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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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.
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. [_]
As of February 29, 2000, 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 $1,876,268,000.
The number of shares of Common Stock, $0.01 par value, of the Company
outstanding as of February 26, 2000 was 86,846,763.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement for its 2000 Annual Meeting
of Stockholders are incorporated by reference into Items 10, 11, 12, and 13 of
Part 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.
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TABLE OF CONTENTS
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Item Page
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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
Matters................................................................. 15
6.Selected Financial Data............................................... 15
7.Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 17
7A.Quantitative and Qualitative Disclosures About Market Risk........... 34
8.Financial Statements and Supplementary Data........................... 38
9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 71
PART III
10.Directors and Executive Officers of the Registrant.................... 71
11.Executive Compensation................................................ 71
12.Security Ownership of Certain Beneficial Owners and Management........ 71
13.Certain Relationships and Related Transactions........................ 71
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 71
Signatures............................................................... 80
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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 34.
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PART I
Item 1. Business
Summary
Ultramar Diamond Shamrock Corporation (the Company or UDS) is a leading
independent refiner and marketer 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 and terminals,
a home heating oil business, and related petrochemical and natural gas liquids
(NGL) operations. The Company currently employs approximately 21,000 people.
The Company owns and operates six 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; and
. Quebec Refinery located near Quebec City in Quebec, Canada.
In the United States, 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 3,800
convenience stores across 17 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 250,000 households.
The Company's Common Stock is listed on the New York Stock Exchange under the
"UDS" symbol. UDS's principal executive offices are located at 6000 North Loop
1604 West, San Antonio, Texas 78249-1112.
Acquisition and Dispositions
In September 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.
In conjunction with the restructuring plan implemented in June 1998, the
Company sold a number of under-performing, non-strategic assets during 1999,
including 239 Company-operated convenience stores, certain pipelines and crude
oil gathering operations in Oklahoma and various other assets. In December
1999, the Company completed the sale of 177 Company-operated convenience
stores, 400 miles of crude oil and refined product pipelines and five
terminals in Michigan to Marathon Ashland Petroleum LLC. Also in December
1999, the Company permanently closed the Alma, Michigan Refinery and is
developing plans to move certain processing units to other refinery locations.
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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,
L.P. and Skelly-Belvieu Pipeline Company, LLC and earnings from Nitromite
fertilizer operations and NGL marketing operations.
See note 17 to the consolidated financial statements included in "Item 8--
Financial Statements and Supplementary Data" for additional segment
information.
Refining
During 1999, the Company's refining operations included seven refineries with
a combined throughput capacity of 701,000 barrels per day which included
52,000 barrels per day from the Alma Refinery through September 1999. In
December 1999, the Alma Refinery was permanently closed following the sale of
the Michigan retail, pipeline and terminal operations. A summary of the
Company's operating refineries is as follows:
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Capacity
Refinery Location (barrels per day)
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McKee....................................... Texas 165,000
Three Rivers................................ Texas 92,000
Wilmington.................................. California 125,000
Ardmore..................................... Oklahoma 80,000
Denver...................................... Colorado 27,000
Quebec...................................... Quebec, Canada 160,000
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649,000
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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 US network of crude oil pipelines and terminals provides the
ability to acquire crude oil from producing leases, major domestic crude 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.
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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 other
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. During 1999, the McKee Refinery's fluid catalytic
cracking unit's (FCCU) power train was revamped increasing the refinery's
throughput capacity by 9,000 barrels per day.
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, 1999, the Company completed several
expansion projects at the Three Rivers Refinery, including replacement of the
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 70-
mile pipeline which has the capacity to deliver 120,000 barrels per day 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 3.0 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
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blend of California and imported foreign crude oils. Given its coking and
desulfurizing capabilities, it is 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 barrels per day. 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 other
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 refined 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 heavy, sour crude oils from both domestic and
foreign sources. 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. Refined products are transported via pipelines, rail cars
and trucks. The Ardmore Refinery has over 1.8 million barrels of refined
product storage.
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 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 refined product pipeline that existed prior to the Acquisition. This
integration has helped streamline operations and allowed both refineries to
optimize production runs.
Quebec Refinery
The Quebec Refinery relies on foreign crude oil for feedstock. During the
three years ended December 31, 1999, the Company completed several capital
projects at the Quebec Refinery, including:
. the expansion of the FCCU and de-bottlenecking the crude units, all of
which have resulted in expanded throughput capacity and
. the reduction of Benzene content in gasoline to meet government
regulation requirements and acidic crude processing.
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
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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 65 bulk storage facilities throughout the Northeast System,
including 28 terminals.
Alma Refinery
The Alma Refinery was fully operational until October 1, 1999 when the Company
suspended operations and completed processing the remaining crude oil held in
storage. In December 1999, the Company permanently closed the Alma Refinery
upon completion of the sale of the Michigan retail, pipeline and terminal
operations to Marathon Ashland. The sale to Marathon Ashland included the
Michigan retail operations, and all pipelines and terminals in Michigan;
however, it excluded the refinery and its various components. As a result of
the closure, the Company recorded a one-time charge of $138.2 million to cover
the severance costs of eliminating all refinery personnel and to write down
the refinery to its estimated salvage value.
The Alma Refinery typically processed Michigan light sweet crude oil, Canadian
crude oil and condensate and North Dakota sweet crude oil which were easily
accessed from multiple crude oil pipeline connections including the
Lakehead/Interprovincial Pipeline, which transports both Canadian and domestic
crude oil. The refinery produced a wide range of specialty products such as
solvents, aviation gasoline, racing fuel and hexenes and yielding very little
residual fuel oil.
The Alma Refinery had 13 crude oil tanks with 800,000 barrels of storage
capacity. The refinery also owned and operated over 250 miles of crude oil
pipelines and over 135 miles of refined product pipelines which were 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 was supplied by truck or boat.
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 completed the construction of its McKee to El Paso,
Texas refined product pipeline and terminal, expanded the Amarillo to
Albuquerque refined product pipeline, and expanded the Colorado to Denver
refined product pipeline.
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.
Refined products are currently received on exchange or by purchase through
approximately 80 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
Pipeline Company an interest in the El Paso refined product pipeline system,
which includes the 408-mile refined product pipeline from McKee to El Paso and
the terminal in El Paso. In accordance with the agreement, Phillips purchased
a 25% interest in the system in 1998 and, when the planned expansion of the
pipeline was completed in 1999, Phillips purchased an additional 8.33%
interest. The Company continues to operate the system.
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Retail
The Company is one of the largest independent retailers of refined products in
the central and southwest United States. The Company has strong brand
identification in its 17-state retail area, including Texas, California,
Colorado and Oklahoma. Gasoline and diesel fuel are sold under the Diamond
Shamrock(R), Beacon(R), Ultramar(R), and Total(R) brand names through a
network of 1,583 Company-operated and 2,193 dealer-operated convenience
stores. Of the Company-operated stores, 826 are owned and 757 are leased. In
1999, the Company's total sales of refined products in its US system averaged
175,100 barrels per day.
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, beverages and
cigarettes.
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.
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 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, and the closure and sale of 316 under-performing convenience
stores.
During 1999 and 1998, the Company opened ten convenience stores; seven of
which are located in Arizona. During 1999, the Company sold or closed 416
convenience stores; 177 of those stores were located in Michigan and 162 were
under-performing convenience stores included in the 1998 restructuring plan.
During 1998, the Company also sold or closed 208 convenience stores, which
included 65 under-performing convenience stores related to the 1998
restructuring plan.
The Company's competitive position is supported by its own proprietary credit
card program, which had approximately 1.4 million active accounts as of
December 31, 1999. 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 1999, the Company's total retail sales
of refined products in its Northeast System averaged 68,400 barrels per day.
The gasoline and diesel fuel is sold under the Ultramar(R) brand through a
network of approximately 1,226 convenience stores located throughout eastern
Canada. As of December 31, 1999, the Company owned or controlled, under long-
term leases, 607 convenience stores and it distributed gasoline to 619 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 180 gasoline-only service stations to high-volume
Company-operated convenience stores and plans to continue this program by
converting an additional 100 to 150 service stations to this higher volume
convenience store format over the next three years.
The Northeast System operations include one of the largest home heating oil
businesses in North America. In 1999, the Company sold, under the Ultramar(R)
brand, home heating oil to approximately 250,000 households in eastern Canada
and the northeastern United States. Under a development plan initiated in
1995, the Company has since acquired ten retail home heating oil operations,
adding approximately 81,000 households.
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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.P. 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 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 barrels per day,
. 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.
Skelly-Belvieu
The Company also has a 50% equity investment in Skelly-Belvieu Pipeline
Company, LLC, a partnership between Phillips Pipeline Company and UDS. The
Skelly-Belvieu Pipeline transports refinery-grade propylene from the McKee
Refinery to Mont Belvieu. Skelly-Belvieu is jointly controlled; thus, the
Company accounts for its interest using the equity method.
Other
The Company's other petrochemical/NGL operations consist of an ammonia
production facility at the McKee Refinery which produces Nitromite fertilizer
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 continued consolidation and
convergence experienced in the
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refining and marketing industry has reduced the number of competitors;
however, it has not reduced overall competition. The Company is the result of
a merger of Ultramar Corporation and Diamond Shamrock, Inc. in December 1996
(the Merger). In 1997, the Company acquired Total, a mid-continent refiner and
marketer.
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
continue to position the Company as a solid competitor in its market areas. In
Quebec, Canada and in the adjacent Canadian Atlantic provinces, the Company is
the largest independent retailer of gasoline.
Financial returns in the refining and marketing industry depend largely on
refining margins and retail 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 1999, crude oil
prices more than doubled which pushed wholesale prices to higher levels.
However, retail pump prices did not increase at the same rate and
consequently, retail fuel margins were squeezed to lower levels during 1999.
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
comply in all material respects 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.
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Employees
As of December 31, 1999, the Company and its subsidiaries had approximately
21,000 employees, including salaried and hourly employees with approximately
18,000 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 29,
2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jean R. Gaulin.......... 57 Chairman of the Board, President, Chief Executive Officer
Timothy J. Fretthold.... 50 Executive Vice President, Chief Administrative and Legal Officer
Christopher Havens...... 45 Executive Vice President, Marketing and Retail Operations
William R. Klesse....... 53 Executive Vice President, Operations
H. Pete Smith........... 58 Executive Vice President and Chief Financial Officer
Robert S. Beadle........ 50 Senior Vice President, Operations Strategy and Business Development
W. Paul Eisman.......... 44 Senior Vice President, Supply Chain Management
</TABLE>
Jean R. Gaulin was elected Chairman of the Board effective January 1, 2000. In
January 1999, he was appointed Chief Executive Officer. As a result of the
Merger in December 1996, he was named and served as Vice Chairman of the
Board, President and Chief Operating Officer. He was appointed Chief Executive
Officer and Chairman of the Board of Ultramar in 1992 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.
Christopher Havens was named Executive Vice President, Marketing and Retail
Operations in December 1999. From January 1999 through December 1999, he
served as Senior Vice President, Marketing. 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. In October 1993, he was appointed Senior
Vice President, Marketing of Ultramar Canada Inc. and served in that role
until March 1996 when the additional position of President, Ultramar Energy
was assumed. From July 1992 to October 1993, he served as Vice President
Retail Operations for Ultramar Inc.'s West Coast Business Unit.
William R. Klesse was named Executive Vice President, Operations in January
1999. From the Merger in December 1996 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, Operations Strategy and
Business Development in April 1999. From January 1999 through April 1999, he
served as Senior Vice President, Development, NGLs and Specialties. 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.
11
<PAGE>
W. Paul Eisman was named Senior Vice President, Supply Chain Management 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.
Item 2. Properties
The Company owns the McKee, Three Rivers, Quebec, Wilmington, Ardmore, Denver
and Alma Refineries and related facilities in fee. The Company also owns
approximately 1,800 miles of crude oil pipelines and over 3,400 miles of
refined product pipelines as of December 31, 1999. The Company jointly owns
with one or more other companies approximately 31 miles of crude oil pipelines
and approximately 1,900 miles of refined product pipelines. As of December 31,
1999, the Company owned 65 bulk storage facilities in the Northeast System and
19 refined product terminals in the US System (one of which is only 67% owned
by the Company). The Company leases, under long-term operating leases, various
parcels of land on which refined product terminals are located and the Corpus
Christi crude oil terminal.
