<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934:
For the year ended December 31, 1998
Commission File Number 1-11154
Ultramar Diamond Shamrock Corporation
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification No. 13-3663331
6000 North Loop 1604 West
San Antonio, Texas 78249-1112
Telephone number: (210) 592-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value registered on the New York Stock Exchange and
the Montreal Stock Exchange.
Securities registered pursuant to 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this Form 10-K. [X]
As of February 26, 1999, the aggregate market value of the voting stock held
by non-affiliates of the Company, based on the last sales price of the Common
Stock of the Company as quoted on the NYSE was $1,700,488,000.
The number of shares of Common Stock, $0.01 par value, of the Company
outstanding as of February 26, 1999 was 86,550,438.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement for its 1999 Annual Meeting
of Stockholders are incorporated by reference into Items 9, 10, 11, 12, and 13
of Parts II and III. The Company intends to file such Proxy Statement no later
than 120 days after the end of the fiscal year covered by this Form 10-K.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
PART I
1.Business.............................................................. 3
2.Properties............................................................ 12
3.Legal Proceedings..................................................... 12
4.Submission of Matters to a Vote of Security Holders................... 14
PART II
5.Market for Registrant's Common Equity and Related Stockholder Mat-
ters.................................................................... 15
6.Selected Financial Data............................................... 15
7.Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations..................................................... 17
7A.Quantitative and Qualitative Disclosures About Market Risk........... 33
8.Financial Statements and Supplementary Data........................... 36
9.Changes in and Disagreements with Accountants on Accounting and Finan-
cial Disclosure......................................................... 72
PART III
10.Directors and Executive Officers of the Registrant.................... 72
11.Executive Compensation................................................ 72
12.Security Ownership of Certain Beneficial Owners and Management........ 72
13.Certain Relationships and Related Transactions........................ 72
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 72
Signatures............................................................... 81
</TABLE>
This Annual Report on Form 10-K (including documents incorporated by reference
herein) contains statements with respect to the Company's expectations or
beliefs as to future events. These types of statements are "forward-looking"
and are subject to uncertainties. See "Certain Forward-Looking Statements" on
page 33.
2
<PAGE>
PART I
Item 1. Business
Summary
Ultramar Diamond Shamrock Corporation (the Company or UDS) is a leading
independent refiner and retailer of high-quality refined products and
convenience store merchandise in the central and southwest regions of the
United States, and the northeast United States and eastern Canada. Its
operations consist of refineries, convenience stores, pipelines, a home
heating oil business, and related petrochemical and natural gas liquids (NGL)
operations. The Company currently employs approximately 24,000 people.
The Company owns and operates seven refineries strategically located near its
key markets:
. McKee Refinery located near Amarillo in north Texas;
. Three Rivers Refinery located near San Antonio in south Texas;
. Wilmington Refinery located near Los Angeles in southern California;
. Ardmore Refinery located near the Oklahoma/Texas border in south central
Oklahoma;
. Denver Refinery located near Denver in eastern Colorado;
. Alma Refinery located near Lansing in central Michigan; and
. Quebec Refinery located in St. Romuald, Quebec Canada.
The Company markets refined products and a broad range of convenience store
merchandise under the Diamond Shamrock(R), Beacon(R), Ultramar(R), and
Total(R) brand names through a network of approximately 4,700 convenience
stores across 18 central and southwest states. In the Northeast, the Company
markets refined products through approximately 1,200 convenience stores and 82
cardlocks. The Northeast operations include one of the largest retail home
heating oil businesses in the northeastern region of North America, selling
heating oil to approximately 236,000 households.
The Company's Common Stock is listed on the New York and Montreal stock
exchanges under the symbols "UDS" and "ULR," respectively. UDS's principal
executive offices are located at 6000 North Loop 1604 West, San Antonio, Texas
78249-1112.
Merger and Acquisition
The Company is the surviving corporation in the December 1996 merger of
Ultramar Corporation and Diamond Shamrock, Inc. (the Merger). In connection
with the Merger, the Company issued 29,876,507 shares of Company Common Stock
and 1,725,000 shares of newly created 5% Cumulative Convertible Preferred
Stock in exchange for all the outstanding common stock and 5% cumulative
convertible preferred stock of Diamond Shamrock. The shareholders of Diamond
Shamrock received 1.02 shares of Company Common Stock for each share of
Diamond Shamrock common stock and one share of Company 5% Cumulative
Convertible Preferred Stock for each share of Diamond Shamrock 5% cumulative
convertible preferred stock.
On September 25, 1997, the Company completed the acquisition of Total
Petroleum (North America) Ltd., a Denver, Colorado based petroleum refining
and marketing company (the Acquisition). In connection with the Acquisition,
the Company issued 0.322 shares of Company Common Stock for each outstanding
share of Total common stock, or 12,672,213 shares of Company Common Stock. The
Company also assumed approximately $460.5 million of Total's debt in
connection with the Acquisition. At acquisition, Total had approximately 6,000
employees and owned and operated refineries in Ardmore, Oklahoma, Alma,
Michigan and Denver, Colorado with a combined throughput capacity of 147,000
barrels per day. In addition, Total distributed gasoline and convenience store
merchandise through 2,100 branded convenience stores located in the central
United States.
3
<PAGE>
The Company's Operations
The Company's operations are segregated into three segments:
. Refining,
. Retail, and
. Petrochemical/NGL.
The Company further segregates its operations geographically into the US
System and the Northeast System since the Northeast System is a self-contained
business unit operating out of Montreal, Canada. The US System includes the
refining, retail and petrochemical/NGL operations in the central and southwest
regions of the United States. The Northeast System includes the Quebec
Refinery and retail operations in the northeast United States and eastern
Canada.
The Refining segment is engaged in the refining of crude oil and wholesale
marketing of refined products. It includes refinery operations, wholesale
operations, product supply and distribution, and transportation operations.
The Retail segment includes operations from Company-operated convenience
stores, dealers/jobbers and truckstop facilities, cardlock and home heating
oil operations.
The Petrochemical/NGL segment includes the equity earnings from Diamond-Koch
and earnings from Nitromite fertilizer operations, NGL marketing operations
and certain NGL pipeline operations.
See note 18 to the consolidated financial statements included in "Item 8--
Financial Statements and Supplementary Data" for additional segment
information.
Refining
The Company's refining operations include seven refineries with a combined
throughput capacity of 685,000 barrels per day (bpd).
<TABLE>
<CAPTION>
Refinery Location Capacity (bpd)
-------- -------------- --------------
<S> <C> <C>
McKee.......................................... Texas 156,000
Three Rivers................................... Texas 92,000
Wilmington..................................... California 120,000
Ardmore........................................ Oklahoma 80,000
Alma........................................... Michigan 50,000
Denver......................................... Colorado 27,000
St. Romuald.................................... Quebec, Canada 160,000
-------
685,000
=======
</TABLE>
These refineries produce primarily gasoline, diesel, jet fuels and liquefied
petroleum gases. Other by-products of the refining process include petroleum
coke, asphalt, sulfur, ammonium thiosulfate and refinery-grade propylene.
The Company's network of crude oil pipelines provides the ability to acquire
crude oil from producing leases, major domestic oil trading centers and Gulf
and West Coast ports, and to transport crude oil to the Company's US System
refineries at a competitive cost. The Canadian refinery relies on foreign
crude oil which is delivered by ship to the Company's St. Lawrence River dock
facility. The Company acquires a portion of its crude oil requirements through
the purchase of futures contracts on the New York Mercantile Exchange. The
Company also uses the futures market to manage the price risk inherent in
purchasing crude oil in advance of the delivery date and in maintaining its
inventories.
4
<PAGE>
The Company does not maintain crude oil reserves; however, it has access to a
large supply of crude oil from both domestic and foreign sources, most of
which is obtained under short-term supply agreements. Although its operations
could be adversely impacted by fluctuations in availability of crude oil and
other supplies, the Company believes that it is currently advantageous to
maintain short-term supply agreements to purchase crude oil at attractive
prices. The Company believes that the current sources of crude oil and
feedstocks will be sufficient to meet the Company's requirements in the
foreseeable future.
McKee Refinery
The McKee Refinery relies primarily on a varying blend of domestically
produced crude oil for feedstock. The refinery produces conventional gasoline,
Federal specification reformulated gasoline (RFG), other oxygenated gasolines,
and low-sulfur diesel meeting governmental specifications for on-road use. A
portion of the oxygenates used in manufacturing RFG and other oxygenated
gasolines is manufactured at the McKee Refinery and the balance is obtained
from other manufacturers.
The McKee Refinery has access to crude oil from the Texas Panhandle, Oklahoma,
southwestern Kansas and eastern Colorado through approximately 1,223 miles of
crude oil pipelines owned or leased by the Company. This refinery is also
connected by common carrier pipelines to major crude oil centers in Cushing,
Oklahoma and Midland, Texas. The McKee Refinery also has access at Wichita
Falls, Texas to major pipelines which transport crude oil from the Texas Gulf
Coast and major West Texas oil fields into the mid-continent region. The crude
oil can be stored in tanks with a capacity totaling 520,000 barrels at the
McKee Refinery and an additional 928,000 barrels of storage capacity is
available throughout the supply system.
Three Rivers Refinery
The Three Rivers Refinery relies primarily on foreign crude oil for feedstock.
The refinery produces gasolines, diesel fuel, fuel oil, propane, and jet fuel.
During the three years ended December 31, 1998, the Company completed several
expansion projects at the Three Rivers Refinery, including replacement of the
fluid catalytic cracking unit's (FCCU) reactor and regenerator, a
benzene/toluene/xylene (BTX) and fractionation unit, a heavy gas oil
hydrotreater, a demetalized oil hydrotreater, a hydrogen plant and a sulfur
recovery plant to allow the refinery flexibility in selecting its crude oil
feedstock and to expand the throughput capacity. In addition, the refinery
processes NGL from local gas processing plants.
The Three Rivers Refinery has access to crude oil from foreign sources
delivered to the Texas Gulf Coast at Corpus Christi, Texas, as well as crude
oil from domestic sources. The Company's crude oil terminal in Corpus Christi
has a total storage capacity of 1.6 million barrels, and allows the Company to
accept delivery of larger crude oil cargoes at the terminal, thereby
decreasing the number of deliveries and the demurrage expense. The Corpus
Christi crude oil terminal is connected to the Three Rivers Refinery by a 92-
mile pipeline which has the capacity to deliver 120,000 bpd to the refinery.
The Three Rivers Refinery also has access to West Texas Intermediate and South
Texas crude oils through common carrier pipelines.
Refined products produced at the McKee and Three Rivers Refineries are
distributed primarily through approximately 3,357 miles of refined product
pipelines connected to 14 terminals. The Company's refined products terminal
near Dallas, Texas also receives products from the Explorer Pipeline, a major
common carrier pipeline from the Houston, Texas area.
Total storage capacity of refined products within the McKee and Three Rivers
pipeline and terminal system is approximately 1.0 million barrels.
Wilmington Refinery
The Wilmington Refinery is the newest refinery in California and one of the
most modern, technologically-advanced and energy efficient refineries in North
America. The Wilmington Refinery operates primarily on a blend of California
and imported foreign crude oils. Given its coking and desulfurizing
capabilities, it is
5
<PAGE>
particularly well suited to process heavy, high-sulfur crude oils, which
historically have cost less than other crude oils. In 1998, the main column
and gas concentration sections of the FCCU were modified to expand throughput
capacity by 5,000 bpd. In 1996, the Company completed several construction
projects which enabled the refinery to produce 100% California Air Resource
Board specification reformulated gasoline (CARB), and increased the throughput
capacity of the refinery.
The Wilmington Refinery has 2.8 million barrels of storage capacity and is
connected by pipeline to marine terminals and associated dock facilities,
which can be utilized for movement and storage of crude oil and feedstocks.
The Company operates a product marine terminal and a dock facility which are
leased from the Port of Los Angeles. The Company also owns tanks at the marine
terminal with a storage capacity of 980,000 barrels.
Refined products are distributed from the Wilmington Refinery by pipeline to a
network of product terminals owned by third parties in southern California,
Nevada and Arizona, and then on to the Company's convenience stores and
wholesale customers. Storage capacity of refined products in the Wilmington
system is 500,000 barrels.
Ardmore Refinery
The Ardmore Refinery processes sour, foreign and heavy crude oils. The
refinery produces many products including conventional gasolines, diesel fuels
and asphalt. Crude oil is delivered to the refinery through the Company's
crude oil gathering system which includes over 200 miles of pipeline. Crude
oil can also be delivered by third-party pipelines and trucking operations.
Finished products are transported via pipelines, rail cars and trucks. The
Ardmore Refinery has over 1.8 million barrels of refined product storage.
In July 1998, the refinery sustained a power failure and fire in the main
fractionation column in the plant's FCCU. Repair of the FCCU was completed in
September 1998 at which time the refinery increased production to full
capacity.
Alma Refinery
The Alma Refinery typically processes Michigan light sweet crude, Canadian
crude and condensate and North Dakota sweet crude which are easily accessed
from multiple crude oil pipeline connections including the
Lakehead/Interprovincial Pipeline, which transports both Canadian and domestic
crude oil. The refinery can be characterized as a light complex refinery
producing a wide range of specialty products such as solvents, aviation
gasoline, racing fuel and hexenes and yielding very little residual fuel.
The Alma Refinery has 13 crude oil tanks with 800,000 barrels of storage
capacity and over 250 miles of crude oil pipelines. The refinery also owns and
operates 135 miles of refined product pipelines which are used to transport
product from the refinery to four Company-owned terminals and to other
terminals operated by exchange partners. A fifth Company-owned product
terminal is supplied by truck or boat.
Denver Refinery
The Denver Refinery relies primarily on a varying blend of domestically
produced and Canadian crude oil for feedstock. The refinery produces
conventional gasoline, oxygenated gasoline, and low-sulfur diesel meeting
government specifications for on-road use. The Denver Refinery is supplied by
third-party pipelines, a 120-mile Company-owned pipeline purchased in 1996 and
by truck.
Since its acquisition in September 1997, the Denver Refinery has been
integrated with the operations of the McKee Refinery due to the McKee to
Denver pipeline that already existed prior to the Acquisition. This
integration has helped streamline operations and allowed both refineries to
optimize production runs.
6
<PAGE>
Quebec Refinery
The Quebec Refinery relies on foreign crude oil for feedstock. During the
three years ended December 31, 1998, the Company completed several capital
projects at the Quebec Refinery, including expansion of the FCCU and de-
bottlenecking and reconfiguring the crude cracking units, all of which have
resulted in expanded throughput.
The Quebec Refinery receives crude oil by ship at its deep-water dock on the
St. Lawrence River. The location of the refinery and dock allow the refinery
to receive year-round shipments of crude oil from large crude oil tankers. The
Quebec Refinery has storage capacity for more than 8.0 million barrels of
crude oil, intermediate and refined products as well as pressurized storage
for liquefied petroleum gas. The Company's ability to receive large, single
cargoes up to 1.0 million barrels offers a significant advantage over other
refineries in the region, which must rely on pipelines and smaller cargoes.
Additionally, the Company has charters on four large crude oil tankers which
are double-bottomed and double-hulled and are capable of navigating the St.
Lawrence River in the winter.
The Company has both short-term and long-term supply contracts with major
international oil companies to supply the Quebec Refinery with light, sweet
crude oils from the North Sea and north Africa, principally at spot market
prices. The Company believes that given the wide availability of North Sea and
north Africa crude oils in the international market, its operations would not
be materially adversely affected if its existing supply contracts were
canceled.
Refined products are transported from the Quebec Refinery by coastal ship,
truck and railroad tank car. The Company operates a distribution network of
approximately 71 bulk storage facilities throughout the Northeast System,
including 23 terminals.
Pipelines and Exchanges
Over the past several years, the Company has increased its distribution system
through the construction of new refined product pipelines to connect the
Company's refineries to expanding markets and by adding to or purchasing
additional capacity in existing refined product pipelines. During the past
three years, the Company constructed the McKee to El Paso, Texas pipeline and
terminal, expanded the Amarillo-Tucumcari-Albuquerque pipeline, and expanded
the Colorado pipeline to Denver.
In addition to Company pipelines and terminals, the Company enters into
product exchange and purchase agreements which enable it to minimize
transportation costs, optimize refinery utilization, balance product
availability, broaden geographic distribution and supply markets not connected
to its refined product pipeline system. Exchange agreements provide for the
delivery of refined products to unaffiliated companies at the Company's and
third party terminals in exchange for delivery of a similar amount of refined
products to the Company by such unaffiliated companies at agreed locations.
Purchase agreements involve the purchase by the Company of refined products
from unaffiliated companies with delivery occurring at agreed locations.
Products are currently received on exchange or by purchase through
approximately 85 terminals and distribution points throughout the Company's
retail areas. Most of the Company's agreements are long-standing arrangements.
However, they can be terminated with 30 to 90 days notice. The Company
believes it is unlikely that there will be an interruption in its ability to
exchange or purchase refined product in the foreseeable future.
In November 1997, the Company entered into an agreement to sell to Phillips
Petroleum Company an interest in the El Paso pipeline system, which includes
the 408-mile pipeline from McKee to El Paso and the terminal in El Paso. The
agreement provided that Phillips purchase a 25% interest in the system and,
once the planned expansion of the pipeline is completed in 1999, Phillips
would purchase an additional 8.33% interest. The Company will continue to
operate the system.
7
<PAGE>
Retail
The Company is one of the largest independent retailers of refined products in
the central and southwest United States. The Company has a strong brand
identification in its 18 state retail area, including Texas, California,
Colorado, Oklahoma and Michigan. Gasoline and diesel fuel are sold under the
Diamond Shamrock(R), Beacon(R), Ultramar(R), and Total(R) brand names through
a network of 2,000 Company-operated and 2,723 dealer-operated convenience
stores. Of the Company-operated stores, 1,074 are owned and 926 are leased. In
1998, the Company's total sales of refined products in its US system averaged
169,900 bpd.
The Company-operated convenience stores are generally modern, attractive,
high-volume gasoline outlets. In addition, these stores sell a wide variety of
products such as groceries, health and beauty aids, fast foods and beverages.
As of December 31, 1998, Company-operated convenience stores in the US System
were located primarily in Texas (1,141), Colorado (227), Michigan (179),
California (162) and Oklahoma (45). The dealer- and jobber-operated stores are
located primarily in Texas (800), Oklahoma (461), California (254), Michigan
(242), Missouri (211), and Kansas (189).
The Company has an ongoing program to modernize and upgrade the convenience
stores it operates. These efforts include the construction of new stores or
improving the uniformity and appearance of existing stores. Improvements
generally include new exterior signage, lighting and canopies, as well as the
installation of computer-controlled pumping equipment. During 1998, the
Company opened nine convenience stores; six are located in Arizona. The
Company also closed 143 stores; and in connection with the retail
restructuring plan implemented in June 1998, closed or sold an additional 65
stores.
In June 1998, the Company approved a restructuring plan designed to reduce its
cost structure to reflect current values and improve operating efficiencies in
its retail marketing, refining and pipeline operations and support services.
As a result, the Company recorded a one-time charge to earnings of $131.6
million to cover the cost of eliminating 466 positions, the closure and sale
of 316 convenience stores and the sale of certain non-strategic terminals and
pipelines.
The Company's competitive position is supported by its own proprietary credit
card program, which had approximately 1.6 million active accounts as of
December 31, 1998. The Company currently utilizes electronic point-of-sale
credit card processing (POS) at substantially all its Company and dealer-
operated stores. POS reduces transaction time at the sales counter and lowers
the Company's credit card program costs. Over the past several years, the
Company has installed dispenser-mounted credit card readers at high volume
Company-operated stores.
In eastern Canada, the Company is a major supplier of refined products serving
Quebec, Ontario and the Atlantic Provinces of Newfoundland, Nova Scotia, New
Brunswick and Prince Edward Island. In 1998, the Company's total sales of
refined products in its Northeast System averaged 64,000 bpd. The gasoline and
diesel fuel is sold under the Ultramar(R) brand through a network of
approximately 1,236 convenience stores located throughout eastern Canada. As
of December 31, 1998, the Company owned or controlled, under long-term leases,
612 convenience stores and it distributed gasoline to 624 branded dealers and
independent jobbers on an unbranded basis. In addition, the Company has 82
cardlocks, which are card or key-activated, self-service, unattended stations
that allow commercial, trucking and governmental fleets to buy gasoline and
diesel fuel 24 hours a day. Over the past several years, the Company has
converted 176 convenience stores of its retail network from lessee- and agent-
operated stores to Company-operated stores and plans to add approximately 200
convenience stores to its network over the next three years.
The Northeast System operations include one of the largest home heating oil
businesses in North America. In 1998, the Company sold, under the Ultramar(R)
brand, home heating oil to approximately 236,000 households in eastern Canada
and the northeastern United States. Under a development plan initiated in
1995, the Company has acquired nine retail home heating oil operations, adding
approximately 67,000 households.
8
<PAGE>
Petrochemical/NGL
Diamond-Koch
On September 1, 1998, the Company and Koch Hydrocarbon Company, a division of
Koch Industries, Inc. and Koch Pipeline Company, L.P., an affiliate of Koch
Industries, Inc. (Koch), finalized the formation of Diamond-Koch L.L.C. and
three related limited partnerships (collectively, Diamond-Koch), a 50-50 joint
venture primarily related to each entity's Mont Belvieu petrochemical assets.
Koch contributed its interest in its Mont Belvieu natural gas liquids
fractionator facility and certain of its pipeline and raw NGL gathering
systems. The Company contributed its interests in its propane/propylene
splitters and related distribution pipeline and terminal, and its interest in
its Mont Belvieu hydrocarbon storage facilities. Diamond-Koch is jointly
controlled, thus the Company accounts for its interest using the equity
method.
The Mont Belvieu hydrocarbon storage facilities are large underground natural
gas liquids and petrochemical storage and distribution facilities located at
the Barbers Hill Salt Dome in Chambers County near Houston, Texas. The
facilities have total permitted storage capacity of 77.0 million barrels and
consist of 30 wells. The facilities receive products from the McKee Refinery
through the Skelly-Belvieu Pipeline as well as from local fractionators and
through major pipelines coming from the mid-continent region, West Texas and
New Mexico. The Company and now Diamond-Koch earns various storage and
distribution fees when NGL and petrochemicals are moved through and stored at
the facilities and when distributed via an extensive network of pipeline
connections to various refineries and petrochemical complexes along the Texas
and Louisiana Gulf Coast.
The Mont Belvieu facility also includes three propane/propylene splitters
which are capable of producing 2.6 billion pounds of polymer-grade propylene
per year. Polymer-grade propylene is a feedstock used to manufacture plastics.
The splitters utilize refinery-grade propylene produced at the McKee and Three
Rivers Refineries and third party refineries for feedstock. The polymer-grade
propylene is distributed to purchasers in the Houston Ship Channel area via a
pipeline from Mont Belvieu to a jointly-owned export terminal in Bayport,
Texas.
The Koch assets contributed to Diamond-Koch consisted of:
. a natural gas liquids fractionator located in Mont Belvieu that is
capable of processing 210,000 bpd,
. the Chaparral Pipeline which is used to transport raw natural gas
liquids and runs approximately 700 miles from various locations in New
Mexico and West Texas to Mont Belvieu, and
. the Quanah Pipeline which runs approximately 380 miles from West Texas
to Midland, Texas where it ties into the Chaparral Pipeline.
Other
The Company's other petrochemical/NGL operations consist of an ammonia
production facility at the McKee Refinery which produces Nitromite fertilizer,
the Skelly-Belvieu Pipeline (which is owned in a 50-50 partnership) that
transports refinery-grade propylene from the McKee Refinery to Mont Belvieu
and certain NGL marketing operations which buy and sell various NGL products.
Competitive Considerations
The refining and marketing business continues to be highly competitive.
Competitors include a number of well capitalized and fully-integrated major
oil companies and other independent refining and marketing entities which
operate in all of the Company's market areas. The recent consolidation and
convergence experienced in the refining and marketing industry has reduced the
number of competitors; however, it has not reduced overall competition. The
Company itself is the result of a Merger, and in 1997, the Company acquired
Total, a mid-continent refiner and marketer.
9
<PAGE>
The Company's refineries, supply and distribution networks are strategically
located in markets it serves. The Company consistently sells more refined
product than its refineries produce, purchasing its additional requirements in
the spot market. This strategy has enabled the Company's refineries to operate
at high throughput rates, while efficiently expanding capacity as deemed
prudent and necessary. Quality products and strong brand identification have
positioned the Company as the largest retailer of motor fuels in Colorado. The
Company is the second largest retailer of motor fuels in Texas, with the
Shell-Texaco joint venture being the largest. In Quebec, Canada and in the
adjacent Canadian Atlantic provinces, the Company is the largest independent
retailer of motor fuels.
Financial returns in the refining and marketing industry depend largely on
refining margins and retail marketing margins, both of which have fluctuated
significantly in recent years. Refining margins are frequently impacted by
sharp changes in crude oil costs which are not immediately reflected in retail
product prices. Crude oil and refined products are commodities, thus their
prices depend on numerous factors beyond the Company's control, including the
supply and demand for crude oil and gasoline. A large, rapid increase in crude
oil prices would adversely affect the Company's operating margins if the
increased costs could not be passed on to customers. During 1998, crude oil
and refined product prices dropped to 20 year lows and significantly impacted
the Company's operations. Refined product selling prices declined more rapidly
than the decrease in crude oil costs which resulted in lower refinery margins
during 1998. The industry also tends to be seasonal with increased demand for
gasoline during the summer driving season and, in the northeast regions, for
home heating oil during the winter months.
Regulatory Matters--Environmental
The Company's refining and retail operations are subject to a variety of laws
and regulations in the United States and Canada governing the discharge of
contaminants into the environment. The Company believes that its operations
are in substantial compliance with all applicable environmental laws.
The principal environmental risks associated with the Company's operations are
emissions into the air and releases into soil or groundwater. The unintended
release of emissions may occur despite stringent operational controls and the
best management practices. Such releases may give rise to liability under
environmental laws and regulations in the United States and Canada relating to
contamination of air, soil, groundwater, and surface waters. The Company's
employees are specifically trained to prevent occurrences and to address and
remediate these problems in the event they arise. In addition, the Company has
adopted policies and procedures relating to:
. pollution control, product safety and occupational health;
. the production, handling, storage, use and transportation of refined
products; and
. the storage, use and disposal of hazardous materials.
These policies and procedures are designed to prevent material environmental
or other damage and limit the financial liability which could result.
The total cost for environmental assessment and remediation depends on a
variety of regulatory standards, some of which cannot be anticipated. The
Company establishes environmental accruals when site restoration and
environmental remediation and cleanup obligations are either known or
considered probable and can be reasonably estimated.
The Company believes that its environmental risks will not, individually or in
the aggregate, have a material adverse effect on its financial or competitive
position. See "Item 3--Legal Proceedings" for a discussion of legal
proceedings involving the Company relative to environmental matters.
10
<PAGE>
Employees
As of December 31, 1998, the Company and its subsidiaries had approximately
24,000 employees, including salaried and hourly employees with approximately
21,000 employed in the United States and approximately 3,000 employed in
Canada. Approximately 4% of the Company's employees were affiliated with a
union under contract or covered by collective bargaining agreements. The
Company believes that it maintains good relations with all its employees.
Executive Officers of the Registrant
The following is a list of the Company's executive officers as of February 26,
1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jean R. Gaulin.......... 56 Vice Chairman of the Board, President, Chief Executive Officer
Timothy J. Fretthold.... 49 Executive Vice President, Chief Administrative and Legal Officer
William R. Klesse....... 52 Executive Vice President, Operations
H. Pete Smith........... 57 Executive Vice President and Chief Financial Officer
Robert S. Beadle........ 49 Senior Vice President, NGL, Petrochemicals and Specialties Group
W. Paul Eisman.......... 43 Senior Vice President, Supply
Alain Ferland........... 45 Senior Vice President and President Ultramar Ltd.
Christopher Havens...... 44 Senior Vice President, Marketing
</TABLE>
Jean R. Gaulin was appointed Chief Executive Officer in January 1999. As a
result of the Merger in December 1996, he was named and continues to serve as
Vice Chairman of the Board and President of the Company. From December 1996
through December 1998, he served as Chief Operating Officer. He was appointed
Chief Executive Officer of Ultramar in April 1992 and reelected Chairman of
the Board of Ultramar in May 1993 and served in those capacities until the
Merger in December 1996.
Timothy J. Fretthold has served as Executive Vice President and Chief
Administrative Officer for the Company since the Merger in December 1996. In
August 1997, he was appointed Chief Legal Officer. From June 1989, he served
as Senior Vice President/Group Executive and General Counsel of Diamond
Shamrock.
William R. Klesse was named Executive Vice President, Operations in January
1999. From the Merger through December 1998, he served as Executive Vice
President, Refining, Product Supply and Logistics of the Company. In February
1995, he was named Executive Vice President of Diamond Shamrock. From June
1989 through January 1995, he was Senior Vice President/Group Executive for
Diamond Shamrock.
H. Pete Smith has served as Executive Vice President and Chief Financial
Officer of the Company since the Merger in December 1996. From April 1996 to
the Merger, he served as Senior Vice President and continued as Chief
Financial Officer of Ultramar. In April 1992, he was appointed Vice President
and Chief Financial Officer of Ultramar.
Robert S. Beadle was named Senior Vice President, NGL, Petrochemicals and
Specialties Group in January 1999. From January 1998 through December 1998, he
served as Senior Vice President, Corporate Development. From the Merger in
December 1996 through December 1997, he was Senior Vice President, Retail
Marketing, Southwest. From 1992 through 1995, he was Vice President, Wholesale
Marketing, and from 1995 through 1996, he was Vice President, Retail Marketing
for Diamond Shamrock.
W. Paul Eisman was named Senior Vice President, Supply in January 1999. From
the Merger in December 1996 through December 1998, he served as Senior Vice
President, Refining. During 1996, he served as Vice President, Refining, and
Group Executive of Diamond Shamrock. Prior to his promotion to Vice President
in 1995, he served in various senior positions within Diamond Shamrock
including Director, Crude Oil Supply, Assistant to the Chairman, and Plant
Manager of the McKee Refinery.
11
<PAGE>
Alain Ferland has served in various Senior Vice President capacities since the
Merger and is President of Ultramar Ltd. In January 1998, he was named Senior
Vice President, Development. From the Merger through December 1997, he served
as Senior Vice President, Refining, Product Supply and Logistics, Northeast.
From June 1996 to the Merger, he was President of Ultramar Canada Inc. In
October 1993, he was appointed Executive Vice President of Ultramar Inc.
Effective March 31, 1999, Mr. Ferland will no longer be employed with the
Company. His executive officer position will not be filled.
Christopher Havens was named Senior Vice President, Marketing in January 1999.
From January 1998 through December 1998, he served as Senior Vice President,
Retail Marketing and Operations. From December 1996 through December 1997, he
was Senior Vice President, Marketing, Northeast and Wholesale. From March 1996
through December 1996, he was President of Ultramar Energy, Inc. In October
1993, he was appointed Senior Vice President, Marketing of Ultramar Canada
Inc.
Item 2. Properties
The Company owns the McKee, Three Rivers, Quebec, Wilmington, Ardmore, Alma
and Denver Refineries and related facilities in fee. The Company also owns
approximately 2,000 miles of crude oil pipelines and over 2,000 miles of
refined product pipelines as of December 31, 1998. The Company jointly owns
with one or more other companies, 41 miles of crude oil pipelines and
approximately 1,600 miles of refined product pipelines. As of December 31,
1998, the Company owned 71 bulk storage facilities in the Northeast System and
14 product terminals in the US System (one of which is only 60% owned by the
Company). The Company leases, under a long-term operating lease, the property
on which its Corpus Christi crude oil terminal is situated.
At December 31, 1998, the Company's US System retail operations included 2,000
Company-operated convenience stores, 1,074 of which were owned in fee and 926
of which were leased under long-term operating leases. Of the leased
convenience stores, 196 were leased to the Company pursuant to a $190.0
million lease facility expiring in December 2003 (the Brazos Lease). At the
end of the lease term, the Company may purchase the properties or renew the
lease or arrange for a sale of the convenience stores. In 1996, the Company
entered into a similar $100.0 million lease facility expiring in July 2003
(the Jamestown Lease). As of December 31, 1998, 18 convenience stores and the
new corporate headquarters building were leased under this facility. As a
result of the Acquisition, the Company assumed a $65.0 million lease facility
with similar terms to the above lease facilities expiring in August 2002 (the
Total Lease). As of December 31, 1998, 44 convenience stores were leased under
this facility. For a description of the Company-operated convenience stores,
see "Retail" in "Item 1--Business" above.
The principal plants and properties used in the Petrochemical/NGL segment are
the hydrocarbon storage facility at Mont Belvieu and the propane/propylene
splitters at Mont Belvieu which are now owned by Diamond-Koch. See
"Petrochemical/NGL" in "Item 1--Business" above.
Item 3. Legal Proceedings
The Company is involved in various claims and lawsuits arising in the normal
course of business. In the opinion of the Company's management, based upon the
advice of counsel, the ultimate resolution of these matters will not have a
material adverse effect on the Company's results of operations or financial
position.
Unocal Patent Infringement Action On August 31, 1998, a California Federal
court upheld the validity of a patent granted to Unocal Corporation with
respect to certain reformulated gasoline compositions that were required by
the State of California when the Phase II regulations of the California Air
Resources Board went into effect in March 1996. The Company is not a party to
the lawsuit and is not bound by the court's decision. The defendants in the
lawsuit, Arco, Chevron, Exxon, Mobil, Shell and Texaco, have appealed the
decision. In an earlier phase of the trial, a jury assessed damages against
the six defendant companies based on infringement of the patent. The Company
is unable to predict the validity or effect of any claimed Unocal patent. The
12
<PAGE>
Company's ultimate exposure, if any, would depend on numerous factors,
including the availability of alternate gasoline formulations and the
industry's ability to recover any additional costs in the marketplace.
In addition, the Company has been notified by various Federal and State
governmental organizations of the environmental actions described below. Any
remediation projects resulting from these actions typically are conducted
under the supervision of the governmental authority requiring such
remediation. The costs of remedial actions are highly uncertain due to, among
other items, the complexity and evolving nature of governmental laws and
regulations and their interpretations as well as the varying costs and
effectiveness of alternative clean up technologies. However, the Company
presently believes that any cost in excess of the amounts already provided for
in the consolidated financial statements should not have a material adverse
effect on the results of operations or financial position. The Company further
believes that a portion of future environmental costs, as well as
environmental expenditures previously made, will be recovered from other
responsible parties under contractual agreements and existing laws and
regulations. See note 15 to the consolidated financial statements included in
"Item 8--Financial Statements and Supplementary Data."
Environmental Protection Agency (EPA) Region VIII v. Total Petroleum, Inc.
(Denver Refinery) In 1998, the Department of Justice (DOJ) and EPA Region VIII
brought an enforcement action against the Company's Denver Refinery alleging
violations of the Clean Air Act (CAA) and the Resource Conservation and
Recovery Act (RCRA). The alleged violations include reporting issues due to
unreliable data, regulation of air emissions from floating roof tanks, and
regulation of emissions from flares. The parties have a letter agreement to
settle all claims with a Consent Decree and pay a penalty of $1.1 million
which will be formalized by execution of a definitive agreement in the second
quarter of 1999. The Company has accrued for the loss exposure related to this
claim.
EPA Region V v. Total Petroleum, Inc. (Alma Refinery) This EPA Region V
enforcement action against the Company's Alma Refinery commenced in September
1997 in the form of Administrative Findings of Violations, a Notice of
Violations, and Table of Violations, all of which have been amended to include
additional items. The allegations include violations of the CAA relating to
fugitive emissions leak detection and monitoring, quantifying and reporting
emissions and improper inspection procedures on regulated tankage. Other
allegations include violations of RCRA relating to maintenance of wastewater
ponds, improper storage of hazardous waste, mischaracterization of wastes,
improper labeling of wastes and improper disposal of wastes. Through February
1999, EPA/DOJ have suggested penalties of $9.0 million for various violations.
In addition, at a January 1999 meeting with EPA/DOJ, it was suggested that a
Consent Decree might include an order requiring the Company to clean sediments
in the Pine River which allegedly have been contaminated by the refinery
through wastewater discharges. The Company is investigating these allegations,
and believes the resolution of such allegations will not have a material
adverse effect on the Company's results of operations or financial position.
