii) junior to all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank senior to the Preferred Stock. The term "equity
securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
legally available therefor, cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Different series of
the Preferred Stock may be entitled to dividends at different rates or based
upon different methods of determination. Such rates may be variable or fixed or
both. Each such dividend shall be payable to holders of record as they appear on
the share transfer books of the Company on such record dates as shall be fixed
by the Board of Directors of the Company. Dividends on any series of the
Preferred Stock may be cumulative or non-cumulative, as provided in the
applicable Prospectus Supplement.
If Preferred Stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to dividends, on a parity with or
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junior to the Preferred Stock of such series for any period unless (i) if such
series of Preferred Stock has a cumulative dividend, full cumulative dividends
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on the Preferred
Stock of such series for all past dividend periods and the then current dividend
period or (ii) if such series of Preferred Stock does not have a cumulative
dividend, full dividends for the then current dividend period have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Preferred Stock of such
series. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon Preferred Stock of any series and the shares
of any other series of Preferred Stock ranking on a parity as to dividends with
the Preferred Stock of such series, all dividends declared upon Preferred Stock
of such series and any other series of Preferred Stock ranking on a parity as to
dividends with such Preferred Stock shall be declared pro rata so that the
amount of dividends declared per share of Preferred Stock of such series and
such other series of Preferred Stock shall in all cases bear to each other the
same ratio that accrued dividends per share on the Preferred Stock of such
series (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend) and such other series of Preferred Stock bear to each other. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on Preferred Stock of such series which may be
in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then current
dividend period, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current divided
period, no dividends (other than in shares of Common Stock or other capital
shares ranking junior to the Preferred Stock of such series as to dividends and
upon liquidation) shall be declared or paid or set aside for payment or other
distribution shall be declared or made upon the Common Stock, or any other
capital shares of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, nor shall
any shares of Common Stock, or any other capital shares of the Company ranking
junior to or on a parity with the Preferred Stock of such series as to dividends
or upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any monies be paid to or made available for a sinking fund for
the redemption of any such shares) by the Company (except by conversion into or
exchange for other capital shares of the Company ranking junior to the Preferred
Stock of such series as to dividends and upon liquidation).
REDEMPTION
The terms, if any, on which shares of a series of Preferred Stock may be
subject to mandatory redemption or redemption at the option of the Company, as a
whole or in part, will be set forth in the Prospectus Supplement applicable to
such series.
RIGHTS UPON LIQUIDATION
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, then, before any distribution or payment shall be made to the
holders of Common Stock or any other class or series of capital shares of the
Company ranking junior to such series of Preferred Stock, the holders of each
series of Preferred Stock shall be entitled to receive out of assets of the
Company legally available for distribution to stockholders liquidating
distributions in the amount of the liquidation preference per share (set forth
in the applicable Prospectus Supplement), plus an amount equal to accrued and
unpaid dividends for the then current dividend period and, if such series of
Preferred Stock is cumulative, for all dividend periods prior thereto, all as
set forth in the Prospectus Supplement with respect to such shares.
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VOTING RIGHTS
Holders of the Preferred Stock will not be entitled to vote, except as
otherwise from time to time required by law or as indicated in the applicable
Prospectus Supplement.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into shares of Common Stock will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number of
shares of Common Stock into which the shares of Preferred Stock are convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Stock.
STOCKHOLDER LIABILITY
Applicable Delaware law provides that no stockholder, including holders of
Preferred Stock, shall be personally liable for the acts and obligations of the
Company and that the funds and property of the Company shall be the only
recourse for such acts or obligations.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
DESCRIPTION OF THE DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Stock, as specified in the applicable Prospectus
Supplement. Shares of Preferred Stock of each series represented by the
Depositary Shares will be deposited under a separate Deposit Agreement (each, a
"Deposit Agreement") among the Company, the depositary named therein (the
"Preferred Stock Depositary") and the holders from time to time of the
Depositary Receipts. Subject to the terms of the Deposit Agreement, each owner
of a Depositary Receipt will be entitled, in proportion to the fractional
interest of a share of a particular series of Preferred Stock represented by the
Depositary Shares evidenced by such Depositary Receipt, to all the rights and
preferences of the Preferred Stock represented by such Depositary Shares
(including dividend, voting, conversion, redemption and liquidation rights). The
Company anticipates that the following provisions will apply to any Deposit
Agreements which may be entered into by the Company.