At December 31, 1999, the Company's US System retail operations included 1,583
Company-operated convenience stores, 826 of which were owned in fee and 757 of
which were leased under long-term operating leases. Of the leased convenience
stores, 195 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, 1999, 19 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 which expires in August 2002 (the Total
Lease). As of December 31, 1999, 15 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 defendant companies based on infringement of the patent. The Company is
unable to predict the validity or effect of any claimed Unocal patent. The
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.
Environmental
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
12
<PAGE>
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 14 to the consolidated financial statements included in
"Item 8--Financial Statements and Supplementary Data."
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 Clean Air Act
(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 Resource
Conservation and Recovery Act (RCRA) relating to maintenance of wastewater
ponds, improper storage of hazardous waste, mischaracterization of wastes,
improper labeling of wastes and improper disposal of wastes. The Company
believes the resolution of such allegations will not have a material adverse
effect on the Company's results of operations or financial position. In
December 1999, the Company permanently closed the Alma Refinery upon
completion of the sale of the Michigan retail, pipeline and terminal
operations.
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
federal Department of Justice (DOJ), on behalf of the Environmental Protection
Agency (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 without a permit.
After narrowing the issues with the DOJ, the Company has responded to all
allegations. Resolution is anticipated before the end of 2000. The Company
believes the resolution of such allegations will not have a material adverse
effect on the Company's results of operations or financial position.
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 Notice
of Violation (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 Company has resolved all
technical issues and each party has submitted briefs to an administrative law
judge on the issue of penalty calculations. The Company believes that a final
resolution 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. The Company
settled all claims for approximately $376,000 which was accrued in 1999 and
paid in January 2000.
13
<PAGE>
EPA Region IX v. Ultramar Inc. (Alleged RCRA Violations at Wilmington
Refinery) EPA Region IX issued a Request for Information dated May 6, 1999
relating to a RCRA facility inspection conducted in August 1998. The
information requested directly related to the refinery's practice of mixing
and disposing of sewer line solids combined with petroleum coke. After the
Company responded to the EPA's request, the EPA served Ultramar, Inc. with a
NOV alleging violations of RCRA. Refinery representatives met with the EPA on
September 1, 1999 and an agreement was reached to settle the matter for
$175,000. A final settlement document is being negotiated.
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 Stock Exchange under the
symbol "UDS". 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 1999
4th Quarter...................................... $ 27.34 $ 21.69 $0.275
3rd Quarter...................................... 26.38 21.67 0.275
2nd Quarter...................................... 24.19 19.23 0.275
1st Quarter...................................... 23.92 17.54 0.275
Year 1998
4th Quarter...................................... 29.69 22.31 0.275
3rd Quarter...................................... 32.13 22.75 0.275
2nd Quarter...................................... 35.75 30.38 0.275
1st Quarter...................................... 36.06 31.38 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 8 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 February 29, 2000, there were 86,846,763 shares of Common Stock
outstanding which were held by 11,169 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 1999 and 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, 1999 was derived from the audited consolidated financial
statements of the Company. The consolidated selected financial data for the
two- year period ended December 31, 1996 has been restated to include the
balances and results of Diamond Shamrock Inc. due to the Merger which was
accounted for as a pooling of interests.
The consolidated selected financial data as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999, 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,
----------------------------------------------------
1999 1998 1997(6) 1996 1995(7)
--------------------- --------- --------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales and other revenues.. $ 13,971.2 $11,133.2 $10,878.9 $10,205.4 $8,080.3
Operating income.......... 429.1 62.4 392.3 66.9 223.6
Income (loss) before
extraordinary loss and
cumulative effect........ 173.2 (78.1) 159.6 (35.9) 95.0
Extraordinary loss on debt
extinguishment(5)........ -- -- (4.8) -- --
Cumulative effect of
accounting change(8)..... -- -- -- -- 22.0
Net income (loss)......... 173.2 (78.1) 154.8 (35.9) 117.0
Comprehensive income
(loss)(3)................ 201.6 (111.9) 134.9 (38.5) 132.0
Basic income (loss) per
share:
Income (loss) before
extraordinary loss and
cumulative effect........ $ 2.00 $ (0.89) $ 1.99 $ (0.54) $ 1.31
Extraordinary loss on debt
extinguishment(5)........ -- (0.06) -- --
Cumulative effect of
accounting change(8)..... -- -- -- -- 0.31
---------- --------- --------- --------- --------
Net income (loss)......... $ 2.00 $ (0.89) $ 1.93 $ (0.54) $ 1.62
========== ========= ========= ========= ========
Diluted income (loss) per
share:
Income (loss) before
extraordinary loss and
cumulative effect........ $ 2.00 $ (0.89) $ 1.94 $ (0.54) $ 1.30
Extraordinary loss on debt
extinguishment(5)........ -- -- (0.06) -- --
Cumulative effect of
accounting change(8)..... -- -- -- -- 0.30
---------- --------- --------- --------- --------
Net income (loss)......... $ 2.00 $ (0.89) $ 1.88 $ (0.54) $ 1.60
========== ========= ========= ========= ========
Cash dividends per share:
Common.................... $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
Preferred(2).............. -- 0.62 2.50 2.50 2.50
Preferred of subsidiary... 2.08 2.08 1.07 -- --
Weighted average number of shares (in
thousands):
Basic(2)(4)............... 86,615 88,555 78,120 74,427 69,467
Diluted................... 86,742 88,555 82,424 74,427 73,333
<CAPTION>
December 31,
----------------------------------------------------
1999 1998 1997(6) 1996 1995(7)
--------------------- --------- --------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents.............. $ 92.8 $ 176.1 $ 92.0 $ 197.9 $ 175.5
Working capital........... 138.7 359.1 359.5 302.6 385.4
Total assets(1)........... 4,936.0 5,315.0 5,594.7 4,420.0 4,216.7
Long-term debt, less
current portion.......... 1,327.6 1,937.0 1,877.5 1,657.8 1,569.5
Preferred stock of
subsidiary............... 200.0 200.0 200.0 -- --
Stockholders' equity(4)... 1,493.3 1,384.0 1,686.6 1,240.9 1,328.0
</TABLE>
- --------
(1) In conjunction with the restructuring plan implemented in June 1998, the
Company sold a number of under-performing, non-strategic assets during
1999, including 239 Company-operated convenience stores, certain pipelines
and crude oil gathering operations in Oklahoma and various other assets. In
December 1999, the Company sold 177 Company-operated convenience stores,
400 miles of crude oil and refined product
16
<PAGE>
pipelines and five terminals in Michigan. Also in December 1999, the
Company permanently closed the Alma, Michigan Refinery and is developing
plans to move certain processing units to other refinery locations.
(2) 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.
(3) 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), the net change in the foreign currency translation adjustment and
minimum pension liability adjustment, net of income taxes.
(4) On July 28, 1998, the Board of Directors approved a $100.0 million Common
Stock buyback program which was completed in December 1998 resulting in
the purchase of 3,740,400 shares of Common Stock. In November 1999, the
Company established a Grantor Trust Stock Ownership Program to which the
Company transferred 3,740,000 shares to fund future employee benefit
obligations.
(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), or $0.06 per share on a diluted basis, as a
result of prepaying the underlying 8.77% Senior Notes related thereto.
(6) 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.
(7) 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.
(8) 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).
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.
In March 1999, the Company and Phillips Petroleum Company terminated
discussions related to the formation of a proposed joint venture (Diamond 66)
between the two companies. During the first quarter of 1999, the Company
expensed $11.0 million of transaction costs incurred related to the formation
of Diamond 66, which costs are included in restructuring and other expenses
for the year ended December 31, 1999.
In December 1999, the Company finalized the sale of the Michigan convenience
stores, pipelines and terminals to Marathon Ashland and recognized a gain of
$97.6 million. Upon completion of the sale, the Company permanently closed the
Alma Refinery and recognized a loss of $138.2 million, which included a $125.4
million write-down of assets and $12.8 million of severance and closure costs.
The gain and loss have been included in restructuring and other expenses for
the year ended December 31, 1999.
17
<PAGE>
Also during 1999, the Company sold or closed 239 convenience stores, including
162 under-performing convenience stores associated with the retail
restructuring program and various other assets for a net gain of $25.2
million. The net gain is included in restructuring and other expenses for the
year ended December 31, 1999.
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 and have been recognized as
permanent reductions to the inventory balance as of December 31, 1999 and
1998.
In June 1998, the Company terminated a proposed joint venture with Petro-
Canada. Included in restructuring and other expenses for the year ended
December 31, 1998 is $11.2 million of costs associated with the joint venture
project including $2.5 million to write off costs for a coker development
project that has not been pursued.
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, refining and pipeline operations and support services. Also
included in restructuring and other expenses for the year ended December 31,
1998 is a $131.6 million charge 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.
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 expenses 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. The Company's US System is less affected by seasonal
fluctuations in demand than its operations in the Northeast System. The
working capital requirements of the US System, though substantial, show little
fluctuation throughout the year. Both the US and Northeast Systems are
impacted by the increased demand for gasoline during the summer driving
season.
18
<PAGE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Financial and operating data by geographic area for the years ended December
31, 1999 and 1998 are as follows:
Financial Data:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
US Northeast Total US Northeast Total
--------- --------- --------- -------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and other
revenues............... $11,013.3 $2,957.9 $13,971.2 $8,658.3 $2,473.9 $11,132.2
Cost of products
sold(1)................ 7,136.2 1,821.0 8,957.2 4,972.1 1,330.8 6,302.9
Operating expenses...... 908.0 112.6 1,020.6 1,025.7 119.8 1,145.5
Selling, general and
administrative
expenses............... 149.4 168.2 317.6 173.0 159.6 332.6
Taxes other than income
taxes.................. 2,253.6 744.1 2,997.7 2,175.2 723.4 2,898.6
Depreciation and amorti-
zation................. 202.3 38.5 240.8 201.5 35.9 237.4
Restructuring and other
expenses, net(2)....... 7.3 0.9 8.2 139.6 13.2 152.8
--------- -------- --------- -------- -------- ---------
Operating income
(loss)................. $ 356.5 $ 72.6 429.1 $ (28.8) $ 91.2 62.4
========= ======== ======== ========
Interest income......... 12.4 9.7
Interest expense........ (141.5) (143.5)
Equity income from joint
ventures............... 14.6 7.4
--------- ---------
Income (loss) before
income taxes and
dividends of
subsidiary............. 314.6 (64.0)
Provision for income
taxes.................. 131.1 3.8
Dividends on subsidiary
stock.................. 10.3 10.3
--------- ---------
Net income (loss)....... $ 173.2 $ (78.1)
========= =========
</TABLE>
- --------
(1) 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.
(2) Restructuring and other expenses for 1999 include:
. $11.0 million of transaction costs associated with the termination of the
proposed Diamond 66 joint venture;
. a gain of $97.6 million related to the sale of the Michigan retail,
pipeline and terminal operations;
. a gain of $25.2 million related primarily to the sale or closure of 239
convenience stores;
. a loss of $138.2 million related to the permanent closure of the Alma
Refinery in December 1999 located in Michigan; and
. $18.2 million of reserve reductions primarily related to retail
restructuring reserves which have not been incurred since the Company
sold the stores as operating stores.
Restructuring and other expenses for 1998 include:
. a $131.6 million charge related to the restructuring of the retail,
refining and pipeline operations and support services;
. a $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 termination costs associated with the cancelled joint
venture with Petro-Canada;
. a $7.0 million gain on the sale of a 25% interest in the McKee to El Paso
refined product pipeline and terminal; and,
. a $5.0 million loss related primarily to the disposition of Company-
operated convenience stores.
19
<PAGE>
Operating Data:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
US System
Mid-Continent Refineries(1):
Throughput (barrels per day)...................... 391,200 395,000
Margin ($/barrel)(2).............................. $ 3.61 $ 3.49
Operating cost ($/barrel)......................... $ 1.77 $ 2.10
Wilmington Refinery:
Throughput (barrels per day)...................... 132,200 114,700
Margin ($/barrel)(2).............................. $ 5.46 $ 4.45
Operating cost ($/barrel)......................... $ 1.62 $ 2.35
Retail:
Fuel volume (barrels per day)(3).................. 175,100 170,100
Fuel margin (cents per gallon)(3)................. 11.1 14.4
Merchandise sales ($1,000/day)(4)................. $ 3,496 $ 3,246
Merchandise margin (4)............................ 26.2% 30.9%
Northeast System
Quebec Refinery:
Throughput (barrels per day)...................... 149,100 153,300
Margin ($/barrel)(2).............................. $ 1.86 $ 2.88
Operating cost ($/barrel)......................... $ 0.92 $ 0.98
Retail:
Fuel volume (barrels per day)..................... 68,400 64,000
Overall margin (cents per gallon)(5).............. 24.0 25.3
</TABLE>
- --------
(1) The Mid-Continent Refineries include the Ardmore, Denver, McKee, Three
Rivers and Alma Refineries.