EPA Region VI v. Diamond Shamrock Refining Company, L.P. (McKee Refinery and
Three Rivers Refinery) On September 15, 1998, the Company was notified by the
DOJ, on behalf of the EPA, that it was ready to bring a Federal court action
for CAA and RCRA violations allegedly committed at the McKee and the Three
Rivers Refineries and for Clean Water Act (CWA) violations allegedly committed
at the Three Rivers Refinery. These alleged violations were categorized as
failure to implement and maintain proper records and reports with respect to
the facilities' leak detection and repair programs under the CAA, failure to
operate the facilities in a manner consistent with good air pollution control
prevention for minimizing emissions, failure to comply with effluent
limitations and reporting requirements under a CWA permit as well as to
properly operate and maintain Three Rivers' wastewater system in accordance
with the CWA permit conditions, and discharging pollutants into the water of
the USA without a permit. The DOJ has proposed a penalty of $2.6 million for
such alleged violations. The Company has requested and received additional
information from the DOJ concerning such allegations. The Company is currently
researching all of the facts underlying the allegations, and believes the
resolution of such allegations will not have a material adverse effect on the
Company's results of operations or financial position.
13
<PAGE>
EPA Region VI v. Diamond Shamrock Refining and Marketing Company (Albuquerque,
New Mexico Products Terminal) On April 1, 1998, EPA Region VI inspected the
Company's Albuquerque, New Mexico products terminal for compliance with
regulations under the CAA including provisions of the City of Albuquerque
Environmental Health Department, Air Pollution Control Division, Air Quality
Permit #500. As a result of such inspection, on December 30, 1998, EPA Region
VI issued a Notice of Violation (NOV) under the CAA against the Company
alleging that the Company failed to abide by certain fuel loading procedures,
inspection and leak detection requirements, recordkeeping provisions, annual
throughput limitations on certain tanks, and an annual VOC emission
limitation. EPA Region VI has indicated it will seek penalties in excess of
$100,000 for these alleged violations. The Company is currently investigating
the allegations of the NOV, and does not believe that resolution of this claim
will be material.
Texas Natural Resources Conservation Commission (TNRCC) v. Ultramar Diamond
Shamrock Corporation (Corpus Christi Terminal) As a result of a TNRCC
industrial solid waste inspection on December 12, 1997, TNRCC issued a NOV for
the Company's failure to comply with hazardous waste notification and
recordkeeping requirements, tank system design criteria, and accumulation time
limits with respect to certain sumps and tanks at the docks used by the
Company in Corpus Christi, Texas. The initial penalty proposed by TNRCC was
$53,000. Company representatives met with the TNRCC to discuss resolution of
the NOV on November 5, 1998. The Company has since received an Enforcement
Order Pursuing Administrative Penalties seeking penalties of $115,200. The
Company is currently in discussions with TNRCC to resolve this matter and
believes that a final settlement will not exceed $100,000.
EPA Region VI v. Ultramar Diamond Shamrock Corporation (Certain Underground
Storage Tank Systems in Arkansas and Texas) On March 11, June 15 and June 16,
1998 and January 15, 1999, EPA Region VI inspected certain of the Company's
retail facilities with underground storage tank systems (USTs) for compliance
with Federal, Texas, and Arkansas rules and regulations governing the
operation, inspection, maintenance, testing and leak detection programs for
such facilities. As a result of such inspections, on January 24, 1999, EPA
Region VI filed an Administrative Complaint, Compliance Order and Notice of
Opportunity for Hearing alleging that the Company at these sites had failed to
inspect and test certain USTs, failed to ensure that leak detection results
for USTs were reported to the state agencies, and failed to conduct suspected
release verifications within time frames dictated by regulation. EPA Region VI
proposed a compliance order and penalties of $670,000. The Company is
currently reviewing the allegations, and believes the resolution of such
allegations will not have a material adverse effect on the Company's results
of operations or financial position.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
14
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The Company's Common Stock is listed on the New York and Montreal stock
exchanges under the symbols "UDS" and "ULR," respectively. The table below
shows the high and low sales prices on the New York Stock Exchange of the
Company's Common Stock and dividends per share thereon.
<TABLE>
<CAPTION>
Price Range of
Common Stock Cash
------------------ Dividends
High Low Declared
--------- -------- ---------
<S> <C> <C> <C>
Year 1998
4th Quarter................................... $29 11/16 $22 5/16 $0.275
3rd Quarter................................... 32 1/8 22 3/4 0.275
2nd Quarter................................... 35 3/4 30 3/8 0.275
1st Quarter................................... 36 1/16 31 3/8 0.275
Year 1997
4th Quarter................................... 34 3/16 27 5/8 0.275
3rd Quarter................................... 34 3/4 31 1/2 0.275
2nd Quarter................................... 33 5/8 30 1/8 0.275
1st Quarter................................... 33 1/4 28 0.275
</TABLE>
The Company expects to continue paying cash dividends. The Company's Board of
Directors determines the timing, amount and form of future dividends which
will depend upon, among other things, future earnings, capital requirements,
financial condition and the availability of dividends and other payments from
subsidiaries which are subject to the limitation described in note 9 to the
consolidated financial statements included in "Item 8--Financial Statements
and Supplementary Data" and discussed in "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations." As of December 31,
1998, under the most restrictive debt covenants, as amended, $330.6 million is
available for the payment of dividends.
As of February 26, 1999, there were 86,550,438 shares of Common Stock
outstanding which were held by 8,326 holders of record.
The Company's 5% Cumulative Convertible Preferred Stock contained a redemption
feature that allowed the Company to redeem the preferred stock for Common
Stock if the Common Stock traded above $33.77 per share for 20 of any 30
consecutive trading days. On February 27, 1998, the trading threshold was
reached. On March 18, 1998, all 1,724,400 shares outstanding of preferred
stock were redeemed for Common Stock at a conversion rate of 1.9246 shares of
Common Stock for each share of preferred stock. A total of 3,318,698 shares of
Common Stock were issued. The Company declared and paid dividends of $0.625
per share on its 5% Cumulative Convertible Preferred Stock in each quarter of
1997 and the first quarter of 1998.
During 1998, the Company also declared and paid dividends totaling $2.08 per
share on the 8.32% Company obligated preferred stock of a subsidiary.
Item 6. Selected Financial Data
The consolidated selected financial data for the five-year period ended
December 31, 1998 was derived from the audited consolidated financial
statements of the Company. The consolidated selected financial data for the
three-year period ended December 31, 1996 has been restated to include the
balances and results of Diamond Shamrock due to the Merger, which was
accounted for as a pooling of interests on December 3, 1996.
The consolidated selected financial data as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, should be
read in conjunction with "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the audited
consolidated financial statements and related notes thereto included in "Item
8--Financial Statements and Supplementary Data."
15
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997(5) 1996 1995(6) 1994
--------- --------- --------- -------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales and other revenues.. $11,134.6 $10,882.4 $10,208.4 $8,083.5 $7,418.3
Operating income.......... 62.8 384.4 69.9 226.8 299.2
Income (loss) before
extraordinary loss and
cumulative effect........ (78.1) 159.6 (35.9) 95.0 136.8
Extraordinary loss on debt
extinguishment(4)........ -- (4.8) -- -- --
Cumulative effect of
accounting change(7)..... -- -- -- 22.0 --
Net income (loss)......... (78.1) 154.8 (35.9) 117.0 136.8
Comprehensive income
(loss)(2)................ (111.9) 134.9 (38.5) 132.0 106.1
Basic income (loss) per
share:
Income (loss) before
extraordinary loss and
cumulative effect........ $ (0.89) $ 1.99 $ (0.54) $ 1.31 $ 1.95
Extraordinary loss on debt
extinguishment(4)........ -- (0.06) -- -- --
Cumulative effect of
accounting change(7)..... -- -- -- 0.31 --
--------- --------- --------- -------- --------
Net income (loss)......... $ (0.89) $ 1.93 $ (0.54) $ 1.62 $ 1.95
========= ========= ========= ======== ========
Diluted income (loss) per
share:
Income (loss) before
extraordinary loss and
cumulative effect........ $ (0.89) $ 1.94 $ (0.54) $ 1.30 $ 1.90
Extraordinary loss on debt
extinguishment(4)........ -- (0.06) -- -- --
Cumulative effect of
accounting change(7)..... -- -- -- 0.30 --
--------- --------- --------- -------- --------
Net income (loss)......... $ (0.89) $ 1.88 $ (0.54) $ 1.60 $ 1.90
========= ========= ========= ======== ========
Cash dividends per share:
Common.................... $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
Preferred(1).............. 0.62 2.50 2.50 2.50 2.50
Preferred of subsidiary... 2.08 1.07 -- -- --
Weighted average number of shares (in
thousands):
Basic(1)(3)............... 88,555 78,120 74,427 69,467 68,064
Diluted................... 88,555 82,424 74,427 73,333 71,994
<CAPTION>
December 31,
--------------------------------------------------
1998 1997(5) 1996 1995(6) 1994
--------- --------- --------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents.............. $ 176.1 $ 92.0 $ 197.9 $ 175.5 $ 82.5
Working capital........... 359.7 360.1 303.1 385.7 361.3
Total assets.............. 5,315.0 5,594.7 4,420.0 4,216.7 3,384.4
Long-term debt, less
current portion.......... 1,926.2 1,866.4 1,646.3 1,557.8 1,042.5
Preferred stock of
subsidiary............... 200.0 200.0 -- -- --
Stockholders' equity(3)... 1,384.0 1,686.6 1,240.9 1,328.0 1,122.3
</TABLE>
- --------
(1) On March 18, 1998, the Company redeemed the 1,724,400 outstanding shares
of preferred stock in exchange for 3,318,698 shares of Common Stock.
(2) Effective March 31, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." For the Company, comprehensive income (loss) includes net income
(loss) and the net change in the foreign currency translation adjustment.
16
<PAGE>
(3) On July 28, 1998, the Board of Directors approved a $100.0 million Common
Stock buyback program to fund future employee benefit obligations. In
December 1998, the buyback program was completed, resulting in the
purchase of 3,740,400 shares of Common Stock.
(4) In November 1997, the Company terminated its ESOPs in conjunction with
restructuring the employee benefit plans pursuant to the Merger, and
recognized an extraordinary loss of $4.8 million (net of income tax
benefit of $3.2 million), or $0.06 per share on a diluted basis, as a
result of prepaying the underlying 8.77% Senior Notes related thereto.
(5) On September 25, 1997, the Company acquired Total for $851.8 million,
consisting of $460.5 million of debt assumed and $391.3 million of Company
Common Stock issued for the outstanding stock of Total. The acquisition
was accounted for using the purchase method and, accordingly, the results
of operations of Total are included from the date of acquisition.
(6) On December 14, 1995, Diamond Shamrock acquired National Convenience
Stores, Inc. (NCS) for approximately $280.0 million. The acquisition was
accounted for using the purchase method and, accordingly, the results of
operations of NCS are included from the date of acquisition.
(7) During the second quarter of 1995, the Company changed its method of
accounting for refinery maintenance turnaround costs from an accrual
method to a deferral method. The change resulted in a cumulative
adjustment through December 31, 1994 of $22.0 million (net of income taxes
of $13.4 million), or $0.30 per share on a diluted basis, which is
included in net income for the year ended December 31, 1995. The effect of
the change on the year ended December 31, 1995 was to increase income
before cumulative effect of accounting change by approximately $3.5
million ($0.05 per share on a diluted basis) and net income by $25.5
million ($0.35 per share on a diluted basis). Had the change in accounting
policy been in effect since the beginning of 1994, net income for the year
ended December 31, 1994 would have been $143.4 million ($1.99 per share on
a diluted basis).
Item 7. Management's Discussion and Analysis of Financial Condition and
Results Of Operations
The Company
The Company's operating results are affected by Company-specific factors,
primarily its refinery utilization rates and refinery maintenance turnarounds;
seasonal factors, such as the demand for refined products and working capital
requirements; and industry factors, such as movements in and the level of
crude oil prices, the demand for and prices of refined products and industry
supply capacity. The effect of crude oil price changes on the Company's
operating results is determined, in part, by the rate at which refined product
prices adjust to reflect such changes. As a result, the Company's earnings
have been volatile in the past and may be volatile in the future.
During 1998, the Company reduced the carrying value of crude oil and refined
product inventories by $133.4 million to reduce such inventories to market
value which was lower than the LIFO carrying value. During 1997, the Company
reduced the carrying value of crude oil inventories by $11.1 million due to
the decline in crude oil prices in late 1997. These reductions in inventories
are included in the cost of products sold.
In January 1998, the Company signed a memorandum of understanding with Petro-
Canada to form a joint venture related to each entity's refining and retail
marketing assets located in Canada and the northern United States.
Subsequently, the Competition Bureau of Canada advised management of both
companies that the joint venture raised serious concerns under the competition
laws of Canada. In light of these concerns and the potentially lengthy review
process, the project was terminated in June 1998. Included in restructuring
and other charges for the year ended December 31, 1998 is $11.2 million of
costs associated with the joint venture project including $2.5 million to
writeoff costs for a coker development project that will not be pursued at the
present time.
In June 1998, the Company approved a restructuring plan designed to reduce its
cost structure to reflect current values and improve operating efficiencies in
its retail marketing, refining and pipeline operations and support services.
As a result, the Company recorded a one-time charge to earnings of $131.6
million to cover the cost of eliminating 466 positions, the sale or closure of
316 convenience stores and the sale of certain non-strategic terminals and
pipelines.
17
<PAGE>
In December 1998, the Company finalized plans to eliminate approximately 300
non-essential jobs, programs and expenses and to implement new initiatives
designed to further reduce capital employed and improve earnings. As a result
of these changes, the Company recorded a $12.0 million charge for severance
costs associated with terminated employees which is included in restructuring
and other charges for the year ended December 31, 1998.
Seasonality
In the Northeast System, demand for refined products varies significantly
during the year. Distillate demand during the first and fourth quarters can
range from 30% to 40% above the average demand during the second and third
quarters. The substantial increase in demand for home heating oil during the
winter months results in the Company's Northeast System having significantly
higher accounts receivable and inventory levels during the first and fourth
quarters of each year. Additionally, the Company is impacted by the increased
demand for gasoline during the summer driving season. The Company's US System
is less affected by seasonal fluctuations in demand than its operations in the
Northeast System.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Financial and operating data by geographic area for the years ended December
31, 1998 and 1997 are as follows:
Financial Data:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1998 1997
----------------------------- ----------------------------
US Northeast Total US(1) Northeast Total
-------- --------- --------- -------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and other
revenues............... $8,663.2 $2,471.4 $11,134.6 $7,866.8 $3,015.6 $10,882.4
Cost of products
sold(2)................ 4,972.1 1,330.8 6,302.9 5,031.8 1,785.7 6,817.5
Operating expenses...... 1,025.7 119.8 1,145.5 762.8 124.4 887.2
Selling, general and
administrative
expenses............... 173.0 159.6 332.6 149.9 167.4 317.3
Taxes other than income
taxes.................. 2,175.2 723.4 2,898.6 1,489.7 786.2 2,275.9
Depreciation and amorti-
zation................. 201.5 35.9 237.4 167.7 32.4 200.1
Restructuring and other
charges(3)............. 144.1 10.7 154.8 -- -- --
-------- -------- --------- -------- -------- ---------
Operating income
(loss)................. $ (28.4) $ 91.2 62.8 $ 264.9 $ 119.5 384.4
======== ======== ======== ========
Gain on sale of
property, plant and
equipment(4)........... 7.0 11.0
Interest income......... 9.7 11.5
Interest expense........ (143.5) (131.7)
--------- ---------
Income (loss) before
income taxes,
extraordinary loss and
dividends of
subsidiary............. (64.0) 275.2
Provision for income
taxes.................. 3.8 110.2
Extraordinary loss(5)... -- 4.8
Dividends on subsidiary
stock.................. 10.3 5.4
--------- ---------
Net income (loss)....... $ (78.1) $ 154.8
========= =========
</TABLE>
- --------
(1) On September 25, 1997, the Company acquired Total. The acquisition was
accounted for using the purchase method and, accordingly, the results of
operations of Total are included from the date of acquisition.
(2) During the year ended December 31, 1998, the Company recorded a $133.4
million non-cash reduction to the carrying value of crude oil and refined
product inventories due to the significant drop in crude oil and refined
product prices in 1998. In December 1997, the Company recorded an $11.1
million non-cash reduction in the carrying value of crude oil inventories
due to the significant drop in crude oil prices in late 1997.
18
<PAGE>
(3) On June 9, 1998, the Company recorded a $131.6 million restructuring
charge related to the retail marketing, refining and pipeline operations
and support services. The restructuring charge included a property, plant
and equipment and goodwill write-down of $82.1 million, severance and
relocation costs of $15.5 million, and lease buyout, fuel system removal
and other costs of $34.0 million. Also, during the second quarter of 1998,
the Company incurred $11.2 million of costs associated with the aborted
Petro-Canada joint venture, including $2.5 million to writeoff costs for a
coker development project that will not be pursued at the present time. In
December 1998, the Company recorded a $12.0 million charge for severance
costs associated with the corporate restructuring and profit improvement
program.
(4) In March 1998, the Company recognized a $7.0 million gain on the sale of a
25% interest in its McKee to El Paso pipeline and El Paso terminal to
Phillips Petroleum Company. In March 1997, the Company recognized an $11.0
million gain on the sale of an office building in San Antonio, Texas.
(5) In November 1997, the Company terminated its ESOPs in conjunction with
restructuring the employee benefit plans pursuant to the Merger, and
recognized an extraordinary loss of $4.8 million (net of income tax
benefit of $3.2 million), as a result of prepaying the underlying 8.77%
Senior Notes related thereto.
Operating Data:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
US System
Mid-Continent Refineries(1):
Throughput (bpd).................................. 395,000 272,300
Margin (dollars per barrel)(2)(3)................. $ 3.94 $ 4.60
Wilmington Refinery:
Throughput (bpd).................................. 114,700 120,300
Margin (dollars per barrel)(3).................... $ 4.45 $ 4.61
Retail Marketing:
Fuel volume (bpd)................................. 169,900 127,200
Fuel margin (cents per gallon)(2)................. 14.3 13.4
Merchandise sales ($1,000/day).................... $ 3,128 $ 2,551
Merchandise margin (%)............................ 30.4% 30.2%
Northeast System
Quebec Refinery:
Throughput (bpd).................................. 153,300 139,800
Margin (dollars per barrel)(3).................... $ 2.88 $ 2.35
Retail Marketing:
Fuel volume (bpd)................................. 64,000 64,000
Overall margin (cents per gallon)(4).............. 25.3 26.8
</TABLE>
- --------
(1) The Mid-Continent Refineries include the McKee and Three Rivers Refineries
and, since their acquisition on September 25, 1997, the Alma, Ardmore and
Denver Refineries.
(2) Effective January 1, 1998, the Company modified its policy for pricing
refined products transferred from its McKee and Three Rivers Refineries to
its Mid-Continent retail operations to more closely reflect spot market
prices for such refined products. Accordingly, the 1997 amounts have been
restated to reflect the pricing policy change as if it had occurred on
January 1, 1997. The refining margin and retail marketing fuel margin
originally reported for the year ended December 31, 1997 were $4.89 per
barrel and 11.9c per gallon, respectively.
(3) Refinery margins for 1998 exclude the impact of the non-cash charge for
the reduction in the carrying value of crude oil and refined product
inventories due to the drop in crude oil and refined product prices. Had
the non-cash charge for the reduction of inventories been included in the
refinery margin computation, the 1998 refinery margins would have been
$3.48 per barrel for the Mid-Continent Refineries, $3.83 per barrel for
the Wilmington Refinery, and $2.15 per barrel for the Quebec Refinery.
19
<PAGE>
(4) Retail marketing overall margin reported for the Northeast System
represents a blend of gross margin for Company and dealer-operated retail
outlets and convenience stores, home heating oil sales and cardlock
operations.
General
Net loss for the year ended December 31, 1998 was $78.1 million compared to
net income in 1997 of $154.8 million. During 1998, the Company recognized the
following unusual items:
. $131.6 million charge related to the restructuring of the retail
marketing, refining and pipeline operations and support services;
. $133.4 million non-cash charge to reduce inventories due to the
continuing drop in crude oil and refined product prices;
. $12.0 million charge for severance benefits payable to terminated
employees under the Company's corporate restructuring and profit
improvement program implemented in December 1998;
. $11.2 million of costs associated with the aborted joint venture with
Petro-Canada; and,
. $7.0 million gain on the sale of a 25% interest in the McKee to El Paso
pipeline and El Paso terminal.
During 1997, the Company recognized an $11.1 million non-cash reduction to
inventories due to the decrease in crude oil and refined product prices in
late 1997 and an $11.0 million gain on the sale of an office building.
As a result of these unusual items, the Company recognized a net loss of $0.89
per basic share for the year ended December 31, 1998 as compared to net income
of $1.93 per basic share for the year ended December 31, 1997. The net loss
per diluted share in 1998 was $0.89 as compared to net income per diluted
share in 1997 of $1.88.
US System
The US System had an operating loss of $28.4 million for the year ended
December 31, 1998 as compared to operating income of $264.9 million for the
year ended December 31, 1997. The decrease in the operating income from 1997
to 1998 is due primarily to the unusual items discussed above.
Sales and other revenues increased 10.1% from 1997 to 1998 primarily due to
$2.3 billion of sales from the Total operations in 1998. However, sales and
other revenues were adversely impacted by lower sales prices of refined
products in 1998 as compared to 1997 due to the overall market decline in
crude oil prices and the downward pressure on prices resulting from the high
level of inventories maintained by the refining and marketing industry.
Throughput at the Mid-Continent Refineries increased from 272,300 barrels per
day to 395,000 barrels per day, a 45.1% increase from 1997 to 1998, as a
result of the three refineries acquired from Total. The Denver, Ardmore and
Alma Refineries contributed approximately 146,000 barrels per day during 1998.
Throughput for the Ardmore Refinery decreased from approximately 80,000
barrels per day during the first six months of 1998 to approximately 67,000
barrels per day during the last half of the year as a result of a power
failure and fire in the main fractionation column in the plant's FCCU which
occurred in mid-July 1998. The repair to the Ardmore Refinery FCCU was
completed in mid-September 1998.
The refining margin for the Mid-Continent Refineries of $3.94 for the year
ended December 31, 1998 decreased 14.3% from $4.60 in 1997. The decrease in
the refining margin was caused by a scheduled 21-day maintenance turnaround at
the Three Rivers Refinery, lower throughput from the Ardmore Refinery due to
the fire in mid-July 1998 and an unplanned repair of the FCCU at the McKee
Refinery. More significantly, product
20
<PAGE>
selling prices were negatively impacted by high industry inventories and
decreased by more than the decrease in crude oil costs.
Throughput at the Wilmington Refinery decreased to 114,700 barrels per day in
1998 from 120,300 barrels per day in 1997. In December 1998, the refinery had
significant downtime for scheduled maintenance turnarounds on the No. 1 coker
and crude unit, the gas oil hydrotreater, and the FCCU's alkylation unit.
These turnarounds caused approximately 25 days of downtime during December
1998 and thus affected negatively per day throughput volumes.
The addition of 36 new stores over the past two years and the acquisition of
the high volume Total stores in the third quarter of 1997 are major factors in
1998 for the 33.6% increase in retail marketing fuel volumes to 169,900
barrels per day and the 22.6% increase in the daily merchandise sales to $3.1
million per day. The increase in retail fuel margins to 14.3 cents per gallon
in 1998 from 13.4 cents per gallon in 1997 was due primarily to the
termination of the frequent fueler stamp programs in the third quarter of
1998.
The retail merchandise margins remained stable from 1997 to 1998. The adverse
impact on retail merchandise sales from the heavy rains in California caused
by El Nino in early 1998 was offset by the increased rebate activity from soft
drink and tobacco vendors in the third and fourth quarters of 1998.
During 1998, the petrochemical/NGL businesses contributed to operating income
at lower levels than in 1997 due to the declining prices of propylene and
other petrochemicals which continue to be impacted by very weak economic
conditions in Asia and the Far East.
Selling, general and administrative expenses of $173.0 million for 1998 were
$23.1 million higher than 1997 primarily due to the additional selling costs
incurred to support the increased sales resulting from the Total operations
and $3.5 million of non-recurring costs associated with the closing of Total's
Denver office.
Restructuring and other charges include the $131.6 million restructuring
charge related to the retail marketing, refining and pipeline operations and
supports services; $1.6 million of costs incurred related to the aborted
Petro-Canada joint venture, and $10.9 million related to the severance
benefits charged in December 1998 for the terminated employees associated with
the Company's corporate restructuring and profit improvement program.
Northeast System
The Northeast System had operating income of $91.2 million for the year ended
December 31, 1998 as compared to $119.5 million for the year ended December
31, 1997. The decrease in the operating income is due primarily to the unusual
items discussed in the "General" section above.
Sales and other revenues in the Northeast System totaled $2.5 billion for 1998
as compared to $3.0 billion in 1997. This 18.0% decrease was caused by lower
sales in the retail and wholesale segments following the mild winters in the
first and fourth quarters of 1998 in the northeastern United States and
eastern Canada. The lower sales were also directly affected by the reduced
1998 selling prices of refined products as a result of high industry
inventories and low crude oil prices.
Throughput at the Quebec Refinery increased to 153,300 barrels per day in 1998
from 139,800 barrels per day in 1997. The low throughput in 1997 was caused by
a significant planned maintenance turnaround on the FCCU in May and June 1997.
The refinery margin increased 22.6% to $2.88 per barrel in 1998 compared to
$2.35 per barrel in 1997. The scheduled maintenance turnaround in mid-1997
combined with lower crude oil costs achieved from favorable long-term supply
contracts contributed to the improved refinery margins.
Retail marketing fuel volumes remained level in 1998 as compared to 1997 at
64,000 barrels per day. However, retail margins decreased to 25.3 cents per
gallon in 1998 from 26.8 cents per gallon in 1997. The drop
21
<PAGE>
in retail margins was caused mainly from a 10.5% decrease in demand for high-
margin home heating oil due to the mild winters of 1998 which was partially
offset by a 2.5% increase in demand for lower-margin motorist and cardlock
products.
Selling, general and administrative expenses of $159.6 million decreased $7.8
million from 1997 to 1998 principally due to continuing efforts to control
administrative costs.
Restructuring and other charges include $9.6 million of costs incurred related
to the aborted Petro-Canada joint venture and $1.1 million related to the
severance benefits charged in December 1998 for the terminated employees
associated with the Company's corporate restructuring and profit improvement
program.
Corporate Expenses
Interest expense of $143.5 million for 1998 was $11.8 million higher than in
1997 due to higher average borrowings in 1998 as compared to 1997 resulting
from the debt incurred to finance the acquisition of Total in September 1997.
The consolidated income tax provision, exclusive of the restructuring charges,
for the year ended December 31, 1998 was based upon the Company's effective
income tax rate for the year of 40.0%. The income tax benefit of the second
quarter restructuring charge was computed separately at 20.6% and is below the
U.S. Federal statutory income tax rate due to the non-deductible writedown of
goodwill. As a result of the unusual items and the profitable Canadian
operations, the Company recognized tax expense of $3.8 million even though it
incurred a consolidated net loss.
The consolidated income tax provision for the year ended December 31, 1997 was
based upon the Company's effective income tax rate for the year of 40.0%. The
consolidated effective income tax rate exceeds the U.S. Federal statutory
income tax rate primarily due to State income taxes and the effects of foreign
operations.
22
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Financial and operating data by geographic area for the years ended December
31, 1997 and 1996 are as follows:
Financial Data:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
US(1) Northeast Total US Northeast Total
-------- --------- --------- -------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and other reve-
nues................... $7,866.8 $3,015.6 $10,882.4 $7,161.6 $3,046.8 $10,208.4
Cost of products
sold(2)................ 5,031.8 1,785.7 6,817.5 4,728.9 1,821.1 6,550.0
Operating expenses...... 762.8 124.4 887.2 802.4 125.7 928.1
Selling, general and
administrative
expenses............... 149.9 167.4 317.3 128.8 173.2 302.0
Taxes other than income
taxes.................. 1,489.7 786.2 2,275.9 1,278.4 822.7 2,101.1
Depreciation and amorti-
zation................. 167.7 32.4 200.1 153.5 26.4 179.9
Merger and integration
costs(3)............... -- -- -- -- -- 77.4
-------- -------- --------- -------- -------- ---------
Operating income........ $ 264.9 $ 119.5 384.4 $ 69.6 $ 77.7 69.9
======== ======== ======== ========
Gain on sale of
property, plant and
equipment(4)........... 11.0 --
Interest income......... 11.5 18.4
Interest expense........ (131.7) (128.5)
--------- ---------
Income (loss) before
income taxes,
extraordinary loss and
dividends of
subsidiary............. 275.2 (40.2)
Provision (benefit) for
income taxes........... 110.2 (4.3)
Extraordinary loss(5)... 4.8 --
Dividends on subsidiary
stock(6)............... 5.4 --
--------- ---------
Net income (loss)....... $ 154.8 $ (35.9)
========= =========
</TABLE>
- --------
(1) On September 25, 1997, the Company acquired Total. The acquisition was
accounted for using the purchase method and, accordingly, the results of
operations of Total are included from the date of acquisition.
(2) In December 1997, the Company recorded an $11.1 million non-cash reduction
in the carrying value of crude oil inventories due to the significant drop
in crude oil prices in late 1997.
(3) In connection with the Merger, the Company recorded merger and integration
costs of $77.4 million during the fourth quarter of 1996. Such costs
consisted of $13.1 million of financial, legal and registration fees and
$64.3 million related to workforce reductions, writedowns of facilities
and equipment, and other costs.
(4) In March 1997, the Company recognized an $11.0 million gain on the sale of
an office building in San Antonio, Texas which was originally purchased to
serve as the Company's corporate headquarters.
(5) In November 1997, the Company terminated its ESOPs in conjunction with
restructuring the employee benefit plans pursuant to the Merger, and
recognized an extraordinary loss of $4.8 million (net of income tax
benefit of $3.2 million), as a result of prepaying the underlying 8.77%
Senior Notes related thereto.
(6) In June 1997, a wholly-owned subsidiary of the Company issued $200.0
million of 8.32% Trust Originated Preferred Securities in an underwritten
public offering. Distributions are cumulative and payable quarterly in
arrears, at an annual rate of 8.32%.
23
<PAGE>
Operating Data:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
US System
Mid-Continent Refineries(1):
Throughput (bpd).................................. 272,300 235,500
Margin (dollars per barrel)(2).................... $ 4.60 $ 3.30
Wilmington Refinery:
Throughput (bpd).................................. 120,300 102,700
Margin (dollars per barrel)....................... $ 4.61 $ 4.66
Retail Marketing:
Fuel volume (bpd)................................. 127,200 107,400
Fuel margin (cents per gallon)(2)................. 13.4 13.6
Merchandise sales ($1,000/day).................... $ 2,551 $ 2,416
Merchandise margin (%)............................ 30.2% 30.6%
Northeast System
Quebec Refinery:
Throughput (bpd).................................. 139,800 143,900
Margin (dollars per barrel)....................... $ 2.35 $ 3.15
Retail Marketing:
Fuel volume (bpd)................................. 64,000 60,900
Overall margin (cents per gallon)(3).............. 26.8 22.2
</TABLE>
- --------
(1) The Mid-Continent refineries include the McKee and Three Rivers Refineries
and, since their acquisition on September 25, 1997, the Alma, Ardmore and
Denver Refineries. Excluding the operations of the Total Refineries for
the fourth quarter of 1997, the 1997 throughput would have been 231,000
bpd and the margin would have been $5.39 per barrel.
(2) Effective January 1, 1998, the Company modified its policy for pricing
refined products transferred from its McKee and Three Rivers Refineries to
its Mid-Continent retail operations to more closely reflect spot market
prices for such refined products. Accordingly, the 1997 and 1996 amounts
have been restated to reflect the pricing policy change as if it had
occurred on January 1, 1996. The refining margin and retail marketing fuel
margin originally reported for the year ended December 31, 1997 were $4.89
per barrel and 11.9c per gallon, respectively. The refining margin and
retail marketing fuel margin originally reported for the year ended
December 31, 1996 were $3.61 per barrel and 12.7c per gallon,
respectively.
(3) Retail marketing overall margin reported for the Northeast System
represents a blend of gross margin for Company and dealer-operated retail
outlets and convenience stores, home heating oil sales and cardlock
operations.
General
Net income for the year ended December 31, 1997 totaled $154.8 million as
compared to a net loss in 1996 of $35.9 million. In the US System, the Company
had operating income of $264.9 million in 1997, as compared to $69.6 million
for 1996. The increase in operating profit was primarily due to increased
refining margins at the Mid-Continent Refineries, increased throughput at the
Wilmington Refinery, increased retail fuel volumes, and decreased operating
expenses due primarily to efficiencies gained from the Merger. These increases
were somewhat offset by a decrease in the average retail marketing fuel margin
and a decrease in the retail marketing merchandise margin. In the Northeast
System, operating income was $119.5 million for 1997 as compared to $77.7
million for 1996, as a result of improved retail marketing fuel volumes and a
20.7% increase in the retail marketing margin. These increases were partially
offset by a decline in the Quebec Refinery throughput and a 25.4% decline in
the Quebec refining margin.
24
<PAGE>
US System
Sales and other revenues in the US System for the year ended December 31, 1997
totaled $7.9 billion and were 9.8% higher than 1996 primarily due to an 18.4%
increase in retail marketing fuel volumes and the additional sales of $755.6
million from Total, acquired in September 1997.
The refining margin for the Mid-Continent Refineries of $4.60 per barrel for
1997 increased by 39.4% as compared to $3.30 per barrel for 1996, reflecting
declining crude oil costs and increased demand during 1997. As a result of a
partial shutdown of the McKee Refinery in the fourth quarter of 1997,
throughput, excluding the Total Refineries, declined by 1.9% from 1996 to
1997; however, this shutdown of McKee allowed the Total Refineries to operate
at much higher levels to supply the needed demand. During the shutdown at the
McKee Refinery, the Company performed additional maintenance in order to defer
a scheduled 1998 turnaround until 1999. The refining margin for the Wilmington
Refinery remained steady at $4.61 per barrel in 1997 as compared to $4.66 in
1996. Throughput at the Wilmington Refinery during 1997 increased by 17.1%
over the same period in 1996 to 120,300 barrels per day, principally due to
the processing of additional feedstocks through the refinery's gas oil
hydrotreater which came on stream in the second quarter of 1996.
Retail marketing fuel volume increased by 18.4% to 127,200 barrels per day,
principally as a result of the addition of 27 new convenience stores during
1997 and increased volumes sold through Total branded convenience stores
acquired in September 1997. The 1997 retail fuel margins remained steady as
compared to 1996 despite the very competitive pricing environment at the
station level in the Texas market.
Merchandise sales at the Company's convenience stores increased 5.6% to $2.6
million per day during 1997 from $2.4 million per day in 1996. This increase
is a direct result of the Company's plan to expand and upgrade its retail
operations, which included the construction of 27 new stores and the
acquisition of 560 Total convenience stores. On a per store basis, merchandise
sales increased 4.3% due to the Company closing or selling approximately 84
underperforming convenience stores. The retail marketing merchandise margin
remained steady at 30.2% in 1997 as compared to 30.6% in 1996, as competitive
pressures on the pricing of beer, soda and tobacco products continued.
The petrochemical/NGL businesses contributed $39.2 million to 1997 operating
income versus $9.5 million in 1996 as a result of increased sales of polymer-
grade propylene from the second splitter completed in 1996, and continued
strong demand for Nitromite fertilizer.
Operating expenses declined $39.6 million or 4.9%, to $762.8 million as a
result of merger synergies experienced in both refining and retail. Excluding
the operating expenses related to Total of $66.5 million, the decline in
operating expenses would have been $106.1 million or 13.2%.
Selling, general and administrative expenses for 1997 of $149.9 million were
$21.1 million higher than in 1996, and included $19.0 million of selling,
general and administrative expenses incurred by Total for the three months
ended December 31, 1997. Overall, selling, general and administrative expenses
remained level with 1996 reflecting higher selling costs incurred to support
the increased sales which were offset by lower general and administrative
expenses associated with synergies resulting from the Merger.
Northeast System
Sales and other revenues in the Northeast System in 1997 totaled $3.0 billion
and were $31.2 million, or 1.0%, lower than 1996, as a result of lower
throughput and lower product prices during the year.
Refining margins decreased by 25.4% to $2.35 per barrel in 1997 as compared to
$3.15 per barrel in 1996, due to lower average Atlantic Basin crack spreads.