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Stock by the Company to the Preferred Stock
Depositary, the Company will cause the Preferred Stock Depositary to issue, on
behalf of the Company, the Depositary Receipts. Upon completion, copies of the
applicable form of Deposit Agreement and Depositary Receipt may be obtained from
the Company upon request.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of the Preferred Stock to the record
holders of Depositary Receipts evidencing the related Depositary Shares in
proportion to the number of such Depositary Receipts owned by such holders,
subject to certain obligations of holders to file proofs, certificates and other
information and to pay certain charges and expenses to the Preferred Stock
Depositary.
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In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of holders
to file proofs, certificates and other information and to pay certain charges
and expenses to the Preferred Stock Depositary, unless the Preferred Stock
Depositary determines that is it not feasible to make such distribution, in
which case the Preferred Stock Depositary may, with the approval of the Company,
sell such property and distribute the net proceeds from such sale to such
holders.
WITHDRAWAL OF STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Stock Depositary (unless the related Depositary Shares have
previously been called for redemption), the holders thereof will be entitled to
delivery at such office, to or upon such holders' order, of the number of whole
or fractional shares of the Preferred Stock and any money or other property
represented by the Depositary Shares evidenced by such Depositary Receipts.
Holders of Depositary Receipts will be entitled to receive whole or fractional
shares of the related Preferred Stock on the basis of the proportion of
Preferred Stock represented by each Depositary Share as specified in the
applicable Prospectus Supplement, but holders of such shares of Preferred Stock
will not thereafter be entitled to receive Depositary Shares therefor. If the
Depositary Receipts delivered by the holder evidence a number of Depositary
Shares in excess of the number of Depositary Shares representing the number of
shares of Preferred Stock to be withdrawn, the Preferred Stock Depositary will
deliver to such holder at the same time a new Depositary Receipt evidencing such
excess number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems shares of Preferred Stock held by the
Preferred Stock Depositary, the Preferred Stock Depositary will redeem as of the
same redemption date the number of Depositary Shares representing shares of the
Preferred Stock so redeemed, provided the Company shall have paid in full to the
Preferred Stock Depositary the redemption price of the Preferred Stock to be
redeemed plus an amount equal to any accrued and unpaid dividends thereon to the
date fixed for redemption. The redemption price per Depositary Share will be
equal to the redemption price and any other amounts per share payable with
respect to the Preferred Stock. If fewer than all the Depositary Shares are to
be redeemed, the Depositary Shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional Depositary Shares) or
by any other equitable method determined by the Company.
From and after the date fixed for redemption, all dividends in respect of
the shares of Preferred Stock so called for redemption will cease to accrue, the
Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts evidencing
the Depositary Shares so called for redemption will cease, except the right to
receive any moneys payable upon such redemption and any money or other property
to which the holders of such Depositary Receipts were entitled upon such
redemption upon surrender thereof to the Preferred Stock Depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the Preferred
Stock are entitled to vote, the Preferred Stock Depositary will mail the
information contained in such notice of meeting to the record holders of the
Depositary Receipts evidencing the Depositary Shares which represent such
Preferred Stock. Each record holder of Depositary Receipts evidencing Depositary
Shares on the record date (which will be the same date as the record date for
the Preferred Stock) will be entitled to instruct the Preferred Stock Depositary
as to the exercise of the voting rights pertaining to the amount of Preferred
Stock represented by such holder's Depositary Shares. The Preferred Stock
Depositary will vote the amount of Preferred Stock represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all reasonable action which may be deemed necessary by the
Preferred Stock Depositary in order to enable the Preferred Stock Depositary to
do so. The Preferred Stock Depositary will abstain from voting the amount of
Preferred Stock represented by such Depositary Shares to the extent it does not
receive specific instructions from the holders of Depositary Receipts evidencing
such Depositary Shares. The Preferred Stock Depositary shall not be responsible
for any failure to carry out any instruction to vote, or for the manner or
effect of any
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such vote made, as long as any such action or non-action is in good faith and
does not result from negligence or wilful misconduct of the Preferred Stock
Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each share of
Preferred Stock represented by the Depositary Share evidenced by such Depositary
Receipt, as set forth in the applicable Prospectus Supplement.