(2) Refinery margins for 1998 exclude 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. In addition, the 1998
Mid-Continent Refineries' margin has been restated ($0.45 per barrel) to
reflect a change in the policy for pricing refined products transferred
from its McKee and Three Rivers Refineries to the Mid-Continent marketing
operations. Had the non-cash charge for the reduction of inventories been
included in the refinery margin computation, the 1998 refinery margins
would have been $3.01 per barrel for the Mid-Continent Refineries, $3.83
per barrel for the Wilmington Refinery, and $2.15 per barrel for the
Quebec Refinery.
(3) The retail fuel volume and fuel margin for 1998 have been restated to
conform to the 1999 presentation. The retail fuel volume and fuel margin
originally reported for the year ended December 31, 1998 was 169,900
barrels per day and 14.3 cents per gallon, respectively.
(4) The merchandise sales per day and merchandise margin for 1998 have been
restated to include certain deli and food service operations previously
included in other retail income. The merchandise sales per day and
merchandise margin originally reported for the year ended December 31,
1998 was $3,128 and 30.4%, respectively.
(5) Retail 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, 1999 was $173.2 million compared to
net loss in 1998 of $78.1 million. On a per share basis, the Company
recognized net income of $2.00 per basic share for the year ended December 31,
1999 as compared to a net loss of $0.89 per basic share for the year ended
December 31, 1998.
During 1999, the Company recognized the following unusual items:
. transaction costs of $11.0 million associated with the termination of
the proposed Diamond 66 joint venture were expensed in March 1999;
20
<PAGE>
. a gain of $97.6 million related to the sale of the Michigan retail,
pipeline and terminal operations in December 1999;
. a gain of $25.2 million related primarily to the sale or closure of 239
convenience stores sold during 1999;
. a loss of $138.2 million related to the permanent closure of the Alma
Refinery in December 1999; and
. $29.7 million of liability reductions primarily related to retail
restructuring reserves and environmental liabilities which are no longer
necessary, and insurance recoveries.
During 1998, the Company recognized the following unusual items:
. $131.6 million charge related to the restructuring of the retail,
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 termination costs associated with the cancelled joint
venture with Petro-Canada; and,
. $7.0 million gain on the sale of a 25% interest in the McKee to El Paso
refined product pipeline and terminal.
US System
The US System had operating income of $356.5 million for the year ended
December 31, 1999 as compared to an operating loss of $28.8 million for the
year ended December 31, 1998. The unusual items discussed above significantly
impacted 1998 operations.
Sales and other revenues increased 27.2% from 1998 to 1999 due primarily to
the increase in refined product selling prices at both the wholesale and the
retail levels. Refined product selling prices increased steadily throughout
1999 as crude oil costs rose from $12 per barrel in January 1999 to $26 per
barrel by December 1999, a 117% increase. In addition, the volumes of refined
product sold increased approximately 4% from 1998 to 1999.
US refining operations in 1999 improved significantly over 1998 levels.
Despite continuing reductions in industry refining margins everywhere but on
the West Coast, the Company was able to improve refining realizations for the
US System by favorably managing its crude oil and other feedstock acquisition
activities particularly for crude oil purchases in the Mid-Continent region
where purchases are arranged approximately 40 days in advance of delivery.
The Wilmington Refinery operated at full capacity during the second and third
quarters when refining margins hit an all-time high on the West Coast as a
result of significant operating problems at other West Coast refineries. In
September 1999, the West Coast refining margins returned to more normal levels
after other West Coast refineries which had been shut down, were restarted and
taken to full capacity. In addition to the higher refinery margin, throughput
at the Wilmington Refinery increased 15.3% from 114,700 barrels per day in
1998 to 132,200 barrels per day in 1999 due to the debottlenecking of the FCCU
which was performed during the 25-day turnaround in December 1998. Operating
costs per barrel at the Wilmington Refinery decreased to $1.62 per barrel in
1999 from $2.35 per barrel in 1998 as a result of higher throughput volumes
and the cost reductions implemented in late 1998.
Throughput at the Mid-Continent Refineries dropped less than 1.0% from 395,000
barrels per day in 1998 to 391,200 barrels per day in 1999 even after
operations at the Alma Refinery were suspended in October 1999. In 1998,
throughput and the refinery margin were adversely affected due to the downtime
at the Ardmore Refinery after it sustained a power failure and fire in the
FCCU in July 1998. Operating costs decreased $0.33 per barrel from 1998 to
1999 due to lower utility expenses and other cost reductions.
21
<PAGE>
The US retail operations were negatively impacted by the increase in crude oil
prices and short-term supply imbalances during 1999 which pushed wholesale
gasoline prices up faster than retail pump prices. Consequently, the retail
fuel margin decreased 3.3 cents per gallon from 1998 to 1999. The decrease in
the US retail merchandise margin was caused by increased cigarette prices in
December 1998 and during 1999 which could not be fully passed on to customers.
On a positive note, merchandise sales per store improved 7.7% from 1998 to
1999 as a result of closing and selling under-performing Company-operated
convenience stores.
Selling, general and administrative expenses decreased 13.6% in 1999 as
compared to 1998 despite the increased selling expenses incurred to support
the higher level of sales. More than offsetting the increased selling expenses
were lower general and administrative expenses due to the cost-reduction
programs initiated in 1998 and early 1999 to improve profitability.
Restructuring and other expenses for 1999 include a net loss of $14.5 million
related to asset sales and write-downs, $11.0 million of transaction costs
incurred related to the termination of the proposed Diamond 66 joint venture,
and $18.2 million of reserve reductions primarily related to retail
restructuring reserves, which have not been incurred since the Company sold
the under-performing convenience stores as operating stores and employees were
hired by the purchaser.
Northeast System
The Northeast System had operating income of $72.6 million for the year ended
December 31, 1999 as compared to $91.2 million for the year ended December 31,
1998. The decrease in the operating income is due primarily to lower refining
margins and retail fuel margins from 1998 to 1999. Despite a 19.6% increase in
sales and other revenues from 1998 to 1999, the rising cost of crude oil
during 1999 negatively impacted the Quebec Refinery's margin resulting in a
decrease from $2.88 per barrel in 1998 to $1.86 per barrel in 1999. However,
operating costs per barrel in 1999 as compared to 1998 decreased due to the
cost-reduction programs implemented at the beginning of 1999 which partially
offset the impact of the reduced refining margin.
Retail fuel volumes increased 6.9% from 1998 to 1999 due to continued
successful promotions programs. The overall retail margin declined to 24.0
cents per gallon in 1999 from 25.3 cents per gallon in 1998 due to slightly
lower margins in the home heating oil business which was caused by the warm
winter, high inventories and the margin squeeze that resulted as crude oil
prices rose during the year.
Selling, general and administrative expenses of $168.2 million increased $8.6
million from 1998 to 1999 due to additional selling expenses associated with
higher sales volumes, severance payments and higher year-end bonus accruals.
Restructuring and other expenses for 1999 include a $0.9 million net loss on
sales of assets.
Corporate Expenses
Interest expense of $141.5 million for 1999 decreased $2.0 million from 1998
due to lower average outstanding borrowings during 1999 as compared to 1998
resulting from the payoff of $205.0 million of debt in April and July 1999. An
additional $397.8 million of debt was paid off in December 1999 with cash flow
from operations and the proceeds from asset sales. These additional debt
reductions should result in further decreases to interest expense in 2000.
The consolidated income tax provision for the year ended December 31, 1999 was
based upon the Company's effective income tax rate for the year of 41.7%. The
consolidated effective income tax rate exceeds the U.S. Federal statutory
income tax rate primarily due to State income taxes, the effects of foreign
operations, and the amortization and write-off of non-deductible goodwill.
22
<PAGE>
The consolidated income tax provision, exclusive of the retail, refining and
pipeline restructuring charge, 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.
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 reve-
nues................... $8,658.3 $2,473.9 $11,132.2 $7,861.7 $3,017.2 $10,878.9
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
expenses, net(3)....... 139.6 13.2 152.8 (13.0) 1.6 (11.4)
-------- -------- --------- -------- -------- ---------
Operating income
(loss)................. $ (28.8) $ 91.2 62.4 $ 272.8 $ 119.5 392.3
======== ======== ======== ========
Interest income......... 9.7 11.5
Interest expense........ (143.5) (131.7)
Equity income from joint
ventures............... 7.4 3.1
--------- ---------
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(4)... -- 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.
(3)Restructuring and other expenses for 1998 include:
. a $131.6 million charge related to the restructuring of the retail,
refining and pipeline operations and support services;
. a $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;
23
<PAGE>
. $11.2 million of termination costs associated with the cancelled joint
venture with Petro-Canada;
. a $7.0 million gain on the sale of a 25% interest in the McKee to El
Paso refined product pipeline and terminal; and,
. a $5.0 million loss related primarily to the disposition of Company-
operated convenience stores.
Restructuring and other expenses for 1997 include:
. an $11.0 million gain on sale of an office building in San Antonio,
Texas, and
. a $0.4 million net gain related to the disposition of other assets.
(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 $3.2 million), as a result of prepaying the underlying 8.77%
Senior Notes related thereto.
24
<PAGE>
Operating Data:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
US System
Mid-Continent Refineries(1):
Throughput (barrels per day)...................... 395,500 272,300
Margin ($/barrel)(2).............................. $ 3.49 $ 3.65
Operating cost ($/barrel)......................... $ 2.10 $ 1.98
Wilmington Refinery:
Throughput (barrels per day)...................... 114,700 120,300
Margin ($/barrel)(2).............................. $ 4.45 $ 4.61
Operating cost ($/barrel)......................... $ 2.35 $ 2.09
Retail:
Fuel volume (barrels per day)..................... 170,100 127,200
Fuel margin (cents per gallon).................... 14.4 13.4
Merchandise sales ($1,000/day)(3)................. $ 3,246 $ 2,559
Merchandise margin(3)............................. 30.9% 30.3%
Northeast System
Quebec Refinery:
Throughput (barrels per day)...................... 153,300 139,800
Margin ($/barrel)(2).............................. $ 2.88 $ 2.35
Operating cost ($/barrel)......................... $ 0.98 $ 1.04
Retail:
Fuel volume (barrels per day)..................... 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) Refinery margins for 1998 exclude 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. In addition, the 1998 Mid-
Continent Refineries' margin has been restated ($0.45 per barrel for 1998
and $0.95 per barrel for 1997) to reflect a change in the policy for
pricing refined products transferred from its McKee and Three Rivers
Refineries to the Mid-Continent marketing operations. Had the non-cash
charge for the reduction of inventories been included in the refinery
margin computation, the 1998 refinery margins would have been $3.03 per
barrel for the Mid-Continent Refineries, $3.83 per barrel for the
Wilmington Refinery, and $2.15 per barrel for the Quebec Refinery.
(3) The merchandise sales per day and merchandise margin for 1998 have been
restated to include certain deli and food service operations previously
included in other retail income. The merchandise sales per day and
merchandise margin originally reported for the year ended December 31,
1998 was $3,128 and 30.4%, respectively. The merchandise sales per day and
merchandise margin originally reported for the year ended December 31,
1997 was $2,551 and 30.2%, respectively.
(4) Retail 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,
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;
25
<PAGE>
. $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 termination costs associated with the cancelled joint
venture with Petro-Canada; and,
. $7.0 million gain on the sale of a 25% interest in the McKee to El Paso
refined product pipeline and terminal.
During 1997, the Company recognized an $11.1 million non-cash charge to reduce
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.
On a per share basis, 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 $28.8 million for the year ended
December 31, 1998 as compared to operating income of $272.8 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 a full year 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 $3.49 for the year
ended December 31, 1998 decreased 4.4% from $3.65 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, refined product 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 convenience stores in 1998 and 1997 and the acquisition
of the high volume Total stores in the third quarter of 1997 are major factors
in 1998 for the 33.7% increase in retail fuel volumes to 170,100 barrels per
day and the 26.8% increase in the daily merchandise sales to $3.2 million per
day. The increase in retail fuel margins to 14.4 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.