Throughput at the Quebec Refinery averaged 139,800 barrels per day or 2.8%
lower than in 1996 as throughput was adversely affected by a scheduled major
turnaround in the second quarter of 1997. During the ice storms in the
Northeast in late 1997 and early 1998, the Quebec Refinery, which is located
north of the affected area, continued to operate, while competitors'
refineries were shut down due to power failures.
25
<PAGE>
Overall retail margins increased 4.6 cents per gallon to 26.8 cents per gallon
in 1997 as compared to 1996, reflecting more stable market conditions as a
result of the Company's "Value Plus" pricing program initiated in the second
half of 1996, and the home heating oil and cardlock segments' ability to
maintain prices as crude oil prices declined. Retail marketing volumes
increased 5.1% in 1997 as compared to 1996, to 64,000 barrels per day, as a
result of acquiring three home heating oil businesses in 1997, and converting
55 agent-operated stores to Company-owned convenience stores.
Selling, general and administrative expenses for 1997 of $167.4 million were
$5.8 million lower than in 1996, principally due to the previously mentioned
cost reductions and synergies from the Merger.
Corporate Expenses
Despite significantly lower average working capital borrowings, net interest
expense of $120.2 million in 1997 was $10.1 million higher than in 1996 due
primarily to the assumption of approximately $400.0 million of debt at the
time of the Total Acquisition and a reduction in the amount of interest
capitalized on property, plant and equipment additions.
The consolidated income tax provisions for 1997 totaled $110.2 million,
representing an effective tax rate of 40.0% as compared to the 1996 effective
income tax benefit of $4.3 million or 10.7%. The 1996 effective tax rate was
low due to non-deductible Merger and other costs recorded in 1996. The
consolidated effective income tax rates exceed the U.S. Federal statutory
income tax rate primarily due to State income taxes and the effects of foreign
operations.
Outlook
The Company's earnings depend largely on refining and retail marketing
margins. The petroleum refining and marketing industry has been and continues
to be volatile and highly competitive. The cost of crude oil purchased by the
Company as well as the price of refined products sold by the Company have
fluctuated significantly in the past. As a result of the historic volatility
of refining and retail marketing margins and the numerous factors which affect
them, it is impossible to predict future margin levels.
Crude oil prices began falling in late 1997 and fell sharply throughout 1998,
ending the year on average approximately $7.00 per barrel lower than their
starting point. Economic weakness in Asia and South America, weather-related
demand disruptions in North America and virtually no tightening of crude oil
supplies by OPEC and key non-OPEC countries led to the decline in crude oil
prices. Adjusted for inflation, crude oil prices are near historic lows and
gasoline prices have never been lower. During 1998, the low crude oil prices
were discounted for the near month, motivating refiners to run at full
capacity. With weather-related demand disruptions, including the warm winters
in the first and fourth quarters and the heavy rains in California in the
first quarter, the excess production created an oversupply of finished product
inventories. As a result, inventory levels throughout the year pushed the
limits of storage capacity leading to lower pump prices and severe pressure on
refining margins. The Company's composite crack spread for 1998 fell by more
than a $1.00 per barrel. Should crude oil prices continue to fall in 1999 from
the December 31, 1998 levels, the Company will be required to further reduce
the carrying value of its crude oil inventories in 1999.
As 1999 begins, these same factors continue and crack spreads are at record
lows. An unusually warm winter in the Northeast for the second year in a row
has caused growing distillate inventories which threaten to drive margins even
lower. In January 1999, several independent refiners and fully-integrated
major oil companies announced plans to reduce production while other companies
and refineries announced plans to bring forward refinery maintenance
turnarounds in an effort to reduce inventories and the oversupply situation.
In February 1999, the Company announced production cuts of nearly 10%, or
40,000 barrels per day, spread throughout its Mid-Continent Refineries. With
announced production cuts totaling nearly 250,000 barrels per day throughout
the United States, the decline in finished product values may slow and begin
to improve. However, crude oil prices, which remain discounted to the near
month, will continue to motivate refiners to utilize incremental capacity so
long as storage capacity is available.
26
<PAGE>
Margin recovery depends primarily on a tightening of crude oil supplies and a
return to more normal pricing conditions. The elimination of the near month
discount in crude oil would significantly reduce utilization rates and would
give the oversupplied finished products market a chance to stabilize.
Beginning in 1999, domestic crude oil producers have already begun shutting-in
marginal wells and have reduced drilling activities. The key to tightening
crude oil supplies still rests with OPEC, Mexico, Venezuela and Norway, which
together supply the vast majority of worldwide crude oil. Once supplies are
tightened, refining and retail margins may begin to recover.
See "Certain Forward-Looking Statements."
Environmental Matters
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities in the jurisdictions in which the
Company operates. The Company has accrued liabilities for estimated site
restoration costs to be incurred in the future at certain facilities and
properties. In addition, the Company has accrued liabilities for environmental
remediation obligations at various sites, including the multiparty sites in
the US System where the Company has been identified as a potentially
responsible party. Under the Company's accounting policy, liabilities are
recorded when site restoration and environmental remediation and cleanup
obligations are either known or considered probable and can be reasonably
estimated. As of December 31, 1998 and 1997, accruals for environmental
matters amounted to $219.4 million and $213.9 million, respectively. Additions
to accrual for environmental matters during the years ended December 31, 1998,
1997 and 1996 totaled zero, $1.3 million, and $41.7 million, respectively. The
1996 additions to accrual includes $37.0 million to conform the accounting
policies of Diamond Shamrock and Ultramar due to the Merger.
Capital Expenditures
The refining and retail marketing of refined products is a capital intensive
business. Significant capital requirements include expenditures to upgrade or
enhance refinery operations to meet environmental regulations and maintain the
Company's competitive position, as well as to acquire, build and maintain
broad-based retail networks. The capital requirements of the Company's
operations consist primarily of:
. maintenance expenditures, such as those required to maintain equipment
reliability and safety and to address environmental regulations; and
. growth opportunity expenditures, such as those planned to expand and
upgrade its retail marketing business, to increase the capacity of
certain refinery processing units and pipelines and to construct
additional petrochemical processing units.
During the year ended December 31, 1998, capital expenditures totaled $171.1
million, of which $92.7 million related to maintenance expenditures and $78.4
million related to growth opportunity expenditures. Approximately $44.7
million and $35.9 million have been incurred at the refineries and at the
retail level, respectively, for various maintenance expenditures. During the
year ended December 31, 1998, the Company also incurred $37.8 million in
refinery maintenance turnaround costs primarily at the Ardmore, Three Rivers
and McKee Refineries.
Growth opportunity expenditures during the year ended December 31, 1998
included:
. $12.7 million for the construction of a third propane/propylene splitter
at the Company's Mont Belvieu facility which was completed in August
1998 and transferred to Diamond-Koch in September 1998;
. $6.6 million for the McKee to El Paso pipeline expansion to increase
capacity to 60,000 barrels per day with the cost being shared with
Phillips Petroleum Company, a partner in the project;
. $2.5 million to replace the Three Rivers Refinery FCCU's reactor and
regenerator with new state-of-the-art designs and to install new
exchangers, pumps and towers in the gas concentration and merox treating
units which have increased throughput capacity by approximately 2,000
barrels per day; and,
27
<PAGE>
. $14.3 million to modify the main column and gas concentration sections
of the Wilmington Refinery FCCU to expand throughput capacity by 5,000
barrels per day.
During the year ended December 31, 1997, capital expenditures and acquisitions
of retail operations totaled $267.9 million, of which $166.9 million related
to growth opportunity expenditures which included:
. $26.7 million for the BTX extraction unit at the Three Rivers Refinery;
. $13.9 million to upgrade the FCCU to increase production yields at the
Quebec Refinery;
. $15.7 million for expansion and construction of the third
propane/propylene splitter at Mont Belvieu, and
. $4.7 million to increase pipeline and terminal capacity in Denver, El
Paso and Albuquerque.
In 1997, in conjunction with plans to expand and upgrade the retail marketing
operations, the Company also spent $75.1 million related to retail marketing
growth projects ($2.4 million of which was lease financed), including the
acquisition of three retail home heating oil operations in the northeast
United States and the completion of 27 new convenience stores in Arizona,
California and Colorado. During the year ended December 31, 1997, the Company
also incurred $25.6 million in deferred refinery maintenance turnaround costs
primarily at the Wilmington and McKee Refineries.
The Company is continually investigating strategic acquisitions and other
business opportunities, some of which may be material, that will complement
its current business activities. For 1999, the Company has established a
capital expenditures budget of approximately $290.6 million, which includes
$152.2 million of growth projects and $138.4 million for maintenance,
reliability and regulatory projects. These budgeted amounts are reviewed
throughout the year by management and are subject to change based on economic
conditions or other opportunities that arise.
The Company expects to fund its capital expenditures over the next several
years from cash provided by operations and, to the extent necessary, from the
proceeds of borrowings under its bank credit facilities and its commercial
paper program discussed below. In addition, depending upon its future needs
and the cost and availability of various financing alternatives, the Company
may, from time to time, seek additional debt or equity financing in the public
or private markets.
Liquidity and Capital Resources
As of December 31, 1998, the Company had cash and cash equivalents of $176.1
million. The Company currently has two committed, unsecured bank facilities
which provide a maximum of $700.0 million U.S. and $200.0 million Cdn. of
available credit, and a $700.0 million commercial paper program supported by
the committed, unsecured U.S. bank facility.
As of December 31, 1998, the Company had borrowing capacity of approximately
$450.7 million under its committed bank facilities and commercial paper
program and approximately $608.8 million under uncommitted, unsecured short-
term lines of credit with various financial institutions.
In addition to its bank credit facilities, the Company has $1.0 billion
available under universal shelf registrations previously filed with the
Securities and Exchange Commission. The net proceeds from any debt or equity
offering under the universal shelf registrations would add to the Company's
working capital and would be available for general corporate purposes.
The Company also has $69.1 million available pursuant to committed lease
facilities aggregating $355.0 million, under which the lessors will construct
or acquire and lease to the Company primarily convenience stores.
The bank facilities and other debt agreements require that the Company
maintain certain financial ratios and other restrictive covenants. The Company
is in compliance with such covenants, as amended, and believes that such
28
<PAGE>
covenants will not have a significant impact on the Company's liquidity or its
ability to pay dividends. The Company believes its current sources of funds
will be sufficient to satisfy its capital expenditure, working capital, debt
service and dividend requirements for at least the next twelve months.
On June 25, 1997, UDS Capital I (the Trust), a wholly-owned subsidiary of the
Company, issued $200.0 million of 8.32% Trust Originated Preferred Securities
(TOPrS) in an underwritten public offering. The TOPrS represent preferred
undivided interests in the Trust's assets, with a liquidation preference of
$25.00 per security. Distributions on the TOPrS are cumulative and payable
quarterly in arrears, at the annual rate of 8.32% of the liquidation amount.
The Company has guaranteed, on a subordinated basis, the dividend payments due
on the TOPrS. The proceeds from the issuance of the TOPrS were used to reduce
long-term debt of the Company.
On September 25, 1997, the Company completed the acquisition of 100% of the
common stock of Total. The purchase price included the issuance of 12,672,213
shares of Company Common Stock and the assumption of $460.5 million of debt
outstanding. On September 25, 1997, the Company repaid most of the debt of
Total with the proceeds of a $150.0 million short-term bridge loan provided by
three banks and with the proceeds from the issuance of commercial paper and
borrowings under uncommitted bank credit lines.
On October 14, 1997, the Company completed a public offering of $400.0 million
of senior notes (the Total Senior Notes) to refinance most of the debt
incurred to finance the acquisition of Total. The Total Senior Notes were
issued in three separate series:
. the 2017 Notes totaling $200.0 million bear interest at 7.20% and are
due October 15, 2017;
. the 2037 Notes totaling $100.0 million bear interest at 6.75% and are
due October 15, 2037; and
. the 2097 Notes totaling $100.0 million bear interest at 7.45% and are
due October 15, 2097.
The 2017 Notes and the 2097 Notes may be redeemed at any time at the option of
the Company, in whole or in part, at a redemption price equal to the greater
of: (a) 100% of the principal amount, or (b) the sum of the present value of
outstanding principal and interest thereon, discounted at the U.S. Treasury
Yield plus 20 basis points, together with accrued interest, if any, to the
date of redemption. The 2037 Notes may be redeemed, in whole or in part, by
the holders on October 15, 2009, at a redemption price equal to 100% of the
principal plus accrued interest. After October 15, 2009, the 2037 Notes are
redeemable at the option of the Company in the same manner as the 2017 Notes
and 2097 Notes.
The Company's 5% Cumulative Convertible Preferred Stock, originally issued in
the Merger, contained a redemption feature that allowed the Company to redeem
the preferred stock for Common Stock if the Common Stock traded above $33.77
per share for 20 of any 30 consecutive trading days. On February 27, 1998, the
trading threshold was reached. On March 18, 1998, all 1,724,400 shares
outstanding of preferred stock were redeemed for Common Stock at a conversion
rate of 1.9246 shares of Common Stock for each share of preferred stock. A
total of 3,318,698 shares of Common Stock were issued. The Company declared
and paid dividends of $0.625 per share on its 5% Cumulative Convertible
Preferred Stock in each quarter of 1997 and the first quarter of 1998, prior
to conversion. As a result of the redemption, the cash dividend requirements
for the Company are lower by $0.7 million on an annualized basis.
The continued consolidation in the refining and marketing industry has changed
the retail product pricing environment resulting in lower retail marketing
margins over the past several years. In order to stay competitive and increase
profitability, the Company initiated a three-year restructuring program in
June 1998 to:
. reorganize its retail support infrastructure (eliminating 341
positions),
. to close and sell 316 under-performing convenience stores, and
. to sell certain excess terminal and pipeline assets, including the
elimination of an additional 125 related positions.
29
<PAGE>
Accordingly, the Company recognized a one-time charge of $131.6 million in the
quarter ended June 30, 1998 consisting of $82.1 million to write-down
property, plant and equipment and goodwill, $34.0 million for costs associated
with closing and selling the 316 convenience stores, and $15.5 million of
severance costs to eliminate 466 positions. During the six month period ended
December 31, 1998, $8.5 million of severance costs were paid and 65
convenience stores were sold or closed.
The restructuring initiatives are expected to increase annual earnings before
interest and income taxes by $99.6 million in 1999, $124.0 million in 2000,
and $128.9 million in 2001 due to lower operating costs. The increase in
annual earnings will more than offset the one-time cash outlays related to the
restructuring program estimated at $49.5 million over the next three years. In
addition, as part of the restructuring plan, the Company decreased its retail
marketing capital expenditures budget by $32.6 million for the second half of
1998.
On July 28, 1998, the Board of Directors approved a $100.0 million stock
buyback program to purchase shares of Common Stock in the open market. The
purchase of Common Stock was funded using available cash flow from operations.
The purchased stock will be used to fund future employee benefit obligations
of the Company. The buyback program was completed in December 1998 resulting
in the purchase of 3,740,400 shares of Common Stock. As a result of the stock
buyback program, the cash dividend requirements for the Company will be lower
by approximately $4.1 million per year.
In December 1998, the Company finalized a plan to eliminate approximately 300
non-essential jobs, programs and expenses and started new initiatives designed
to further reduce capital employed and improve earnings. These changes are
expected to result in an improvement of pretax earnings by approximately
$160.0 million and capital recovery totaling more than $100.0 million by the
year 2000. Operating and administrative cost reductions are expected to
account for about two-thirds of the improvement. Optimization initiatives
designed to increase revenues account for the remainder. As a result of these
changes, the Company recognized a $12.0 million charge as of December 31, 1998
for severance costs associated with the employees to be terminated.
On February 3, 1999, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on March 4, 1999, to holders of record on
February 18, 1999.
Cash Flows for the Year Ended December 31, 1998
During the year ended December 31, 1998, the Company's cash position increased
$84.1 million to $176.1 million. Net cash provided by operating activities was
$347.0 million as compared to $235.2 million in 1997. This increase is due
primarily to additional depreciation and amortization as result of the Total
Acquisition and an improved working capital position.
Net cash used in investing activities during the year ended December 31, 1998,
totaled $127.1 million. Cash outflows included $171.1 million for capital
expenditures and $37.8 million for deferred refinery maintenance turnaround
costs. Cash inflows from investing activities included $27.0 million related
to proceeds from the sale of the McKee to El Paso pipeline and El Paso
terminal to Phillips Petroleum Company, $17.2 million of proceeds from the
sale of 29 convenience stores to Griffin L.L.C. and $27.0 million received
from Diamond-Koch for reimbursement of the cost to construct the third
propane/propylene splitter at Mont Belvieu.
Net cash used in financing activities during the year ended December 31, 1998
totaled $132.1 million, primarily due to the cash dividends declared and paid
totaling $98.5 million on outstanding Common Stock and 5% Cumulative
Convertible Preferred Stock prior to redemption in March 1998 and the purchase
of 3,740,400 shares of the Company's Common Stock for a total cost of $100.0
million.
Exchange Rates
The value of the Canadian dollar relative to the U.S. dollar has weakened
substantially since the acquisition of the Canadian operations in 1992. During
1998, the Canadian dollar continued to decline against the U.S. dollar
30
<PAGE>
and reached an historic low against the U.S. dollar during the year. As the
Company's Canadian operations are in a net asset position, the weaker Canadian
dollar has reduced, in U.S. dollars, the Company's net equity as of December
31, 1998, by $112.0 million. Although the Company expects the exchange rate to
fluctuate during 1999, it cannot reasonably predict its future movement.
With the exception of its crude oil costs, which are U.S. dollar denominated,
fluctuations in the Canadian dollar exchange rate will affect the U.S. dollar
amount of revenues and related costs and expenses reported by the Canadian
operations. The potential impact on the refining margin of fluctuating
exchange rates together with U.S. dollar denominated crude oil costs is
mitigated by the Company's pricing policies in the Northeast System, which
generally pass on any change in the cost of crude oil. Retail marketing
margins, on the other hand, have been adversely affected by exchange rate
fluctuations as competitive pressures have, from time to time, limited the
Company's ability to promptly pass on the increased costs to the ultimate
consumer. The Company has considered various strategies to manage currency
risk, and it hedges the Canadian currency risk when such hedging is considered
economically appropriate.
Year 2000 Issue
State of Readiness
In 1997, the Company initiated an enterprise-wide effort to assess and
mitigate or eliminate the business risk associated with Year 2000 issues,
focusing on:
. information technology (IT) computer hardware and software systems,
. internal process control equipment outside of the IT area used in the
refining or retail operations, and
. interfaces and support services from key suppliers, vendors and
customers.
A Company-wide process is in place to inventory, assess, test and develop
contingency plans for addressing the Year 2000 issues described above. The
process is periodically reassessed as new information becomes known, and the
process is revised accordingly.
The Company's US IT systems have been assessed as being substantially Year
2000 compliant resulting from the 1995 implementation of a new IT system and
the migration in early 1998 of Total's operations to the US IT system at a
cost of $4.3 million. As an integral step within the Year 2000 process, the
Company will verify and test certain aspects of these systems during 1999 to
attempt to mitigate any material adverse impact which may arise from Year 2000
issues. The Company's Northeast IT systems are not Year 2000 compliant.
However, the Company is implementing a new stand-alone enterprise-wide IT
system which will bring the Northeast into compliance by the third quarter of
1999. This new enterprise-wide IT system will also be implemented in the US
operations during the later part of 1999 because it offers superior
technological enhancements and operating efficiencies not available in the
existing US IT system. The cost of the new enterprise-wide IT system for the
Northeast and US is expected to be approximately $48.0 million, with most of
the costs being capitalized.
The Company believes it has identified most of the significant exposure items
associated with internal process control equipment used at the refineries and
throughout the retail operations, and has implemented a plan to bring such
equipment into compliance with Year 2000. The Company has also engaged outside
consultants to assist in addressing its Year 2000 issues. Additionally, the
Company has corresponded with its key suppliers, vendors and customers and has
developed a plan to mitigate potential exposure areas. The estimated cost to
be incurred for the non-IT and third-party corrective action plans range from
$28.2 million to $44.0 million, with most of the costs being capitalized. The
actual costs incurred will depend on the alternative chosen for each
corrective action. Management anticipates that all corrective actions will be
completed by December 31, 1999 to ensure minimal disruption to operations as
the new millennium begins.
Risks
Certain Year 2000 risk factors which could have a material adverse effect on
the Company's results of operations, liquidity, and financial condition
include, but are not limited to, failure to identify critical systems
31
<PAGE>
which could experience failures, errors in efforts to correct problems,
unexpected or extended failures by key suppliers, vendors and customers, and
failures in global banking systems and commodity exchanges.
As a matter of operating policy, we routinely analyze our production and
automation systems for potential failures, such as interruptions in the supply
of raw materials or utilities. We do not anticipate that a problem in these
areas will have a significant impact on our ability to continue our normal
business activities. In addition, it is not expected that these failures would
impact safety or the environment nor have a material impact on production or
sales. Any problems in these systems can be dealt with using our existing
operating procedures.
The worst case scenario would be that our failure or the failure by our key
suppliers, vendors and customers to correct material Year 2000 issues could
result in serious disruptions in normal business activities and operations.
Such disruptions could prevent us from refining crude oil and delivering
refined products to customers. While we do not expect a worst case scenario,
if it occurs, Year 2000 failures, if not corrected on a timely basis or
otherwise mitigated by our contingency plans, could have a material adverse
impact on the Company's results of operations, liquidity and financial
position.
Contingency Plans
Based on the current assessments and analysis of our Year 2000 readiness and
that of our key suppliers, vendors and customers, Year 2000 specific
contingency plans are being developed for data collection, reporting and
communication. For the remainder of 1999, the Year 2000 contingency plans will
be adjusted or new plans developed as circumstances warrant. The Company's
current and planned activities with respect to the Year 2000 issue are
expected to significantly reduce the Company's level of uncertainty about the
magnitude of the risk posed by the Year 2000 issue and, in particular, about
the Year 2000 compliance and readiness of its key suppliers, vendors, and
customers. The Company believes that, with the implementation of new IT
systems and completion of the planned activities as scheduled, the possibility
of significant interruptions of normal operations should be reduced. See
"Certain Forward-Looking Statements."
Impact of Inflation
The impact of inflation has slowed in recent years. However, it is still a
factor in the United States and Canadian economies and may increase the cost
to acquire or replace property, plant and equipment and/or increase the costs
of supplies and labor. To the extent permitted by competition, the Company has
and will continue to pass along increased costs to its customers.
In addition, the Company is affected by volatility in the cost of crude oil
and refined products as market conditions continue to be the primary factor in
determining the costs of the Company's products. Throughout 1998, the price of
crude oil and refined products declined to 20-year lows helping keep the
United States inflation rate very low. The cost of products sold by the
Company, as reported in its consolidated financial statements, approximates
current cost since the Company uses the LIFO method to account for its
inventories. However, the steep crude oil and refined product price declines
during 1998 resulted in a $133.4 million write-down of the Company's
inventories.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in June 1998. SFAS No. 133 establishes new and revises
several existing standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be designated as a cash flow
hedge, a fair value hedge or a foreign currency hedge. An entity that elects
to apply hedge accounting is required to establish at the inception of the
hedge the method it will use for assessing the effectiveness of the hedge and
the measurement method to be used. Changes in the fair value
32
<PAGE>
of derivatives are either recognized in earnings in the period of change or as
a component of other comprehensive income in the case of certain hedges. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, with earlier application encouraged. The statement should not
be applied retroactively to financial statements of prior periods. The Company
expects to adopt SFAS No. 133 as of January 1, 2000 and is currently
evaluating the impact of the change, but has not quantified the effect at this
time.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Startup
Activities." This SOP requires startup activity costs and organization costs
to be expensed as incurred. SOP 98-5 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company will adopt the SOP
effective January 1, 1999. The impact of implementation of the SOP is not
expected to be material.
Certain Forward-Looking Statements
This Annual Report on Form 10-K and the Proxy Statement, incorporated herein
by reference, contain certain "forward-looking" statements as such term is
defined in the U.S. Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of management as well as assumptions made by and information currently
available to management. When used in this Annual Report or the Proxy
Statement, the words "anticipate," "believe," "estimate," "expect," "intend"
and similar expressions, as they relate to the Company or its subsidiaries or
management, identify forward-looking statements. Such statements reflect the
current views of management with respect to future events and are subject to
certain risks, uncertainties and assumptions relating to the operations and
results of operations, including as a result of competitive factors and
pricing pressures, shifts in market demand and general economic conditions and
other factors.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes in interest
rates, foreign currency rates and commodity prices related to crude oil,
refined products and natural gas. To manage or reduce these market risks, the
Company uses interest rate swaps, foreign exchange contracts, and commodity
futures and price swap contracts. As of December 31, 1998, the Company did not
hold or issue derivative instruments for trading purposes. The Company's
policy governing the use of derivatives requires that every derivative relate
to an underlying, offsetting position, anticipated transaction or firm
commitment and prohibits the use of highly complex or leveraged derivatives. A
discussion of the Company's primary market risk exposures in derivative
financial instruments is presented below.
Interest Rate Risk
The Company is subject to interest rate risk on its long-term fixed interest
rate debt. Commercial paper borrowings and borrowings under revolving credit
facilities do not give rise to significant interest rate risk because these
borrowings have maturities of less than three months. The carrying amount of
the Company's floating interest rate debt approximates fair value. Generally,
the fair market value of debt with a fixed interest rate will increase as
interest rates fall, and the fair market value will decrease as interest rates
rise. This exposure to interest rate risk is managed by obtaining debt that
has a floating interest rate or using interest rate swaps to change fixed
interest rate debt to floating interest rate debt. Generally, the Company
maintains floating interest rate debt of between 35% and 45% of total debt.
Interest rates have remained relatively stable over the past year and the
Company anticipates such rates to remain relatively stable over the next year.
The following table provides information about the Company's long-term debt
and interest rate swaps, both of which are sensitive to changes in interest
rates. For long-term debt, principal cash flows and related weighted
33
<PAGE>
average interest rates by expected maturity dates, after consideration of
refinancing, are presented. For interest rate swaps, the table presents
notional amounts and weighted average interest rates by expected (contractual)
maturity dates. Notional amounts are used to calculate the contractual
payments to be exchanged under the contract. Weighted average floating rates
are based on implied forward rates in the yield curve at the reporting date.
<TABLE>
<CAPTION>
Expected Maturity Dates
----------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ----- ----- ------ ----- ---------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate............ $5.8 $14.8 $86.5 $492.4 $35.0 $914.3 $1,548.8 $1,638.6
Average interest
rate............... 9.2% 8.7% 9.4% 8.6% 8.5% 7.6% 8.1% N/A
Floating rate......... $-- $ -- $ -- $383.2 $ -- $ -- $ 383.2 $ 383.2
Average interest
rate............... -- % -- % -- % 5.8% -- % -- % 5.8% N/A
Interest Rate Swaps:
Fixed to floating..... $-- $ -- $ -- $200.0 $ -- $250.0 $ 450.0 $ 450.0
Average pay rate.... 4.90% 5.04% 5.32% 5.54% 5.63% 6.10% 5.70% N/A
Average receive
rate............... 6.43% 6.43% 6.43% 6.43% 6.59% 6.85% 6.66% N/A
</TABLE>
Foreign Currency Risk
The Company periodically enters into short-term foreign exchange contracts to
manage its exposure to exchange rate fluctuations on the trade payables of its
Canadian operations that are denominated in U.S. dollars. These contracts
involve the exchange of Canadian and U.S. currency at future dates. Gains and
losses on these contracts generally offset losses and gains on the U.S. dollar
denominated trade payables. At December 31, 1998, the Company did not have any
short-term foreign exchange contracts. The Company generally does not hedge
for the effects of foreign exchange rate fluctuations on the translation of
its foreign results of operations or financial position.
Commodity Price Risk
The Company is subject to the market risk associated with changes in market
prices of its underlying crude oil, refined products and natural gas; however,
such changes in values are generally offset by changes in the sales price of
the Company's refined products. Price swaps are price hedges for which gains
and losses are recognized when the hedged transactions occur; however, losses
are recognized when future prices are not expected to recover.
As of December 31, 1998, the Company had outstanding commodity futures and
price swap contracts to buy $312.0 million and sell $130.2 million of crude
oil and refined products or to settle differences between a fixed price and
market price on aggregate notional quantities of 8.6 million barrels of crude
oil and refined products which mature on various dates through June 2002. The
fair value of commodity futures contracts is based on quoted market prices.
The fair value of price swap contracts is determined by comparing the contract
price with current broker quotes for futures contracts corresponding to the
period that the anticipated transactions are expected to occur.
The information below reflects the Company's price swaps and futures contracts
that are sensitive to changes in crude oil, refined product or natural gas
commodity prices. The table presents the notional amounts in barrels for crude
oil or MMBTU for natural gas, the weighted average contract prices and the
total contract amount by expected maturity dates. Contract amounts are used to
calculate the contractual payments and quantity of barrels of crude oil or
MMBTU of natural gas to be exchanged under the futures contract.
34
<PAGE>
<TABLE>
<CAPTION>
December 31,
1998 Maturities
---------------- --------------------
Carrying Fair
Amount Value 1999 2000 2002
-------- ------- ------ ------ ------
(in millions, except weighted average
price)
<S> <C> <C> <C> <C> <C>
Price swaps:
Contract volumes (barrels)............. N/A N/A 2.2 N/A 6.4
Weighted average price per barrel...... N/A N/A $24.64 N/A $22.00
Contract amount........................ $(31.7) $ (55.2) $ 55.2 N/A $140.0
Futures contracts--buy:
Contract volumes (barrels)............. N/A N/A 5.4 3.2 N/A
Weighted average price per barrel...... N/A N/A $12.43 $14.61 N/A
Contract amount........................ $ (7.2) $ (7.6) $ 67.0 $ 46.0 N/A
Futures contracts--sell:
Contract volumes (barrels)............. N/A N/A 11.1 N/A N/A
Weighted average price per barrel...... N/A N/A $11.76 N/A N/A
Contract amount........................ $ (0.4) $ (0.4) $130.2 N/A N/A
Futures contracts--buy:
Contract volumes (MMBTU)............... N/A N/A 1.95 N/A N/A
Weighted average price per MMBTU....... N/A N/A $ 1.94 N/A N/A
Contract amount........................ $ (0.3) $ (0.3) $ 3.8 N/A N/A
</TABLE>
35
<PAGE>
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Ultramar Diamond Shamrock Corporation:
We have audited the accompanying consolidated balance sheets of Ultramar
Diamond Shamrock Corporation (a Delaware corporation) and subsidiaries (the
Company) as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity, cash flows and comprehensive
income (loss) for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ultramar Diamond Shamrock
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Antonio, Texas
February 19, 1999
36
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Ultramar Diamond Shamrock Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, cash flows and comprehensive income (loss) of Ultramar
Diamond Shamrock Corporation (formerly Ultramar Corporation) for the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the consolidated
statements of operations, stockholders' equity and cash flows of the Diamond
Shamrock operations for the year ended December 31, 1996, which financial
statements reflect total revenues constituting 49% of the related consolidated
totals. Those financial statements were audited by PricewaterhouseCoopers LLP
whose report has been furnished to us, and our opinion, insofar as it relates
to data included for the Diamond Shamrock operations, is based solely on the
report of PricewaterhouseCoopers LLP.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit and the report of
PricewaterhouseCoopers LLP provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of PricewaterhouseCoopers
LLP, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash
flows of Ultramar Diamond Shamrock Corporation for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Antonio, Texas
February 7, 1997
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ultramar Diamond Shamrock Corporation:
In our opinion, the consolidated statements of operations, stockholders'
equity, and cash flows present fairly, in all material respects, the results
of operations and cash flows of the Diamond Shamrock operations of Ultramar
Diamond Shamrock Corporation for the year ended December 31, 1996, in
conformity with generally accepted accounting principles. These consolidated
financial statements are the responsibility of the Ultramar Diamond Shamrock
Corporation's management; our responsibility is to express an opinion on the
consolidated financial statements based on our audits. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management and evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for the opinion
expressed above.
/s/ Pricewaterhousecoopers LLP
Houston, Texas
February 7, 1997
38
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(in millions,
except share
data)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 176.1 $ 92.0
Accounts and notes receivable, less allowances for
uncollectible accounts of $14.3 million in 1998 and
$16.2 million in 1997................................... 562.7 673.9
Inventories.............................................. 635.6 741.0
Prepaid expenses and other current assets................ 33.0 53.1
Deferred income taxes.................................... 98.4 50.8
-------- --------
Total current assets................................... 1,505.8 1,610.8
-------- --------
Property, plant and equipment.............................. 4,423.2 4,631.9
Less accumulated depreciation and amortization............. (1,162.0) (1,080.7)
-------- --------
Property, plant and equipment, net....................... 3,261.2 3,551.2
Other assets, net.......................................... 548.0 432.7
-------- --------
Total assets........................................... $5,315.0 $5,594.7
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt...... $ 5.8 $ 6.5
Accounts payable......................................... 366.0 661.7
Accrued liabilities...................................... 402.4 331.9
Taxes other than income taxes............................ 343.0 237.2
Income taxes payable..................................... 28.9 13.4
-------- --------
Total current liabilities.............................. 1,146.1 1,250.7
Long-term debt, less current portion....................... 1,926.2 1,866.4
Other long-term liabilities................................ 453.7 403.5
Deferred income taxes...................................... 205.0 187.5
Commitments and contingencies
Company obligated preferred stock of subsidiary............ 200.0 200.0
Stockholders' equity:
5% Cumulative Convertible Preferred Stock, par value
$0.01 per share:
25,000,000 shares authorized; no shares and 1,724,400
shares issued and outstanding as of December 31, 1998
and 1997................................................ -- --
Common Stock, par value $0.01 per share:
250,000,000 shares authorized; 86,558,000 and 86,663,000
shares issued and outstanding as of December 31, 1998
and 1997................................................ 0.9 0.9
Additional paid-in capital............................... 1,512.7 1,534.9
Treasury stock........................................... (100.1) (30.1)
Retained earnings........................................ 82.5 259.1
Accumulated other comprehensive loss..................... (112.0) (78.2)
-------- --------
Total stockholders' equity............................. 1,384.0 1,686.6
-------- --------
Total liabilities and stockholders' equity............. $5,315.0 $5,594.7
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(in millions, except per share data)
<S> <C> <C> <C>
Sales and other revenues (including
excise taxes)...................... $ 11,134.6 $ 10,882.4 $ 10,208.4
------------ ------------ ------------
Operating costs and expenses:
Cost of products sold............. 6,302.9 6,817.5 6,550.0
Operating expenses................ 1,145.5 887.2 928.1
Selling, general and
administrative expenses.......... 332.6 317.3 302.0
Taxes other than income taxes..... 2,898.6 2,275.9 2,101.1
Depreciation and amortization..... 237.4 200.1 179.9
Restructuring and other charges... 154.8 -- --
Merger and integration costs...... -- -- 77.4
------------ ------------ ------------
Total operating costs and
expenses....................... 11,071.8 10,498.0 10,138.5
------------ ------------ ------------
Operating income.................... 62.8 384.4 69.9
Interest income................... 9.7 11.5 18.4
Interest expense.................. (143.5) (131.7) (128.5)
Gain on sale of property, plant
and equipment.................... 7.0 11.0 --
------------ ------------ ------------
Income (loss) before income taxes,
extraordinary loss, and dividends
of subsidiary...................... (64.0) 275.2 (40.2)
Provision (benefit) for income
taxes............................ 3.8 110.2 (4.3)
Dividends on preferred stock of
subsidiary....................... 10.3 5.4 --
------------ ------------ ------------
Income (loss) before extraordinary
loss............................... (78.1) 159.6 (35.9)
Extraordinary loss on debt
extinguishment................... -- (4.8) --
------------ ------------ ------------
Net income (loss)................... $ (78.1) $ 154.8 $ (35.9)
============ ============ ============
Basic income (loss) per share:
Income (loss) before extraordinary
loss............................. $ (0.89) $ 1.99 $ (0.54)
Extraordinary loss on debt
extinguishment................... -- (0.06) --
------------ ------------ ------------
Net income (loss)................. $ (0.89) $ 1.93 $ (0.54)
============ ============ ============
Diluted income (loss) per share:
Income (loss) before extraordinary
loss............................. $ (0.89) $ 1.94 $ (0.54)
Extraordinary loss on debt
extinguishment................... -- (0.06) --
------------ ------------ ------------
Net income (loss)................. $ (0.89) $ 1.88 $ (0.54)
============ ============ ============
Weighted average number of shares:
Basic............................. 88.555 78.120 74.427
Diluted........................... 88.555 82.424 74.427
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(in millions)
<TABLE>
<CAPTION>
Treasury Accumulated
Additional Stock, Other Total
Common Paid-in ESOP and Retained Comprehensive Stockholders'
Stock Capital Other Earnings Loss Equity
------ ---------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $0.7 $1,117.8 $ (37.5) $302.7 $ (55.7) $1,328.0
Issuance of Common
Stock.................. -- 16.4 1.2 (3.1) -- 14.5
Payment of ESOP note.... -- -- 4.2 -- -- 4.2
Net loss................ -- -- -- (35.9) -- (35.9)
Cash dividends.......... -- -- -- (69.8) -- (69.8)
Other, net.............. -- 2.8 (0.1) (0.2) (2.6) (0.1)
---- -------- ------- ------ ------- --------
Balance at December 31,
1996................... 0.7 1,137.0 (32.2) 193.7 (58.3) 1,240.9
Issuance of Common
Stock.................. 0.1 6.7 (0.7) -- -- 6.1
Termination of ESOP..... -- -- 2.8 -- -- 2.8
Net income.............. -- -- -- 154.8 -- 154.8
Cash dividends.......... -- -- -- (89.8) -- (89.8)
Acquisition of Total.... 0.1 391.2 -- -- -- 391.3
Other, net.............. -- -- -- 0.4 (19.9) (19.5)
---- -------- ------- ------ ------- --------
Balance at December 31,
1997................... 0.9 1,534.9 (30.1) 259.1 (78.2) 1,686.6
Issuance of Common
Stock.................. -- 8.0 (0.1) -- -- 7.9
Conversion of Preferred
Stock.................. -- (30.2) 30.2 -- -- --
Shares purchased under
Common Stock buyback
program................ -- -- (100.0) -- -- (100.0)
Net loss................ -- -- -- (78.1) -- (78.1)
Cash dividends.......... -- -- -- (98.5) -- (98.5)
Other, net.............. -- -- (0.1) -- (33.8) (33.9)
---- -------- ------- ------ ------- --------
Balance at December 31,
1998................... $0.9 $1,512.7 $(100.1) $ 82.5 $(112.0) $1,384.0
==== ======== ======= ====== ======= ========
</TABLE>
As of December 31, 1997 and 1996, the Company had issued and outstanding
1,724,400 shares and 1,725,000 shares, respectively, of 5% Cumulative
Convertible Preferred Stock with a par value of less than $100,000.