CONVERSION
The Depositary Shares, as such, are not convertible into Common Stock or
any other securities or property of the Company. Nevertheless, if so specified
in the applicable Prospectus Supplement relating to an offering of Depositary
Shares, the Depositary Receipts may be surrendered by holders thereof to the
Preferred Stock Depositary with written instructions to the Preferred Stock
Depositary to instruct the Company to cause conversion of the Preferred Stock
represented by the Depositary Shares evidenced by such Depositary Receipts into
whole shares of Common Stock, other shares of Preferred Stock of the Company or
other shares of capital stock, and the Company, upon receipt of such
instructions and any amounts payable in respect thereof, would cause the
conversion thereof utilizing the same procedures as those provided for delivery
of Preferred Stock to effect such conversion. If the Depositary Shares evidenced
by a Depositary Receipt are to be converted in part only, a new Depositary
Receipt or Receipts would be issued for any Depositary Shares not to be
converted. No fractional shares of Common Stock would be issued upon conversion,
and if such conversion would result in a fractional share being issued, an
amount would be paid in cash by the Company equal to the value of the fractional
interest based upon the closing price of the Common Stock on the last business
day prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares which
represent the Preferred Stock and any provision of the Deposit Agreement may at
any time be amended by agreement between the Company and the Preferred Stock
Depositary. However, any amendment that would materially and adversely alter the
rights of the holders of Depositary Receipts or be materially and adversely
inconsistent with the rights granted to holders of the related Preferred Stock
will not be effective unless such amendment is approved by the holders of at
least two-thirds of the Depositary Shares evidenced by the Depositary Receipts
then outstanding. No amendment will impair the right, subject to certain
exceptions in the Deposit Agreement, of any holder of Depositary Receipts to
surrender any Depositary Receipt with instructions to deliver to the holder the
related Preferred Stock and all money and other property, if any, represented
thereby, except in order to comply with law. Every holder of an outstanding
Depositary Receipt at the time any such amendment becomes effective shall be
deemed, by continuing to hold such Receipt, to consent and agree to such
amendment and to be bound by the Deposit Agreement as amended thereby.
The Deposit Agreement may be terminated by the Company upon not less than
30 days' prior written notice to the Preferred Stock Depositary if a majority of
each series of Preferred Stock affected by such termination consents to such
termination, whereupon the Preferred Stock Depositary shall deliver or make
available to each holder of Depositary Receipts, upon surrender of the
Depositary Receipts held by such holder, such number of whole or fractional
shares of Preferred Stock as are represented by the Depositary Shares evidenced
by such Depositary Receipts together with any other property held by the
Preferred Stock Depositary with respect to such Depositary Receipt. In addition,
the Deposit Agreement will automatically terminate if (i) all outstanding
Depositary Shares shall have been redeemed, (ii) there shall have been a final
distribution in respect of the related Preferred Stock in connection with any
liquidation, dissolution or winding up of the Company and such distribution
shall have been distributed to the holders of Depositary Receipts evidencing the
Depositary Shares representing such Preferred Stock or (iii) each share of the
related Preferred Stock shall have been converted into capital stock of the
Company not so represented by Depositary Shares.