26
<PAGE>
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 expenses for 1998 include the $131.6 million
restructuring charge related to the retail, refining and pipeline operations
and support services; $1.6 million of costs incurred related to the cancelled
Petro-Canada joint venture, $10.9 million related to the severance benefits
expensed in December 1998 for the terminated employees associated with the
Company's corporate restructuring and profit improvement program, and $4.5
million net gain on the sale of assets during the year.
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 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 in retail margins was caused
mainly from a 10.5% decrease in demand for high-margin home heating oil due to
the mild winter of 1998 which was partially offset by a 2.5% increase in
demand for lower-margin retail 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 expenses include $9.6 million of costs incurred
related to the cancelled Petro-Canada joint venture, $1.1 million related to
the severance benefits expensed in December 1998 for the terminated employees
associated with the Company's corporate restructuring and profit improvement
program and $2.5 million loss on the sale of assets during the year.
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.
27
<PAGE>
The consolidated income tax provision, exclusive of the retail, refining and
pipeline restructuring charge, 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, the effects of foreign
operations, and the amortization of non-deductible goodwill.
Outlook
The Company's earnings depend largely on refining and retail 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 widely in the past. As a result of the historic volatility of
refining and retail margins and the fact that they are affected by numerous
diverse factors, it is impossible to predict future margin levels.
Refining margins during the fourth quarter of 1999 declined from year-ago
levels due to a continued increase in the price of crude oil, combined with
lower overall demand in gasoline and distillates. Gasoline demand was
seasonally lower than the third quarter of 1999 while distillate demand was
lower due to yet another mild winter, especially in eastern Canada and the
northeastern part of the United States where the Company operates its home
heating oil business. Refiners cut production levels in December in response
to the lower refining margins. The decrease in refining utilization did help
in lowering the gasoline and distillate inventories on a national level.
Moving into the first quarter of 2000, crude oil prices once again moved
higher in response to rumors that OPEC and other major producers will not
increase production until the summer of 2000. This rumor caused an already
tight market to push the price of crude oil to $30 per barrel in mid-February
2000. New sulfur requirements in Europe are helping the distillate margin as
jet fuel is needed to lower the sulfur content of diesel fuel in that market.
This has benefited the U.S. refiners in the form of lower foreign imports.
Refining fundamentals are showing continued improvement as inventories of
gasoline and distillates are at or below fifteen-year lows during the normal
refinery turnaround season. This should help increase refining margins from
year-ago levels in both the first and second quarters of 2000.
Retail fuel margins were negatively impacted in 1999 as retail pump prices did
not keep pace with rising crude oil costs and wholesale gasoline prices. This
pressure is continuing into the first quarter of 2000 as demand decreases
during the winter season. However, winter finally arrived in eastern Canada
and the northeastern United States in January 2000 resulting in sharply higher
heating oil prices as demand reduced inventory levels to four-year lows.
Merchandise margins in the first quarter of 2000 are expected to move
incrementally higher than the average of 1999 as the Company moves into the
second phase of its marketing strategy.
In December 1999, the Company announced plans to improve earnings by $100.0
million in 2000. These improvements include continued expense reductions,
refinery yield and throughput improvements and increased merchandise
contributions from retail. The announced improvements should help the Company
achieve its goal of increasing return on capital employed (ROCE) in a "low-
margin" environment.
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
28
<PAGE>
site restoration costs and remediation obligations to be incurred in the
future at certain facilities and properties, including 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, 1999 and 1998, accruals for environmental matters amounted to
$171.0 million and $219.4 million, respectively. During 1999, the accruals for
environmental matters were reduced $16.5 million based on revised estimates of
the cost to be incurred. For the year ended December 31, 1998 and 1997, there
were zero and $1.3 million, respectively of additions to the accrual for
environmental matters.
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 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, 1999, capital expenditures totaled $184.9
million, of which $79.8 million related to maintenance expenditures, $82.5
million related to growth opportunity expenditures, and $22.6 million related
to Year 2000 expenditures for the replacement of non-compliant equipment.
Approximately $43.3 million and $27.8 million have been incurred at the
refineries and at the retail level, respectively, for various maintenance
expenditures. During the year ended December 31, 1999, the Company also
incurred $33.9 million in refinery maintenance turnaround costs primarily at
the Wilmington Refinery.
Growth opportunity expenditures during the year ended December 31, 1999
included:
. $36.2 million associated with the implementation of the Company's new
information technology systems, and
. $10.1 million to revamp the McKee Refinery's FCCU power train which has
increased throughput capacity by 9,000 barrels per day.
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 refined product pipeline expansion
to increase capacity to 60,000 barrels per day with the cost being
shared with Phillips Pipeline 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,
. $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.
29
<PAGE>
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 2000, the Company has established a
capital expenditures budget of approximately $259.2 million, which includes
$158.0 million of growth projects and $101.2 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
Financing
As of December 31, 1999, the Company had cash and cash equivalents of $92.8
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, 1999, the Company had borrowing capacity of approximately
$825.4 million under its committed bank facilities and commercial paper
program and approximately $624.2 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 $75.7 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 and believes that such 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.
Effective March 29, 1999, the Company established a revolving accounts
receivable securitization facility (Securitization Facility) which provides
the Company with the ability to sell up to $250.0 million of accounts
receivable on an ongoing basis. In connection with the Securitization
Facility, the Company sells, on a revolving basis, an undivided interest in
certain of its trade and credit card receivables. The proceeds from the sale
of accounts receivable, which totaled $237.6 million during 1999, were used to
reduce the Company's outstanding indebtedness, including indebtedness under
its commercial paper program. In December 1999, the balance of receivables
sold was reduced to $39.8 million. The remaining availability under the
Securitization Facility can be used should the Company decide to sell
additional receivables in the future.
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.
30
<PAGE>
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 an alternative financing vehicle, the Company is considering the formation
of a master limited partnership (MLP), which would operate most of the
Company's pipeline and terminal assets. A wholly-owned subsidiary of the
Company would be the general partner of the MLP and operate the assets on its
behalf. It is contemplated that the MLP, through an initial public offering,
would sell limited partnership units to the public representing a minority of
the ownership interest. Management expects to form the MLP and complete the
initial public offering during the second quarter of 2000, subject to approval
by the Board of Directors, acceptable market conditions and other
considerations.
Equity
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.
During 1998, the Company purchased 3,740,400 shares of its Common Stock under
a $100.0 million buyback program approved by the Board of Directors in July
1998. The purchased stock was funded using available cash flow from
operations. 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 November 1999, 3,740,000 of the buyback shares were transferred to
the Grantor Trust Stock Ownership Program, which will fund future employee
benefit obligations of the Company.
On February 8, 2000, the Board of Directors declared a quarterly dividend of
$0.275 per Common Share payable on March 2, 2000, to holders of record on
February 17, 2000.
Asset Dispositions and Restructurings
The continued consolidation in the refining and marketing industry has changed
the retail product pricing environment resulting in lower retail margins over
the past several years. In order to stay competitive and increase
profitability, the Company initiated a 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.
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.
31
<PAGE>
During 1999 and continuing in 2000, the market demand for convenience stores
increased significantly as both large and small operators sought to expand
their portfolios. As a result, the Company has been able to sell many of its
under-performing convenience stores, instead of closing them and selling the
underlying property. During 1999 and 1998, the Company has sold 227 of the
under-performing convenience stores and terminated 235 retail employees. The
Company expects to close or sell the remaining 89 under-performing convenience
stores during 2000.
In December 1999, the Company finalized the sale of 177 Michigan convenience
stores, 400 miles of crude oil and refined product pipelines and five
terminals to Marathon Ashland and recognized a gain of $97.6 million. Upon
completion of the sale, the Company permanently closed the Alma, Michigan
Refinery and recognized a loss of $138.2 million consisting of $125.4 million
to write-down property, plant and equipment, goodwill and deferred refinery
maintenance turnaround costs, and $12.8 million of severance and closure
costs.
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. As a result of this
plan, the Company recognized a $12.0 million charge as of December 31, 1998
for severance costs associated with the employees to be terminated.
The initiatives described in the preceding four paragraphs and the Company's
ongoing efforts to improve operational performance resulted in $182.7 million
of pre-tax earnings improvements during 1999 over 1998 and capital recovered
from asset sales totaling $289.4 million during 1999.
Cash Flows for the Year Ended December 31, 1999
Net cash provided by operating activities during the year ended December 31,
1999 was $536.7 million as compared to $347.3 million in 1998. This increase
is due primarily to effective cost management and improved profitability
during 1999.
During the year ended December 31, 1999, investing activities provided net
cash flow of $70.6 million. Cash outflows included $167.6 million for capital
expenditures, $17.3 million for retail operations purchased in the Northeast
System, and $33.9 million for deferred refinery maintenance turnaround costs.
Proceeds from sales of property, plant and equipment of $289.4 million include
proceeds related to the December 1999 sale of the Michigan retail, pipeline
and terminal operations and the 239 convenience stores sold throughout 1999.
Net cash used in financing activities during the year ended December 31, 1999
was $694.6 million. During 1999, the Company declared and paid quarterly
dividends which totaled $95.3 million. In addition, the proceeds received from
the Securitization Facility, established in March 1999, and from asset sales
were used to reduce the Company's commercial paper and working capital
borrowings. In April and July 1999, the Company paid off $30.0 million of
10.75% Senior Notes and $175.0 million of 8.25% Notes, respectively. Overall,
the Company paid down $602.8 million of balance sheet debt, thus reducing the
Company's debt to total capitalization ratio to 42.4% as of December 31, 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
$347.3 million as compared to $235.5 million in 1997. This increase is due
primarily to additional depreciation and amortization as result of the
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 a portion of the McKee to El Paso refined product
pipeline and terminal to Phillips Pipeline Company, $17.2 million of proceeds
from the sale of 29 convenience stores, and $27.0 million received from
Diamond-Koch for reimbursement of the cost to construct the third
propane/propylene splitter at Mont Belvieu.
32
<PAGE>
Net cash used in financing activities during the year ended December 31, 1998
totaled $132.4 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
1999, the Canadian dollar improved against the U.S. dollar from $0.6535 at
December 31, 1998 to $0.6924 at December 31, 1999. However, 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,
1999, by $82.3 million. Although the Company expects the exchange rate to
fluctuate during 2000, 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 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
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based
on operations since January 1, 2000, the Company does not expect any
significant impact to its ongoing business as a result of the Year 2000 issue.
However, it is possible that the full impact of the date change has not been
fully recognized. The Company believes that any such problems are likely to be
minor and correctable. In addition, the Company could still be negatively
affected if its key suppliers, vendors and customers are adversely affected by
the Year 2000 or similar issues. The Company currently is not aware of any
significant Year 2000 or similar problems that have arisen for its key
suppliers, vendors and customers.
As of December 31, 1999, the Company incurred and expensed approximately $12.0
million related to the remediation and testing of all Company systems for Year
2000 purposes and the development of Year 2000 contingency plans. In addition,
the Company capitalized approximately $15.0 million for retail equipment which
was replaced in order to be Year 2000 compliant.
In August 1999, the Company implemented a new stand-alone, Year 2000
compatible, enterprise-wide information technology (IT) system for the
Northeast System. Effective February 1, 2000, this new enterprise-wide IT
system was implemented in the US System 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 $54.8 million, with most of
the costs being capitalized. As of December 31, 1999, the Company had incurred
$41.0 million of costs related to the new IT system.
See "Certain Forward-Looking Statements."
Impact of Inflation
The impact of inflation has stabilized 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.
33
<PAGE>
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 refined products. Throughout 1999, the
price of crude oil and refined products increased significantly from 1998
levels. The cost of refined 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 most of its inventories. However, the
sharp rises in crude oil and refined product prices during 1999 outpaced
retail pump prices, which negatively impacted retail fuel margins for the
Company.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes new accounting and
reporting standards for derivative instruments. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133" which defers the
effective date of SFAS No. 133 for one year to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company
expects to adopt SFAS No. 133 as of January 1, 2001. The Company has not yet
completed its evaluation of the impact of the adoption of this new standard.
In August 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 99, "Materiality," which provides guidance in
applying materiality thresholds to the preparation of financial statements
filed with the SEC and the performance of audits of those financial
statements. In November 1999, the SEC issued SAB No. 100, "Restructuring and
Impairment Charges," which provides guidance regarding the accounting for and
disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. In December 1999, the SEC issued SAB No.
101, "Revenue Recognition in Financial Statements," which provides the SEC's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Management of the Company has reviewed the guidance of
these SABs and believes that the accounting policies of the Company and the
disclosures in the consolidated financial statements and in "Item 7--
Management's Discussion and Analysis of Financial Condition and Results of
Operations" are appropriate and adequately address the requirements of these
SABs.