See accompanying notes to consolidated financial statements.
41
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................... $ (78.1) $ 154.8 $ (35.9)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 237.4 200.1 179.9
Provision for losses on receivables........... 12.7 14.9 13.6
Restructuring charges--write-down of property,
plant and equipment and goodwill............. 82.1 -- --
Equity income from Diamond-Koch joint
venture...................................... (3.5) -- --
Loss (gain) on sale of property, plant and
equipment.................................... (2.0) (11.4) 0.2
Deferred income tax provision (benefit)....... (9.0) 104.8 (45.7)
Other, net.................................... 4.4 3.4 1.0
Changes in operating assets and liabilities,
net of acquisition:
Decrease (increase) in accounts and notes
receivable................................. 82.1 25.6 (119.9)
Decrease in inventories..................... 89.1 46.5 31.7
Increase (decrease) in accounts payable and
other current liabilities.................. (81.7) (221.5) 213.9
Increase (decrease) in other long-term
liabilities................................ (0.4) (57.0) 20.0
Other, net.................................. 13.9 (25.0) 34.8
-------- -------- --------
Net cash provided by operating
activities............................... 347.0 235.2 293.6
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures.......................... (171.1) (247.1) (315.2)
Acquisition of Total, net of cash acquired.... -- (402.4) --
Acquisition of retail operations.............. -- (20.8) (27.9)
Deferred refinery maintenance turnaround
costs........................................ (37.8) (25.6) (11.5)
Expenditures for investments.................. -- (11.9) (5.2)
Proceeds from sales of property, plant and
equipment.................................... 81.8 93.8 51.6
-------- -------- --------
Net cash used in investing activities..... (127.1) (614.0) (308.2)
-------- -------- --------
Cash Flows from Financing Activities:
Net change in commercial paper and short-term
borrowings................................... 96.6 (189.2) --
Proceeds from long-term debt borrowings....... -- 415.9 578.9
Repayment of long-term debt................... (37.5) (68.3) (490.5)
Proceeds from issuance of Common Stock........ 7.3 5.5 14.0
Issuance of Company obligated preferred stock
of subsidiary................................ -- 200.0 --
Shares purchased under Common Stock buyback
program...................................... (100.0) -- --
Payment of cash dividends..................... (98.5) (89.8) (69.8)
Other, net.................................... -- (2.2) 5.2
-------- -------- --------
Net cash provided by (used in) financing
activities............................... (132.1) 271.9 37.8
Effect of exchange rate changes on cash......... (3.7) 1.0 (0.8)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................... 84.1 (105.9) 22.4
Cash and Cash Equivalents at Beginning of Year.. 92.0 197.9 175.5
-------- -------- --------
Cash and Cash Equivalents at End of Year........ $ 176.1 $ 92.0 $ 197.9
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- ----------------
(in millions)
<S> <C> <C> <C>
Net income (loss).................................... $ (78.1) $ 154.8 $ (35.9)
Other comprehensive loss--
Foreign currency translation adjustment............ 33.8 19.9 2.6
-------- ------- -------
Comprehensive income (loss).......................... $ (111.9) $ 134.9 $ (38.5)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 1: Summary of Significant Accounting Policies
Basis of Presentation: Ultramar Diamond Shamrock Corporation (the Company or
UDS, formerly Ultramar Corporation or Ultramar) was incorporated in the state
of Delaware in 1992 and is a leading independent refiner and marketer of
refined products and convenience store merchandise in the central and
southwest regions of the United States and the northeast United States and
eastern Canada. The Company owns and operates seven refineries located in
Texas, California, Michigan, Oklahoma, Colorado and Quebec, Canada and,
markets its products through 2,612 Company-operated convenience stores, 3,347
dealer-operated wholesale outlets and 82 unattended cardlock stations. In the
Northeast, the Company sells, on a retail basis, home heating oil to
approximately 236,000 households.
Effective December 3, 1996, Diamond Shamrock, Inc. was merged into Ultramar in
a transaction accounted for as a pooling-of-interests (see note 3). In
connection with the Merger, Ultramar changed its name to Ultramar Diamond
Shamrock Corporation.
On September 25, 1997, the Company completed its acquisition of Total
Petroleum (North America) Ltd. (Total). The purchase price included the
issuance of shares of Company Common Stock and the assumption of Total's
outstanding debt. The acquisition was accounted for using the purchase method
and, accordingly, operating results of Total subsequent to the date of
acquisition have been included in the consolidated statements of operations.
Total, an independent refiner and retail marketer, operated three refineries
in Michigan, Oklahoma and Colorado, and marketed its products in the central
region of the United States through company-owned convenience stores and
wholesale outlets (see note 2).
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries and partnerships in which a controlling interest
is held. Investments in 50% or less owned companies and joint ventures are
accounted for using the equity method of accounting. All intercompany balances
and transactions are eliminated in consolidation.
Use of Estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates, including
those related to restructurings, litigation, environmental liabilities, and
pensions, based on currently available information. Changes in facts and
circumstances may result in revised estimates.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash
equivalents.
Inventories: Crude oil and refined and other finished product inventories are
valued at the lower of cost or market (net realizable value). Cost is
determined primarily on the last-in, first-out (LIFO) basis. Materials,
supplies and convenience store merchandise are valued at average cost, not in
excess of market value.
Property, Plant and Equipment: Additions to property, plant and equipment
including capitalized interest are recorded at cost. Depreciation is provided
principally using the straight-line method over the estimated useful lives of
the related assets. Assets recorded under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the useful life of the related asset.
Goodwill: The excess of cost (purchase price) over the fair value of net
assets of businesses acquired (goodwill) is being amortized using the
straight-line method over periods ranging from 10 to 30 years.
44
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment: Long-lived assets, including goodwill, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The evaluation of recoverability is performed using
undiscounted estimated net cash flows generated by the related asset. The
amount of impairment is determined as the amount by which the net carrying
value exceeds discounted estimated net cash flows.
Refinery Maintenance Turnaround Costs: Refinery maintenance turnaround costs
are deferred when incurred and amortized over the period of time estimated to
lapse until the next turnaround occurs which is typically three years.
Environmental Remediation Costs: Environmental remediation costs are expensed
if they relate to an existing condition caused by past operations and do not
contribute to future revenue generation. Liabilities are accrued when site
restoration and environmental remediation and cleanup obligations are either
known or considered probable and can be reasonably estimated. Accrued
liabilities are not discounted to present value.
Excise Taxes: Federal excise and State motor fuel taxes collected on the sale
of products and remitted to governmental agencies are included in sales and
other revenues and in taxes other than income taxes. For the year ended
December 31, 1998, 1997 and 1996, excise taxes were $2,788.0 million, $1,998.9
million and $1,792.9 million, respectively.
Income Taxes: The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred amounts are
measured using enacted tax rates expected to apply to taxable income in the
year those temporary differences are expected to be recovered or settled.
Foreign Currency Translation: The functional currency of the Company's
Canadian operations is the Canadian dollar. The translation into U.S. dollars
is performed for balance sheet accounts using exchange rates in effect at the
balance sheet date and for revenue and expense accounts using the weighted
average exchange rate during the year. Adjustments resulting from such
translation are reported in other comprehensive income (loss).
Stock-Based Compensation: The Company accounts for stock-based compensation
using the intrinsic value method, in accordance with Accounting Principles
Board Opinion (APB) No. 25. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the Company's
Common Stock at the date of grant over the amount an employee must pay to
acquire the stock.
Income (Loss) Per Share: In February 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," which established new standards for computing and
presenting earnings per share (EPS) for entities with publicly held common
stock. SFAS No. 128 simplifies the standards for computing EPS previously
found in APB No. 15, "Earnings Per Share," and makes them more comparable to
international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS, and requires dual presentation of basic and
diluted EPS on the face of the statement of operations. The Company adopted
SFAS No. 128 as of December 31, 1997, and has restated all prior-period income
(loss) per share data.
The computation of basic income (loss) per share is based on the weighted
average number of common shares outstanding during the year. Diluted income
per share is based on the weighted average number of common
45
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares outstanding during the year and, to the extent dilutive, common stock
equivalents consisting of stock options, stock awards subject to restrictions,
stock appreciation rights and convertible preferred stock. Basic income (loss)
per share is adjusted for dividend requirements on preferred stock.
Derivative Instruments: Interest rate swap agreements are used by the Company
to manage liquidity and interest rate exposures. The differentials paid or
received on interest rate swap agreements are recognized currently as an
adjustment to interest expense.
The Company uses commodity futures contracts to manage its exposure to crude
oil and refined product price volatility. The contracts are marked to market
value and gains and losses are recognized currently in cost of products sold
as a component of the related crude oil and refined product purchases.
The Company uses commodity price swaps to manage its exposure to price
volatility related to future planned purchases of crude oil and refined
products. Commodity price swaps designated as hedges are not recorded until
the resulting purchases occur; however, losses are recognized when prices are
not expected to recover. The losses are recognized currently in cost of
products sold.
The Company periodically enters into short-term foreign exchange contracts to
manage its exposure to exchange rate fluctuations on the trade payables of its
Canadian operations that are denominated in U.S. dollars. These contracts
involve the exchange of Canadian and U.S. currency at future dates. Gains and
losses on these contracts generally offset losses and gains on the U.S. dollar
denominated trade payables and are recognized currently in income.
Comprehensive Income (Loss): Effective March 31, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income," which established standards
for reporting comprehensive income and its components (revenues, expenses,
gains and losses). Separate consolidated statements of comprehensive income
(loss) are now included in the accompanying consolidated financial statements.
Certain amounts from prior periods have been reclassified to conform with the
new requirements of SFAS No. 130. The Company includes foreign currency
translation adjustments in other comprehensive income (loss).
Segment Disclosures: Effective December 31, 1998, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
This statement established new standards for reporting information about
operating segments in annual financial statements and selected information
about operating segments in interim financial statements issued to
stockholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. The Company has
redefined its segments as "Refining," "Retail" and "Petrochemical/NGL."
Accordingly, the segment disclosure in note 18 related to prior periods has
been reclassified to conform with the Company's new segments.
Pensions and Other Postretirement Benefits Disclosures: Effective December 31,
1998, the Company adopted SFAS No. 132, "Employers Disclosures about Pensions
and Other Postretirement Benefits." This statement standardizes the disclosure
requirements for pension plans and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair value of plan assets and eliminates certain disclosures
in existing standards. Certain amounts from prior periods have been
reclassified to conform with the new requirements of SFAS No. 132 and
additional information for prior periods has been added.
Computer Software Costs: In March 1998, the American Institute of Certified
Public Accountants (AICPA) released Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires capitalization of all external direct costs of
material and services, payroll costs for employees directly associated with
internal use software projects, and interest costs incurred during
development.
46
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective March 1998, the Company began capitalizing purchased software costs,
and the direct costs, both external and internal, associated with internally
developed software. The internal costs are limited to capitalized interest and
payroll costs of employees involved in the development. During 1998, the
Company capitalized $3.8 million of external and internal software costs,
primarily related to the Company's new stand-alone enterprise-wide IT system
being developed. Amortization is provided using the straight-line method over
the estimated useful life of the related software, generally three to seven
years.
Reclassifications: Certain previously reported amounts have been reclassified
to conform to the 1998 presentation.
NOTE 2: Acquisition of Total
On September 25, 1997, the Company completed its acquisition of Total for a
purchase price of $851.8 million. The Company issued 12,672,213 shares of
Company Common Stock, valued at $30.875 per share, and assumed approximately
$460.5 million of debt. To finance the immediate pay-off of the assumed debt,
the Company obtained a $150.0 million bridge loan, borrowed funds under
uncommitted bank credit lines and issued commercial paper. The $150.0 million
bridge loan had an interest rate equal to 5.92% and was refinanced on October
14, 1997 (see note 9).
The acquisition was accounted for using the purchase method. The purchase
price was allocated based on an estimate of the fair values of the individual
assets and liabilities at the date of acquisition. As additional facts became
known, it was determined that in the original purchase price allocation,
environmental receivables were overstated, environmental liabilities were
understated, and pension and other assets were understated. As a result, the
purchase price was reallocated on September 24, 1998 as follows:
<TABLE>
<CAPTION>
Final Initial
Allocation Allocation
---------- ----------
(in millions)
<S> <C> <C>
Working capital...................................... $ 29.8 $ 36.1
Property, plant and equipment........................ 839.6 842.6
Excess of cost over fair value of net assets of
purchased business.................................. 123.5 76.5
Liabilities assumed and other, net (includes $18.0
million of severance liabilities)................... (141.1) (103.4)
------ ------
Total purchase price................................. $851.8 $851.8
====== ======
</TABLE>
The excess of purchase price over the fair value of net assets acquired is
being amortized as goodwill on a straight-line basis over 20 years.
The following unaudited pro forma information presents summary consolidated
statements of operations of the Company and Total as if the acquisition had
occurred as of January 1, 1997 and 1996. The pro forma amounts include certain
adjustments such as amortization of goodwill, changes to operating costs to
account for refinery maintenance turnaround costs under the deferral method,
and other adjustments, together with related income tax effects.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996
------------------ ------------------
(in millions, except per share data)
<S> <C> <C>
Sales and other revenues............ $ 13,179.7 $ 13,541.8
Income (loss) before extraordinary
loss............................... 163.9 (37.3)
Net income (loss)................... 159.1 (37.3)
Net income (loss) applicable to
Common Shares...................... 154.8 (41.6)
Net income (loss) per share:
Basic............................. $ 1.77 $ (0.48)
Diluted........................... 1.74 (0.48)
</TABLE>
47
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These unaudited pro forma results have been prepared for comparative purposes
only. They do not include the cost reductions or operating synergies which
have resulted from the acquisition and therefore are not indicative of the
operating results that would have occurred had the acquisition been
consummated as of the above dates, nor are they indicative of future operating
results.
NOTE 3: Merger of Ultramar and Diamond Shamrock
On December 3, 1996, Diamond Shamrock merged into Ultramar. In connection with
the Merger, the Company issued 29,876,507 shares of its Common Stock and
1,725,000 shares of its newly created 5% Cumulative Convertible Preferred
Stock in exchange for all the outstanding common stock and 5% cumulative
convertible preferred stock of Diamond Shamrock. The shareholders of Diamond
Shamrock received 1.02 shares of UDS Common Stock for each share of Diamond
Shamrock common stock and one share of UDS 5% Cumulative Convertible Preferred
Stock for each share of Diamond Shamrock 5% cumulative convertible preferred
stock. The Merger qualified as a tax-free reorganization and was accounted for
as a pooling-of-interests. Accordingly, the Company's consolidated financial
statements have been restated for all periods prior to the Merger to include
the results of operations, financial position and cash flows of Ultramar and
Diamond Shamrock. In addition, all share amounts, stock option data and per
share amounts were adjusted to give effect to the above exchange of UDS stock
for Diamond Shamrock stock.
The following table presents the separate Ultramar and Diamond Shamrock
amounts for the year ended December 31, 1996 (in millions, except per share
data).
<TABLE>
<S> <C>
Sales and other revenues:
Ultramar....................................................... $ 3,421.8
Diamond Shamrock............................................... 4,993.7
Reclassifications.............................................. 1,792.9
---------
$10,208.4
=========
Net income (loss):
Ultramar....................................................... $ 48.2
Diamond Shamrock............................................... (31.1)
Merger and transaction costs, net of income tax benefit........ (53.0)
---------
$ (35.9)
=========
Dividends per share:
Ultramar Common Stock.......................................... $ 1.10
Diamond Shamrock common stock.................................. 0.56
Diamond Shamrock preferred stock............................... 2.50
</TABLE>
In combining the financial information, certain reclassifications of
historical financial data have been made to conform the accounting policies of
the two companies.
In connection with the Merger, the Company recorded merger and integration
expenses of $77.4 million during the fourth quarter of 1996. Merger expenses
of $13.1 million consisted principally of financial and legal fees and
registration costs. Integration expenses of $64.3 million included costs to
combine the two operations, including expenses associated with a workforce
reduction of approximately 200 employees, the termination of certain
agreements, the writedown of certain facilities and equipment and other
expenses. During 1998, the Company paid $10.2 million against the December 31,
1997 integration expense accrual of $13.5 million for lease payments and
payments on other agreements. Integration expenses accrued at December 31,
1998 totaled $3.3 million of which $2.4 million is expected to be paid out for
lease obligations and $0.9 million to settle a legal claim.
48
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4: Restructuring and Other Charges
The continuing consolidation in the refining and marketing industry has
changed the retail product pricing environment resulting in lower retail
marketing margins over the past several years. New store construction by
competitors in the Company's markets and customer demand for larger stores
with fast food items has caused a number of the Company's existing stores to
decline in profitability. In light of these competitive conditions, in June
1998, the Company adopted a three-year restructuring plan to reduce its retail
cost structure by eliminating 341 positions to improve operating efficiencies
and to close and sell 316 under-performing convenience stores.
The restructuring charge included a $34.3 million write-down of property,
plant and equipment and a $37.1 million write-down of goodwill related to the
convenience store assets, whose carrying values prior to the write-down were
$51.8 million and $44.9 million, respectively. Fair value for the impaired
convenience store assets was based on present values of expected future cash
flows at the store level, as well as information about sales and purchases of
similar properties in the same geographic areas. The carrying value of the
impaired convenience stores as of December 31, 1998 was $24.6 million and the
estimated salvage value was $23.4 million. The Company intends to operate the
convenience stores until they are closed and management decides the best sales
alternative.
The competitive conditions applicable to the Company's pipeline and terminal
operations have also resulted in the restructuring of certain pipeline and
terminal facilities and support infrastructure. Accordingly, the Company
recorded a $10.7 million impairment charge to reduce the carrying value ($19.3
million prior to the write-down) of certain pipelines and terminals to their
estimated realizable values based on sales of similar facilities and estimated
salvage values. The estimated salvage value of the pipelines and terminals was
$8.0 million. The Company intends to operate these pipelines and terminals
until they are sold. The infrastructure reorganization resulted in the
elimination of 125 positions.
The total restructuring charge of $131.6 million included $82.1 million of
impairment write-downs mentioned above, $15.5 million of severance and related
benefit costs for the eliminated positions, $14.1 million for lease buyout
costs, $16.7 million for fuel system removal costs and $3.2 million for
cancellation of the frequent fueler stamp programs and other costs. Changes in
accrued restructuring costs from June 30, 1998 through December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
Balance at Balance at
June 30, 1998 Payments December 31, 1998
------------- -------- -----------------
(in millions)
<S> <C> <C> <C>
Severance and related costs........ $15.5 $ 8.5 $ 7.0
Lease buyout costs................. 14.1 0.1 14.0
Fuel system removal costs.......... 16.7 0.6 16.1
Other costs........................ 3.2 3.2 --
----- ----- -----
$49.5 $12.4 $37.1
===== ===== =====
</TABLE>
During the six month period ended December 31, 1998, 65 convenience stores
were sold or closed. In addition, 158 retail employees and 42 pipeline and
terminal employees were terminated. The Company anticipates that substantially
all severance and related costs will be paid during 1999. Funding of the
accrued lease buyout costs and fuel system removal costs are expected to occur
over the next two and one-half years as the Company negotiates lease buyouts,
or closes the stores and sells the stores to third parties. Operating income
before retail overhead expense allocations and restructuring charges for the
316 convenience stores for the year ended December 31, 1998 was $4.5 million,
including the results for the sold stores through the date of sale.
Also, in June 1998, the Company and Petro-Canada terminated discussions
relating to the formation of a refining and retail marketing joint venture
involving the Company's Canadian and northeastern United States operations.
49
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Competition Bureau of Canada advised management of both companies that the
joint venture raised serious concerns under the competition laws of Canada. In
light of these concerns and the potentially lengthy review process, the
project was terminated. Included in restructuring and other charges for the
year ended December 31, 1998 is $11.2 million of costs associated with the
joint venture project including $2.5 million to writeoff costs for a coker
development project that will not be pursued at the present time.
In December 1998, the Company finalized plans to eliminate approximately 300
non-essential jobs, programs and expenses and to implement new initiatives
designed to further reduce capital employed and improve earnings. As a result
of these changes, the Company recognized a $12.0 million charge as of December
31, 1998 for severance costs associated with terminated employees which is
included in restructuring and other charges. The Company expects to pay
approximately $7.0 million in severance benefits to terminated employees
during the first quarter of 1999. The balance of the $12.0 million severance
accrual will be paid during the remaining nine months of 1999.
NOTE 5: Accounts and Notes Receivable
Accounts and notes receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Accounts receivable.......................................... $552.8 $654.2
Notes receivable............................................. 8.2 9.7
------ ------
Total...................................................... 561.0 663.9
Allowance for uncollectible accounts......................... (14.3) (16.2)
Other........................................................ 16.0 26.2
------ ------
Accounts and notes receivable, net......................... $562.7 $673.9
====== ======
</TABLE>
The changes in allowance for uncollectible accounts consisted of the
following:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
(in millions)
<S> <C> <C> <C>
Balance at beginning of year............................ $16.2 $15.4 $13.7
Provision charged to expense............................ 12.7 17.3 13.5
Accounts written off, net of recoveries................. (14.6) (16.5) (11.8)
----- ----- -----
Balance at end of year.................................. $14.3 $16.2 $15.4
===== ===== =====
</TABLE>
NOTE 6: Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Crude oil and other feedstocks............................... $283.9 $342.7
Refined and other finished products and convenience store
items....................................................... 296.9 340.5
Materials and supplies....................................... 54.8 57.8
------ ------
Total inventories.......................................... $635.6 $741.0
====== ======
</TABLE>
50
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1998 and 1997, the Company recorded a $133.4 million and an $11.1
million, respectively, non-cash reduction in the carrying value of crude oil
and refined product inventories to reduce such inventories to market value
which was lower than LIFO cost. At December 31, 1998, the LIFO value of the
Company's crude oil and refined product inventories was based on an average
cost of $20.97 per barrel. However the average market price was $16.95 per
barrel; therefore requiring the non-cash reduction to inventories.
NOTE 7: Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
December 31,
Estimated --------------------
Useful Lives 1998 1997
------------ --------- ---------
(in millions)
<S> <C> <C> <C>
Refining................................ 15--30 years $ 3,186.7 $ 3,155.0
Retail.................................. 5--30 years 1,165.9 1,213.0
Petrochemical/NGL....................... 5--25 years 9.8 208.5
Other................................... 3--10 years 60.8 55.4
--------- ---------
Total................................. 4,423.2 4,631.9
Accumulated depreciation and
amortization........................... (1,162.0) (1,080.7)
--------- ---------
Property, plant and equipment, net.... $ 3,261.2 $ 3,551.2
========= =========
</TABLE>
The Company's investment in Petrochemical/NGL property, plant and equipment
was reduced September 1, 1998 in connection with the formation of Diamond Koch
L.L.C. (see note 8).
In March 1998, the Company recognized a pre-tax gain of $7.0 million resulting
from the sale of a 25% interest in the McKee to El Paso pipeline and El Paso
terminal to Phillips Petroleum Company. During 1997, the Company recognized a
pre-tax gain of $11.0 million resulting from the sale of an office building in
San Antonio, Texas, which was originally purchased to serve as the Company's
corporate headquarters.
Capitalized interest costs included in property, plant and equipment were $2.6
million, $2.8 million and $8.8 million for the years ended December 31, 1998,
1997 and 1996, respectively.
NOTE 8: Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Goodwill and other intangibles, net of accumulated
amortization of $53.3 million in 1998 and $37.1 million in
1997......................................................... $259.1 $265.9
Non-current notes receivable, net of allowances of $0.9
million in 1998 and $1.0 million in 1997..................... 27.8 31.9
Refinery maintenance turnaround costs, net of accumulated
amortization of $27.4 million in 1998 and $36.5 million in
1997......................................................... 48.6 31.5
Equity investment in Diamond-Koch............................. 114.2 --
Other non-current assets...................................... 98.3 103.4
------ ------
Other assets, net............................................. $548.0 $432.7
====== ======
</TABLE>
51
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 1, 1998, the Company and Koch Hydrocarbon Company, a division of
Koch Industries, Inc. and Koch Pipeline Company, L.P., an affiliate of Koch
Industries, Inc. (Koch), finalized the formation of Diamond-Koch L.L.C. and
three related partnerships (collectively, Diamond-Koch), a 50-50 joint venture
primarily related to each entity's Mont Belvieu petrochemical assets. Koch
contributed its interest in its Mont Belvieu natural gas liquids fractionator
facility and certain of its pipeline and supply systems. The Company
contributed its interests in its propane/propylene splitters and related
distribution pipeline and terminal and its interest in its Mont Belvieu
hydrocarbon storage facilities. Effective with the formation on September 1,
1998, the Company transferred the carrying value of the various net assets
contributed of $110.7 million to its investment in Diamond-Koch, which is
accounted for using the equity method.
During 1998, the Company recognized equity income of $3.5 million from
Diamond-Koch. In addition, in September 1998, the Company received $27.0
million from Diamond-Koch for reimbursement of the cost to construct the third
propane/propylene splitter which was completed in August 1998 and transferred
to Diamond-Koch in September 1998.
NOTE 9: Notes Payable and Long-Term Debt
Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
Maturity 1998 1997
-------- -------- --------
(in millions)
<S> <C> <C> <C>
8.25% Notes .................................... 1999 $ 175.0 $ 175.0
8.625% Guaranteed Notes......................... 2002 274.6 274.4
Medium-term Notes:
8.0%.......................................... 2005 149.8 149.8
9.375%........................................ 2001 75.0 75.0
8.5% (average rate)........................... 2003 24.0 24.0
7.4% (average rate)........................... 2005 46.0 46.0
Debentures:
7.65%......................................... 2026 100.0 100.0
7.25% Non-callable............................ 2010 25.0 25.0
8.75% Non-callable............................ 2015 75.0 75.0
8.00%......................................... 2023 100.0 100.0
Total Senior Notes:
7.20%......................................... 2017 200.0 200.0
6.75%......................................... 2037 100.0 100.0
7.45%......................................... 2097 100.0 100.0
Money Market Lines of Credit.................... -- 40.0
Commercial Paper................................ 274.8 246.8
U.S. Bank Facility.............................. 2002 100.0 --
10.75% Senior Notes............................. 1999 30.0 60.0
9.50% Mortgages................................. 2003 37.0 41.5
Other........................................... Various 45.8 40.4
-------- --------
Total debt.................................... 1,932.0 1,872.9
Less current portion............................ (5.8) (6.5)
-------- --------
Long-term debt, less current portion.......... $1,926.2 $1,866.4
======== ========
</TABLE>
52
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Generally, the Company's outstanding debt is unsecured with interest payable
semi-annually. The 10.75% Senior Notes require annual installment payments of
$30.0 million through April 1999. Mortgages are recorded at their net present
value and are secured by retail properties owned by the Company.
In 1992, Ultramar Credit Corporation (UCC), a financing subsidiary, issued the
8.625% Guaranteed Notes in a public offering and such notes are guaranteed by
the Company.
On October 14, 1997, the Company completed a public offering of $400.0 million
of senior notes (the Total Senior Notes) to refinance most of the debt
incurred to finance the acquisition of Total. The 2017 Notes and the 2097
Notes may be redeemed at any time at the option of the Company, in whole or in
part, at a redemption price equal to the greater of: (a) 100% of the principal
amount, or (b) the sum of the present value of outstanding principal and
interest thereon, discounted at the U.S. Treasury Yield plus 20 basis points,
together with accrued interest, if any, to the date of redemption. The 2037
Notes may be redeemed, in whole or in part, by the holders on October 15,
2009, at a redemption price equal to 100% of the principal plus accrued
interest. After October 15, 2009, the 2037 Notes are redeemable at the option
of the Company in the same manner as the 2017 Notes and 2097 Notes.
As of December 31, 1998, the Company had available money market lines of
credit with numerous financial institutions which provide the Company with
additional uncommitted capacity of $460.0 million and Cdn. $235.0 million.
Borrowings under the money market lines are typically short-term and bear
interest at prevailing market rates as established by the financial
institutions. At December 31, 1998, there were no outstanding borrowings under
these money market lines. At December 31, 1997, there were outstanding
borrowings of $40.0 million with a weighted average interest rate of 6.12%.
As of December 31, 1998, the Company's committed bank facilities consisted of:
. a U.S. facility under which the Company may borrow and obtain letters of
credit in an aggregate amount of $700.0 million (the U.S. Bank
Facility), and
. a Canadian facility under which the Company's Canadian subsidiary,
Canadian Ultramar Company (CUC), may borrow, issue bankers' acceptances
and obtain letters of credit in an aggregate amount of Cdn. $200.0
million (the Canadian Bank Facility and together with the U.S. Bank
Facility, the Revolving Credit Facilities).
The Company must pay annual fees of 11 basis points on the total used and
unused portion of the Revolving Credit Facilities. The interest rate under the
Revolving Credit Facilities is floating based upon the prime rate, the London
interbank offered rate or other floating interest rates, at the option of the
Company. Amounts outstanding under the Revolving Credit Facilities are due in
2002, upon expiration. The Company also has a $700.0 million commercial paper
program supported by the U.S. Bank Facility. Outstanding letters of credit
totaled $104.6 million and $116.7 million as of December 31, 1998 and 1997,
respectively.
Borrowings under the commercial paper program, money market lines of credit,
8.25% Notes and the 10.75% Senior Notes were classified as long-term based on
the Company's ability and intent to refinance these amounts on a long-term
basis, using its Revolving Credit Facilities.
In addition to the Revolving Credit Facilities, the Company has $1.0 billion
available under universal shelf registrations previously filed with the
Securities and Exchange Commission. The net proceeds from any debt or equity
offering under the universal shelf registrations would add to the Company's
working capital and would be available for general corporate purposes.
53
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate maturities, after consideration of refinancing, of notes payable
and long-term debt as of December 31, 1998 were as follows (in millions):
<TABLE>
<S> <C>
1999............................................................... $ 5.8
2000............................................................... 14.8
2001............................................................... 86.5
2002............................................................... 875.6
2003............................................................... 35.0
Thereafter......................................................... 914.3
--------
Total notes payable and long-term debt........................... $1,932.0
========
</TABLE>
The Revolving Credit Facilities and the indentures governing the various Notes
contain restrictive covenants relating to the Company and its financial
condition, operations and properties. Under these covenants, as amended, the
Company and certain of its subsidiaries are required to, among other things,
maintain consolidated interest coverage and debt-to-total capital ratios.
Although these covenants have the effect of limiting the Company's ability to
pay dividends, it is not anticipated that such limitations will affect the
Company's present ability to pay dividends. As of December 31, 1998, under the
most restrictive of these covenants, as amended, $330.6 million was available
for the payment of dividends.
In order to manage interest costs on its outstanding debt, the Company has
entered into various types of interest rate swap agreements (see note 17). In
December 1997, the Company entered into interest rate swap agreements the
effect of which is to modify the interest rate characteristics of a portion of
its debt from a fixed to a floating rate. As of December 31, 1998 and 1997,
the Company had the following interest rate swap agreements outstanding:
<TABLE>
<CAPTION>
Year of Maturity
----------------------
Fixed to Floating 2002 2005 2023
----------------- ------ ------ ------
<S> <C> <C> <C>
Notional amount (in millions)........................ $200.0 $150.0 $100.0
Weighted average rate received....................... 6.24% 6.36% 6.93%
</TABLE>
Interest payments totaled $141.7 million, $125.7 million and $122.8 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 10: Company Obligated Preferred Stock of Subsidiary
On June 25, 1997, UDS Capital I (the Trust) issued $200.0 million of 8.32%
Trust Originated Preferred Securities (TOPrS) in an underwritten public
offering. Distributions on the TOPrS are cumulative and payable quarterly in
arrears, at the annual rate of 8.32% of the liquidation amount of $25.00 per
TOPrS.
The TOPrS were issued by the Trust using a partnership, UDS Funding I, L.P.
Both entities are wholly-owned by the Company. The Company has guaranteed, on
a subordinated basis, the dividend payments due on the TOPrS if and when
declared. The proceeds from the issuance of the TOPrS were used to reduce
long-term debt of the Company.
NOTE 11: Stockholders' Equity
5% Cumulative Convertible Preferred Stock
The Company's 5% Cumulative Convertible Preferred Stock, originally issued in
the Merger, contained a redemption feature that allowed the Company to redeem
the preferred stock for Common Stock if the Common
54
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock traded above $33.77 per share for 20 of any 30 consecutive trading days.
On February 27, 1998, the trading threshold was reached. On March 18, 1998,
all 1,724,400 shares outstanding of preferred stock were redeemed for Common
Stock at a conversion rate of 1.9246 shares of Common Stock for each share of
preferred stock. A total of 3,318,698 shares of Common Stock were issued. The
Company declared and paid dividends of $0.625 per share on its 5% Cumulative
Convertible Preferred Stock in each quarter of 1997 and the first quarter of
1998, prior to conversion.
Common Stock Buyback Program
On July 28, 1998, the Board of Directors approved a $100.0 million stock
buyback program to purchase shares of Common Stock in the open market. The
purchase of Common Stock was funded using available cash flow from operations.
The purchased stock will be used to fund future employee benefit obligations
of the Company. The buyback program was completed in December 1998 and the
Company had purchased 3,740,400 shares of its Common Stock as of December 31,
1998.
Incentive Plans
The Company has adopted several Long-Term Incentive Plans (the LTIPs) which
are administered by the Compensation Committee of the Board of Directors (the
Committee). Under the terms of the LTIPs, the Committee may grant restricted
stock, stock options, stock appreciation rights and performance units to
officers and key employees of the Company. The vesting period for awards under
the LTIPs are established by the Committee at the time of grant. Restricted
shares awarded under the Company's 1992 and 1996 LTIPs generally vest on the
third anniversary of the date of grant. Restricted shares granted under the
Company's 1987 and 1990 LTIPs vest generally over a four-year period. Stock
options may not be granted at less than the fair market value of the Company's
Common Stock at the date of grant and may not expire more than ten years from
the date of grant. Options granted by Diamond Shamrock prior to the Merger
become exercisable 40%, 30% and 30% on the first, second and third
anniversaries of the date of grant. Under the terms of Ultramar's 1992 LTIP,
upon the occurrence of a change in control, all rights and options become
immediately vested and exercisable, and all restricted shares immediately
vest. As a result, upon consummation of the Merger, 1,152,920 stock options
became vested and exercisable and 24,898 restricted shares vested. At December
31, 1998 and 1997, there were no stock appreciation rights outstanding.