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CHARGES OF PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Stock Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay certain other transfer and
other taxes and governmental charges as well as the fees and expenses of the
Preferred Stock Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Stock Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time remove
the Preferred Stock Depositary, any such resignation or removal to take effect
upon the appointment of a successor Preferred Stock Depositary. A successor
Preferred Stock Depositary must be appointed within 60 days after delivery of
the notice of resignation or removal and must be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Stock Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Stock Depositary with respect to the related Preferred Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if it
is prevented from or delayed in, by law or any circumstances beyond its control,
performing its obligations under the Deposit Agreement. The obligations of the
Company and the Preferred Stock Depositary under the Deposit Agreement will be
limited to performing their duties thereunder in good faith and without
negligence (in the case of any action or inaction in the voting of Preferred
Stock represented by the Depositary Shares), gross negligence or willful
misconduct, and the Company and the Preferred Stock Depositary will not be
obligated to prosecute or defend any legal proceeding in respect of any
Depositary Receipts, Depositary Shares or shares of Preferred Stock represented
thereby unless satisfactory indemnity is furnished. The Company and the
Preferred Stock Depositary may rely on written advice of counsel or accountants,
or information provided by persons presenting shares of Preferred Stock
represented thereby for deposit, holders of Depositary Receipts or other persons
believed in good faith to be competent to give such information, and on
documents believed in good faith to be genuine and signed by a proper party.
In the event the Preferred Stock Depositary shall receive conflicting
claims, requests or instructions from any holders of Depositary Receipts, on the
one hand, and the Company, on the other hand, the Preferred Stock Depositary
shall be entitled to act on such claims, requests or instructions received from
the Company.
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PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as their agents to offer and sell the Securities
upon the terms and conditions as are set forth in the applicable Prospectus
Supplement. In connection with the sale of Securities, underwriters may be
deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, are set forth in
the applicable Prospectus Supplement. Underwriters, dealers and agents
participating in the distribution of the Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with the Company, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as their agents to solicit offers by certain
institutions to purchase Securities from them at the public offering price set
forth in such Prospectus Supplement pursuant to Delayed Delivery Contracts
("Contracts") providing for payment and delivery on the date or dates stated in
such Prospectus Supplement. Each Contract will be for an amount not less than,
and the aggregate principal amount of Securities sold pursuant to Contracts
shall be not less nor more than, the respective amounts stated in the applicable
Prospectus Supplement. Institutions with whom Contracts, when authorized, may be
made include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions, and other
institutions but will in all cases be subject to the approval of the Company.
Contracts will not be subject to any conditions except (i) the purchase by an
institution of the Securities covered by its Contracts shall not at the time of
delivery be prohibited under the laws of any jurisdiction in the United States
to which such institution is subject, and (ii) if the Securities are being sold
to underwriters, the Company shall have sold to such underwriters the total
principal amount of the Securities less the principal amount thereof covered by
Contracts.
The Securities (other than Common Stock) will be a new issue of securities
with no established trading market. If so indicated in the applicable Prospectus
Supplement, any underwriters or agents to or through whom Securities are sold by
the Company for public offering and sale may make a market in such Securities,
but such underwriters and agents will not be obligated to do so and may
discontinue any market-making at any time without notice. No assurance can be
given as to the liquidity of the trading market for any Securities, other than
Common Stock.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company in the ordinary
course of business.
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LEGAL OPINIONS
The validity of the Securities will be passed upon for the Company by Mr.
Gregory C. King, Esq., Vice President and General Counsel of the Company. Mr.
King is an employee of the Company and at June 1, 1998, beneficially owned
13,586 shares of the Company's Common Stock (including shares held under
employee benefit plans) and held options under employee stock option plans of
the Company to purchase an additional 62,101 shares of the Company's Common
Stock. None of such shares or options were granted in connection with the
offering of the Securities. Certain legal matters in connection with the
Securities may be passed upon for underwriters, dealers or agents by Baker &
Botts, Houston, Texas.
EXPERTS
The audited consolidated financial statements of the Company contained in
the Company's Annual Report on Form 10-K incorporated by reference herein have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports 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 reports of independent public accountants relating to the audited
consolidated financial statements of the Company in any documents filed pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering will, to the extent
covered by consents thereto filed with the Commission, be incorporated by
reference in reliance upon the authority of such independent public accountants
as experts in accounting and auditing.
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