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 Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934, 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
34
<PAGE>
contracts. The Company's policies allow using derivatives for the purchase of
physical quantities of crude oil and refined products as well as for the
management of crude oil costs. Generally, the derivatives relate to an
underlying, offsetting position, anticipated transaction or firm commitment.
During 1999, as part of the Company's crude oil procurement activities,
commodity futures contracts were used to manage the price of crude oil
supplied to its Mid-Continent refineries. The Company has from time to time,
on a very limited basis, used derivative instruments for trading purposes;
however, the gains and losses from such activities have been immaterial. 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 40% and 50% of total debt.
Since mid-1999, the Federal Reserve has raised interest rates 0.25% on three
different occasions and is biased towards continued rate increases as long as
the economy remains in an expansion mode. As a result, the fair value of the
Company's fixed rate debt is declining as shown in the following tables.
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 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>
December 31, 1999
----------------------------------------------------------------
Expected Maturity Dates
---------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
----- ----- ------ ----- ---- ---------- -------- --------
(in millions, except interest rates)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate............ $14.0 $84.5 $285.0 $33.5 $0.6 $911.4 $1,329.0 $1,295.2
Average interest
rate............... 8.8% 9.6% 8.7% 8.8% 7.7% 7.6% 8.0% N/A
Floating rate......... $ -- $ -- $ 12.6 $ -- $-- $ -- $ 12.6 $ 12.6
Average interest
rate............... -- % -- % 5.7% -- % -- % -- % 5.7% N/A
Interest Rate Swaps:
Fixed to floating..... $ -- $ -- $200.0 $ -- $-- $250.0 $ 450.0 $ 450.0
Average pay rate.... 6.22% 6.91% 7.00% 7.09% 7.13% 7.50% 7.18% N/A
Average receive
rate............... 6.43% 6.43% 6.43% 6.59% 6.59% 6.88% 6.69% N/A
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Expected Maturity Dates
----------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ----- ------ ------ ----- ---------- -------- --------
(in millions, except interest rates)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate............ $6.4 $15.1 $ 87.0 $492.8 $35.4 $923.5 $1,560.2 $1.651.1
Average interest
rate............... 9.1% 8.6% 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, 1999, the Company had short-term
foreign exchange contracts totaling $12.1 million and commitments to purchase
$34.2 million of U.S. dollars. The Company's exposure to market risk is
minimal on these contracts as they matured in early January 2000.
The Company 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
inventories; 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.
During 1999, the Company purchased $3.7 billion of crude oil to supply its
various refineries. In conjunction with these purchases, the Company entered
into commodity futures contracts. The commodity futures contracts are
generally satisfied by the Company taking physical delivery of the underlying
crude oil or refined product; however, there are contracts which are closed
without taking physical delivery of the underlying barrels.
As of December 31, 1999 and 1998, the Company did not hold any commodity
futures contracts not designated as hedges. However during 1999, the Company
reduced its crude oil cost by $48.0 million associated with such contracts not
designated as hedges which are marked to market value and recognized currently
in cost of products sold.
As of December 31, 1999, the Company had outstanding commodity futures
contracts designated as hedges and price swap contracts to purchase $351.8
million and sell $194.0 million of crude oil and refined products or to settle
differences between a fixed price and market price on aggregate notional
quantities of 6.4 million barrels of crude oil and refined products which
mature on various dates through June 2002. As of December 31, 1998, the
Company had outstanding commodity futures contracts designated as hedges and
price swap contracts to purchase $319.9 million and sell $130.6 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
36
<PAGE>
products which mature on various dates through June 2002. The fair value of
commodity futures contracts designated as hedges 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 futures contracts and price swaps
that are sensitive to changes in crude oil, refined product or natural gas
commodity prices. The tables present the notional amounts in barrels for crude
oil and refined product 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.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Carrying Fair Value Weighted
Amount Amount Contract Contract Average
Gain (Loss) Gain (Loss) Amount Volumes Price
----------- ----------- -------- ------------ --------
(mbbl)
(in millions, except weighted average price)
<S> <C> <C> <C> <C> <C>
Procurement:
Futures contracts--long:
2000.................. $ 0.9 $ 2.3 $211.8 9.5 $22.26
Futures contracts--
short:
2000.................. 0.1 0.4 194.0 8.8 22.02
Price swaps:
2002.................. (9.1) (19.9) 140.0 6.4 22.00
<CAPTION>
December 31, 1998
------------------------------------------------------
Carrying Fair Value Weighted
Amount Amount Contract Contract Average
Gain (Loss) Gain (Loss) Amount Volumes Price
----------- ----------- -------- ------------ --------
(mmbl/mmbtu)
(in millions, except weighted average price)
<S> <C> <C> <C> <C> <C>
Procurement:
Futures contracts--long:
1999 (crude oil or
refined product)..... $(0.1) $(7.1) $ 74.1 5.4 $13.75
2000 (crude oil or
refined product)..... -- (0.5) 46.5 3.2 14.76
1999 (natural gas).... -- (0.3) 4.1 2.0 2.08
Futures contracts--
short:
1999 (crude oil or
refined product)..... (1.1) (0.4) 130.6 11.1 11.69
Price swaps:
1999 (crude oil or
refined product)..... (22.6) (22.6) 55.2 2.2 24.64
2002 (crude oil or
refined product)..... (9.1) (32.6) 140.0 6.4 22.00
</TABLE>
37
<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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, cash flows and comprehensive
income (loss) for each of the three years in the period ended December 31,
1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
San Antonio, Texas
February 29, 2000
38
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998
---------------- ----------------
(in millions, except share data)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents................ $ 92.8 $ 176.1
Accounts and notes receivable, net....... 616.5 562.7
Inventories.............................. 556.8 635.6
Prepaid expenses and other current
assets.................................. 20.3 33.0
Deferred income taxes.................... 110.4 98.4
---------------- ----------------
Total current assets................... 1,396.8 1,505.8
---------------- ----------------
Property, plant and equipment.............. 4,345.8 4,423.2
Less accumulated depreciation and
amortization.............................. (1,315.9) (1,162.0)
---------------- ----------------
Property, plant and equipment, net....... 3,029.9 3,261.2
Other assets, net.......................... 509.3 548.0
---------------- ----------------
Total assets........................... $ 4,936.0 $ 5,315.0
================ ================
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Notes payable and current portion of
long-term debt.......................... $ 14.0 $ 6.4
Accounts payable......................... 489.2 366.0
Accrued liabilities...................... 392.4 402.4
Taxes other than income taxes............ 293.8 343.0
Income taxes payable..................... 68.7 28.9
---------------- ----------------
Total current liabilities.............. 1,258.1 1,146.7
Long-term debt, less current portion....... 1,327.6 1,937.0
Other long-term liabilities................ 372.8 442.3
Deferred income taxes...................... 284.2 205.0
Commitments and contingencies
Company obligated preferred stock of
subsidiary................................ 200.0 200.0
Stockholders' equity:
Common Stock, par value $0.01 per share:
250,000,000 shares authorized; 86,700,000
and 86,558,000 shares
issued and outstanding as of
December 31, 1999 and 1998.............. 0.9 0.9
Additional paid-in capital............... 1,516.3 1,512.7
Treasury stock, at cost; 28,686 shares
and 3,746,125 shares
as of December 31, 1999 and 1998........ (0.7) (100.1)
Grantor trust stock ownership program, at
cost;
3,740,000 shares as of
December 31, 1999....................... (100.0) --
Retained earnings........................ 160.4 82.5
Accumulated other comprehensive loss..... (83.6) (112.0)
---------------- ----------------
Total stockholders' equity............. 1,493.3 1,384.0
---------------- ----------------
Total liabilities and stockholders'
equity................................ $ 4,936.0 $ 5,315.0
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions, except per
share data)
<S> <C> <C> <C>
Sales and other revenues...................... $13,971.2 $11,132.2 $10,878.9
--------- --------- ---------
Operating costs and expenses:
Cost of products sold....................... 8,957.2 6,302.9 6,817.5
Operating expenses.......................... 1,020.6 1,145.5 887.2
Selling, general and administrative
expenses................................... 317.6 332.6 317.3
Taxes other than income taxes............... 2,997.7 2,898.6 2,275.9
Depreciation and amortization............... 240.8 237.4 200.1
Restructuring and other expenses, net....... 8.2 152.8 (11.4)
--------- --------- ---------
Total operating costs and expenses........ 13,542.1 11,069.8 10,486.6
--------- --------- ---------
Operating income.............................. 429.1 62.4 392.3
Interest income............................. 12.4 9.7 11.5
Interest expense............................ (141.5) (143.5) (131.7)
Equity income from joint ventures........... 14.6 7.4 3.1
--------- --------- ---------
Income (loss) before income taxes,
extraordinary loss, and
dividends of subsidiary...................... 314.6 (64.0) 275.2
Provision for income taxes.................. 131.1 3.8 110.2
Dividends on preferred stock of subsidiary.. 10.3 10.3 5.4
--------- --------- ---------
Income (loss) before extraordinary loss....... 173.2 (78.1) 159.6
Extraordinary loss on debt extinguishment... -- -- (4.8)
--------- --------- ---------
Net income (loss)............................. $ 173.2 $ (78.1) $ 154.8
========= ========= =========
Basic income (loss) per share:
Income (loss) before extraordinary loss..... $ 2.00 $ (0.89) $ 1.99
Extraordinary loss on debt extinguishment... -- -- (0.06)
--------- --------- ---------
Net income (loss)........................... $ 2.00 $ (0.89) $ 1.93
========= ========= =========
Diluted income (loss) per share:
Income (loss) before extraordinary loss..... $ 2.00 $ (0.89) $ 1.94
Extraordinary loss on debt extinguishment... -- -- (0.06)
--------- --------- ---------
Net income (loss)........................... $ 2.00 $ (0.89) $ 1.88
========= ========= =========
Weighted average number of shares:
Basic....................................... 86.615 88.555 78.120
Diluted..................................... 86.742 88.555 82.424
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(in millions)
<TABLE>
<CAPTION>
Grantor
Treasury Trust Accumulated
Additional Stock, Stock Other Total
Common Paid-in ESOP and Ownership Retained Comprehensive Stockholders'
Stock Capital Other Program Earnings Loss Equity
------ ---------- -------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 ....... $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
Issuance of Common
Stock.................. -- 3.6 (0.6) -- -- -- 3.0
Shares transferred to
Grantor Trust Stock
Ownership Program...... -- -- 100.0 (100.0) -- -- --
Net income.............. -- -- -- -- 173.2 -- 173.2
Cash dividends.......... -- -- -- -- (95.3) -- (95.3)
Other, net.............. -- -- -- -- -- 28.4 28.4
---- -------- ------ ------- ------ ------ --------
Balance at December 31,
1999................... $0.9 $1,516.3 $ (0.7) $(100.0) $160.4 $(83.6) $1,493.3
==== ======== ====== ======= ====== ====== ========
</TABLE>
As of December 31, 1997, the Company had issued and outstanding 1,724,400
shares 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,
----------------------
1999 1998 1997
------ ------ ------
(in millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)..................................... $173.2 $(78.1) $154.8
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 240.8 237.4 200.1
Provision for losses on receivables................. 9.2 12.7 14.9
Write-down of property, plant and equipment and
goodwill........................................... 131.4 82.1 --
Equity income from joint ventures................... (14.6) (7.4) (3.1)
Gain on sale of property, plant and equipment....... (116.0) (2.0) (11.4)
Deferred income tax provision (benefit)............. 72.4 (9.0) 104.8
Other, net.......................................... 3.6 4.4 3.4
Changes in operating assets and liabilities, net of
acquisition:
Decrease (increase) in accounts and notes
receivable....................................... (79.2) 82.1 25.6
Decrease in inventories........................... 87.4 89.1 46.5
Decrease in prepaid expenses and other current
assets........................................... 13.1 20.2 6.9
Increase (decrease) in accounts payable and other
current liabilities.............................. 56.0 (81.7) (221.5)
Decrease (increase) in other long-term assets....... 18.2 (2.4) (28.8)
Decrease in other long-term liabilities............. (58.8) (0.1) (56.7)
------ ------ ------
Net cash provided by operating activities....... 536.7 347.3 235.5
------ ------ ------
Cash Flows from Investing Activities:
Capital expenditures................................ (184.9) (171.1) (267.9)
Acquisition of Total, net of cash acquired.......... -- -- (402.4)
Deferred refinery maintenance turnaround costs...... (33.9) (37.8) (25.6)
Expenditures for investments........................ -- -- (11.9)
Proceeds from sales of property, plant and
equipment.......................................... 289.4 81.8 93.8
------ ------ ------
Net cash provided by (used in) investing
activities..................................... 70.6 (127.1) (614.0)
------ ------ ------
Cash Flows from Financing Activities:
Net change in commercial paper and working capital
borrowings......................................... (371.4) 96.6 (189.2)
Proceeds from long-term debt borrowings............. -- -- 415.9
Repayment of long-term debt......................... (231.4) (37.8) (68.6)
Proceeds from issuance of Common Stock.............. 3.5 7.3 5.5
Issuance of Company obligated preferred stock of
subsidiary......................................... -- -- 200.0
Shares purchased under Common Stock buyback
program............................................ -- (100.0) --
Payment of cash dividends........................... (95.3) (98.5) (89.8)
Other, net.......................................... -- -- (2.2)
------ ------ ------
Net cash provided by (used in) financing
activities..................................... (694.6) (132.4) 271.6
Effect of exchange rate changes on cash............... 4.0 (3.7) 1.0
------ ------ ------
Net Increase (Decrease) in Cash and Cash Equivalents.. (83.3) 84.1 (105.9)
Cash and Cash Equivalents at Beginning of Year........ 176.1 92.0 197.9
------ ------ ------
Cash and Cash Equivalents at End of Year.............. $ 92.8 $176.1 $ 92.0
====== ====== ======
</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,
-----------------------
1999 1998 1997
------ ------- ------
(in millions)
<S> <C> <C> <C>
Net income (loss)...................................... $173.2 $ (78.1) $154.8
Other comprehensive income (loss):
Foreign currency translation adjustment.............. 29.7 (33.8) (19.9)
Minimum pension liability adjustment, net of income
tax benefit......................................... (1.3) -- --
------ ------- ------
Comprehensive income (loss)............................ $201.6 $(111.9) $134.9
====== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 1: Summary of Significant Accounting Policies
Basis of Presentation: Ultramar Diamond Shamrock Corporation (the Company or
UDS) was incorporated in 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 six refineries
located in Texas, California, Oklahoma, Colorado and Quebec, Canada, and
markets its products through 2,190 Company-operated convenience stores, 2,812
dealer-operated wholesale outlets and 82 unattended cardlock stations. In the
Northeast, the Company sells, on a retail basis, home heating oil to
approximately 250,000 households.