During 1998 and 1997, the Company did not grant any restricted shares or
performance units. During 1996, the Company granted 48,106 restricted shares
and 2,374,356 performance units. The Company did not recognize compensation
expense related to performance units during 1998 and 1997. During 1996, the
Company recognized compensation expense of $2.9 million related to the
performance units.
55
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option transactions under the various LTIPs are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding January 1, 1996...................... 3,443,239 $21.86
Granted......................................... 3,902,675 29.82
Canceled........................................ (275,255) 26.25
Exercised....................................... (707,526) 19.98
---------
Outstanding December 31, 1996.................... 6,363,133 26.76
Granted......................................... 203,360 31.33
Additions from Total acquisition................ 675,595 33.37
Canceled........................................ (128,089) 33.54
Exercised....................................... (327,720) 21.06
---------
Outstanding December 31, 1997.................... 6,786,279 27.74
Granted......................................... 1,350,120 28.60
Canceled........................................ (539,343) 33.38
Exercised....................................... (400,457) 24.32
---------
Outstanding December 31, 1998.................... 7,196,599 27.67
=========
</TABLE>
The stock options granted during 1998, 1997 and 1996 vest as follows:
<TABLE>
<CAPTION>
Number of
Vesting Period Options
-------------- ---------
<S> <C>
30%, 30%, and 40% on the first, second and third anniversaries.... 3,057,560
40%, 30%, and 30% on the first, second and third anniversaries.... 343,675
100% on the second anniversary.................................... 61,170
100% in 4 1/2 years from date of grant............................ 1,993,750
---------
5,456,155
=========
</TABLE>
For options issued with a 4 1/2 year vesting period, accelerated vesting will
occur if the market price of the Company's Common Stock reaches prescribed
levels prior to such time. The above stock options have terms ranging from 5
to 10 years. As of December 31, 1998, there were 1,970,869 options available
for future issuance under the LTIPs. Effective December 1, 1998, the Committee
eliminated shares available for future issuance from the Total 1990 Stock
Incentive Plan, the Ultramar 1992 LTIP and the Diamond Shamrock 1987 LTIP.
As of December 31, 1998, 1997 and 1996, exercisable stock options totaled 3.6
million, 3.1 million and 2.9 million options, respectively, and had weighted
average exercise prices of $25.70, $24.29 and $23.04 per option, respectively.
Stock options outstanding and exercisable as of December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Number Remaining Life Average Number Average
Range of Exercise Price Outstanding In Years Exercise Price Exercisable Exercise Price
----------------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$15.00--$19.49.......... 647,592 3.5 $16.71 647,592 $16.71
$20.40--$24.88.......... 905,014 5.0 23.55 905,014 23.55
$25.00--$29.90.......... 2,255,252 6.7 27.30 1,175,121 28.06
$30.13--$34.63.......... 3,190,524 7.8 30.73 684,139 30.50
$35.53--$37.66.......... 186,614 5.4 36.42 133,813 36.61
$46.40.................. 11,603 1.9 46.40 11,603 46.40
--------- ---------
$15.00--$46.40.......... 7,196,599 6.3 27.67 3,557,282 25.70
========= =========
</TABLE>
56
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company accounts for its stock option plans using the intrinsic value
method and, accordingly, has not recognized compensation expense for its stock
options granted. Had the Company accounted for stock options granted in 1998,
1997 and 1996 using the fair value method at the date of grant, additional
compensation expense would have been recorded and the pro forma effect would
have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ ------------
(in millions, except per share data)
<S> <C> <C> <C>
Pro forma net income (loss)....... $ (84.7) $ 145.3 $ (44.2)
Pro forma net income (loss) per
share:
Basic........................... $ (0.96) $ 1.86 $ (0.59)
Diluted......................... (0.96) 1.76 (0.59)
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996 was $4.76, $5.23 and $5.83 per option,
respectively.
For purposes of the pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting periods. The fair value for
these options was estimated at the respective grant dates using the Black-
Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Expected volatility...................... 19%-25% 19%-22% 22%-23%
Expected dividend yield.................. 3.70%-3.90% 3.96%-4.08% 3.34%-3.48%
Expected life............................ 4 years 4 years 4-6 years
Risk free interest rate.................. 4.04%-5.66% 5.83%-6.40% 5.45%-6.07%
</TABLE>
In January 1993, the Committee adopted the Ultramar Corporation Annual
Incentive Plan (Ultramar AIP) which provides for cash and restricted common
stock awards to officers and key employees of the Company. Annual awards under
the Ultramar AIP are generally based on attainment of various performance
measures established by the Committee. Restricted shares awarded under the
terms of the Ultramar AIP generally vest on the second anniversary of the date
of grant. For the year ended December 31, 1996, Ultramar AIP cash awards
totaled $8.4 million. Effective December 1, 1998, the Committee eliminated the
shares available for future issuance under the Ultramar AIP.
During 1997 and 1998, the Committee adopted the 1997 and 1998 Annual Incentive
Plans (AIP) which provide for cash awards based on certain criteria to
officers and key employees of the Company. For the years ended December 31,
1998 and 1997, the related AIP expense was $6.5 million and $8.1 million,
respectively.
A Performance Incentive Plan (PIP) had been adopted by Diamond Shamrock under
which the Committee granted cash awards and restricted stock to eligible
employees. In 1997, the PIP was terminated and replaced with the AIP. For the
years ended December 31, 1997 and 1996, the Company expensed $13.8 million and
$4.3 million, respectively, under this plan.
Prior to the Merger, Diamond Shamrock had established two Employee Stock
Ownership Plans (ESOPs). ESOP I was formed in June 1987, and ESOP II was
formed in April 1989. All employees of Diamond Shamrock who had attained a
minimum length of service and satisfied other plan requirements were eligible
to participate in the ESOPs, except that ESOP II excluded employees covered by
any collective bargaining agreements.
Prior to 1993, Diamond Shamrock loaned the ESOPs $65.8 million to purchase
shares of the Company's Common Stock and contributed 82,400 treasury shares of
its Common Stock to ESOP I as part of special award
57
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and success sharing programs. The Company made contributions to the ESOPs in
sufficient amounts, when combined with dividends on the Common Stock, to
retire the principal and to pay interest on the loans used to fund the ESOPs.
Common Shares were allocated to participants and included in the computation
of income per share as the payments of principal and interest were made on the
loans. Contributions to the ESOPs that were charged to expense for 1997 and
1996 were $3.5 million and $5.6 million, respectively. Dividend and interest
income reduced the amounts charged to expense in 1997 and 1996 by $1.4 million
and $1.7 million, respectively.
On November 14, 1997, the Company prepaid $29.6 million of the 8.77% Senior
Notes which had been issued to acquire Company Common Stock for the ESOPs. As
a result of the termination of the ESOPs, prepayment of the 8.77% Senior Notes
was necessary and the Company purchased, as treasury stock, the Common Stock
of the Company held by the ESOPs which had not been allocated to participants
by November 14, 1997. The ESOPs were terminated as a part of restructuring the
benefit plans of the Company pursuant to the Merger. The Company incurred an
extraordinary loss of $4.8 million, net of income tax benefit of $3.2 million,
as a result of terminating the ESOPs and prepaying the 8.77% Senior Notes.
Under the terms of the Company's Non-Employee Director Equity Plan, non-
employee directors of the Company are granted restricted shares on the date
elected to the Board equal to at least 50% of the non-employee director's
annual retainer. Additional restricted shares are granted to the non-employee
director every five years following the initial date of grant. In addition,
each non-employee director is granted options for 1,000 shares at each annual
meeting of the Company. The options are fully exercisable at the following
annual meeting. The options expire ten years from the date of grant. During
1998 and 1997, 10,000 shares were granted annually. As of December 31, 1998, a
total of 44,944 shares are available for future issuance under this plan.
In December 1993, the Committee adopted the Ultramar Corporation Stock
Purchase Plan and Dividend Reinvestment Plan which allows eligible holders of
the Company's Common Stock to use dividends to purchase Company Common Stock
and to make optional cash payments to buy additional shares of Common Stock.
The Company has reserved a total of 2,000,000 shares of Common Stock for
issuance under this plan. As of December 31, 1998, a total of 26,658 shares
had been issued under the plan and 1,973,342 shares remain available for
future issuance.
58
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12: Computation of Net Income (Loss) Per Share
Basic net income (loss) per share is calculated as net income (loss) less
preferred stock dividends divided by the weighted average number of Common
Shares outstanding. Diluted net income (loss) per share assumes, when
dilutive, issuance of the net incremental shares from stock options and
restricted stock, and conversion of the 5% Cumulative Convertible Preferred
Shares. The following table reconciles the net income (loss) amounts and share
numbers used in the computation of net income (loss) per share.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(in millions, except per share data)
<S> <C> <C> <C>
Basic Income (Loss) Per Share:
Weighted average Common Shares
outstanding (in thousands).......... 88,555 78,120 74,427
============ ============ ============
Income (loss) before extraordinary
loss................................ $ (78.1) $ 159.6 $ (35.9)
Dividends on 5% Cumulative
Convertible Preferred Stock......... (1.1) (4.3) (4.3)
------------ ------------ ------------
Income (loss) applicable to Common
Shares.............................. (79.2) 155.3 (40.2)
Extraordinary loss on debt
extinguishment...................... -- (4.8) --
------------ ------------ ------------
Net income (loss) applicable to
Common Shares..................... $ (79.2) $ 150.5 $ (40.2)
============ ============ ============
Per Share Amounts
Income (loss) before extraordinary
loss................................ $ (0.89) $ 1.99 $ (0.54)
Extraordinary loss on debt
extinguishment...................... -- (0.06) --
------------ ------------ ------------
Net income (loss).................. $ (0.89) $ 1.93 $ (0.54)
============ ============ ============
Diluted Income (Loss) Per Share:
Weighted average Common Shares
outstanding (in thousands).......... 88,555 78,120 74,427
Net effect of dilutive stock
options--based on the treasury stock
method using the average market
price............................... -- 985 --
Assumed conversion of 5% Cumulative
Convertible Preferred Stock......... -- 3,319 --
------------ ------------ ------------
Weighted average common equivalent
shares............................ 88,555 82,424 74,427
============ ============ ============
Income (loss) before extraordinary
loss................................ $ (78.1) $ 159.6 $ (35.9)
Dividends on 5% Cumulative
Convertible Preferred Stock......... (1.1) -- (4.3)
------------ ------------ ------------
Income (loss) applicable to Common
Shares.............................. (79.2) 159.6 (40.2)
Extraordinary loss on debt
extinguishment...................... -- (4.8) --
------------ ------------ ------------
Net income (loss) applicable to
common equivalent shares.......... $ (79.2) $ 154.8 $ (40.2)
============ ============ ============
Per Share Amounts
Income (loss) before extraordinary
loss................................ $ (0.89) $ 1.94 $ (0.54)
Extraordinary loss on debt
extinguishment...................... -- (0.06) --
------------ ------------ ------------
Net income (loss).................. $ (0.89) $ 1.88 $ (0.54)
============ ============ ============
</TABLE>
NOTE 13: Employee Benefit Plans
The Company has several qualified, non-contributory defined benefit plans (the
Qualified Plans) covering substantially all of its salaried employees in the
United States and Canada, including certain plans subject to collective
bargaining agreements. These plans generally provide retirement benefits based
on years of service and compensation during specific periods. Senior
executives and key employees covered by these plans are also entitled to
participate in various unfunded supplemental executive retirement plans which
provide retirement
59
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
benefits based on years of service and compensation, including compensation
not permitted to be taken into account under the Qualified Plans (the
Supplemental Plans and together with the Qualified Plans, the Pension Plans).
Under the Qualified Plans, the Company's policy is to fund normal cost plus
the amortization of the unfunded actuarial liability for costs arising from
qualifying service determined under the projected unit credit method. The
underlying pension plan assets include cash equivalents, fixed income
securities (primarily obligations of the U.S. government) and equity
securities.
The following table summarizes the changes in benefit obligation and changes
in plan assets for pension benefits for the Pension Plans and other
postretirement benefits for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
-------------- ----------------
1998 1997 1998 1997
------ ------ ------- -------
(in millions)
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year..... $273.3 $102.2 $ 84.8 $ 62.9
Service cost.............................. 15.5 10.2 1.9 1.8
Interest cost............................. 21.2 10.4 5.5 4.9
Plan participant's contributions.......... 0.3 -- -- --
Plan amendments........................... 5.2 19.3 -- (13.3)
Actuarial loss (gain)..................... 9.2 27.3 (3.3) (10.0)
Acquisition of Total...................... -- 120.6 -- 42.2
Foreign currency exchange rate changes.... -- -- (0.7) (0.5)
Benefits paid............................. (20.6) (16.7) (5.6) (3.2)
------ ------ ------- -------
Benefit obligation at end of year........... 304.1 273.3 82.6 84.8
------ ------ ------- -------
Change in Plan Assets:
Fair value of plan assets at beginning of
year....................................... 234.4 87.2 -- --
Actual return on plan assets.............. 40.6 19.7 -- --
Acquisition of Total...................... -- 131.6 -- --
Employer contributions.................... 5.9 12.6 5.6 3.2
Plan participant's contributions.......... 0.3 -- -- --
Benefits paid............................. (20.6) (16.7) (5.6) (3.2)
------ ------ ------- -------
Fair value of plan assets at end of year.... 260.6 234.4 -- --
------ ------ ------- -------
Funded status at end of year................ (43.5) (38.9) (82.6) (84.8)
Unrecognized net actuarial loss (gain).... 5.1 16.8 (15.9) (13.6)
Unrecognized prior service cost........... 25.2 22.4 (14.6) (15.8)
Unrecognized net transition obligation.... 0.3 0.4 -- --
------ ------ ------- -------
Prepaid (accrued) benefit cost.............. $(12.9) $ 0.7 $(113.1) $(114.2)
====== ====== ======= =======
Amounts recognized in the consolidated
balance sheets:
Prepaid benefit cost...................... $ 17.8 $ 15.4 $ -- $ --
Accrued benefit liability................. (30.7) (14.7) (113.1) (114.2)
------ ------ ------- -------
Net amount recognized at end of year........ $(12.9) $ 0.7 $(113.1) $(114.2)
====== ====== ======= =======
Weighted average assumptions:
Discount rate............................. 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets............ 9.00% 9.00% N/A N/A
Rate of compensation increase............. 4.25% 4.50% 4.25% 4.50%
Health care cost trend on covered
charges.................................. N/A N/A 6.10% 7.60%
</TABLE>
60
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The health care cost trend rate was assumed to decrease gradually to 5.40% by
the year 2001 and remain at that level thereafter.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the Pension Plans with accumulated benefit
obligations in excess of plan assets consisted of the following:
<TABLE>
<CAPTION>
December
31,
-----------
1998 1997
----- -----
(in
millions)
<S> <C> <C>
Projected benefit obligation.................................... $40.7 $34.4
Accumulated benefit obligation.................................. 34.2 27.0
Fair value of plan assets....................................... 27.0 22.7
</TABLE>
The following table summarizes the components of net periodic benefit cost for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------ ----------------
1998 1997 1996 1998 1997 1996
----- ----- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost........................ $15.5 $10.2 $8.8 $1.9 $1.8 $1.9
Interest cost....................... 21.2 10.4 7.1 5.5 4.9 4.5
Expected return on plan assets...... (20.2) (10.2) (6.0) -- -- --
Amortization of:
Prior service cost................ 2.4 -- -- (1.2) (0.3) --
Actuarial loss (gain)............. 0.5 1.1 0.5 (1.0) (0.6) (0.7)
Curtailment charge................ -- 2.5 -- -- -- --
Settlement credit................. -- (3.6) (0.5) -- -- --
----- ----- ---- ---- ---- ----
Net periodic benefit cost........... $19.4 $10.4 $9.9 $5.2 $5.8 $5.7
===== ===== ==== ==== ==== ====
</TABLE>
The Company also maintains a retirement plan for certain Diamond Shamrock and
Total collective bargaining groups (the Bargaining Unit Plans). The Bargaining
Unit Plans generally provide benefits that are based on the union member's
monthly base pay during the five years prior to retirement.
As a result of the Merger, the Company assumed obligations with respect to a
retirement plan for the former non-employee Directors of Diamond Shamrock (the
Directors Plan). The Directors Plan provides an annual retirement benefit for
a period of time equal to the shorter of (a) length of service as a non-
employee director, or (b) life of director. Following the Merger, the Company
discontinued future contributions to the Directors Plan.
The Company also maintains several defined contribution retirement plans for
substantially all its eligible employees in the United States and Canada.
Contributions to the plans are generally determined as a percentage of each
eligible employee's salary. The aggregate costs of these plans amounted to
$7.1 million, $4.0 million and $8.0 million during the years ended December
31, 1998, 1997 and 1996, respectively.
The Company sponsors unfunded defined benefit postretirement plans which
provide health care and life insurance benefits to retirees who satisfy
certain age and service requirements. In addition, pursuant to the terms of a
distribution agreement between Diamond Shamrock and Maxus, Diamond Shamrock's
parent company prior to its 1987 spin-off, the Company also shares in the cost
of providing similar benefits to former employees of Maxus (see note 16).
61
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Generally, the health care plans pay a stated percentage of most medical
expenses reduced for any deductibles, payments made by government programs and
other group coverage. The cost of providing these benefits is shared with
retirees.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1% 1%
Increase Decrease
-------- --------
(in millions)
<S> <C> <C>
Effect on total of
service and interest
cost components........ $0.4 $(0.3)
Effect on postretirement
benefit obligation..... 4.4 (3.7)
</TABLE>
NOTE 14: Income Taxes
Income (loss) before income taxes, extraordinary loss and dividends of
subsidiary consisted of the following:
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1998 1997 1996
------- ------ -------
(in millions)
<S> <C> <C> <C>
United States....................................... $(132.2) $187.2 $(110.7)
Canada.............................................. 68.2 88.0 70.5
------- ------ -------
Total............................................. $ (64.0) $275.2 $ (40.2)
======= ====== =======
</TABLE>
Provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1998 1997 1996
----- ------ -----
(in millions)
<S> <C> <C> <C>
Current:
U.S. Federal........................................ $ -- $ (1.0) $20.2
U.S. State.......................................... -- 1.8 1.5
Canada.............................................. 12.8 4.6 19.7
----- ------ -----
Total current..................................... 12.8 5.4 41.4
----- ------ -----
Deferred:
U.S. Federal........................................ (24.6) 68.1 (43.4)
U.S. State.......................................... 0.6 6.9 (10.2)
Canada.............................................. 15.0 29.8 7.9
----- ------ -----
Total deferred.................................... (9.0) 104.8 (45.7)
----- ------ -----
Provision (benefit) for income taxes.................. $ 3.8 $110.2 $(4.3)
===== ====== =====
</TABLE>
62
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the consolidated
financial statements. The components of the Company's deferred income tax
liabilities and assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
(in millions)
<S> <C> <C>
Deferred tax liabilities:
Excess of book basis over tax basis of:
Property, plant and equipment........................ $(524.7) $(510.9)
Investment in Diamond-Koch........................... (16.1) --
LIFO inventory and market valuation allowance.......... (5.5) (36.9)
Deferred refinery maintenance turnaround costs......... (32.6) (26.3)
------- -------
Total deferred tax liabilities....................... (578.9) (574.1)
------- -------
Deferred tax assets:
Accrued liabilities and payables....................... 181.9 193.0
U.S. Federal and State income tax credit
carryforwards......................................... 89.9 95.9
Canadian tax benefit on unrealized foreign exchange
adjustment............................................ 5.5 5.8
Net operating loss carryforwards....................... 194.2 138.3
Other.................................................. 12.1 12.8
------- -------
Total deferred tax assets............................ 483.6 445.8
Less valuation allowance............................... (11.3) (8.4)
------- -------
Net deferred tax liability........................... $(106.6) $(136.7)
======= =======
</TABLE>
As of December 31, 1998, the Company had the following U.S. Federal and State
income tax credit and loss carryforwards:
<TABLE>
<CAPTION>
Amount Expiration
------------- -----------------
(in millions)
<S> <C> <C>
U.S. Federal and State
income tax credits..... $ 39.2 1999 through 2018
Alternative minimum tax
(AMT) credits.......... 50.7 Indefinitely
Net operating losses
(NOL).................. 481.5 2004 through 2018
</TABLE>
Included in the above are $18.3 million of income tax credit carryforwards,
$49.8 million of AMT credits and $178.3 million of NOL carryforwards acquired
from Total, NCS and Diamond Shamrock, which are subject to annual U.S. Federal
income tax limitations.
The Company has established a valuation allowance for certain deferred tax
assets, primarily State NOL and credit carryforwards, which may not be
realized in future periods. The realization of net deferred tax assets
recorded as of December 31, 1998 is dependent upon the Company's ability to
generate future taxable income in both the U.S. and Canada. Although
realization is not assured, the Company believes it is more likely than not
that the net deferred tax assets will be realized.
63
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences between the Company's effective income tax rate and the U.S.
Federal statutory rate is reconciled as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1998 1997 1996
----- ---- ------
(in millions)
<S> <C> <C> <C>
U.S. Federal statutory rate......................... (35.0)% 35.0% (35.0)%
Effect of foreign operations........................ 6.1 1.3 7.3
U.S. State income taxes, net of U.S. Federal taxes.. 4.7 2.1 (14.2)
Non-deductible reserves............................. -- -- 11.2
Non-deductible merger costs......................... -- -- 11.2
Non-deductible goodwill amortization and impairment
charge............................................. 28.6 1.2 7.0
Other............................................... 1.5 0.4 1.8
----- ---- ------
Effective income tax rate......................... 5.9% 40.0% (10.7)%
===== ==== ======
</TABLE>
Income taxes paid net of refunds for the years ended December 31, 1998, 1997
and 1996 amounted to $3.2 million (refund), $16.8 million and $9.6 million,
respectively.
NOTE 15: Environmental Matters
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities in the jurisdictions in which the
Company operates. Accordingly, the Company has adopted policies, practices and
procedures in the areas of pollution control, product safety, occupational
health and the production, handling, storage, use and disposal of hazardous
materials to prevent material environmental or other damage, and to limit the
financial liability which could result from such events. However, some risk of
environmental or other damage is inherent in the business of the Company, as
it is with other companies engaged in similar businesses.
The Company has been designated as a potentially responsible party by the U.S.
Environmental Protection Agency (the EPA) under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, and by
certain states under applicable state laws, with respect to the cleanup of
hazardous substances at several sites. In each instance, other potentially
responsible parties also have been so designated. The Company has accrued
liabilities for environmental remediation obligations at these sites, as well
as estimated site restoration costs to be incurred in the future.
The balances of and changes in accruals for environmental matters which are
principally included in other long-term liabilities consisted of the
following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Balance at beginning of year................... $ 213.9 $ 151.4 $ 122.2
Purchase price adjustment for Total.......... 39.7 80.0 --
Additions to accrual......................... -- 1.3 41.7
Payments..................................... (34.2) (18.8) (12.5)
-------- -------- --------
Balance at end of year......................... $ 219.4 $ 213.9 $ 151.4
======== ======== ========
</TABLE>
The 1996 additions to accrual include $37.0 million to conform the accounting
policies of Diamond Shamrock and Ultramar due to the Merger.
64
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accruals noted above represent the Company's best estimate of the costs
which will be incurred over an extended period for restoration and
environmental remediation at various sites. These liabilities have not been
reduced by possible recoveries from third parties and projected cash
expenditures have not been discounted. Environmental exposures are difficult
to assess and estimate due to unknown factors such as the magnitude of
possible contamination, the timing and extent of remediation, the
determination of the Company's liability in proportion to other parties,
improvements in cleanup technologies and the extent to which environmental
laws and regulations may change in the future. Although environmental costs
may have a significant impact on results of operations for any single period,
the Company believes that such costs will not have a material adverse effect
on the Company's financial position.
NOTE 16: Commitments and Contingencies
The Company leases convenience stores, office space and other assets under
operating leases with terms expiring at various dates through 2021. Certain
leases contain renewal options and escalation clauses and require the Company
to pay property taxes, insurance and maintenance costs. These provisions vary
by lease. Certain convenience store leases provide for the payment of rentals
based solely on sales volume while others provide for payments, in addition to
any established minimums, contingent upon the achievement of specified levels
of sales volumes.
Future minimum rental payments applicable to non-cancelable operating leases
as of December 31, 1998, are as follows (in millions):
<TABLE>
<S> <C>
1999................................................................. $ 75.0
2000................................................................. 62.4
2001................................................................. 53.1
2002................................................................. 45.5
2003................................................................. 37.8
Thereafter........................................................... 132.3
------
Gross lease payments............................................... 406.1
Less future minimum sublease rental income........................... (24.8)
------
Net future minimum lease payments.................................. $381.3
======
</TABLE>
Rental expense, net of sublease rental income, for all operating leases
consisted of the following:
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Minimum rental expense............................... $ 94.8 $ 76.7 $ 76.7
Contingent rental expense............................ 8.9 7.8 6.8
------ ------ ------
Gross rental expense................................. 103.7 84.5 83.5
Less sublease rental income.......................... (10.9) (10.9) (10.4)
------ ------ ------
Net rental expense................................... $ 92.8 $ 73.6 $ 73.1
====== ====== ======
</TABLE>
The Company has three long-term operating lease arrangements (the Brazos
Lease, the Jamestown Lease and the Total Lease) to accommodate its convenience
store construction program. The Brazos, Jamestown and Total Leases have lease
terms which will expire in December 2003, July 2003, and August 2002,
respectively. As of December 31, 1998, substantially all of the $190.0 million
Brazos Lease commitment has been used to construct or purchase convenience
stores and $102.4 million of the Jamestown and the Total Lease commitments,
65
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which totaled $165.0 million, have been used to construct or purchase
convenience stores and to construct the new corporate headquarters of the
Company in San Antonio, Texas. After their respective non-cancelable lease
terms, the Brazos, the Jamestown and the Total Leases may be extended by
agreement of the parties, or the Company may purchase or arrange for the sale
of the convenience stores or corporate headquarters. If the Company were
unable to extend the lease or arrange for the sale of the properties to a
third party at the respective expiration dates of the Leases, the amount
necessary to purchase the properties under the Leases as of December 31, 1998
would be approximately $285.9 million.
In conjunction with the construction of a high-pressure gas oil hydrotreater
at the Company's Wilmington Refinery, the Company entered into a long-term
contract for the supply of hydrogen. The contract commenced in 1996 and will
run for 15 years. The purchase price for the hydrogen is fixed, based on the
quantity and flow rate of product supplied. The contract has a take-or-pay
provision of $1.2 million per month. In November 1996, the Company also
entered into a contract for the supply of hydrogen to its Three Rivers
Refinery, containing a take-or-pay provision of $0.7 million per month, with
an initial term of 15 years.
Pursuant to the terms of various agreements, the Company has agreed to
indemnify the former owners of Ultramar, Inc. (UI) and CUC and certain of
their affiliates for any claims or liabilities arising out of, among other
things, refining and retail marketing activities and litigation related to the
operations of UI and CUC prior to their acquisition. The Company has also
agreed to indemnify two affiliates of the former owner against liability for
substantially all U.S. Federal, State and local income or franchise taxes in
respect of periods in which any UI company was a member of a consolidated,
combined or unitary return with any other member of the affiliated group.
In connection with the 1987 spin-off of Diamond Shamrock from Maxus, Diamond
Shamrock entered into a distribution agreement which provided for the sharing
by the Company and Maxus of certain liabilities relating to businesses Maxus
discontinued or disposed of prior to the spin-off date. The Company's total
liability for such shared costs was limited to $85.0 million. As of December
31, 1996, the Company has fully performed all of its obligations to Maxus
under the agreement including $8.3 million paid during 1996.
There are various legal proceedings and claims pending against the Company
which arise in the ordinary course of business. It is management's opinion,
based upon advice of counsel, that these matters, individually or in the
aggregate, will not have a material adverse effect on the Company's results of
operations or financial position.
In December 1998, the Company announced its plans to consider the sale of the
Company's Michigan assets which include the 52,000 barrel per day Alma
Refinery, refined product and crude oil pipelines, four terminals and 183
convenience stores. The Company has had very preliminary discussions with
several interested parties who are reviewing financial information related to
the assets. The Company has not received definitive offers and cannot
determine at this time whether a sale is probable of occurring.
NOTE 17: Financial Instruments
Financial instruments consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 176.1 $ 176.1 $ 92.0 $ 92.0
Non-current notes receivable....... 27.8 27.8 31.9 31.9
Long-term debt, including current
portion........................... (1,932.0) (2,021.8) (1,872.9) (1,999.2)
Interest rate swap agreements...... -- 18.7 (0.4) 5.9
Commodity futures and price swap
contracts......................... (39.6) (63.5) (0.9) (12.0)
</TABLE>
66
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and cash equivalents as of December 31, 1998 and 1997 include $114.2
million and $14.4 million of investments in marketable securities with
maturities of less than three months, respectively. The investments are
available for sale and are stated at cost, which approximates fair market
value. The aggregate carrying amount of non-current notes receivable
approximated fair value as determined based on the discounted cash flow
method.
The fair value of the Company's fixed rate debt as of December 31, 1998 and
1997 was $1,638.6 million and $1,712.4 million, respectively (carrying amounts
of $1,548.8 million and $1,586.1 million, respectively) and was estimated
based on the quoted market price of similar debt instruments. The carrying
amounts of the Company's borrowings under its revolving credit agreements and
money market facilities approximate fair value because such obligations
generally bear interest at floating rates.
The interest rate swap agreements subject the Company to market risk as
interest rates fluctuate and impact the interest payments due on the notional
amounts of the agreements. The fair value of interest rate swap agreements is
determined based on the differences between the contract rate of interest and
the rates currently quoted for agreements of similar terms and maturities.
The Company uses commodity futures contracts to manage its exposure to crude
oil and refined product price volatility and does not use such contracts with
the intent of producing speculative gains. These contracts are marked to
market value and gains and losses are recognized currently in cost of products
sold, as a component of the related crude oil and refined product purchases.
In addition, the Company has entered into various price swaps as price hedges
for which gains or losses will be recognized when the hedged transactions
occur; however, losses are recognized when future prices are not expected to
recover. The losses are recognized currently in cost of products sold.
As of December 31, 1998, the Company had outstanding commodity futures and
price swap contracts to purchase $312.0 million and sell $130.2 million of
crude oil and refined products or to settle differences between a fixed price
and market price on aggregate notional quantities of 8.6 million barrels of
crude oil and refined products which mature on various dates through June
2002. As of December 31, 1997, the Company had outstanding commodity futures
and price swap contracts to purchase $213.2 million and sell $62.7 million of
crude oil and refined products or to settle differences between a fixed price
and market price on aggregate notional quantities of 8.6 million barrels of
crude oil and refined products which mature on various dates through June
2002. The fair value of commodity futures contracts is based on quoted market
prices. The fair value of price swap contracts is determined by comparing the
contract price with current broker quotes for futures contracts corresponding
to the period that the anticipated transactions are expected to occur.
The Company also periodically enters into short-term foreign exchange
contracts to manage its exposure to exchange rate fluctuations on the trade
payables of its Canadian operations that are denominated in U.S. dollars.
These contracts involve the exchange of Canadian and U.S. currency at future
dates. Gains and losses on these contracts generally offset losses and gains
on the U.S. dollar denominated trade payables. At December 31, 1998, the
Company did not have any short-term foreign exchange contracts. At December
31, 1997, the Company had short-term foreign exchange contracts totaling $35.3
million. The Company generally does not hedge for the effects of foreign
exchange rate fluctuations on the translation of its foreign results of
operations or financial position.
The Company is subject to the market risk associated with changes in market
price of the underlying crude oil and refined products; however, except in the
case of the price swaps, such changes in values are generally offset by
changes in the sales price of the Company's refined products. The Company is
exposed to credit risk in the event of nonperformance by the counterparties in
all interest rate swap agreements, price swap contracts and foreign exchange
contracts. However, the Company does not anticipate nonperformance by any of
the counterparties. The amount of such exposure is generally the unrealized
gains or losses on such contracts.
67
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other financial instruments which potentially subject the Company to credit
risk consist principally of trade receivables. Concentration of credit risk
with respect to trade receivables is limited due to the large number of
customers comprising the Company's customer base and their dispersion across
different geographic areas. As of December 31, 1998, the Company had no
significant concentrations of credit risk.
NOTE 18: Business Segments and Geographic Information
The Company has three reportable segments: Refining, Retail and
Petrochemical/NGL. The Refining segment is engaged in the refining of crude
oil and wholesale marketing of refined products. It includes refinery
operations, wholesale operations, product supply and distribution, and
transportation operations. The Retail segment includes operations from
Company-operated convenience stores, dealers/jobbers and truckstop facilities,
cardlock and home heating oil operations. The Petrochemical/NGL segment
includes the equity earnings from Diamond-Koch and earnings from Nitromite
fertilizer operations, NGL marketing operations and certain NGL pipeline
operations.
The accounting policies for the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on earnings before interest, taxes and depreciation and
amortization (EBITDA). Intersegment sales are generally derived from
transactions made at prevailing market rates.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each business
requires different technology and marketing strategies.
<TABLE>
<CAPTION>
Petrochemical/
Refining Retail NGL Corporate Total
-------- -------- -------------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998:
Sales and other revenues
from external
customers............... $5,375.0 $5,497.6 $262.0 $ -- $11,134.6
Intersegment sales....... 2,090.0 5.3 16.6 -- 2,111.9
EBITDA................... 272.3 182.7 34.9 (189.7) 300.2
Depreciation and
amortization............ 160.4 67.2 7.1 2.7 237.4
Operating income (loss).. 111.9 115.5 27.8 (192.4) 62.8
Total assets............. 3,581.4 1,383.0 163.4 187.2 5,315.0
Capital expenditures..... 94.0 51.3 17.3 8.5 171.1
Year ended December 31,
1997:
Sales and other revenues
from external
customers............... 5,852.3 4,557.8 472.3 -- 10,882.4
Intersegment sales....... 1,822.8 4.0 45.1 -- 1,871.9
EBITDA................... 482.6 218.9 49.0 (166.0) 584.5
Depreciation and
amortization............ 123.1 59.8 9.8 7.4 200.1
Operating income (loss).. 359.5 159.1 39.2 (173.4) 384.4
Total assets............. 3,675.8 1,478.3 239.2 201.4 5,594.7
Capital expenditures and
acquisitions............ 127.1 114.3 20.5 6.0 267.9
Year ended December 31,
1996:
Sales and other revenues
from external
customers............... 5,361.5 4,385.8 461.1 -- 10,208.4
Intersegment sales....... 1,431.2 3.9 32.3 -- 1,467.4
EBITDA................... 263.3 61.7 23.0 (98.2) 249.8
Depreciation and
amortization............ 108.9 55.9 13.5 1.6 179.9
Operating income (loss).. 154.4 5.8 9.5 (99.8) 69.9
Total assets............. 2,874.7 1,047.6 240.0 257.7 4,420.0
Capital expenditures and
acquisitions............ 192.7 120.5 28.1 1.8 343.1
</TABLE>
68
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes the reconciliation of reportable segment sales and
other revenues, operating income, and assets to consolidated sales and other
revenues, operating income and total assets:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Sales and other revenues:
Total sales for reportable segments....... $13,246.5 $12,754.3 $11,675.8
Elimination of intersegment sales......... (2,111.9) (1,871.9) (1,467.4)
--------- --------- ---------
Consolidated sales and other revenues... $11,134.6 $10,882.4 $10,208.4
========= ========= =========
Operating income:
Total operating income for reportable
segments................................. $ 255.2 $ 557.8 $ 169.7
Other income (loss)....................... (192.4) (173.4) (99.8)
--------- --------- ---------
Consolidated operating income........... $ 62.8 $ 384.4 $ 69.9
========= ========= =========
Total assets:
Total assets for reportable segments...... $ 5,127.8 $ 5,393.3 $ 4,162.3
Other unallocated assets.................. 187.2 201.4 257.7
--------- --------- ---------
Consolidated total assets............... $ 5,315.0 $ 5,594.7 $ 4,420.0
========= ========= =========
</TABLE>
Geographic information by country for sales and other revenues from external
customers based on location of customer consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
United States................................. $ 8,823.6 $ 8,089.8 $ 7,412.3
Canada........................................ 2,311.0 2,792.6 2,796.1
--------- --------- ---------
Total consolidated sales and other revenues... $11,134.6 $10,882.4 $10,208.4
========= ========= =========
</TABLE>
Geographic information by country for long-lived assets consisted of the
following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(in millions)
<S> <C> <C>
United States............................................. $2,817.8 $3,066.9
Canada.................................................... 443.4 484.3
-------- --------
Total long-lived assets................................... $3,261.2 $3,551.2
======== ========
</TABLE>
NOTE 19: Subsequent Events (Unaudited)
On February 3, 1999, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on March 4, 1999, to holders of record on
February 18, 1999.