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
United States 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 estimated 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 primarily over 15 to 20 years.
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 assets. The
amount of impairment is determined as the amount by which the net carrying
value exceeds discounted estimated net cash flows.
44
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Computer Software Costs: The Company capitalizes 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 1999 and 1998,
the Company capitalized $36.2 million and $3.8 million, respectively, of
external and internal software costs, primarily related to the Company's new
stand-alone enterprise-wide information technology 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.
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 years ended
December 31, 1999, 1998 and 1997, excise taxes were $2,895.9 million, $2,788.0
million and $1,998.9 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 as of
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. 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: The computation of basic income (loss) per share is
based on the weighted average number of common stock outstanding during the
year. Diluted income (loss) per share is based on the weighted average number
of common stock 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.
45
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company uses commodity futures contracts to procure a large portion of its
crude oil requirements and to hedge its exposure to crude oil, refined
product, and natural gas price volatility. Such contracts are used principally
to hedge the procurement of crude oil and refined product and to lock in
prices on a portion of the natural gas fuel needs of the refineries. The
Company also uses commodity futures contracts to manage the price of crude oil
and refined products. Realized gains and losses on commodity futures contracts
on qualifying hedges are included as a component of the related crude oil and
refined product purchases. Realized gains and losses on contracts not
designated as hedges are marked to market value and recognized currently in
cost of products sold.
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.
The Financial Accounting Standards Board (FASB) 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 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 of derivatives
are either recognized in earnings in the period of change or as a component of
other comprehensive income (loss) in the case of certain hedges. The statement
should not be applied retroactively. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133" which defers the effective
date of SFAS No. 133 for one year to be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company expects to adopt
SFAS No. 133 as of January 1, 2001. The Company has not yet completed its
evaluation of the impact of the adoption of this new standard.
Reclassifications: Certain previously reported amounts have been reclassified
to conform to the 1999 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 8).
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:
46
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<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.
NOTE 3: Restructuring and Other Expenses
Restructuring and other expenses consisted of the following:
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1999 1998 1997
------ ------ ------
(in millions)
<S> <C> <C> <C>
Loss on permanent closure of Alma Refinery......... $138.2 $ -- $ --
Gain on sale of Michigan convenience stores,
pipelines and terminals........................... (97.6) -- --
Gain on sale of other property, plant and
equipment......................................... (25.2) (2.0) (11.4)
Transaction costs related to the proposed Diamond
66 joint venture.................................. 11.0 -- --
Restructuring costs related to corporate
operations........................................ -- 12.0 --
Termination costs related to the proposed Petro-
Canada joint venture.............................. -- 11.2 --
Restructuring costs related to retail, refining and
pipeline operations............................... -- 131.6 --
Restructuring reserve reductions................... (18.2) -- --
------ ------ ------
Restructuring and other expenses, net............. $ 8.2 $152.8 $(11.4)
====== ====== ======
</TABLE>
Asset Sales and Joint Ventures
In December 1999, the Company finalized the sale of the Michigan convenience
stores, pipelines and terminals to Marathon Ashland Petroleum LLC and
recognized a gain of $97.6 million. Upon completion of the sale, the Company
permanently closed the Alma Refinery and recognized a loss of $138.2 million,
which included a $125.4 million impairment write-down and $12.8 million of
severance and closure costs. The impairment write-down consisted of $100.4
million related to property, plant and equipment (carrying value prior to
write-down was $128.4 million), $22.0 million related to goodwill and $3.0
million related to deferred refinery maintenance turnaround costs.
Included in gain on sale of property, plant and equipment of $25.2 million for
the year ended December 31, 1999 is a $22.6 million gain related to the sale
or closure of 239 convenience stores including 162 of the under-performing
convenience stores identified in June 1998. In addition, the Company
recognized a $2.2 million gain on the sale of an 8.33% interest in the McKee
to El Paso refined product pipeline and terminal to Phillips Pipeline Company.
Included in gain on sale of property, plant and equipment in 1998 is a $7.0
million gain on the sale of a 25% interest in the McKee to El Paso refined
product pipeline and terminal to Phillips and a $5.0 million loss related
primarily to the disposition of Company-operated convenience stores. During
1997, the Company recognized a pre-tax gain of $11.0 million from the sale of
an office building.
In March 1999, the Company and Phillips Petroleum Company terminated
discussions related to the formation of a proposed joint venture (Diamond 66)
between the two companies. During the first quarter of 1999, the Company
expensed $11.0 million of transaction costs incurred related to the formation
of Diamond 66.
47
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Company and Petro-Canada terminated discussions relating to
the formation of a refining and retail joint venture involving the Company's
Canadian and northeastern United States operations. During the second quarter
of 1998, the Company expensed $11.2 million of costs associated with the
termination of this joint venture project including $2.5 million to write-off
costs for a coker development project that has not been pursued.
Restructurings
The continuing consolidation in the refining and marketing industry has
changed the retail product pricing environment resulting in lower retail
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 convenience 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. In addition,
the Company restructured certain pipeline and terminal operations and support
infrastructure resulting in the elimination of 125 positions.
The total restructuring charge related to the retail, refining and pipeline
operations was $131.6 million which included:
.$82.1 million of impairment write-downs (see below),
.$15.5 million of severance and related benefit costs for 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.
The impairment write-downs included in the restructuring charge consisted of
the following:
.$34.3 million write-down of property, plant and equipment (carrying value
prior to write-down was $51.8 million);
.$37.1 million write-down of goodwill related to the convenience stores
(carrying value prior to the write-down was $44.9 million); and,
.$10.7 million write-down of certain pipelines and terminals (carrying
value prior to the write-down was $19.3 million).
Fair value for the impaired assets was based on present values of expected
future cash flows as well as information about sales and purchases of similar
properties in the same geographic areas. The carrying value of the under-
performing convenience stores as of December 31, 1999 and 1998 was $12.6
million and $24.6 million, respectively, and the average remaining depreciable
lives range from 3 to 22 years. Under the Company's restructuring plan, the
convenience stores were to be operated until closed and management decided the
best sales alternative. Operating income before retail overhead expense
allocations for the 316 convenience stores for the years ended December 31,
1999 and 1998 was $3.8 million and $4.5 million, respectively, including the
results for the sold stores through the date of sale.
In 1999, the market demand for convenience stores increased significantly as
both large and small operators sought to increase the number of stores they
operated. As a result, the Company has been able to sell many of its under-
performing convenience stores, instead of closing them and selling the
underlying property as originally planned. Because the Company has been able
to sell these properties as operating stores, the fuel system removal costs,
lease buyout costs and severance costs have not been incurred, and the
restructuring reserves have been reduced during 1999 accordingly.
48
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1999, 162 convenience stores were sold or
closed. During the six month period ended December 31, 1998, 65 convenience
stores were sold or closed. The remaining 89 convenience stores, which have
had little buyer interest, are expected to be closed or sold during 2000. From
June 1998 through December 1999, 235 retail employees and 62 pipeline and
terminal employees were terminated. Funding of the remaining accrued lease
buyout costs and fuel system removal costs are expected to occur in 2000 as
the Company negotiates lease buyouts, closes the stores and sells the
underlying properties to third parties.
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 in 1998 for
severance costs associated with terminated employees. For the year ended
December 31, 1999, payments of $10.6 million were made to 111 terminated
employees. The remaining balance of $1.4 million at December 31, 1999 is
expected to be paid in 2000.
Changes in accrued restructuring costs from June 30, 1998 through December 31,
1999 were as follows:
<TABLE>
<CAPTION>
Severance Fuel
and Lease System
Related Buyout Removal Other
Costs Costs Costs Costs Total
--------- ------ ------- ----- ------
(in millions)
<S> <C> <C> <C> <C> <C>
Accruals during 1998............... $ 27.5 $14.1 $ 16.7 $3.2 $ 61.5
Payments........................... (8.5) (0.1) (0.6) (3.2) (12.4)
------ ----- ------ ---- ------
Balance at December 31, 1998....... 19.0 14.0 16.1 -- 49.1
Payments........................... (12.8) (1.8) (2.7) -- (17.3)
Reserve reductions................. (1.1) (6.2) (10.9) -- (18.2)
------ ----- ------ ---- ------
Balance at December 31, 1999....... $ 5.1 $ 6.0 $ 2.5 $ -- $ 13.6
====== ===== ====== ==== ======
</TABLE>
NOTE 4: Accounts and Notes Receivable
Accounts and notes receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
(in millions)
<S> <C> <C>
Accounts receivable.......................................... $260.3 $552.8
Notes receivable............................................. 325.2 8.2
------ ------
Total...................................................... 585.5 561.0
Allowance for uncollectible accounts......................... (3.4) (14.3)
Other........................................................ 34.4 16.0
------ ------
Accounts and notes receivable, net......................... $616.5 $562.7
====== ======
</TABLE>
The changes in allowance for uncollectible accounts consisted of the
following:
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1999 1998 1997
------ ------ ------
(in millions)
<S> <C> <C> <C>
Balance at beginning of year......................... $ 14.3 $ 16.2 $ 15.4
Provision charged to expense......................... 0.4 12.7 17.3
Accounts written off, net of recoveries.............. (11.3) (14.6) (16.5)
------ ------ ------
Balance at end of year............................... $ 3.4 $ 14.3 $ 16.2
====== ====== ======
</TABLE>
49
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1999, the Company arranged a $250.0 million revolving accounts
receivable securitization facility. On an ongoing basis, the Company sells
eligible accounts receivable to Coyote Funding, L.L.C. (Coyote), a non-
consolidated, wholly-owned subsidiary. Coyote sells a percentage ownership in
such receivables, without recourse, to a third party cooperative corporation.
The Company's retained interest in receivables sold to Coyote is included in
notes receivable. The proceeds from the sales of receivables in March 1999 and
June 1999 totaled $237.6 million and were used to reduce long-term debt of the
Company. In December 1999, the balance of receivables sold was reduced to
$39.8 million. The remaining availability under the Securitization Facility
can be used should the Company decide to sell additional receivables in the
future. Discounts and net expenses associated with the sales of receivables
totaled $11.2 million and are included in interest expense in the consolidated
statement of operations for the year ended December 31, 1999.
NOTE 5: Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(in millions)
<S> <C> <C>
Crude oil and other feedstocks................................. $155.4 $249.7
Refined and other finished products and convenience store
items......................................................... 346.9 331.1
Materials and supplies......................................... 54.5 54.8
------ ------
Total inventories............................................ $556.8 $635.6
====== ======
</TABLE>
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. The lower of cost or market adjustments have
been treated as permanent reductions to inventory as of December 31, 1999. As
a result, the LIFO value of the Company's crude oil and refined product
inventories at December 31, 1999 was based on an average cost of $16.94 per
barrel and the average market price was $24.76 per barrel. At December 31,
1999, replacement cost exceeded the LIFO cost of inventories by $166.6
million.
During 1999, inventory quantities were reduced, which resulted in a
liquidation of LIFO inventory layers carried at lower costs which prevailed in
prior years. The effect of the liquidation was to decrease cost of products
sold by approximately $7.4 million. There were no liquidations of LIFO
inventories during 1998 or 1997.
NOTE 6: Property, Plant and Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
Estimated ------------------
Useful Lives 1999 1998
------------ -------- --------
(in millions)
<S> <C> <C> <C>
Refining..................................... 15--30 years $3,140.1 $3,186.7
Retail....................................... 5--30 years 1,119.5 1,165.9
Petrochemical/NGL............................ 5--25 years 11.1 9.8
Other........................................ 3--10 years 75.1 60.8
-------- --------
Total....................................... 4,345.8 4,423.2
Accumulated depreciation and amortization.... (1,315.9) (1,162.0)
-------- --------
Property, plant and equipment, net.......... $3,029.9 $3,261.2
======== ========
</TABLE>
50
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1999, the Company sold 177 convenience stores, pipelines and
terminals in Michigan with a net carrying value of $114.1 million to Marathon
Ashland. Upon completion of the Michigan sale, the Company permanently closed
the Alma Refinery and recognized a $100.4 million impairment write-down to
property, plant and equipment based on the estimated net salvage value of the
refinery. The Company also recognized a $6.0 million impairment write-down in
1999 related to certain pipelines and crude oil gathering operations in
Oklahoma. The net carrying value of property, plant and equipment related to
the other assets sold or closed during 1999, including 239 convenience stores,
was $52.8 million.
NOTE 7: Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(in millions)
<S> <C> <C>
Goodwill and other intangibles, net of accumulated amortization
of $61.8 million in 1999 and $53.3 million in 1998............ $218.3 $259.1
Non-current notes receivable, net.............................. 30.7 27.8
Refinery maintenance turnaround costs, net of accumulated
amortization
of $43.2 million in 1999 and $27.4 million in 1998............ 52.2 48.6
Equity investment in Diamond-Koch, L.P......................... 114.0 114.2
Equity investment in Skelly-Belvieu Pipeline Company, LLC...... 17.0 16.8
Other non-current assets....................................... 77.1 81.5
------ ------
Other assets, net............................................. $509.3 $548.0
====== ======
</TABLE>
During 1999, in conjunction with various asset sales and the permanent closure
of the Alma Refinery, goodwill was reduced $39.6 million and refinery
maintenance turnaround costs were reduced $3.0 million.
On September 1, 1998, the Company and Koch Industries, Inc. (Koch) finalized
the formation of Diamond-Koch, L.P. 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.
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.
The Company owns a 50% equity investment in Skelly-Belvieu Pipeline Company,
LLC, a partnership that transports refinery-grade propylene from the McKee
Refinery to Mont Belvieu, Texas.
51
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8: Notes Payable and Long-Term Debt
Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
Maturity 1999 1998
-------- -------- --------
(in millions)
<S> <C> <C> <C>
8.25% Notes..................................... 1999 $ -- $ 175.0
8.625% Guaranteed Notes......................... 2002 274.7 274.6
Medium-term Notes:
8.0%.......................................... 2005 149.9 149.8
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
Commercial Paper................................ 8.0 274.8
U.S. Bank Facility.............................. 2002 -- 100.0
10.75% Senior Notes............................. 1999 -- 30.0
9.50% Mortgages................................. 2003 27.3 37.0
Other........................................... Various 36.7 57.2
-------- --------
Total debt.................................... 1,341.6 1,943.4
Less current portion............................ (14.0) (6.4)
-------- --------
Long-term debt, less current portion.......... $1,327.6 $1,937.0
======== ========
</TABLE>
Generally, the Company's outstanding debt is unsecured with interest payable
semi-annually. The 10.75% Senior Notes were repaid in April 1999 and the 8.25%
Notes were repaid in July 1999. Mortgages are recorded at their net present
value and are secured by convenience stores 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, 1999, the Company had available money market lines of
credit with numerous financial institutions which provide the Company with
additional uncommitted capacity of $470.0 million and Cdn. $225.0 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, 1999 and 1998, there were no outstanding
borrowings under these money market lines.
52
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, 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 $102.2 million and $104.6 million as of December 31, 1999 and 1998,
respectively.
Borrowings under the commercial paper program, money market lines of credit,
8.25% Notes and the 10.75% Senior Notes are 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.
The aggregate maturities, after consideration of refinancing, of notes payable
and long-term debt as of December 31, 1999 were as follows (in millions):
<TABLE>
<S> <C>
2000............................................................... $ 14.0
2001............................................................... 84.5
2002............................................................... 297.6
2003............................................................... 33.5
2004............................................................... 0.6
Thereafter......................................................... 911.4
--------
Total notes payable and long-term debt........................... $1,341.6
========
</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, the Company and
certain of its subsidiaries are required to maintain, among other things,
certain specified 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.
In order to manage interest costs on its outstanding debt, the Company has
entered into various interest rate swap agreements (see note 16). In December
1996 and 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, 1999 and 1998,
the Company had the following interest rate swap agreements outstanding:
53
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<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....................... 6.23% 6.36% 6.93%
Weighted average rate paid in 1999................... 5.20% 4.75% 5.38%
Weighted average rate paid in 1998................... 5.57% 4.89% 5.66%
</TABLE>
Interest payments totaled $143.2 million, $141.7 million and $125.7 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 9: 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.
NOTE 10: Stockholders' Equity
5% Cumulative Convertible Preferred Stock
The Company's 5% Cumulative Convertible Preferred Stock, originally issued in
the merger of Ultramar Corporation and Diamond Shamrock, Inc. (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.
Common Stock Buyback Program and Grantor Trust Stock Ownership Program
During 1998, the Company purchased 3,740,400 shares of its Common Stock under
a $100.0 million buyback program approved by the Board of Directors in July
1998.
In November 1999, the Company created the Grantor Trust Stock Ownership
Program (GSOP) to which the Company contributed 3,740,000 shares of treasury
stock. The Company is authorized to instruct the trustee to sell shares as
necessary and to use the proceeds from such sales and any dividends paid on
such contributed shares, toward the satisfaction of a portion of the Company's
future obligations under certain of its compensation and employee benefit
plans. The shares held in trust are not considered outstanding for earnings
per share purposes until they are committed to be released. As of December 31,
1999, no shares were committed to be released. For financial reporting
purposes, the GSOP is consolidated. All dividends and interest transactions
between the GSOP and the Company are eliminated.
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
shares, 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
54
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The majority of stock options become
exercisable 30%, 30% and 40% on the first, second and third anniversaries of
the date of grant.
During 1999, 1998 and 1997, the Company did not grant any restricted shares or
performance units.
Stock option transactions under the various LTIPs are summarized as follows:
<TABLE>
<CAPTION>
Number of
Stock Weighted Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding January 1, 1997..................... 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
Granted....................................... 290,900 21.71
Canceled...................................... (597,199) 30.26
Exercised..................................... (157,339) 20.38
---------
Outstanding December 31, 1999................... 6,732,961 27.35
=========
Stock options exercisable at December 31:
1997.......................................... 3,127,166 24.29
1998.......................................... 3,557,282 25.70
1999.......................................... 3,941,934 26.92
</TABLE>
For stock 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, 1999, there were 2,017,197
shares 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.
55
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock options outstanding and exercisable as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock 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.......... 569,502 2.8 $16.64 569,502 $16.64
$20.40--$24.88.......... 1,098,999 6.8 23.10 817,899 23.59
$25.00--$29.90.......... 2,070,391 5.8 27.31 1,420,602 27.79
$30.13--$34.44.......... 2,859,909 6.9 30.70 1,051,572 30.83
$35.53--$37.66.......... 129,562 4.4 36.36 77,761 36.64
$46.40.................. 4,598 0.9 46.40 4,598 46.40
--------- ---------
$15.00--$46.40.......... 6,732,961 5.9 27.35 3,941,934 26.92
========= =========
</TABLE>
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. The weighted average fair value of stock options granted
during the years ended December 31, 1999, 1998 and 1997 was $3.96, $4.76, and
$5.23 per option, respectively. The fair value for these stock 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,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Risk free interest rate.................. 4.77%-6.02% 4.04%-5.66% 5.83%-6.40%
Expected life............................ 4 years 4 years 4 years
Expected volatility...................... 24%-25% 19%-25% 19%-22%
Expected dividend yield.................. 3.70%-3.94% 3.70%-3.90% 3.96%-4.08%
</TABLE>
Had the Company accounted for stock options granted in 1999, 1998 and 1997
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,
---------------------------------
1999 1998 1997
---------- ---------- ----------
(in millions, except per share
data)
<S> <C> <C> <C>
Pro forma net income (loss)............... $ 170.1 $ (84.7) $ 145.3
Pro forma net income (loss) per share:
Basic................................... $ 1.96 $ (0.96) $ 1.86
Diluted................................. $ 1.96 (0.96) 1.76
</TABLE>
For purposes of the pro forma disclosures, the estimated fair value of stock
options is amortized to expense over the stock options' vesting periods.
The Committee adopted the 1999, 1998 and 1997 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, 1999, 1998 and
1997, the related AIP expense was $8.0 million, $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 shares to eligible
employees. In 1997, the PIP was terminated and replaced with the AIP. For the
year ended December 31, 1997, the Company expensed $13.8 million under this
plan.
56
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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. 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 were $3.5 million. Dividend
and interest income reduced the amounts charged to expense in 1997 by $1.4
million.
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 shares, 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 stock options for 1,000 shares at each
annual meeting of the Company. The stock options are fully exercisable at the
following annual meeting. The stock options expire ten years from the date of
grant. During 1999, 11,000 stock options and 2,502 restricted share awards
were granted. During 1998 and 1997, 10,000 stock options were granted
annually; there were no restricted share awards granted. As of December 31,
1999, a total of 31,442 shares were 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, 1999, a total of 41,738 shares
had been issued under the plan and 1,958,262 shares remain available for
future issuance.
NOTE 11: 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
Stock outstanding. Diluted net income (loss) per share assumes, when dilutive,
issuance of the net incremental shares from stock options and restricted
shares, and conversion of the 5% Cumulative Convertible Preferred Stock. The
following table reconciles the net income (loss) amounts and share numbers
used in the computation of net income (loss) per share.
57
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
------------ ------------ ------------
(in millions, except per share data)
<S> <C> <C> <C>
Basic Income (Loss) Per Share:
Weighted average Common Stock
outstanding (in thousands)....... 86,615 88,555 78,120
============ ============ ============
Income (loss) before extraordinary
loss............................. $ 173.2 $ (78.1) $ 159.6
Dividends on 5% Cumulative
Convertible Preferred Stock...... -- (1.1) (4.3)
------------ ------------ ------------
Income (loss) applicable to Common
Stock............................ 173.2 (79.2) 155.3
Extraordinary loss on debt
extinguishment................... -- -- (4.8)
------------ ------------ ------------
Net income (loss) applicable to
Common Stock................... $ 173.2 $ (79.2) $ 150.5
============ ============ ============
Per Share Amounts
Income (loss) before extraordinary
loss............................. $ 2.00 $ (0.89) $ 1.99
Extraordinary loss on debt
extinguishment................... -- -- (0.06)
------------ ------------ ------------
Net income (loss)............... $ 2.00 $ (0.89) $ 1.93
============ ============ ============
Diluted Income (Loss) Per Share:
Weighted average Common Stock
outstanding (in thousands)....... 86,615 88,555 78,120
Net effect of dilutive stock
options--based on the
treasury stock method using the
average market price............. 127 -- 985
Assumed conversion of 5%
Cumulative Convertible Preferred
Stock............................ -- -- 3,319
------------ ------------ ------------
Weighted average common
equivalent shares.............. 86,742 88,555 82,424
============ ============ ============
Income (loss) before extraordinary
loss............................. $ 173.2 $ (78.1) $ 159.6
Dividends on 5% Cumulative
Convertible Preferred Stock...... -- (1.1) --
------------ ------------ ------------
Income (loss) applicable to Common
Stock............................ 173.2 (79.2) 159.6
Extraordinary loss on debt
extinguishment................... -- -- (4.8)
------------ ------------ ------------
Net income (loss) applicable to
common equivalent shares....... $ 173.2 $ (79.2) $ 154.8
============ ============ ============
Per Share Amounts
Income (loss) before extraordinary
loss............................. $ 2.00 $ (0.89) $ 1.94
Extraordinary loss on debt
extinguishment................... -- -- (0.06)
------------ ------------ ------------
Net income (loss)............... $ 2.00 $ (0.89) $ 1.88
============ ============ ============
</TABLE>
NOTE 12: 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 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.