On October 8, 1998, the Company and Phillips Petroleum Company (Phillips)
signed a letter of intent to combine all of the operations of the Company and
all of the North American refining, marketing and transportation operations of
Phillips (Phillips RM&T business) into a newly formed Delaware L.L.C. named
Diamond 66 L.L.C. (Diamond 66). The Company would have owned 55% of the voting
and beneficial interest and controlled
69
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the board of directors of Diamond 66 and Phillips would have owned the
remaining 45%. Under the terms of the letter of intent, Phillips was to
receive from Diamond 66 a payment of $500.0 million at closing and an
additional payment of $300.0 million one year thereafter. The combination
would have been accounted for by the Company using the purchase method.
On March 19, 1999, the Company and Phillips terminated discussions relating to
the formation of Diamond 66 as both companies were unable to reach a final
agreement on certain key terms and conditions. Approximately $10.0 million of
expenses incurred by the Company related to the formation of the proposed
joint venture will be expensed during the first quarter of 1999.
NOTE 20: Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1998 Quarters
------------------------------------
First Second Third Fourth
-------- -------- -------- --------
(in millions, except per share
data)
<S> <C> <C> <C> <C>
Sales and other revenues............. $2,789.6 $3,041.0 $2,740.9 $2,563.1
Cost of products sold and operating
expenses............................ 1,909.2 2,014.4 1,779.3 1,745.5
Operating income (loss).............. 58.1 (15.5) 81.1 (60.9)
Net income (loss).................... 16.4 (52.6) 25.8 (67.7)
Net income (loss) per share:
Basic.............................. $ 0.18 $ (0.58) $ 0.29 $ (0.78)
Diluted............................ 0.18 (0.58) 0.29 (0.78)
Weighted average number of shares (in
thousands):
Basic.............................. 87,284 90,220 89,526 87,180
Diluted............................ 90,882 90,220 89,760 87,180
<CAPTION>
1997 Quarters
------------------------------------
First Second Third Fourth
-------- -------- -------- --------
(in millions, except per share
data)
<S> <C> <C> <C> <C>
Sales and other revenues............. $2,550.2 $2,414.4 $2,613.2 $3,304.6
Cost of products sold and operating
expenses............................ 1,859.9 1,678.0 1,818.9 2,347.9
Operating income..................... 64.9 100.6 125.9 93.0
Extraordinary loss................... -- -- -- (4.8)
Net income........................... 27.6 46.3 56.6 24.3
Net income per share:
Basic.............................. $ 0.35 $ 0.60 $ 0.73 $ 0.27
Diluted............................ 0.35 0.59 0.71 0.27
Weighted average number of shares (in
thousands):
Basic.............................. 74,725 74,799 75,724 87,122
Diluted............................ 78,881 79,113 80,164 91,334
</TABLE>
Throughout 1998, the Company recognized $133.4 million of non-cash charges to
reduce the carrying value of inventories due to the continuing decline in
crude oil and refined product prices. The 1998 quarterly charges were $13.6
million in the first quarter, $12.5 million in the second quarter, $16.1
million in the third quarter, and $91.2 million in the fourth quarter.
In June 1998, the Company recognized:
. a one-time charge of $131.6 million related to the restructuring of the
retail marketing, refining and pipeline operations and support services,
and
. an $11.2 million charge for costs associated with the aborted Petro-
Canada joint venture.
70
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1998, the Company recognized $12.0 million in severance costs
associated with the termination of employees related to the Company's
corporate restructuring and profit improvement program.
The fourth quarter of 1997 includes Total's results since acquisition on
September 25, 1997. Excluding Total's results, sales and other revenues,
operating income and net income would have been $2,560.2 million, $95.5
million and $26.5 million, respectively.
The results for the fourth quarter of 1997 also include a $4.8 million
extraordinary loss (net of income tax benefit of $3.2 million) related to the
termination of the ESOPs and the related prepayment of the ESOPs' debt. In
December 1997, the Company recorded an $11.1 million non-cash reduction in the
carrying value of crude oil inventories due to the significant drop in crude
oil prices late in 1997.
71
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information appearing under the caption "Ratification of Appointment of
Independent Accountants" in the Company's Proxy Statement relating to its 1999
Annual Meeting of Stockholders as filed with the Securities and Exchange
Commission (the Proxy Statement) is hereby incorporated by reference. On March
4, 1997, the Company changed its independent accountants from Ernst & Young
LLP to Arthur Anderson LLP as reported on Form 8-K dated March 4, 1997. There
were no disagreements on accounting principles or financial disclosures prior
to the change.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information appearing under the caption "Election of Directors Proposal"
and "Compensation of Executive Officers and Directors" in the Proxy Statement
is hereby incorporated by reference. See also the information appearing under
the caption "Executive Officers of the Registrant" appearing in Part I.
The Company is not aware of any family relationship between any director or
executive officer. Each officer is generally elected to hold office until his
or her successor is elected or until such officer's earlier removal or
resignation.
Item 11. Executive Compensation
The information appearing under the caption "Compensation of Executive
Officers and Directors" in the Proxy Statement is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the caption "Ownership of the Company's Common
Shares by Management and Certain Beneficial Owners" in the Proxy Statement is
hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information appearing under the caption "Compensation of Executive
Officers and Directors" in the Proxy Statement is hereby incorporated by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(A)(1) and (2)--List of financial statements and financial statement schedules
The following consolidated financial statements of Ultramar Diamond Shamrock
Corporation are included under Part II, Item 8:
Accountants' Reports
Balance Sheets--December 31, 1998 and 1997
Statements of Operations--Years Ended December 31, 1998, 1997 and 1996
Statements of Stockholders' Equity--Years Ended December 31, 1998, 1997 and
1996
Statements of Cash Flows--Years Ended December 31, 1998, 1997 and 1996
Statements of Comprehensive Income (Loss)--Years Ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements--Years Ended December 31, 1998,
1997 and 1996
All schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
72
<PAGE>
(B) Reports on Form 8-K
None.
(C) Exhibits:
Unless otherwise indicated, each of the following exhibits has been previously
filed with the Securities and Exchange Commission under File No. 1-11154. Where
indicated as being filed by Diamond Shamrock, Inc., such filings were filed
under File No. 1-9409 unless otherwise indicated.
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
3.1 Certificate of Incorporation dated Registration Statement on Form S-1
April 27, 1992, as amended on April (File No.33-47586), Exhibit 3.1
28, 1992
3.2 Certificate of Merger of Diamond Registration Statement on Form S-8
Shamrock, Inc. with and into the (File No.333-19131), Exhibit 4.2
Company, amending the Company's
Articles of Incorporation
3.3 Certificate of Designations of the Registration Statement on Form S-8
Company's 5% Cumulative Convertible (File No.333-19131), Exhibit 4.3
Preferred Stock
3.4 By-laws dated April 28, 1992 Registration Statement on Form S-1
(File No.33-47586), Exhibit 3.2
3.5 Amendment dated July 22, 1993 to By- Annual Report on Form 10-K for the
laws year ended December 31, 1995,
Exhibit 3.3
3.6 Amendment dated December 3, 1996 to Registration Statement on Form S-8
By-laws (File No.333-19131), Exhibit 4.6
3.7 Amendment dated March 3, 1999 to +
Bylaws
4.1 Form of Common Stock Certificate Registration Statement on Form S-8
(File No.333-19131), Exhibit 4.8
4.2 See Exhibit 3.1
4.3 See Exhibit 3.2
4.4 See Exhibit 3.3
4.5 See Exhibit 3.4
4.6 See Exhibit 3.5
4.7 See Exhibit 3.6
4.8 See Exhibit 3.7
4.9 Form of Indenture between Diamond Registration Statement on Form S-1
Shamrock, Inc. and the First of Diamond Shamrock, Inc. (File
National Bank of Chicago No.33-32024), Exhibit 4.1
4.10 Form of 9 3/8% Note Due March 1, Current Report on Form 8-K of
2001 Diamond Shamrock, Inc. dated
February 20, 1991, Exhibit 4.1
4.11 Forms of Medium Term Notes, Series A Registration Statement on Form S-3
of Diamond Shamrock, Inc. (File
No.33-58744), Exhibit 4.2
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
4.12 Form of 8% Debenture due April 1, Current Report on Form 8-K of
2003 Diamond Shamrock, Inc. dated March
22, 1993, Exhibit 4.1
4.13 Form of 8 3/4% Debenture due June Current Report on Form 8-K of
15, 2015 Diamond Shamrock, Inc. dated
February 6, 1995, Exhibit 4.1
4.14 Form of 7 1/4% Debenture due June Current Report on Form 8-K of
15, 2010 Diamond Shamrock, Inc. dated June 1,
1995, Exhibit 4.1
4.15 Form of 7.65% Debenture due July 1, Current Report on Form 8-K of
2026 Diamond Shamrock, Inc. dated June
20, 1996, Exhibit 4.1
4.16 Rights Agreement dated June 25, 1992 Registration Statement on Form S-1
between Ultramar Diamond Shamrock (File No.33-47586), Exhibit 4.2;
Corporation and Registrar and Quarterly Report on Form 10-Q for
Transfer Company (as successor the quarter ended September 30,
rights agent to First City Texas- 1992, Exhibit 4.2; Annual Report on
Houston, NA) as amended by the First Form 10-K for the year ended
Amendment dated October 26, 1992 and December 1, 1994, Exhibit 4.3
the Amendment dated May 10, 1994
4.17 Indenture dated July 6, 1992 between Quarterly Report on Form 10-Q for
Ultramar Diamond Shamrock the quarter ended June 30, 1992,
Corporation, as issuer, and First Exhibit 10.5
City Texas-Houston NA, as trustee,
relating to the 8 1/4% Notes due
July 1, 1999
4.18 Indenture dated July 6, 1992 among Quarterly Report on Form 10-Q for
Ultramar Credit Corporation, as the quarter ended June 30, 1992,
issuer, Ultramar Diamond Shamrock Exhibit 10.6
Corporation, as guarantor, and First
City Texas-Houston NA, as trustee,
relating to the 8 5/8% Guaranteed
Notes due July 1, 2002
4.19 Indenture dated March 15, 1994 Current Report on Form 8-K for the
between Ultramar Diamond Shamrock quarter ended June 30, 1997, Exhibit
Corporation, as issuer, and The Bank 4.3
of New York, as trustee;
Subordinated Debt Indenture dated
June 25, 1997 between Ultramar
Diamond Shamrock Corporation and the
Bank of New York, as trustee
4.20 Form of 7.20% Senior Note due Current Report on Form 8-K dated
October 15, 2017 October 8, 1997, Exhibit 4.1
4.21 Form of 6.75% Senior Note due Current Report on Form 8-K dated
October 15, 2037 October 8, 1997, Exhibit 4.2
4.22 Form of 7.45% Senior Note due Current Report on Form 8-K dated
October 15, 2097 October 8, 1997, Exhibit 4.3
10.1 Lease dated April 30, 1970 between Registration Statement on Form S-1
Ultramar, Inc. by assignment, and (File No.33-47586), Exhibit 10.20
the City of Long Beach
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
10.2 Lease dated November 27, 1992 Registration Statement on Form S-1
between Ultramar Canada, Inc. and (File No.33-47586), Exhibit 10.27
the National Harbours Board
10.3 Permit No. 306 dated October 1, 1975 Registration Statement on Form S-1
issued by the City of Los Angeles to (File No.33-47586), Exhibit 10.19
Ultramar, Inc. by assignment
10.4 Agreement dated April 6, 1977 Registration Statement on Form S-1
between Atlantic Richfield Company (File No.33-47586), Exhibit 10.22
and Ultramar, Inc. by assignment
10.5 Agreement for Use of Marine Terminal Registration Statement on Form S-1
and Pipeline dated August 30, 1978 (File No. 33-47586), Exhibit 10.21
between Ultramar, Inc. by
assignment, Arco Transportation
Company and Shell Oil Company
10.6 Warehousing Agreement dated July 1, Registration Statement on Form S-1
1984 between Ultramar, Inc., by (File No. 33-47586), Exhibit 10.25
assignment and GATX Tank Storage
Terminals Corporation
10.7 Contract re Charlottetown Terminal Registration Statement on Form S-1
dated October 1, 1990 between (File No. 33-47586), Exhibit 10.30
Ultramar Canada, Inc. and Imperial
Oil (1)
10.8 Tax Allocation Agreement dated April Registration Statement on Form S-1
30, 1992 between Ultramar Diamond (File No. 33-47586), Exhibit 10.2
Shamrock Corporation, LASMO plc and
Ultramar America Limited and
Guarantee of Performance and
Indemnity to Ultramar Diamond
Shamrock Corporation by LASMO plc,
as amended by Amendment No. 1 dated
May 22, 1992
10.9 Reorganization Agreement dated as of Quarterly Report on Form 10-Q for
July 6, 1992 between LASMO plc and the quarter ended June 30, 1992,
Ultramar Diamond Shamrock Exhibit 10.1
Corporation
10.10 Ultramar Diamond Shamrock Registration Statement on Form S-8
Corporation 1992 Long Term Incentive (File No. 33-52148), Exhibit 28;
Plan dated July 21, 1992, as amended Annual Report on Form 10-K for the
by the First Amendment dated January year ended December 31, 1992,
23, 1993, the Second Amendment dated Exhibit 10.34; Annual Report on Form
July 21, 1993, the Third Amendment 10-K for the year ended December 31,
dated March 21, 1994 and the Fourth 1993, Exhibit 10.46; Quarterly
Amendment dated February 10, 1995 Report on Form 10-Q for the quarter
ended March 31, 1994, Exhibit 10.47;
Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995,
Exhibit 10.50
10.11 Ultramar Diamond Shamrock +
Corporation Annual Incentive Plan
for 1998
10.12 Ultramar Diamond Shamrock Annual Report on Form 10-K for the
Corporation Restricted Share Plan year ended December 31, 1992,
for Directors dated January 26, 1993 Exhibit 10.36
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
10.13 Ultramar Diamond Shamrock Annual Report on Form 10-K for the
Corporation Supplemental Executive year ended December 31, 1995,
Retirement Plan dated July 27, 1994 Exhibit 10.13
10.14 Ultramar Diamond Shamrock Annual Report on Form 10-K for the
Corporation U.S. Employees year ended December 31, 1995,
Retirement Restoration Plan dated Exhibit 10.14
July 27, 1994
10.15 Ultramar Diamond Shamrock Annual Report on Form 10-K for the
Corporation U.S. Savings Incentive year ended December 31, 1995,
Restoration Plan dated July 27, 1994 Exhibit 10.15
10.16 Trust Agreement dated April 1985 Registration Statement on Form S-1
between Ultramar Canada, Inc. and (File No. 33-47586), Exhibit 10.1
Montreal Trust Company of Canada
10.17 Employment Agreement dated as of Registration Statement on Form S-4
September 22, 1996 between Ultramar (File No. 333-14807), Exhibit 10.1
Diamond Shamrock Corporation and
Jean Gaulin
10.18 Employment Agreement dated Current Report on Form 8-K of
September 22, 1996 between Ultramar Diamond Shamrock, Inc. dated
Diamond Shamrock Corporation and September 30, 1996, Exhibit 10(c)
Roger Hemminghaus
10.20 Form of Employment Agreement dated Annual Report on Form 10-K for the
as of September 22, 1996 between year ended December 31, 1996,
Diamond Shamrock, Inc. and W. R. Exhibit 10.20
Klesse
10.21 Hydrogen and Steam Supply Agreement Annual Report on Form 10-K for the
dated December 22, 1993 between year ended December 31, 1993,
Ultramar, Inc. and Air Products and Exhibit 10.43
Chemicals, Inc. (1)
10.22 MTBE Terminaling Agreement dated Annual Report on Form 10-K for the
March 3, 1995 between Petro-Diamond year ended December 31, 1995
Incorporated and Ultramar, Inc. (1)
10.23 Confidential Transportation Contract Quarterly Report on Form 10-Q for
dated May 25, 1995 between Canadian the quarter ended June 30, 1995,
National Railway Company and Exhibit 10.52
Ultramar Canada, Inc. (1)
10.24 Senior Subordinated Note Purchase Registration Statement on Form 10 of
Agreement dated as of April 17, 1987 Diamond Shamrock, Inc. (DS Form 10),
between Diamond Shamrock, Inc. and Exhibit 10.22
certain purchasers (the Senior
Subordinated Note Agreement)
10.25 Amendment No.1 to the Senior Quarterly Report on Form 10-Q of
Subordinated Note Agreement dated as Diamond Shamrock, Inc. for the
of March 31, 1988 quarter ended March 31, 1988,
Exhibit 19.5
10.26 Amendment No.2 to the Senior Quarterly Report on Form 10-Q of
Subordinated Note Agreement dated as Diamond Shamrock, Inc. for the
of July 12, 1989 quarter ended June 30, 1989, Exhibit
19.2
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
10.27 Amendment No. 3 to the Senior Annual Report on Form 10-K of
Subordinated Note Agreement dated as Diamond Shamrock, Inc. for the year
of December 6, 1993 ended December 31, 1993, Exhibit
10.8
10.28 Deferred Compensation Plan for Annual Report on Form 10-K of
executives and directors of Diamond Diamond Shamrock, Inc. for the year
Shamrock, Inc. amended and restated ended December 31, 1988, Exhibit
as of January 1, 1989 10.13
10.29 Supplemental Executive Retirement DS Form 10, Exhibit 10.16
Plan of Diamond Shamrock, Inc. (the
DS SERP)
10.30 First Amendment to the DS SERP Registration Statement on Form S-1
of Diamond Shamrock, Inc. (File
No. 33-21991) (DS S-1), Exhibit
10.21
10.31 Second Amendment to the DS SERP Annual Report on Form 10-K of
Diamond Shamrock, Inc. for the year
ended December 31, 1989, Exhibit
10.21
10.32 Excess Benefits Plan of Diamond Quarterly Report on Form 10-Q of
Shamrock, Inc. Diamond Shamrock, Inc. for the
quarter ended June 30, 1987, Exhibit
19.5
10.33 1987 Long-Term Incentive Plan of Registration Statement on Form S-8
Diamond Shamrock, Inc. of Diamond Shamrock, Inc. (File
No. 33-15268), Annex A-1
10.34 Form of Disability Benefit Agreement DS S-1, Exhibit 10.21
between Diamond Shamrock, Inc. and
certain of its executive officers
10.35 Form of Supplemental Death Benefit Quarterly Report on Form 10-Q of
Agreement between Diamond Shamrock, Diamond Shamrock, Inc. for the
Inc. and certain of its executive quarter ended June 30, 1987, Exhibit
officers 19.9
10.36 Diamond Shamrock, Inc. Long-Term Quarterly Report on Form 10-Q of
Incentive Plan as amended and Diamond Shamrock, Inc. for the
restated as of August 15, 1996 quarter ended September 30, 1996 (DS
1996 Form 10-Q), Exhibit 10.9
10.37 Diamond Shamrock, Inc. Long-Term Quarterly Report on Form 10-Q of
Incentive Plan as amended and Diamond Shamrock, Inc. for the
restated as of May 5, 1992 quarter ended June 30, 1992, Exhibit
19.1
10.38 Form of Employee Stock Purchase Loan Quarterly Report on Form 10-Q of
Agreement between Diamond Shamrock, Diamond Shamrock, Inc. for the
Inc. and certain of its executive quarter ended June 30, 1992, Exhibit
officers and employees amended and 19.2
restated as of May 26, 1992
10.39 Form of Excess benefit plan between Annual Report on Form 10-K of
Diamond Shamrock, Inc. and certain Diamond Shamrock, Inc. for the year
officers amended and restated as of ended December 31, 1992 (DS 1992 10-
December 1, 1992 K), Exhibit 10.49
10.40 Form of Disability Benefit Agreement DS 1992 10-K, Exhibit 10.50
between Diamond Shamrock, Inc. and
certain officers amended and
restated as of January 1, 1993
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
10.41 Form of Deferred Compensation Plan DS 1992 10-K, Exhibit 10.51
between Diamond Shamrock, Inc. and
certain directors, officers and
other employees amended and restated
as of January 1, 1993
10.42 Diamond Shamrock, Inc. Nonqualified Registration Statement on Form S-8
401(k) Plan of Diamond Shamrock, Inc. (File
No. 33-64645), Exhibit 4.1
10.43 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Supplemental Executive Retirement
Plan, July 22, 1996
10.44 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Disability Benefit Agreement July
22, 1996
10.45 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Supplemental Death Benefit Agreement
July 22, 1996
10.46 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Excess Benefits Plan July 22, 1996
10.47 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Long-Term Incentive Plan July 22,
1996
10.48 Credit Agreement dated July 23, 1997 Quarterly Report on Form 10-Q for
in the amount of $700,000,000 the quarter ended June 30, 1997,
between the Company, Morgan Guaranty Exhibit 10.1
Trust Company of New York and
certain other banks
10.50 Credit Agreement dated December 19, Annual Report on Form 10-K for the
1996 in the amount of CND year ended December 31, 1996,
$200,000,000 between the Company, Exhibit 10.50
Canadian Ultramar Company, Canadian
Imperial Bank of Commerce and
certain other banks
10.51 Amendment No. 1 to Credit Agreement Annual Report on Form 10-K for the
described in Exhibit 10.50 year ended December 31, 1996,
Exhibit 10.51
10.52 Amended and Restated Lease Agreement Annual Report on Form 10-K for the
dated December 19, 1996 among year ended December 31, 1996,
Jamestown Funding L.P., Ultramar, Exhibit 10.52
Inc., Ultramar Energy, Inc., Diamond
Shamrock Leasing, Inc., Diamond
Shamrock Arizona, Inc. and Diamond
Shamrock Refining and Marketing
Company
10.53 Amended and Restated Ground Lease Annual Report on Form 10-K for the
Agreement dated December 19, 1996 year ended December 31, 1996,
between Brazos River Leasing L.P. Exhibit 10.53
and Diamond Shamrock Refining and
Marketing Company
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
10.54 Amended and Restated Facilities Annual Report on Form 10-K for the
Lease Agreement dated December 19, year ended December 31, 1996,
1996 between Brazos River Leasing, Exhibit 10.54
L.P. and Diamond Shamrock Refining
and Marketing Company
10.55 Ultramar Diamond Shamrock Registration Statement on Form S-4
Corporation 1996 Long-Term Incentive (File No. 333-14807), Exhibit 10.2
Plan
10.56 Relocation Agreement between the Annual Report on Form 10-K for the
Company and H. Pete Smith dated as year ended December 31, 1997,
of December 2, 1996 Exhibit 10.57
10.57 First Amendment to Employment Annual Report on Form 10-K for the
Agreement between H. Pete Smith and year ended December 31, 1997,
the Company effective December 3, Exhibit 10.58
1996
10.58 Agreement between the Company and Annual Report on Form 10-K for the
H. Pete Smith dated effective March year ended December 31, 1997,
3, 1998, amending Mr. Smith's Exhibit 10.59
Employment Agreement dated as of
November 25, 1996, and Mr. Smith's
Relocation Agreement dated as of
December 2, 1996
10.59 Ultramar Diamond Shamrock Registration Statement on Form S-8
Corporation Non-Employee Director (No. 333-27697), Exhibit 4.1
Plan
10.60 Amendment No. 1 to Credit Agreement +
described in Exhibit 10.48 dated
December 31, 1998
10.61 Amending Agreement relating to +
Credit Agreement described in
Exhibit 10.50 dated November 7, 1997
10.62 Amendment No. 3 relating to Credit +
Agreement described in Exhibit 10.50
dated December 31, 1998
10.63 Agreements to Defer Compensation +
Between the Company and Jean Gaulin,
Timothy Fretthold and William Klesse
16.1 Letter of Ernst & Young LLP to the Current Report on Form 8-K dated
Securities and Exchange Commission March 4, 1997, Exhibit 16.1
regarding its concurrence with the
Company's statements contained in
the Company's Current Report on Form
8-K
16.2 Letter of PricewaterhouseCoopers LLP Current Report on Form 8-K dated
to the Securities and Exchange March 4, 1997, Exhibit 16.2
Commission regarding its concurrence
with the Company's statements
contained in the Company's Current
Report on Form 8-K
21 Subsidiaries +
23.1 Consent of Ernst & Young LLP +
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
23.2 Consent of PricewaterhouseCoopers +
LLP
23.3 Consent of Arthur Andersen LLP +
24.1 Power of Attorney of Officers and +
Directors
24.2 Power of Attorney of the Company +
27 Financial Data Schedule +
</TABLE>
- --------
+ Filed herewith.
(1) Contains material for which confidential treatment has been granted
pursuant to Rule 406 under the Securities Exchange Act of 1933, as
amended, or Rule 24b-2 under the Securities Exchange Act of 1934, as
amended. This material has been filed separately with the Securities and
Exchange Commission pursuant to the application for confidential
treatment.
80
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized as of March 29, 1999.
Ultramar Diamond Shamrock
Corporation
/s/ Jean R. Gaulin
By: _________________________________
Jean R. Gaulin
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed as of March 29, 1999 by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Jean R. Gaulin President, Chief Executive Officer and
______________________________________ Vice Chairman of the Board of Directors
Jean R. Gaulin (Principal Executive Officer)
/s/ H. Pete Smith Executive Vice President and Chief Financial
______________________________________ Officer (Principal Financial and Accounting
H. Pete Smith Officer)
/s/ * Chairman of the Board of Directors
______________________________________
Roger R. Hemminghaus
/s/ * Director
______________________________________
Byron Allumbaugh
/s/ * Director
______________________________________
E. Glenn Biggs
/s/ * Director
______________________________________
W. E. Bradford
/s/ * Director
______________________________________
H. Fredrick Christie
/s/ * Director
______________________________________
W. H. Clark
/s/ * Director
______________________________________
</TABLE> Bob Marbut
<TABLE>
<S> <C> <C>
/s/ * Director
______________________________________
Katherine D. Ortega
/s/ * Director
______________________________________
Madeleine Saint Jacques
/s/ * Director
______________________________________
</TABLE> C. Barry Schaefer
/s/ H. Pete Smith Attorney-in-Fact
*By: ____________________________
H. Pete Smith
81
<PAGE>
EXHIBIT 3.7
AMENDMENT TO ARTICLE II, SECTION 9, PARA. 3 OF THE BY-LAWS
- ----------------------------------------------------------
To be timely, a stockholder's notice to the Secretary must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than sixty days nor more than ninety days prior to the anniversary date on
which the Corporation first mailed its proxy materials for the immediately
preceding annual meeting of stockholders; provided, however, that in the event
that the annual meeting is called for a date that is not within thirty days
before or after the anniversary date of the immediately preceding annual meeting
of stockholders, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth day following the day
on which the Corporation first mailed its proxy materials for such annual
meeting or such public disclosure of the date of the annual meeting was made,
whichever occurs first.
AMENDMENT TO ARTICLE III, SECTION 2, PARA. 3
- --------------------------------------------
To be timely, a stockholder's notice to the Secretary must be delivered to or
mailed and received at the principal executive offices of the Corporation (a) in
the case of an annual meeting, not less than sixty days nor more than ninety
days prior to the anniversary date on which the Corporation first mailed its
proxy materials for the immediately preceding annual meeting of stockholders;
provided, however, that in the event that the annual meeting is called for a
date that is not within thirty days before or after the anniversary date of the
immediately preceding annual meeting of stockholders, notice by the stockholders
in order to be timely must be so received not later than the close of business
on the tenth day following the day on which the Corporation first mailed its
proxy materials for such annual meeting or such public disclosure of the date of
the annual meeting was made, whichever occurs first; and (b) in the case of a
special meeting of stockholders called for the purpose of electing directors,
not later than the close of business on the tenth day following the day on which
the Corporation first mailed its proxy materials for such special meeting or
public disclosure of the date of the special meeting was made, whichever occurs
first.
<PAGE>
EXHIBIT 10.11
=======================
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
1998 ANNUAL INCENTIVE PLAN
Ultramar Diamond Shamrock Corporation's Annual Incentive Plan ("AIP") is
designed to incentivize participants to enhance shareholder value.
In making decisions under the AIP regarding participation and awards, it is
appropriate to consider the following:
. providing substantial compensation incentive for AIP participants to
ensure their focus in carrying out the Company's annual operating plans;
. maintaining the competitiveness of the Company's program in attracting,
rewarding, and retaining executives and other key employees;
. the program's sensitivity to corporate financial and stock market
performance; and
. the extent to which participants are building a significant ownership
stake in the Company and thus more closely identifying with the interests
of shareholders.
Incentive targets will vary according to a participant's position and the
relative impact a participant can have on the company's operations, typically as
measured by total shareholder return ("TSR") and return on capital employed
("ROCE"). The payment of any awards is conditioned on the Company's earnings and
financial condition.
Awards will be determined by the 1998 results of the total Company and business
units using TSR and ROCE performance measures, and where applicable the
participant's individual performance. These performance measures are described
in more detail below.
I. CRITERIA FOR PARTICIPATION
Officers, high-level and select middle-level professionals who have been
nominated by the Company's management, based upon their potential to
impact the Company's performance, may participate in the AIP.
The Compensation Committee designates individuals or positions as eligible
for participation in the AIP.
II. TARGET BONUS
Target bonuses are expressed as a percentage of the participant's base
salary. Performance above or below target performance produces an award
that is respectively greater or smaller than the target bonus.
The Compensation Committee, in its sole discretion, determines a
participant's target bonus. Target bonus percentages may be set at
different levels, depending on the participant's scope of responsibility.
Generally, the higher the level of responsibility, the greater the target
bonus percentage. The Compensation Committee may also consider
<PAGE>
1998 ANNUAL INCENTIVE PLAN
Page 2
such factors as the participant's dedication, ingenuity, initiative, and
other contributions made toward the Company's success. In no event may any
participant's total annual award exceed 200% of his target bonus.
III. PERFORMANCE MEASURES
For the Chief Executive Officer ("CEO") and Chief Operating Officer
("COO"), 60% of the bonus is determined by the TSR performance measure, and
40% by the ROCE (at the "Total Company" measurement level) performance
measure.
In the case of corporate executives and other corporate participants (other
than the CEO and COO), 40% of the bonus is determined by the TSR
performance measure, 40% by the ROCE (at the "Total Company" measurement
level) performance measure, and 20% by the individual performance measure.
For participants in business units ("Units") below the Total Company level,
the bonus is determined by the TSR performance measure for 40%, the Unit's
ROCE performance measure for 40%, and the individual performance measure
for 20%.
The TSR, ROCE, and individual performance measures are calculated as a
percent of target award, and reflect the Compensation Committee's
assessment of the appropriate award levels for attaining different levels
of relative performance. The Compensation Committee, in its sole
discretion, may change the minimum and maximum measure levels during an AIP
year.
TSR Performance Measure
-----------------------
The TSR performance measure is UDS' share price appreciation plus dividends
measured against the Company's peer group of refining and marketing
companies ("Peer Group"). Members of the Peer Group are listed in Chart V.
For each calendar quarter UDS' TSR is calculated and compared to the UDS'
"Peer Group Average TSR" for the same period (see Chart I). The quarterly
Peer Group TSR is first determined by calculating each Peer Group member's
TSR; the Peer Group Average TSR is the simple, equally weighted average of
the individual TSR results.
The "point spread" is the difference between the quarterly UDS TSR and the
Peer Group Average TSR. The "point spread" is annualized and applied
against the TSR Incentive Scale (Chart II).
The TSR performance measure percentage of target award is determined by
averaging the quarterly target award percentages achieved during the AIP
year. There is no award where the annualized quarterly point spread is less
than - 10 percentage points. There is no limitation on the quarterly
percentage of target award that can be achieved.
<PAGE>
1998 ANNUAL INCENTICE PLAN
PAGE 3
ROCE Performance Measure
------------------------
The ROCE performance measure is composed of two internal ROCE measurements.
The first component is the actual ROCE for the year compared to the target
(or budgeted) ROCE. The second measurement compares ROCE "normalized" for
refining margins. "Normalized ROCE" compares ROCE for the year recalculated
at 1997 industry refining margins to the target ROCE. This second
measurement adjusts ROCE to reflect how efficiently the business is managed
independent of industry refining margins variability. The ROCE performance
measure is determined on a full-year basis.
These target ROCE components will be established for the Company ("Total
Company") and one or more Units. For 1998 the ROCE measure will be
established for Total Company, and the West Coast, Southwest, Northeast
(including Canada), and Petrochemicals (actual ROCE measure only) Units.
Early in the first quarter each year, the Compensation Committee
establishes the target ROCE performance measures for the year.
The two ROCE performance measure components are weighted equally to
determine the total ROCE performance measure. The ROCE measure results are
compared against the ROCE Performance Measure Scale (Chart III). Each ROCE
component has a separate scale for its portion of the percentage of target
award. The scale for ROCE at actual margins reaches a maximum 200% of
target award. The scale for ROCE at budgeted refining margins has no limit.
The calculation of the percentage of target award achieved for the ROCE
performance measure for any of the Company's Canadian operations will be
calculated in Canadian dollars, so as to neutralize currency exchange rate
shifts during the year.
Individual Performance Measure
------------------------------
A participant's individual performance is compared to the achievement of
objectives which may include, but are not limited to, attainment of
significant objective or quantifiable goals, and developmental goals in
such ares as leadership, communication, and affirmative action. The
percentage of target award achieved may range from 0% (failed to achieve
objectives) to 200% (exceeded all expectations in achieving the
objectives). The employee and his manager establish individual performance
objectives, and progress and priorities are reviewed periodically during
the year. Establishment of three to five individual objectives is
suggested. An example of the calculation of a participant's award is set
out in Chart IV.
IV. ANNUAL INCENTIVE THRESHOLD
Payment of any award is within the Compensation Committee's discretion.
Before any funds become available for the AIP, the Committee will generally
require that there be sufficient earnings before interest, taxes,
depreciation, and amortization ("EBITDA") to cover the AIP "Annual
Incentive Threshold." The Annual Incentive Threshold is the total of
budgeted expenses for dividends, debt service, current taxation, corporate
<PAGE>
1998 ANNUAL INCENTIVE PLAN
Page 4
administration, and the total potential payout (calculated at target award
level) for the AIP and all variable pay programs for employees not
participating in the AIP.
If sufficient funds are not available to pay the bonuses as calculated,
all awards may be prorated by the ratio of the actual funds available for
the AIP to the total calculated. In its sole discretion, the Compensation
Committee may cause the balance of such prorated awards to be paid in
stock or restricted stock.
V. BONUS ADJUSTMENTS
At its discretion, the Compensation Committee may adjust actual
performance measure results for extraordinary events or accounting
adjustments resulting from significant asset purchases or dispositions or
other events not contemplated or otherwise considered by the Compensation
Committee when the performance measure targets were set.
VI. BONUS PAYOUT
Awards typically are determined in January or February for performance in
the preceding year. Awards are paid in cash, unless the participant has
elected, or is required to receive, a portion of his award in restricted
stock.
Beginning in the year 2000 (at the time of award payout), if a participant
does not hold shares of Company stock sufficient to meet any applicable
stock ownership guidelines that have been approved by the Compensation
Committee, the participant will receive a restricted stock award in lieu
of cash. The current applicable stock ownership guidelines are set out in
Chart VI. The number of restricted shares is determined by dividing the
dollar amount of 25% of the total award by the closing share price on the
award date (the Canadian dollar exchange rate on the date of the award
will be used for Canadian participants). All stock awards are granted
pursuant to the Company's Long-Term Incentive Plan.
Participants may increase the percentage of bonus payment taken in
restricted shares. They may also request that the Compensation Committee
extend the restriction period beyond the minimum two years up to a maximum
of five years. In both cases elections and requests must be made prior to
October 1st of the AIP year to secure tax deferral treatment on the share
grant.
<PAGE>
1998 ANNUAL INCENTIVE PLAN
PAGE 5
CHART 1
COMPUTATION OF TOTAL SHAREHOLDER RETURN ("TSR")
-----------------------------------------------
1. For each calendar quarter:
TSR is calculated at the end of each calendar quarter, using the last trading
day's closing price for the preceding quarter (the beginning price) and the
current quarter (the ending price) plus the dividend for the period.
Ending Price + Dividends - 1
------------------------
Beginning Price
For example, UDS' TSR is calculated as follows, assuming a beginning
price of $32, an ending price of $33, and $.275 in dividends:
$33.00 + $.275 - 1 = 3.98%
--------------
$32.00
This calculation is performed for UDS and each company in its Peer Group. UDS'
TSR is compared to its Peer Group's average TSR to determine the "point spread."
The Peer Group's average is determined by a simple (not weighted) average of the
TSR results for the Peer Group.
The point spread is annualized by multiplying it by 4, and is then compared to
the Total Sharehold Return Incentive Scale (Chart II) to determine the
annualized percentage of target award achieved. The quarterly percentage of
target award is then determined by dividing by 4 the annualized percentage of
target award indicated on Chart II.
For example, the "point spread" is calculated as follows, assuming
UDS' TSR was 3.5% and its Peer Group average TSR was -1.5%:
3.5% - (-1.5%) = 5% percentage points
4 x 5% = 20% (the annualized point spread)
Applying the 20% point spread to Chart II reflects that 160% of target
award was achieved for the quarter. Since 160% is the annualized
percentage of target award, in this example 40% (one-fourth of 160%)
is the quarterly percentage of target award achieved.
2. At the end of the AIP year:
The quarterly percentages of target award achieved during the AIP year are
averaged (totaled and divided by 4) to yield the total TSR performance measure's
percentage of target award achieved for the AIP year.
<PAGE>
1998 ANNUAL INCENTIVE PLAN
Page 6
CHART II
TOTAL SHAREHOLDER RETURN INCENTIVE SCALE
----------------------------------------
- --------------------------------------------------------------------------------
TSR PERCENTAGE POINT SPREAD % OF TARGET AWARD*
- --------------------------------------------------------------------------------
55 to 60 300%
50 to 55 280%
45 to 50 260%
40 to 45 240%
35 to 40 220%
30 to 35 200%
25 to 30 180%
20 to 25 160%
15 to 20 140%
10 to 15 120%
5 to 10 100%
-5 to 5 90%
-10 to -5 75%
- --------------------------------------------------------------------------------
The scale is continued on a linear basis above 60%, with each 5 percentage
point increment equaling a 20% increment for the annualized percentage of target
award achieved.
_____________________________
* annualized
<PAGE>
1998 ANNUAL INCENTIVE PLAN
Page 7
CHART III
ROCE PERFORMANCE MEASURE SCALE/1/
---------------------------------
- --------------------------------------------------------------------------------
ROCE ACHIEVED AT
ROCE ACHIEVED AT ACTUAL PAYOUT% OF TARGET NORMALIZED REFINING
MARGINS AWARD MARGINS
- --------------------------------------------------------------------------------
N/A/2/ 270/3/ 125/4/
130 200 115
100 130 100
85 60 85
70 25 80
*70 0 *80
- --------------------------------------------------------------------------------
Results between points on the scale will be interpolated.
___________________________________
/1/ ROCE as a percentage of budget.
/2/ Awards under ROCE Achieved at Actual Margins are limited to a 200% payout
for this measure.
/3/ Scale to be continued above 270% for ROCE at Normalized Refining Margins,
with each percentage point increment equaling a 10% increment for the percentage
of target award.
/4/ Awards under ROCE Achieved at Normalized Refining Margins are not limited.
* Less than.
<PAGE>
1998 ANNUAL INCENTIVE PLAN
Page 8
CHART IV
EXAMPLE OF AIP AWARD CALCULATION
--------------------------------
Assume the following for this example:
. the participant is in the Total Company (Corporate) category
. the target ROCE is 8.61%
. the actual ROCE is 6.02%
. ROCE at normalized refining margins is 9.91%
. actual ROCE performance is 69.92% (6.02%/8.61%)
. ROCE at normalized refining margins performance is 115.10%
(9.91%/8.61%)
For an AIP participant earning $130,000 per year and a 25% target bonus, the
award is determined as follows:
1. The ROCE performance measure (40% of total award) portion of the bonus
payout:
By referring to the applicable ROCE Performance Measure Scale (Chart III):
. Actual margin ROCE results at 69.92% of target = 0% of target award
. ROCE results at normalized refining margins at 115.10% of target =
200.7% of target award
ROCE Performance Measure Percentage of Salary =
[(0% percentage of target award + 200.7% percentage of target
award) / 2]
X 25% target bonus X 40% ROCE performance measure weight =
10.035%
ROCE Performance Measure Bonus Payout = 10.035% X $130,000 = $13,045.50
2. The TSR performance measure (40% of total award) portion of the bonus
payout:
The Company's TSR point spread (by calendar quarterly):
- --------------------------------------------------------------------------------
QUARTER ACTUAL POINT SPREAD % TARGET AWARD*
- --------------------------------------------------------------------------------
1st + 7.5% 180%
2nd - 3.0% 0%
3rd + 4.0% 140%
4th + 6.0% 160%
Total 480%
- --------------------------------------------------------------------------------
______________________________
* Annualized by multiplying the point spread by 4 and applying each quarter's
results against Chart II to determine the Incentive % Target achieved for each
quarter; these values are totaled (480%) and divided by 4 to determine the
Incentive Target % achieved for the AIP year (120%).
<PAGE>
1998 ANNUAL INCENTIVE PLAN
Page 9
TSR Performance Measure Percentage of Salary =
40% TSR performance measure weight X 25% target bonus X 120%
percentage of target award = 12%
TSR Performance Measure Bonus Payout = 12% of $130,000 = $15,600
3. The Individual performance measure (20% of total award for this
participant) portion of the bonus payout:
Individual Performance Measure Percentage of Salary =
20% individual performance measure weight X 25% of target bonus X
110% percentage of target award = 5.5%
Individual Performance Measure Bonus Payout = 5.5% of $130,000 =
$7,150
In this example this participant's total bonus would be $13,045.50 + $15,600 +
$7,150 = $35,795.50.
<PAGE>
1998 ANNUAL INCENTIVE PLAN
Page 10
CHART V
PEER GROUP
----------
ASHLAND, INC.
COASTAL CORP.
CROWN CENTRAL PETROLEUM
GIANT INDUSTRIES INC.
HOLLY CORP.
SUN COMPANY INC.
TOSCO CORP.
USX-MARATHON GROUP
VALERO ENERGY CORP.
<PAGE>
1998 ANNUAL INCENTIVE PLAN
Page 11
CHART VI
EMPLOYEE STOCK OWNERSHIP GUIDELINES
-----------------------------------
-------------------------------------------------------------------------
EMPLOYEE GROUP GUIDELINE
-------------------------------------------------------------------------
CEO & COO 3 X ANNUAL BASE PAY
EXECUTIVE TEAM MEMBERS 2 X ANNUAL BASE PAY
VICE PRESIDENTS* 1 X ANNUAL BASE PAY
SENIOR MANAGERS 1 X ANNUAL BASE PAY
- ---------------------------------------------------------------------------
* Vice Presidents of UDS or any of its subsidiaries
. Shares to be counted toward ownership:
. personal or beneficially owned shares
. Company-sponsored program shares (e.g. ESOP)
. restricted shares
. for senior managers only - the value of vested stock options which
exceed the exercise price
. Certification of ownership level will be required before AIP bonus
payout.
. If after the three-year transition period beginning January 1, 1997, a
participant does not own sufficient Company stock to meet the applicable
ownership guideline, 25% of the participant's bonus award will be paid
in restricted shares.
<PAGE>
EXHIBIT 10.60
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT dated as of December 31, 1998 among ULTRAMAR DIAMOND SHAMROCK
CORPORATION (the "Borrower"), the BANKS listed on the signature pages hereof
(the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"Agent").
W I T N E S S E T H:
WHEREAS, the parties hereto have heretofore entered into a Credit Agreement
dated as of July 28, 1997 (the "Agreement"); and
WHEREAS, the parties hereto desire to amend certain provision of the
Agreement in the manner set forth below:
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions, References. Unless otherwise specifically
-----------------------
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in this Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
SECTION 2. Amendment of Section 1.1 of the Agreement. The definition of
-----------------------------------------
"Consolidated Net Income" in Section 1.1 is amended to read in its entirety as
follows:
"Consolidated Net Income" means, for any period, the net income (or loss) of
the Borrower and its Consolidated Subsidiaries for such period; provided that
there shall be excluded from such calculation (i) any after-tax gains or losses
attributable to asset sales (other than sales in the ordinary course of
business) or returned surplus assets of any Plan, (ii) up to $127,800,000 of
non-recurring charges in connection with or as a result of (A) the Merger or (B)
certain changes to conform the accounting practices of Ultramar Corporation and
Diamond Shamrock, Inc., (iii) $131,600,000 in non-recurring restructuring
charges in connection with certain corporate restructuring activities initiated
in 1998, as reflected by the Borrower's Report on Form 10-Q/A for the Quarterly
Period ended June 30, 1998, (iv) up to $135,000,000 of non-recurring non-cash
charges against income taken in connection with the adjustment of inventory
value for the Fiscal Year ended December 31, 1998, and
<PAGE>
(v) to the extent not included in clauses (i), (ii), (iii), or
(iv) any net extraordinary gains or net extraordinary losses.
SECTION 3. Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the laws of the State of New York.
SECTION 4. Counterparts; Effectiveness. This Amendment may be signed in any
---------------------------
number of counterparts, each of which shall be an original, with the same effect
as if the signature thereto and hereto were upon the same instrument. This
Amendment shall become effective as of the date hereof when the Agent shall have
received duly executed counterparts hereof signed by the Borrower and the
Required Banks (or, in the case of any party as to which an executed counterpart
shall not have been received, the Agent shall have received telegraphic, telex
or other written confirmation from such party of execution of a counterpart
hereof by such party).
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
BY: /s/ STEVE BLANK
---------------------------------------
Title: VP, Treasurer
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
BY: _______________________________________
Title:
BARCLAYS BANK PLC
BY: _______________________________________
Title:
THE CHASE MANHATTAN BANK
BY: _______________________________________
Title:
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: ______________________________________
Title:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
/s/ Stacey Haines
By: --------------------------------------
Title: Vice President
BARCLAYS BANK PLC
By:
______________________________________
Title:
THE CHASE MANHATTAN BANK
By: ______________________________________
Title:
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: _____________________________________
Title:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By: _____________________________________
Title:
BARCLAYS BANK PLC
By: /s/ [SIGNATURE ILLEGIBLE]^^
-------------------------------------
Title: ASSOC. DIRECTOR
THE CHASE MANHATTAN BANK
By: _____________________________________
Title:
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the date first above written.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: ______________________________________
Title:
MORGAN GUARANTY TROST COMPANY OF NEW YORK
By: ______________________________________
Title:
BARCLAYS BANK PLC
By: ______________________________________
Title:
THE CHASE MANHATTAN BANK
By: /s/ Peter M. Ling
--------------------------------------
Title: Peter M. Ling
Vice President
-3-
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
By: /s/ Daryl G. Patterson
--------------------------------------------------
Title: DARYL G. PATTERSON
Vice President
CIBC INC.
By: __________________________________________________
Title:
ROYAL BANK OF CANADA
By: __________________________________________________
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: __________________________________________________
Title:
BANK OF TOKYO-MITSUBISHI, LTD.
By: __________________________________________________
Title:
-4-
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
By: __________________________________________________
Title:
CIBC INC.
By: /s/ Michael A.G. Corbam
--------------------------------------------------
Michael A.G. Corbam
Title:
ROYAL BANK OF CANADA
By: __________________________________________________
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: __________________________________________________
Title:
BANK OF TOKYO-MITSUBISHI LTD.
By: __________________________________________________
Title:
-4-
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By:____________________________
Title:
CIBC INC.
By:____________________________
Title:
ROYAL BANK OF CANADA
By:/s/ Linda M. Stephens
----------------------------
Title: Linda M. Stephens
Senior Manager
THE INDUSTRIAL BANK OF JAPAN,
LIMITED,
By:____________________________
Title
BANK OF TOKYO-MITSUBISHI, LTD.
By:____________________________
Title:
-4-
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:____________________________
Title:
CIBC INC.
By:____________________________
Title:
ROYAL BANK OF CANADA
By:____________________________
Title:
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
/s/ Kazutoshi Kuwahara
By:----------------------------
Title: KAZUTOSHI KUWAHARA
Executive Vice
President,
HOUSTON OFFICE
BANK OF TOKYO-MITSUBISHI, LTD.
By:____________________________
Title:
-4-
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:_____________________________
Title:
CIBC INC.
By:_____________________________
Title:
ROYAL BANK OF CANADA
By:_____________________________
Title:
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By:_____________________________
Title:
BANK OF TOKYO-MITSUBISHI, LTD.
By: /s/ Michael G. Meiss
-----------------------------
Title: Vice President
-4-
<PAGE>
THE FUJI BANK, LIMITED HOUSTON
AGENCY
By: /s/ Raymond Ventura
-----------------------------
Title: RAYMOND VENTURA
Vice President & Manager
NATIONSBANK OF TEXAS, N,A.
By:_____________________________
Title:
BANK ONE, TEXAS N.A.
By:_____________________________
Title:
-5-
<PAGE>
THE FUJI BANK, LIMITED HOUSTON
AGENCY
By:_____________________________
Title:
NATIONSBANK OF TEXAS N.A.
By: /s/ Daryl G. Patterson
-----------------------------
Title: DARYL G. PATTERSON
Vice President
THE BANK OF NOVIA SCOTIA
By:_____________________________
Title:
BANK ONE, TEXAS N.A.
By:_____________________________
Title:
-5-
<PAGE>
THE FUJI BANK, LIMITED HOUSTON
AGENCY
By:_____________________________
Title:
NATIONSBANK OF TEXAS, N.A.
By:_____________________________
Title:
THE BANK OF NOVIA SCOTIA
By: /s/ [Signature Illegible]^^
-----------------------------
Title: Sr. Manager Loan
Operations
BANK ONE, TEXAS N.A.
By:_____________________________
Title:
-5-
<PAGE>
THE FUJI BANK, LIMITED HOUSTON
AGENCY
By:_____________________________
Title:
NATIONSBANK OF TEXAS, N.A.
By:_____________________________
Title:
THE BANK OF NOVA SCOTIA
By:_____________________________
Title:
BANK ONE, TEXAS N.A.
By: /s/ [Signature Illegible]^^
-----------------------------
Title: Sr. Vice President
-5-
<PAGE>
THE FROST NATIONAL BANK
By: /s/ [Signature Illegible]^^
----------------------------
Title: S.V.P.
THE SANWA BANK LIMITED,
DALLAS AGENCY
By:_____________________________
Title:
THE SUMITOMO BANK, LIMITED
By:______________________________
Title:
UNION RANK OF SWITZERLAND
By:______________________________
Title:
BANK OF SCOTLAND
By:______________________________
Title:
-6-
<PAGE>
THE FROST NATIONAL BANK
By: ____________________________
Title:
THE SANWA BANK LIMITED
By: /s/ C. Lawrence Murphy
----------------------------
Title: C. Lawrence Murphy
Senior Vice President
THE SUMITOMO BANK, LIMITED
By: ____________________________
Title:
UNION BANK OF SWITZERLAND
By: ____________________________
Title:
BANK OF SCOTLAND
By: ____________________________
Title:
-6-
<PAGE>
THE FROST NATIONAL BANK
By: ____________________________
Title:
THE SANWA BANK LIMITED,
DALLAS AGENCY
By: ____________________________
Title:
THE SUMITOMO BANK, LIMITED
By: /s/ William R. McKown, III
----------------------------
Title: William R. McKown, III
Vice President & Manager
UNION BANK OF SWTTZERLAND
By: ____________________________
Title:
-6-
<PAGE>
THE FROST NATIONAL BANK
By: ____________________________
Title:
THE SANWA BANK LIMITED,
DALLAS AGENCY
By: ____________________________
Title:
THE SUMITOMO BANK, LIMITED
By: ____________________________
Title:
UBS,AG, Stamford Branch
By: [SIGNATURE ILLEGIBLE]
----------------------------
Title: Executive Director
Eric C. Hanson
Assoc. Dir.
BANK OF SCOTLAND
By: ____________________________
Title:
-6-
<PAGE>
THE FROST NATIONAL BANK
By: ____________________________
Title:
THE SANWA BANK LIMITED,
DALLAS AGENCY
By: ____________________________
Title:
THE SUMITOMO BANK, LIMITED
By: ____________________________
Title:
UNION BANK OF SWITZERLAND
By: ____________________________
Title:
BANK OF SCOTLAND
By: /s/ Annie Chin Tat
----------------------------
Title: ANNIE CHIN TAT
SENIOR VICE PRESIDENT
-6-
<PAGE>
BANQUE NATIONALE DE PARIS,
HOUSTON AGENCY
By: /s/ David C. Schad
----------------------------
Title: David C. Schad
Executive Vice President
CREDIT LYONNAIS NEW YORK
BRANCH
By: ____________________________
Title:
DEN NORSKE BANK ASA
By: ____________________________
Title:
CREDIT AGRICOLE INDOSUEZ
By: ____________________________
Title:
COMERICA BANK
By: ____________________________
Title:
BANCA NATIONALE DEL LAVORO SPA
By: ____________________________
Title:
-7-
<PAGE>
BANQUE NATIONALE DE PARIS,
HOUSTON AGENCY
By: ____________________________
Title:
CREDIT LYONNAIS NEW YORK
BRANCH
By: /s/ Philippe Soustra
----------------------------
Title: Philippe Soustra
Senior Vice President
DEN NORSKE BANK ASA
By: ____________________________
Title:
CREDIT AGRICOLE INDOSUEZ
By: ____________________________
Title:
COMERICA BANK
By: ____________________________
Title:
BANCA NATIONALE DEL LAVORO SPA
By: ____________________________
Title:
-7-
<PAGE>
BANQUE NATIONALE DE PARIS,
HOUSTON AGENCY
By: ____________________________
Title:
CREDIT LYONNAIS NEW YORK
BRANCH
By: ____________________________
Title:
DEN NORSKE BANK ASA
By: /s/ Byron L. Cooley
----------------------------
Title: BYRON L. COOLEY
SENIOR VICE PRESIDENT
CREDIT AGRICOLE INDOSUEZ
By: ____________________________
Title:
COMERICA BANK
By: ____________________________
Title:
BANCA NATIONALE DEL LAVORO SPA
By: ____________________________
Title:
-7-
<PAGE>
BANQUE NATIONALE DE PARIS,
HOUSTON AGENCY
By: ____________________________
Title:
CREDIT LYONNAIS NEW YORK
BRANCH
By: ____________________________
Title:
DEN NORSKE BANK ASA
By: ____________________________
Title:
CREDIT AGRICOLE INDOSUEZ
By: /s/ David Bouhl By: /s/ Katherine L. Abbott
---------------------------- ----------------------------
Title: DAVID BOUHL, FVP. Title: Katherine L. Abbott
HEAD OF CORPORATE BANKING First Vice President
CHICAGO
COMERICA BANK
By: ____________________________
Title:
BANCA NATIONALE DEL LAVORO SPA
By: ____________________________
Title:
-7-
<PAGE>
BANQUE NATIONALE DE PARIS,
HOUSTON AGENCY
By: ____________________________
Title:
CREDIT LYONNAIS NEW YORK
BRANCH
By: ____________________________
Title:
DEN NORSKE BANK ASA
By: ____________________________
Title:
CREDIT AGRICOLE INDOSUEZ
By: ____________________________
Title:
COMERICA BANK
By: [SIGNATURE ILLEGIBLE]^^
----------------------------
Title: Vice President
BANCA NATIONALE DEL LAVORO SPA
By: ____________________________
Title:
-7-
<PAGE>
EXHIBIT 10.61
AMENDING AGREEMENT
------------------
THIS AMENDING AGREEMENT dated November 7, 1997
BETWEEN:
CANADIAN ULTRAMAR COMPANY
- and -
ULTRAMAR DIAMOND SHAMROCK CORPORATION
- and -
THE LENDERS HERETO
- and -
CANADIAN IMPERIAL BANK OF COMMERCE
PREAMBLE:
The parties hereto are parties to the Credit Agreement dated as of
December 19, 1996 (the "Credit Agreement") and wish to amend the Credit
Agreement to reflect the changes to the credit established thereunder.
NOW THEREFORE in consideration of the covenants and agreements between
the parties contained in this Amending Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. INTERPRETATION
--------------
In this Amending Agreement, capitalized terms which are not otherwise
defined herein shall have the meaning given in the Credit Agreement.
2. AMENDMENTS
----------
The Credit Agreement is hereby amended as follows:
(a) The definition of "Consolidated EBITDA" in Section 1.1 is amended to
read as follows:
<PAGE>
-2-
"CONSOLIDATED EBITDA" means in respect of the Borrower or UDSC, as
applicable, for any period, Consolidated Net Income for such period
plus, to the extent deducted in such period in the determination of
Consolidated Net Income:
(a) provisions for taxes based on income;
(b) Consolidated Interest Expense;
(c) depreciation;
(d) amortization; and
(e) distributions made to the holders of TOPrS.
(b) The definition of "Consolidated Interest Expense" in Section 1.1 is
amended to read as follows:
"CONSOLIDATED INTEREST EXPENSE" in respect of the Borrower or UDSC, as
applicable, and its Consolidated Subsidiaries, for any period, total
interest expense (including that portion attributable to Capital
Leases in accordance with GAAP and capitalized interest that is
payable in cash) net of interest income with respect to all
outstanding Indebtedness, including without limitation, all
commissions, discounts (including Discount Notes), other fees and
charges owed with respect to letters of credit and bankers' acceptance
financings and distributions made to the holders of TOPrS.
(c) The definition of "Consolidated Net Worth" in Section 1.1 is amended
to read as follows:
"CONSOLIDATED NET WORTH" means at any date and in respect of the
Borrower or UDSC, as applicable, and its Consolidated Subsidiaries,
the sum of:
(a) its consolidated shareholder's equity determined as of such date;
and
(b) 50% of the liquidation value of outstanding TOPrS determined as
of such date.
(d) The definition of "CONTINGENT OBLIGATIONS" in Section 1.1. is amended
to read as follows:
<PAGE>
-3-
"CONTINGENT OBLIGATIONS" means, with respect to any Person, any
obligation of such Person guaranteeing or intended to guarantee any
Indebtedness ("primary obligations") of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not
contingent:
(a) to purchase any such primary obligation or any property
constituting direct or indirect security therefor from the
primary obligee;
(b) to advance or supply funds for the payment of any such primary
obligation or to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor;
(c) to purchase property, securities or services primarily for the
purpose of assuring the primary obligee of the ability of the
primary obligor to make payment of such primary obligation but
excluding agreements on the part of such Person to supply crude
oil or petroleum products or feedstock; or
(d) otherwise to assure or hold harmless the primary obligee against
loss in respect of such primary obligation;
provided, however, that the term Contingent Obligation does not
include endorsements of instruments for deposit or collection in the
ordinary course of business.
(e) The definition of "Indebtedness" in Section 1.1. is amended to read
as follows:
"INDEBTEDNESS" means in relation to any Person and without
duplication, (a) all obligations of such Person for borrowed money or
for the deferred purchase price of property or services (other than
current trade payables within credit terms normally prevailing in the
industry and accrued liabilities incurred in the ordinary course of
business of such Person), (b) all obligations of such Person in
respect of principal evidenced by a note, bond, debenture or similar
instrument, (c) the obligations of such Person which are capitalized
under Capital Leases, (d) all non-contingent obligations (and, for
purposes of Sections 12.3 and 13.1(d), all Contingent Obligations) of
such Person to reimburse any financial institution or other Person in
respect of amounts paid under a letter of credit or similar
instrument, (e) all indebtedness of any other Person secured by any
Lien on any Property owned by such Person, whether or not such
indebtedness has been assumed by such Person, (f) all obligations of
such Person in respect
<PAGE>
-4-
of surety bonds, appeal bonds or other similar instruments, (g) in the
case of UDS Capital I, 50% of the liquidation value of outstanding
TOPrS, and (h) all Contingent Obligations of such Person.
(f) The definition of "Joint Proxy Statement" in Section 1.1. is deleted.
(g) The definition of "Repayment Date" in Section 1.1. is amended to read
as follows:
"REPAYMENT DATE" means July 28, 2002.
(h) The definition of "Subsidiary" in Section 1.1. is amended to read as
follows:
"SUBSIDIARY" means, with respect to any Person, (a) any corporation
50% or more of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of
such corporation (irrespective of whether or not at the time stock of
any class or classes of such corporation have or might have voting
power by reason of the happening of any contingency) is at the time
owned by such Person directly or indirectly through Subsidiaries and
(b) any partnership, limited liability company, association, joint
venture, trust or other entity in which such Person, directly or
indirectly through Subsidiaries, is either a general partner, has a
50% or greater equity interest at the time or otherwise owns a
controlling interest.
(i) Section 1.1 is amended with the addition of the definitions as
follows:
"TOPRS" means the 8.32% Trust Originated Preferred Securities of UDS
Capital I described in the Prospectus Supplement dated as of June 20,
1997.
"UDSC'S 1996 FORM 10-K" means UDSC's Annual Report on Form 10-K for
1996, as filed with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934.
"UDSC'S LATEST FORM 10-Q" means UDSC's quarterly report on Form 10-
Q for the quarter ended June 30, 1997, as filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of
1934.
U) The definition of "U.S. Revolver" in Section 1.1 is amended to read as
follows:
"U.S. REVOLVER" means the revolving credit facility of U.S.
$700,000,000 made available to UDSC pursuant to the Credit Agreement
dated as of July 28, 1997, among UDSC, the Banks Party thereto, Morgan
Guaranty Trust
<PAGE>
-5-
Company of New York, as agent, J.P. Morgan Securities Inc. and Chase
Securities Inc., as arrangers, and The Chase Manhattan Bank, as
syndication agent.
(k) Section 3.4 is amended to read as follows:
3.4 CANCELLATION OF CREDIT. The Borrower may, upon three Banking Days
----------------------
prior written notice to the Agent, permanently cancel the Unutilized
Portion of the Credit in whole or from time to time in part, provided
that any partial cancellation must be in a minimum amount of Cdn.
$5,000,000 or any larger multiple of $1,000,000.
(I) Section 10.4 is amended to read as follows:
10.4 FINANCIAL INFORMATION
---------------------
(a) The consolidated balance sheet of UDSC and its Consolidated
Subsidiaries as of December 31, 1996 and the related
consolidated statements of income and cash flows for the
fiscal year then ended, reported on by Ernst & Young LLP and
set forth in UDSC's 1996 Form 10-K, a copy of which has been
delivered to each of the Lenders, fairly present, in
conformity with GAAP the consolidated financial position of
UDSC and its Consolidated Subsidiaries as of such date and
their consolidated results of operations and cash flows for
such fiscal year.
(b) The unaudited consolidated balance sheet of UDSC and its
Consolidated Subsidiaries as of June 30, 1997 and the
related unaudited consolidated statements of income and cash
flows for the six months then ended, set forth in UDSC's
Latest Form 10-Q, a copy of which has been given to each of
the Lenders, fairly present, in conformity with GAAP or SEC
regulation, the consolidated financial position of UDSC as
of such date and its consolidated results of operations and
cash flows for such six month period (subject to year-end
adjustments).
(c) The unaudited consolidated balance sheet of the Borrower
and its Consolidated Subsidiaries as of June 30, 1997 and
the related unaudited consolidated statements of income and
cash flow for the six months then ended, fairly present, in
<PAGE>
-6-
conformity with GAAP, the consolidated financial position of
the Borrower and its Consolidated Subsidiaries as of such
date and their consolidated results of operations and cash
flows for such six month period (subject to year-end
adjustments).
(m) Section 10.5 is amended to read as follows:
10.5 MATERIAL ADVERSE CHANGE. Since December 31, 1996, there has
-----------------------
occurred no event, act or condition which has had, or could reasonably
be expected to have, a Material Adverse Effect.
(n) Section 12.3 subsections (k) and (l) are amended to read as follows:
(k) Liens on commingled stored crude oil and product inventory
existing to secure obligations of parties with which the
Borrower, UDSC or any of their respective Subsidiaries have
entered into crude oil processing and crude oil and product
storage agreements;
(l) extensions, renewals and replacements of Liens referred to in
paragraphs (a) through j); provided, that any such extension,
renewal or replacement Lien shall be limited to the property or
assets covered by the Lien extended, renewed or replaced and that
the obligations secured by any such extension, renewal or
replacement Lien shall be in an amount not greater than the
amount of the obligations secured by the Lien extended, renewed
or replaced; and
(o) Section 12.3 is further amended by adding the following subsection:
(m) Liens other than those described in paragraphs (a) through (l)
above; provided that the aggregate outstanding principal amount
of Indebtedness secured by such Liens shall at no time exceed 10%
of Consolidated Net Worth of the Borrower or UDSC, as applicable.
(p) Schedule "F" is amended to read as follows:
Ultramar Diamond Shamrock Corporation Career Average Retirement Income
Plan
Ultramar Diamond Shamrock Corporation Retirement Income Plan
Ultramar Diamond Shamrock Corporation Employee's Retirement Plan
<PAGE>
-7-
Ultramar Diamond Shamrock Corporation Employee Stock Ownership Plan
I
Ultramar Diamond Shamrock Corporation Employee Stock Ownership Plan
II
Ultramar Diamond Shamrock Corporation 401(k) Retirement Savings Plan
Ultramar Diamond Shamrock Corporation U.S. Savings Incentive Plan
Ultramar Energy 401(k) Plan
Ultramar Diamond Shamrock Corporation U.S. Employee's Retirement Plan
MULTIEMPLOYER PLANS
New England Teamsters & Trucking Industry Pension Fund
Automotive Industries Welfare Fund
Western Conference of Teamsters Pension Trust Fund - Northern
California Area
Western Conference of Teamsters Pension Trust Fund - Southern Area
3. EFFECTIVE DATE The amendments contained herein shall be effective as of the
--------------
date of this Amending Agreement, provided that the calculations to be made
pursuant to Sections 12.5 and 12.6 as of and with respect to the period ended
September 30, 1997 shall be made as if this Amending Agreement had been in
effect as of such date.
4. CONTINUING EFFECT. Each of the parties hereto acknowledges and agrees that
-----------------
the Credit Agreement, as amended by this Amending Agreement, the Guarantee and
Postponement dated as of December 19, 1996 delivered by UDSC to the Agent and
Lenders and the Overdraft Lending Agreement dated December 19, 1996 between CIBC
and the Borrower, shall be and continue in full force and effect and are hereby
confirmed and the rights and obligations of all parties thereunder shall not be
affected or prejudiced in any manner except as specifically provided for herein.
<PAGE>
-8-
5. COUNTERPARTS. This Amending Agreement may be executed in any number of
------------
counterparts, each of which when executed and delivered shall be deemed to be an
original, but all of which when taken together constitute one and the same
instrument; any party may execute this Amending Agreement by signing any
counterpart of it.
IN WITNESS WHEREOF, the Parties have caused this Amending Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
CANADIAN ULTRAMAR COMPANY
By: /s/ Steven A. Blank
-------------------------------
Name: Steven A. Blank
Title: Treasurer
Address: c/o Ultramar Diamond Shamrock
Corporation
6000 N. Loop 1604 W.
San Antonio, Texas 78249
Facsimile: (210) 592-2010
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
By: /s/ Steven A. Blank
-------------------------------
Name: Steven A. Blank
Title: Treasurer
Address: 6000 N. Loop 1604 W.
San Antonio, Texas 78249
Facsimile: (210) 592-2010
<PAGE>
-9-
LENDERS SIGNATURES
CANADIAN IMPERIAL BANK OF
COMMERCE, AS AGENT
By: /s/ Tim Thomas
-------------------------------
Name: Tim Thomas
Title: Director
Address: Commerce Court West, 7th Flr.,
Toronto, Ontario M5L 1A2
Facsimile: (416) 980-2804
By: /s/ Rick Lomas
---------------------------------
Name: Rick Lomas
Title: Managing Director
Address: Commerce Court West, 7th Flr.,
Toronto, Ontario M5L 1A2
Facsimile: (416) 980-2804
CANADIAN IMPERIAL BANK OF
COMMERCE
By: ___________________________________
Name: James Chepyha
Title: Director, Global Energy
Address: 10th Flr., 855-2nd Street S.W.,
Calgary, Alberta T2P 2P2
Facsimile: (403) 221-5779
By: ___________________________________
Name: David Swain
Title: Vice President & Managing Director
Address: 10th Flr., 855-2nd Street S.W.,
Calgary, Alberta T2P 2P2
Facsimile: (403) 221-5779
<PAGE>
-9-
LENDERS SIGNATURES
CANADIAN IMPERIAL BANK OF
COMMERCE, AS AGENT
By:________________________________________
Name: Tim Thomas
Title: Director
Address: Commerce Court West, 7th Flr.,
Toronto, Ontario M5L 1A2
Facsimile: (416) 980-2804
By: _______________________________________
Name: Rick Lomas
Title: Managing Director
Address: Commerce Court West, 7th Flr.,
Toronto, Ontario M5L 1A2
Facsimile: (416) 980-2804
CANADIAN IMPERIAL BANK OF
COMMERCE
By: /s/ James Chepyha
----------------------------------------
Name: James Chepyha
Title: Director, Global Energy
Address: 10th Flr., 855-2nd Street S.W.,
Calgary, Alberta T2P 2P2
Facsimile: (403) 221-5779
By: /s/ David Swain
----------------------------------------
Name: David Swain
Title: Vice President & Managing Director
Address: 10th FIr., 855-2nd Street S.W.,
Calgary, Alberta T2P 2P2
Facsimile: (403) 221-5779
<PAGE>
-10-
BANK OF TOKYO - MITSUBISHI (CANADA)
By: /s/ Amos Simpson
----------------------------------------
Name: Amos Simpson
Title: Vice President & General Manager
Address: 600 rue de la Gauchetiere Ouest
Suite 2780, Montreal, Quebec H3B 4L8
Facsimile: (514) 875-9392
FUJI BANK CANADA
By:________________________________________
Name: John Bailey
Title: Senior Vice President
Address: BCE Place, Canada Trust Tower
P.O. Box 609, Suite 2800,
161 Bay Street, Toronto, Ontario
M5J 2S1
Facsimile: (416) 865-9618
THE BANK OF NOVA SCOTIA
By:________________________________________
Name: Michael G. Locke
Title: Vice President
Address: 44 King Street West,
Toronto, Ontario M5H lHl
Facsimile: (416) 866-2009
By:________________________________________
Name: David M. Torrey
Title: Relationship Manager
Address: 44 King Street West,
Toronto, Ontario M5H 1H1
Facsimile: (416) 866-2009
<PAGE>
-10-
BANK OF TOKYO - MITSUBISHI (CANADA)
By:________________________________________
Name: Amos Simpson
Title: Vice President & General Manager
Address: 600 rue de la Gauchetiere Ouest
Suite 2780, Montreal, Quebec H3B 4L8
Facsimile: (514) 875-9392
FUJI BANK CANADA
By: /s/ John Bailey
----------------------------------------
Name: John Bailey
Title: Senior Vice President
Address: BCE Place, Canada Trust Tower
P.O. Box 609, Suite 2800,
161 Bay Street, Toronto, Ontario
M5J 2S1
Facsimile: (416) 865-9618
THE BANK OF NOVA SCOTIA
By:________________________________________
Name: Michael G. Locke
Title: Vice President
Address: 44 King Street West,
Toronto, Ontario M5H lHl
Facsimile: (416) 866-2009
By:________________________________________
Name: David M. Torrey
Title: Relationship Manager
Address: 44 King Street West,
Toronto, Ontario M5H 1H1
Facsimile: (416) 866-2009
<PAGE>
-10-
BANK OF TOKYO - MITSUBISHI (CANADA)
By:________________________________________
Name: Amos Simpson
Title: Vice President & General Manager
Address: 600 rue de la Gauchetiere Ouest
Suite 2780, Montreal, Quebec H3B 4L8
Facsimile: (514) 875-9392
FUJI BANK CANADA
By:________________________________________
Name: John Bailey
Title: Senior Vice President
Address: BCE Place, Canada Trust Tower
P.O. Box 609, Suite 2800,
161 Bay Street, Toronto, Ontario
M5J 2S1
Facsimile: (416) 865-9618
THE BANK OF NOVA SCOTIA
By: /s/ Michael G. Locke
----------------------------------------
Name: Michael G. Locke
Title: Vice President
Address: 44 King Street West,
Toronto, Ontario M5H lHl
Facsimile: (416) 866-2009
By: /s/ David M. Torrey
----------------------------------------
Name: David M. Torrey
Title: Relationship Manager
Address: 44 King Street West,
Toronto, Ontario M5H 1H1
Facsimile: (416) 866-2009
<PAGE>
-11-
ABN AMRO BANK CANADA
By: /s/ [SIGNATURE ILLEGIBLE]^^
----------------------------------------
Name: [ILLEGIBLE]^^
Title: AVP
Address: #1500, 600 de Maisonneuve Ouest
Montreal, Quebec H3A 3J2
Facsimile: (514) 284-2357
CAISSE CENTRALE DESJARDINS
By:________________________________________
Name: Robert Labelle
Title: Manager, Financing and Banking
Services
Address: 1 Complexe Desjardins, Suite 2822
Montreal, Quebec H5B 1B3
Facsimile: (514) 281-7083
By:________________________________________
Name: Michel Paquette
Title: Senior Manager
Address: 1 Complexe Desjardins, Suite 2822
Montreal, Quebec HSB 1B3
Facsimile: (514) 281-7083
CREDIT LYONNAIS CANADA
By:________________________________________
Name: Daniel Arpin
Title: Vice President
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
<PAGE>
-11-
ABN AMRO BANK CANADA
By:________________________________________
Name:
Title:
Address: #1500, 600 de Maisonneuve Ouest
Montreal, Quebec H3A 3J2
Facsimile: (514) 284-2357
CAISSE CENTRALE DESJARDINS
By: /s/ Robert Labelle
----------------------------------------
Name: Robert Labelle
Title: Manager, Financing and Banking
Services
Address: 1 Complexe Desjardins, Suite 2822
Montreal, Quebec H5B 1B3
Facsimile: (514) 281-7083
By: /s/ Michel Paquette
----------------------------------------
Name: Michel Paquette
Title: Senior Manager
Address: 1 Complexe Desjardins, Suite 2822
Montreal, Quebec HSB 1B3
Facsimile: (514) 281-7083
CREDIT LYONNAIS CANADA
By:________________________________________
Name: Daniel Arpin
Title: Vice President
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
<PAGE>
-11-
ABN AMRO BANK CANADA
By:________________________________________
Name:
Title:
Address: #1500, 600 de Maisonneuve Ouest
Montreal, Quebec H3A 3J2
Facsimile: (514) 284-2357
CAISSE CENTRALE DESJARDINS
By:________________________________________
Name: Robert Labelle
Title: Manager, Financing and Banking
Services
Address: 1 Complexe Desjardins, Suite 2822
Montreal, Quebec H5B 1B3
Facsimile: (514) 281-7083
By:________________________________________
Name: Michel Paquette
Title: Senior Manager
Address: 1 Complexe Desjardins, Suite 2822
Montreal, Quebec HSB 1B3
Facsimile: (514) 281-7083
CREDIT LYONNAIS CANADA
By: /s/ Cynthia Hansen
----------------------------------------
Name: CYNTHIA HANSEN
Title: MANAGER
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
<PAGE>
-12-
By: /s/ Thierry Hauret
----------------------------------------
Name: Thierry Hauret
Title: First Vice-President & Manager
Eastern Region
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
INDUSTRIAL BANK OF JAPAN (CANADA)
By:________________________________________
Name: Mr. Tatsuhisa Nagao
Title: Executive Vice President
Address: 100 Yonge Street, Suite 1102
Toronto, Ontario M5C 2W1
Facsimile: (416) 367-3452
ROYAL BANK OF CANADA
By:________________________________________
Name: Ritta Y. Lee
Title: Senior Account Manager
Address: Royal Bank Plaza, South Tower
14th Flr., Toronto, Ontario M5J 2J5
Facsimile: (416) 974-7376
<PAGE>
-12-
By:________________________________________
Name: Thierry Hauret
Title: First Vice-President & Manager
Eastern Region
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
INDUSTRIAL BANK OF JAPAN (CANADA)
By: /s/ Mr. Tatsuhisa Nagao
----------------------------------------
Name: Mr. Tatsuhisa Nagao
Title: Executive Vice President
Address: 100 Yonge Street, Suite 1102
Toronto, Ontario M5C 2W1
Facsimile: (416) 367-3452
ROYAL BANK OF CANADA
By:________________________________________
Name: Ritta Y. Lee
Title: Senior Account Manager
Address: Royal Bank Plaza, South Tower
14th Flr., Toronto, Ontario M5J 2J5
Facsimile: (416) 974-7376
<PAGE>
-12-
By:________________________________________
Name: Thierry Hauret
Title: First Vice-President & Manager
Eastern Region
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
INDUSTRIAL BANK OF JAPAN (CANADA)
By:________________________________________
Name: Mr. Tatsuhisa Nagao
Title: Executive Vice President
Address: 100 Yonge Street, Suite 1102
Toronto, Ontario M5C 2W1
Facsimile: (416) 367-3452
ROYAL BANK OF CANADA
By: /s/ Fiona Dubsky
----------------------------------------
Name: Fiona Dubsky
Title: Senior Manager
Address: Royal Bank Plaza,
Corporate Banking, Quebec
1 Place Ville Marie,
8th Floor, West Wing
Montreal, Quebec H3C 3AP
Facsimile: (514) 874-5315
<PAGE>
EXHIBIT 10.62
AMENDMENT NO. 3 TO CREDIT AGREEMENT.
AMENDMENT dated as of December 31, 1998 among ULTRAMAR DIAMOND
SHAMROCK CORPORATION, CANADIAN ULTRAMAR COMPANY (the "Borrower"), the
LENDERS listed on the signature pages hereof (the "Lenders") and CANADIAN
IMPERIAL BANK OF COMMERCE, as Agent (the "Agent").
PREAMBLE:
1. The parties hereto entered into a Credit Agreement dated December 19,
1996 (the "Agreement"), as amended in February, 1997 and on November
7,1997; and
2. The parties hereto desire to amend certain provisions of the Agreement
in the manner set forth below.
AGREEMENT:
For good an valuable consideration, the parties hereto agree as follows:
1.1 Definition. References. Unless otherwise specifically defined herein, each
----------------------
term used herein which is defined in the Agreement shall have the meaning
given such term in the Agreement. Each reference to "hereof", "hereunder",
"herein" and "hereby" and each other similar reference and each reference
to "this Agreement" and each other similar reference contained in the
Agreement shall from and after the date hereof refer to the Agreement as
amended hereby.
2.1 Amendment to Section 1.1 of the Agreement. The definition of "Consolidated
------------------------------------------
Net Income" in Section 1.1 of the Agreement is replaced with the
following:
"Consolidated Net Income" means, for any period, the net income (or
loss) of the Borrower or UDSC, as the case may be, and its
Consolidated Subsidiaries for such period; provided that there shall
be excluded from such calculation (i) any after-tax gains or losses
attributable to asset sales (other than sales in the ordinary course
of business) or returned surplus assets of any Plan, (ii) in the case
of UDSC only, up to U.S. $127,800,000 of non-recurring charges in
connection with or as a result of (A) the Merger or (B) certain
changes to conform the accounting practices of Ultramar Corporation
and Diamond Shamrock, Inc., (iii) (A) U.S. $131,600,000 in non-
recurring restructuring charges in connection with certain corporate
restructuring activities initiated in 1998, as reflected by UDSC's
report on Form 10-Q/A for the quarterly period ended June 30, 1998,
and (B) up to U.S. $135,000,000 of non-recurring non-cash charges
against income taken in connection with the adjustment of inventory
value for the fiscal year ended
<PAGE>
-2-
December 31, 1998, and (iv) to the extent not included in clauses (i),
(ii) or (iii), any net extraordinary gains or net extraordinary
losses.
3.1 Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the Province of Ontario, Canada.
4.1 Counterparts; Effectiveness. This Amendment may be signed in any number of
---------------------------
counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument. This
Amendment shall become effective as of the date hereof when the Agent shall
have received duly executed counterparts hereof signed by the Borrower and
the Majority Lenders (or, in the case of any party as to which an executed
counterpart shall not have been received, the Agent shall have received
telegraphic, telex or other written confirmation from such party of
execution of a counterpart hereof by such party).
The parties hereto have caused this Amendment to be executed by their
respective authorized representatives or officers effective the date referred to
above.
CANADIAN ULTRAMAR COMPANY
By: /s/ Steve Blank
--------------------------------
Name: Steve Blank
Title: Treasurer
Address: c/o Ultramar Diamond Shamrock Corporation
Facsimile: (210) 592- 2010
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
By: /s/ Steve Blank
--------------------------------
Name: Steven A. Blank
Title: Vice President and Treasurer
Address: 6000 N Loop 1604 W
San Antonio, Texas 78249
Facsimile: (210) 592-2010
<PAGE>
-3-
LENDERS SIGNATURES
CANADIAN IMPERIAL BANK OF COMMERCE, AS AGENT
By: /s/ Tim Thomas
--------------------------------
Name: Tim Thomas
Title: Executive Director
Address: Commerce Court West, 7th Flr.,
Toronto, Ontario M5L 1A2
Facsimile: (416) 980-2804
By: /s/ D. Evelyn
-------------------------------
Name: D. Evelyn
Title: Director
Address: Commerce Court West, 7th Flr.,
Toronto, Ontario M5L 1A2
Facsimile: (416) 980-2804
CANADIAN IMPERIAL BANK OF COMMERCE
By:_______________________________
Name:
Title:
Address: 10th FIr., 855 - 2nd Street, S.W.
Calgary, Alberta T2P 2P2
Facsimile: (403) 221-5779
By:_______________________________
Name:
Title:
Address: 10th Flr., 855 - 2nd Street, S.W.
Calgary, Alberta T2P 2P2
Facsimile: (403) 221-5779
<PAGE>
-3-
LENDERS SIGNATURES
CANADIAN IMPERIAL BANK OF COMMERCE, AS AGENT
By:_______________________________
Name:
Title:
Address: Commerce Court West, 7th Flr.,
Toronto, Ontario M5L 1A2
Facsimile: (416) 980-2804
By:_______________________________
Name:
Title:
Address: Commerce Court West, 7th Flr.,
Toronto, Ontario M5L 1AS
Facsimile: (416) 980-2804
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ D. J. Swain
--------------------------------
Name: D. J. Swain
Title: Vice President
Address: 10th Flr., 855 - 2nd Street, S.W.
Calgary, Alberta T2P 2P2
Facsimile: (403) 221-5779
By: /s/ L. Sagriff
-------------------------------
Name: L. Sagriff
Title: Executive Director
Address: 10th Flr., 855 - 2nd Street, S.W.
Calgary, Alberta T2P 2P2
Facsimile: (403) 221-5779
<PAGE>
-4-
BANK OF TOKYO - MITSUBISHI (CANADA)
By: /s/ Amos Simpson
-------------------------------
Name: Amos Simpson
Title: General Manager
Address: 600 rue de la Gauchetiere Ouest, Suite 2780,
Montreal, Quebec H3B 4L8
Facsimile: (514) 875-9392
FUJI BANK CANADA
By:_______________________________
Name:
Title:
Address:
Facsimile:
THE BANK OF NOVA SCOTIA
By:________________________________
Name: David Torrey
Title: Relationship Manager
Address: 44 King Street West,
Toronto, Ontario MAH 1H1
Facsimile: (416) 866-2009
By:_______________________________
Name:
Title:
Address: 44 King Street West,
Toronto, Ontario MAH 1H1
Facsimile: (416) 866-2009
<PAGE>
-4-
BANK OF TOKYO - MITSUBISHI (CANADA)
By:_______________________________
Name: Amos Simpson
Title: General Manager
Address: 600 rue de la Gauchetiere Ouest, Suite 2780,
Montreal, Quebec H3B 4L8
Facsimile: (514) 875-9392
FUJI BANK CANADA
By:/s/ Daniel Lee
-------------------------------
Name: Daniel Lee
Title: Senior Vice President
Address:
Facsimile:
THE BANK OF NOVA SCOTIA
By:_______________________________
Name: David Torrey
Title: Relationship Manager
Address: 44 King Street West,
Toronto, Ontario MAH 1H1
Facsimile: (416) 866-2009
By:________________________________
Name:
Title:
Address: 44 King Street West,
Toronto, Ontario MAH 1H1
Facsimile: (416) 866-2009
<PAGE>
-4-
BANK OF TOKYO - MITSUBISHI (CANADA)
By:_______________________________
Name: Amos Simpson
Title: General Manager
Address: 600 rue de la Gauchetiere Ouest, Suite 2780,
Montreal, Quebec H3B 4L8
Facsimile: (514) 875-9392
FUJI BANK CANADA
By:_______________________________
Name:
Title:
Address:
Facsimile:
THE BANK OF NOVA SCOTIA
By: /s/ David Torrey
-------------------------------
Name: David Torrey
Title: Relationship Manager
Address: 44 King Street West,
Toronto, Ontario MAH 1H1
Facsimile: (416) 866-2009
By: /s/ Stephanie Spencer
-------------------------------
Name: Stephanie Spencer
Title: Account Officer
Address: 44 King Street West,
Toronto, Ontario MAH 1H1
Facsimile: (416) 866-2009
<PAGE>
-5-
ABN AMRO BANK CANADA
By:/s/ [SIGNATURE ILLEGIBLE]^^
--------------------------------
Name: [ILLEGIBLE]^^
Title: SENIOR VICE PRESIDENT
Address: #1500, 600 de Maisonneuve Ouest
Montreal, Quebec H3A 3J2
Facsimile: (514) 284-2357
CAISSE CENTRALE DESJARDINS
By:_______________________________
Name: Robert LaBelle
Title: Director, Corporate Banking
Address: 1 Complex Desjardins, Suite 2822
Montreal, Quebec H5B 1B3
Facsimile: (514) 288-9683
CREDIT LYONNAIS CANADA
By:________________________________
Name: Joycelyn Cote
Title: Vice President
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 284-2357
By:_______________________________
Name: Cynthia Hansen
Title: Assistant Vice President
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
<PAGE>
-5-
ABN AMRO BANK CANADA
By:_______________________________
Name: Enrico Pallatto
Title:
Address: #1500, 600 de Maisonneuve Ouest
Montreal, Quebec H3A 3J2
Facsimilie (514) 284-2357
CASSIE CENTRALE DESJARDINS
By: /s/ Robert LaBelle
-------------------------------
Name: Robert LaBelle
Title: Director, Corporate Banking
Address: 1 Complexe Desjardins, Suite 2822
Montreal, Quebec H5B 1B3
Facsimile: (514) 284-2357
CREDIT LYONNAIS CANADA
By:________________________________
Name: Jocelyn Cote
Title: Vice President
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
By:________________________________
Name: Cynthia Hansen
Title: Assistant Vice President
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
<PAGE>
-5-
ABN AMRO BANK CANADA
By:________________________________
Name: Enrico Pallatto
Title:
Address: #1500, 600 de Maisonneuve Ouest
Montreal, Quebec H3A 3J2
Facsimilie (514) 284-2357
CASSIE CENTRALE DESJARDINS
By:________________________________
Name: Robert LaBelle
Title: Director, Corporate Banking
Address: 1 Complexe Desjardins, Suite 2822
Montreal, Quebec H5B 1B3
Facsimile: (514) 284-2357
CREDIT LYONNAIS CANADA
By: /s/ Jocelyn Cote
--------------------------------
Name: Jocelyn Cote
Title: Vice President
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
By: /s/ Cynthia Hansen
--------------------------------
Name: Cynthia Hansen
Title: Assistant Vice President
Address: 2000 Mansfield, 16th Floor
Montreal, Quebec H3A 3A6
Facsimile: (514) 288-9683
<PAGE>
-6-
THE INDUSTRIAL BANK OF JAPAN (CANADA)
By: /s/ Campbell McLeish
----------------------------------
Name: Campbell McLeish
Title: Senior Vice President
Address: 100 Yonge Street, Suite 1102
Toronto, Ontario M5C 2W1
Facsimile: (416) 367-3452
ROYAL BANK OF CANADA
By:________________________________
Name: Fiona Dubsky
Title: Senior Manager
Address: 1 Place Ville Marie, 8th Floor West Wing
Montreal, Quebec H3C 3A9
Facsimile: (514) 874-5315
<PAGE>
-6-
THE INDUSTRIAL BANK OF JAPAN (CANADA)
By:________________________________
Name: Campbell McLeish
Title: Senior Vice President
Address: 100 Yonge Street, Suite 1102
Toronto, Ontario M5C 2W1
Facsimile: (416) 367-3452
ROYAL BANK OF CANADA
By: /s/ Fiona Dubsky
-------------------------------
Name: Fiona Dubsky
Title: Senior Manager
Address: 1 Place Ville Marie, 8th Floor West Wing
Montreal, Quebec H3C 3A9
Facsimile: (514) 874-5315
<PAGE>
EXHIBIT 10.63
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
CONFIDENTIAL
PENELOPE RHUDE VITEO
Vice President
Human Resources
February 18, 1999
Mr. Jean Gaulin
Dear Jean:
Effective as of January 1, 1999 your annual base salary was increased to
$800,000, except that payment of $75,000 of that increase in 1999 is suspended
pursuant to your instructions set out in your letter to me effective as of
December 30, 1998.
This letter confirms that the Compensation Committee of the Company's Board of
Directors determined, effective January 1, 1999, to increase your incentive
factor under the Company's 1999 Annual Incentive Plan ("1999 AIP") to 76.55%.
This approval is contingent upon your continuing to suspend payment of $75,000
in base salary during 1999.
Although you will not receive $75,000 in annual base salary in 1999, you will be
treated as earning $800,000 annually in base salary for the following purposes,
to the extent relevant to your personal situation:
. 1999 Annual Incentive Plan
. Life Insurance Coverage
. Short and Long-Term Disability Insurance Coverage
. Severance under your Employment Agreement
. Supplemental Executive Retirement Plan
To the extent you or your beneficiaries are subject to any federal income and
employment taxes respecting payments under the life insurance and/or long-term
disability insurance by reason of this treatment, then you or your beneficiaries
will receive an additional payment equal to the amount of said taxes imposed
upon the payments.
You will not be treated as having earned $800,000 in annual base salary with
respect to the qualified or nonqualified 401(k) Plans, and the qualified defined
benefit pension plan in which you participate. However, subject to the terms of
these plans and your
<PAGE>
elections under same, any award you may receive under the 1999 Annual Incentive
Plan will be treated as earned for the purposes of these plans.
Please sign the original and enclosed copy of this letter in the space below,
indicating your agreement to the terms outlined above and the continuing
suspension of $75,000 of your annual base salary during 1999. Your agreement is
irrevocable during 1999. Please return the signed original to me.
Sincerely,
/s/ Penny
AGREED TO THIS 23 DAY OF FEBRUARY 1999.
/s/ Jean Gaulin
- --------------------
Jean Gaulin
<PAGE>
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
CONFIDENTIAL
PENELOPE RHUDE VITEO
Vice President
Human Resources
February 18, 1999
Mr. Timothy Fretthold
Dear Tim:
Effective as of January 1, 1999 your annual base salary was increased to
$370,000, except that payment of $35,000 of that increase in 1999 is suspended
pursuant to your instructions set out in your letter to me effective as of
December 30, 1998.
This letter confirms that the Compensation Committee of the Company's Board of
Directors determined, effective January 1, 1999, to increase your incentive
factor under the Company's 1999 Annual Incentive Plan ("1999 AIP") to 60.15%.
This approval is contingent upon your continuing to suspend payment of $35,000
in base salary during 1999.
Although you will not receive $35,000 in annual base salary in 1999, you will be
treated as earning $370,000 annually in base salary for the following purposes,
to the extent relevant to your personal situation:
. 1999 Annual Incentive Plan
. Life Insurance Coverage
. Short and Long-Term Disability Insurance Coverage
. Severance under your Employment Agreement
. Supplemental Executive Retirement Plan
To the extent you or your beneficiaries are subject to any federal income and
employment taxes respecting payments under the life insurance and/or long-term
disability insurance by reason of this treatment, then you or your beneficiaries
will receive an additional payment equal to the amount of said taxes imposed
upon the payments.
You will not be treated as having earned $370,000 in annual base salary with
respect to the qualified or nonqualified 401(k) Plans, and the qualified defined
benefit pension plan in which you participate. However, subject to the terms of
these plans and your
<PAGE>
elections under same, any award you may receive under the 1999 Annual Incentive
Plan will be treated as earned for the purposes of these plans.
Please sign the original and enclosed copy of this letter in the space below,
indicating your agreement to the terms outlined above and the continuing
suspension of $35,000 of your annual base salary during 1999. Your agreement is
irrevocable during 1999. Please return the signed original to me.
Sincerely,
/s/ Penny
AGREED TO THIS 18TH DAY OF FEBRUARY 1999.
/s/ Timothy Fretthold
- ----------------------
Timothy Fretthold
<PAGE>
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
CONFIDENTIAL
PENELOPE RHUDE VITEO
Vice President
Human Resources
February 22, 1999
Mr. William Klesse
Dear Bill:
Effective as of February 1, 1999 your annual base salary was increased to
$400,000, except that payment of $35,000 of that increase in 1999 is suspended
pursuant to your instructions set out in your letters to me effective as of
December 30, 1998 and January 25, 1999.
This letter confirms that the Compensation Committee of the Company's Board of
Directors determined, effective January 1, 1999, to increase your incentive
factor under the Company's 1999 Annual Incentive Plan ("1999 AIP") to 58.9%.
This approval is contingent upon your continuing to suspend payment of $35,000
in base salary during 1999.
Although you will not receive $35,000 in annual base salary in 1999, you will be
treated as earning $400,000 annually in base salary for the following purposes,
to the extent relevant to your personal situation:
. 1999 Annual Incentive Plan
. Life Insurance Coverage
. Short and Long-Term Disability Insurance Coverage
. Severance under your Employment Agreement
. Supplemental Executive Retirement Plan
To the extent you or your beneficiaries are subject to any federal income and
employment taxes respecting payments under the life insurance and/or long-term
disability insurance by reason of this treatment, then you or your beneficiaries
will receive an additional payment equal to the amount of said taxes imposed
upon the payments.
You will not be treated as having earned $400,000 in annual base salary with
respect to the qualified or nonqualified 401(k) Plans, and the qualified defined
benefit pension plan in which you participate. However, subject to the terms of
these plans and your
<PAGE>
elections under same, any award you may receive under the 1999 Annual Incentive
Plan will be treated as earned for the purposes of these plans.
Please sign the original and enclosed copy of this letter in the space below,
indicating your agreement to the terms outlined above and the continuing
suspension of $35,000 of your annual base salary during 1999. Your agreement is
irrevocable during 1999. Please return the signed original to me.
Sincerely,
/s/ Penny
AGREED TO THIS 23/RD/ DAY OF FEBRUARY 1999.
/s/ William Klesse
- -----------------------
William Klesse
<PAGE>
Exhibit 21
Ultramar Diamond Shamrock Corporation
List of Subsidiaries
<TABLE>
<CAPTION>
Corporation State of Incorporation
----------- ----------------------
<S> <C>
3007152 Nova Scotia Company......................... Nova Scotia
585043 Ontario Limited.............................. Ontario
Autotronic Systems, Inc. ........................... Delaware
Barinco Insurance Ltd............................... Barbados
Bay Area Petrochemicals Company, L.L.C.............. Delaware
Belvex, Inc......................................... Texas
Big Diamond Number 1, Inc........................... Texas
Big Diamond, Inc. .................................. Texas
Bioremetec Inc...................................... Canada
Canadian Marine Response Management Corporation
Ltd................................................ Canada
Canadian Ultramar Company........................... Nova Scotia
Canadian Ultramar Holding Corporation............... Delaware
Colonnade Assurance Limited......................... Bermuda
Colonnade Vermont Insurance Company................. Vermont
Colorado Refining Company........................... Colorado
Corporate Claims Management, Inc.................... Texas
Coyote Capital, L.L.C............................... Delaware
Coyote Funding, L.L.C............................... Delaware
CUSH-PO, Inc........................................ Oklahoma
D-S Mont Belvieu, Inc............................... Texas
D-S Systems, Inc.................................... Delaware
D-S United, Inc..................................... Delaware
D-S Venture Company, L.L.C. ........................ Delaware
D-S World Energy, Inc. ............................. Delaware
D. S. E. Pipeline Company........................... Delaware
Diamond 66, L.L.C. ................................. Delaware
Diamond-Koch, L.L.C................................. Delaware
Diamond-Koch, L.P................................... Texas
Diamond-Koch II, L.P................................ Texas
Diamond-Koch III, L.P............................... Texas
Diamond Reforming, Inc.............................. Delaware
Diamond Security Systems, Incorporated.............. Delaware
Diamond Shamrock Arizona, Inc....................... Delaware
Diamond Shamrock Boliviana, Ltd..................... California
Diamond Shamrock Leasing, Inc....................... Delaware
Diamond Shamrock of Bolivia, Inc. .................. Delaware
Diamond Shamrock Pipeline Company................... Delaware
Diamond Shamrock Refining and Marketing Company..... Delaware
Diamond Shamrock Refining Company, L.P.............. Delaware
Diamond Shamrock Stations, Inc...................... Delaware
DSRM National Bank.................................. N/A
Eastern Canada Response Corporation Ltd. ........... Canada
</TABLE>
<PAGE>
Exhibit 21--(Continued)
Ultramar Diamond Shamrock Corporation
List of Subsidiaries
<TABLE>
<CAPTION>
Corporation State of Incorporation
----------- ----------------------
<S> <C>
Emerald Corporation................................... Delaware
Emerald Marketing, Inc................................ Texas
Emerald Pipe Line Corporation......................... Delaware
Geo Williamson Fuels Ltd. ............................ Ontario
Hanover Petroleum Corporation......................... Delaware
Integrated Product Systems, Inc....................... Delaware
Kempco Petroleum Company.............................. Texas
Laurelglen Holdings, Inc.............................. Delaware
Les Carburants Ultra-GNV Enr. ........................ Quebec
Les Petroles D. Kirouac Inc........................... Quebec
Metro Oil Co.......................................... Michigan
Michigan Petroleum, L.L.C............................. Delaware
Michigan Pipeline, L.L.C.............................. Delaware
National Convenience Stores Incorporated.............. Delaware
National Money Orders Incorporated.................... Texas
Natural/Total Limited Liability Company............... Wyoming
Navajo Sales Company, Inc............................. Arizona
Oceanic Tankers Agency Limited........................ Quebec
Petro/Chem Environmental Services, Inc. .............. Delaware
Robinson Oil Company (1987) Limited................... Nova Scotia
Sallans Fuels Limited................................. Ontario
Schepps Food Stores, Inc.............................. Texas
Shamrock Ventures, Ltd................................ Bermuda
Sigmor Beverage, Inc.................................. Texas
Sigmor Corporation.................................... Delaware
Sigmor Number 5, Inc.................................. Texas
Sigmor Number 11, Inc................................. Texas
Sigmor Number 24, Inc................................. Texas
Sigmor Number 43, Inc................................. Texas
Sigmor Number 56, Inc................................. Texas
Sigmor Number 79, Inc................................. Texas
Sigmor Number 80, Inc................................. Texas
Sigmor Number 103, Inc................................ Texas
Sigmor Number 105, Inc................................ Texas
Sigmor Number 111, Inc................................ Texas
Sigmor Number 119, Inc................................ Texas
Sigmor Number 125, Inc................................ Texas
Sigmor Number 140, Inc................................ Texas
Sigmor Number 156, Inc................................ Texas
Sigmor Number 170, Inc................................ Texas
Sigmor Number 178, Inc................................ Texas
Sigmor Number 181, Inc................................ Texas
Sigmor Number 196, Inc................................ Texas
Sigmor Number 197, Inc................................ Texas
Sigmor Number 202, Inc................................ Texas
</TABLE>
<PAGE>
Exhibit 21--(Continued)
Ultramar Diamond Shamrock Corporation
List of Subsidiaries
<TABLE>
<CAPTION>
Corporation State of Incorporation
----------- ----------------------
<S> <C>
Sigmor Number 206, Inc................................ Texas
Sigmor Number 228, Inc................................ Texas
Sigmor Number 229, Inc................................ Texas
Sigmor Number 232, Inc................................ Texas
Sigmor Number 238, Inc................................ Texas
Sigmor Number 239, Inc................................ Texas
Sigmor Number 259, Inc................................ Texas
Sigmor Number 306, Inc................................ Texas
Sigmor Number 363, Inc................................ Texas
Sigmor Number 422, Inc................................ Texas
Sigmor Number 605, Inc................................ Texas
Sigmor Number 606, Inc................................ Texas
Sigmor Number 611, Inc................................ Texas
Sigmor Number 613, Inc................................ Texas
Sigmor Pipeline Company............................... Texas
Skelly-Belvieu Pipeline Company, L.L.C................ Delaware
Skipper Beverage Company, Inc......................... Texas
Stop 'N Go Markets of Georgia, Inc.................... Georgia
Stop 'N Go Markets of Texas, Inc...................... Texas
Sunshine Beverage Company............................. Texas
Texas Super Duper Markets, Inc........................ Texas
The Shamrock Pipe Line Corporation.................... Delaware
TOC-DS Company........................................ Delaware
Total Donut, L.L.C.................................... Michigan
TPI Engineering and Research Company.................. Colorado
TPI Petroleum, Inc.................................... Michigan
TPI Petroleum, L.L.C.................................. Delaware
TPI Pipeline Corporation.............................. Michigan
TPI Pipeline, L.L.C................................... Delaware
UDS Capital I......................................... Delaware
UDS Capital II........................................ Delaware
UDS Corporation....................................... Delaware
UDS Funding I, L.P.................................... Delaware
UDS Funding II, L.P................................... Delaware
UDS PNW Corporation................................... Delaware
Ultramar Acceptance Inc............................... Ontario
Ultramar Credit Corporation........................... Ontario
Ultramar D.S., Inc. .................................. Texas
Ultramar Energy Inc................................... Delaware
Ultramar Inc.......................................... Nevada
Ultramar, L.L.C. ..................................... Delaware
Ultramar Ltee / Ultramar Ltd.......................... Nova Scotia
Ultramar Services Inc................................. Quebec
West Emerald Pipe Line Corporation.................... Delaware
XCEL Products Company, Inc............................ Texas
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements: (i) Form S-8 (No. 33-52148) pertaining to the Ultramar Diamond
Shamrock Corporation 1992 Long-Term Incentive Plan, (ii) Form S-8 (No. 33-
62894) pertaining to the Ultramar Diamond Shamrock Corporation Restricted
Share Plan for Directors, (iii) Form S-8 (No. 333-19131) pertaining to the
Diamond Shamrock, Inc. 1987 Long-Term Incentive Plan and the Diamond Shamrock,
Inc. Long-Term Incentive Plan, (iv) Form S-3 (Nos. 333-28737, 333-28737-02,
333-28737-04, 333-46775, 333-46775-01 and 333-46775-02) pertaining to the
universal shelf registration of Ultramar Diamond Shamrock Corporation, UDS
Capital II and UDS Funding II, L.P., (v) Form S-8 (No. 333-27697) pertaining to
the Ultramar Diamond Shamrock Corporation Non-Employee Director Equity Plan,
(vi) Form S-8 (No. 333-27699) pertaining to the Ultramar Diamond Shamrock
Corporation 1996 Long-Term Incentive Plan, (vii) Form S-8 (No. 333-27701)
pertaining to the Ultramar Diamond Shamrock Corporation 401(k) Retirement
Savings Plan, and (viii) Form S-8 (No. 333-27703) pertaining to the Ultramar
Diamond Shamrock Corporation Non-Qualified 401(k) Plan of our report dated
February 7, 1997 with respect to the consolidated statements of operations,
stockholders' equity, cash flows and comprehensive income (loss) of Ultramar
Diamond Shamrock Corporation (formerly Ultramar Corporation) for the year ended
December 31, 1996 included in this Annual Report (Form 10-K) for the year ended
December 31, 1998 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
San Antonio, Texas
March 29, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each of the
Prospectuses constituting part of the Registration Statements of Ultramar
Diamond Shamrock Corporation on Form S-3 (Nos. 333-28737, 333-28737-02, 333-
28737-04, 333-46775, 333-46775-01 and 333-46775-02) and on Form S-8 (Nos. 33-
52148, 33-62894, 333-19131, 333-27697, 333-27699, 333-27701, and 333-27703) of
our report dated February 7, 1997 with respect to the consolidated financial
statements and financial statement schedule of the Diamond Shamrock operations
of Ultramar Diamond Shamrock Corporation, appearing in Item 8 of this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 29, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-3 (Nos. 333-28737, 333-28737-02, 333-28737-
04, 333-46775, 333-46775-01, and 333-46775-02) and on Form S-8 (Nos. 33-52148,
33-62894, 333-19131, 333-27697, 333-27699, 333-27701 and 333-27703).
/s/ Arthur Andersen LLP
San Antonio, Texas
March 29, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned directors and/or officers of Ultramar Diamond Shamrock
Corporation, hereby constitute and appoint Timothy J. Fretthold, H. Pete Smith,
Curtis V. Anastasio, Todd Walker, or any of them, their true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, to do any and all acts and things in their name and behalf in
their capacity as a director and/or officer of Ultramar Diamond Shamrock
Corporation and to execute any and all instruments for them and in their name in
such capacity, which said attorneys-in-fact and agents, or any of them, may deem
necessary or advisable to enable Ultramar Diamond Shamrock Corporation to comply
with the Securities Exchange Act of 1934, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission, in connection with
the Annual Report on Form 10-K of Ultramar Diamond Shamrock Corporation for the
fiscal year ended December 31, 1998, including without limitation, power and
authority to sign for them, in their name in the capacity indicated above, such
Form 10-K and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
said attorneys-in-fact and agents, or their substitute or substitutes, or any
one of them, shall do or cause to be done by virtue hereof.
/s/ R.R. Hemminghaus /s/ Jean Gaulin
- ------------------------------ ----------------------------
R. R. HEMMINGHAUS JEAN GAULIN
______________________________ /s/ Byron Allumbaugh
----------------------------
E. GLENN BIGGS BYRON ALLUMBAUGH
/s/ W. E. Bradford /s/ H. Frederick Christie
- ------------------------------ ----------------------------
W. E. BRADFORD H. FREDERICK CHRISTIE
/s/ W. H. Clark /s/ Russell H. Herman
- ------------------------------ ----------------------------
W. H. CLARK RUSSELL H. HERMAN
/s/ Bob Marbut /s/ M. Saint-Jacques
- ------------------------------ ----------------------------
BOB MARBUT MADELEINE SAINT-JACQUES
/s/ Katherine D. Ortega /s/ C. Barry Schaefer
- ------------------------------ ----------------------------
KATHERINE D. ORTEGA C. BARRY SCHAEFER
/s/ H. Pete Smith
- ------------------------------
H. PETE SMITH
Dated: March 3, 1999
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of Ultramar
Diamond Shamrock Corporation, a Delaware corporation (the "Corporation"), hereby
constitutes and appoints Timothy J. Fretthold, H. Pete Smith, Curtis V.
Anastasio, and Todd Walker, attorneys-in-fact and agents of the Corporation,
with full power of substitution and resubstitution, to do any and all acts and
things in its name and on its behalf and to execute any and all instruments in
its name in such capacity which they may deem appropriate or advisable to enable
the Corporation to comply with the Securities Exchange Act of 1934, as amended,
and any rules and regulations of the Securities and Exchange Commission, in
connection with the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, including without limitation, the power to sign such
report on the Corporation's behalf and to sign any amendments thereto, and to
file the same, with all exhibits thereto, and other documents required in
connection therewith, with the Securities and Exchange Commission, granting to
each and all of said attorneys-in-fact, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection with the filing of such report as herein described.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
/s/ Jean Gaulin
- ----------------------
Jean Gaulin
Chief Executive Officer
Dated: March 3, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 176,100
<SECURITIES> 0
<RECEIVABLES> 577,000
<ALLOWANCES> (14,300)
<INVENTORY> 635,600
<CURRENT-ASSETS> 1,505,800
<PP&E> 4,423,200
<DEPRECIATION> (1,162,000)
<TOTAL-ASSETS> 5,315,000
<CURRENT-LIABILITIES> 1,146,100
<BONDS> 1,926,200
200,000
0
<COMMON> 900
<OTHER-SE> 1,383,100
<TOTAL-LIABILITY-AND-EQUITY> 5,315,000
<SALES> 11,134,600
<TOTAL-REVENUES> 11,134,600
<CGS> 6,302,900
<TOTAL-COSTS> 6,302,900
<OTHER-EXPENSES> 4,756,200
<LOSS-PROVISION> 12,700
<INTEREST-EXPENSE> 143,500
<INCOME-PRETAX> (64,000)
<INCOME-TAX> 3,800
<INCOME-CONTINUING> (64,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78,100)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>