58
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999 and 1998:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
-------------- -------------------
1999 1998 1999 1998
------ ------ ---------- -------
(in millions)
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of
year................................. $304.1 $273.3 $ 82.6 $ 84.8
Service cost........................ 16.1 15.5 2.1 1.9
Interest cost....................... 22.5 21.2 5.9 5.5
Plan participant's contributions.... 0.3 0.3 -- --
Plan amendments..................... -- 5.2 -- --
Actuarial (gain) loss............... (24.3) 9.2 (5.1) (3.3)
Foreign currency exchange rate
changes............................ -- -- 0.6 (0.7)
Curtailment gain.................... (1.2) -- -- --
Settlement gain..................... (0.7) -- -- --
Termination benefits................ 6.4 -- -- --
Benefits paid....................... (39.7) (20.6) (4.8) (5.6)
------ ------ ---------- -------
Benefit obligation at end of year..... 283.5 304.1 81.3 82.6
------ ------ ---------- -------
Change in Plan Assets:
Fair value of plan assets at beginning
of year.............................. 260.6 234.4 -- --
Actual return on plan assets........ 20.8 40.6 -- --
Employer contributions.............. 19.9 5.9 4.8 5.6
Plan participant's contributions.... 0.3 0.3 -- --
Benefits paid....................... (39.7) (20.6) (4.8) (5.6)
------ ------ ---------- -------
Fair value of plan assets at end of
year................................. 261.9 260.6 -- --
------ ------ ---------- -------
Funded status at end of year.......... (21.6) (43.5) (81.3) (82.6)
Unrecognized net actuarial (gain)
loss............................... (19.9) 5.1 (20.4) (15.9)
Unrecognized prior service cost..... 22.8 25.2 (13.4) (14.6)
Unrecognized net transition
obligation......................... 0.1 0.3 -- --
------ ------ ---------- -------
Accrued benefit cost.................. $(18.6) $(12.9) $ (115.1) $(113.1)
====== ====== ========== =======
Amounts recognized in the consolidated
balance sheets:
Prepaid benefit cost................ $ -- $ 17.8 $ -- $ --
Accrued benefit liability........... (18.6) (30.7) (115.1) (113.1)
Additional minimum liability........ (2.2) -- -- --
Accumulated other comprehensive
loss............................... 2.2 -- -- --
------ ------ ---------- -------
Net amount recognized at end of year.. $(18.6) $(12.9) $ (115.1) $(113.1)
====== ====== ========== =======
Weighted average assumptions:
Discount rate....................... 7.75% 7.00% 7.75% 7.00%
Expected return on plan assets...... 9.50% 9.00% N/A N/A
Rate of compensation increase....... 4.50% 4.25% 4.25%-4.50% 4.25%
Health care cost trend on covered
charges............................ N/A N/A 5.6% 6.10%
</TABLE>
During 1999, the Company recognized a charge of approximately $6.4 million for
termination benefits associated with the permanent closure of the Alma
Refinery. Effective December 31, 1999, the Company transferred the net assets
of the plan associated with the Alma Refinery to the UDS Pension Plan which
resulted in a $1.2 million curtailment gain.
59
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
-----------
1999 1998
----- -----
(in
millions)
<S> <C> <C>
Projected benefit obligation.................................... $23.7 $40.7
Accumulated benefit obligation.................................. 17.9 34.2
Fair value of plan assets....................................... 9.8 27.0
</TABLE>
The following table summarizes the components of net periodic benefit cost for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------- ----------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost....................... $16.1 $15.5 $10.2 $2.1 $1.9 $1.8
Interest cost...................... 22.5 21.2 10.4 5.9 5.5 4.9
Expected return on plan assets..... (21.8) (20.2) (10.2) -- -- --
Amortization of:
Transition obligation............ 0.1 -- -- -- -- . --
Prior service cost............... 2.4 2.4 -- (1.2) (1.2) (0.3)
Actuarial loss (gain)............ 1.5 0.5 1.1 (0.6) (1.0) (0.6)
Termination charge............... 6.4 -- -- -- -- --
Curtailment loss (gain).......... (1.2) -- 2.5 -- -- --
Settlement charge (gain)......... 0.2 -- (3.6) -- -- --
----- ----- ----- ---- ---- ----
Net periodic benefit cost.......... $26.2 $19.4 $10.4 $6.2 $5.2 $5.8
===== ===== ===== ==== ==== ====
</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.
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. Contributions to these plans amounted to $6.0
million, $6.3 million and $3.6 million during the years ended December 31,
1999, 1998 and 1997, 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.
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.
60
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (3.8)
</TABLE>
NOTE 13: Income Taxes
Income (loss) before income taxes, extraordinary loss and dividends of
subsidiary consisted of the following:
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1999 1998 1997
------- ------- -------
(in millions)
<S> <C> <C> <C>
United States.................................... $ 264.9 $(132.2) $ 187.2
Canada........................................... 49.7 68.2 88.0
------- ------- -------
Total.......................................... $ 314.6 $ (64.0) $ 275.2
======= ======= =======
Provision for income taxes consisted of the following:
<CAPTION>
Years Ended December
31,
-------------------------
1999 1998 1997
------- ------- -------
(in millions)
<S> <C> <C> <C>
Current:
U.S. Federal................................... $ 6.9 $ -- $ (1.0)
U.S. State..................................... (1.4) -- 1.8
Canada......................................... 53.2 12.8 4.6
------- ------- -------
Total current................................ 58.7 12.8 5.4
------- ------- -------
Deferred:
U.S. Federal................................... 96.0 (24.6) 68.1
U.S. State..................................... 10.1 0.6 6.9
Canada......................................... (33.7) 15.0 29.8
------- ------- -------
Total deferred............................... 72.4 (9.0) 104.8
------- ------- -------
Provision for income taxes....................... $ 131.1 $ 3.8 $ 110.2
======= ======= =======
</TABLE>
61
<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,
----------------
1999 1998
------- -------
(in millions)
<S> <C> <C>
Deferred tax liabilities:
Excess of book basis over tax basis of:
Property, plant and equipment........................ $(535.8) $(524.7)
Equity investment in Diamond-Koch, L.P............... (15.2) (16.1)
LIFO inventory and market valuation allowance.......... -- (5.5)
Deferred refinery maintenance turnaround costs......... (31.0) (32.6)
------- -------
Total deferred tax liabilities....................... (582.0) (578.9)
------- -------
Deferred tax assets:
LIFO inventory......................................... 25.1 --
Accrued and other long-term liabilities................ 155.4 181.9
U.S. Federal and State income tax credit
carryforwards......................................... 99.2 89.9
Canadian tax benefit on unrealized foreign exchange
adjustment............................................ 5.8 5.5
Net operating loss carryforwards....................... 123.1 194.2
Other.................................................. 9.1 12.1
------- -------
Total deferred tax assets............................ 417.7 483.6
Less valuation allowance............................... (9.5) (11.3)
------- -------
Net deferred tax liability........................... $(173.8) $(106.6)
======= =======
</TABLE>
As of December 31, 1999, 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..... $ 39.1 2000 through 2019
Alternative minimum tax
(AMT) credits.......... 60.1 Indefinitely
U.S. Federal net
operating losses
(NOL).................. 301.3 2004 through 2018
</TABLE>
Included in the above are $16.4 million of income tax credit carryforwards,
$50.8 million of AMT credits and $131.1 million of NOL carryforwards acquired
from Total, National Convenience Stores, Inc. 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 NOLs and U.S. Federal income tax credit carryforwards,
which may not be realized in future periods. The realization of net deferred
tax assets recorded as of December 31, 1999 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.
The Company has not provided any U.S. Federal deferred income taxes or
Canadian withholding taxes on the undistributed earnings of its Canadian
subsidiaries based on the determination that such earnings will be
indefinitely reinvested. As of December 31, 1999, the cumulative undistributed
earnings of these subsidiaries were approximately $276.6 million. If such
earnings were not considered indefinitely reinvested, U.S. Federal deferred
income taxes and Canadian withholding taxes would have been provided after
consideration of foreign tax credits. However, determination of the amount of
U.S. Federal deferred income taxes and Canadian withholding taxes is not
practical.
62
<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,
------------------
1999 1998 1997
---- ------ ----
(in millions)
<S> <C> <C> <C>
U.S. Federal statutory rate............................ 35.0% (35.0)% 35.0%
Effect of foreign operations........................... 0.6 6.1 1.3
U.S. State income taxes, net of U.S. Federal taxes..... 2.5 4.7 2.1
Non-deductible goodwill amortization and impairment
charge................................................ 5.6 28.6 1.2
Other.................................................. (2.0) 1.5 0.4
---- ------ ----
Effective income tax rate............................ 41.7% 5.9% 40.0%
==== ====== ====
</TABLE>
Income taxes paid net of refunds for the years ended December 31, 1999, 1998
and 1997 amounted to $22.1 million, $3.2 million (refund) and $16.8 million,
respectively.
NOTE 14: 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,
----------------------------
1999 1998 1997
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Balance at beginning of year................... $ 219.4 $ 213.9 $ 151.4
Purchase price allocation for Total.......... -- 39.7 80.0
Additions to accrual......................... 4.1 -- 1.3
Reductions from accrual...................... (20.6) -- --
Payments..................................... (31.9) (34.2) (18.8)
-------- -------- --------
Balance at end of year......................... $ 171.0 $ 219.4 $ 213.9
======== ======== ========
</TABLE>
During 1999, based on the annual review of environmental liabilities, it was
determined that certain liabilities were overstated as the required cleanup
obligation was less than originally estimated. Accordingly, environmental
liabilities were reduced by $20.6 million.
63
<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 15: Commitments and Contingencies
The Company leases convenience stores, office space and other assets under
operating leases with terms expiring
at various dates through 2053. 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, 1999 are as follows (in millions):
<TABLE>
<S> <C>
2000.................................................................. $ 64.8
2001.................................................................. 57.0
2002.................................................................. 49.8
2003.................................................................. 40.7
2004.................................................................. 21.9
Thereafter............................................................ 104.9
------
Gross lease payments................................................ 339.1
Less future minimum sublease rental income............................ (23.4)
------
Net future minimum lease payments................................... $315.7
======
</TABLE>
Rental expense, net of sublease rental income, for all operating leases
consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Minimum rental expense........................ $ 90.3 $ 94.8 $ 76.7
Contingent rental expense..................... 8.5 8.9 7.8
-------- -------- --------
Gross rental expense........................ 98.8 103.7 84.5
Less sublease rental income................... (10.6) (10.9) (10.9)
-------- -------- --------
Net rental expense.......................... $ 88.2 $ 92.8 $ 73.6
======== ======== ========
</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, 1999, substantially all of the $190.0 million
Brazos Lease commitment has been used to construct
64
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
or purchase convenience stores and $93.9 million of the Jamestown and the
Total Lease commitments, which totaled $165.0 million, have been used to
construct or purchase convenience stores and to construct the 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, 1999 would be approximately $279.3 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 which expires in 2011. 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.
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 which expires in 2011.
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 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.
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.
NOTE 16: Financial Instruments
Financial instruments consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 92.8 $ 92.8 $ 176.1 $ 176.1
Non-current notes receivable....... 30.7 30.7 27.8 27.8
Long-term debt, including current
portion........................... (1,341.6) (1,307.8) (1,943.4) (2,034.3)
Interest rate swap agreements...... -- (11.7) -- 18.7
Commodity futures and price swap
contracts......................... (8.1) (17.2) (32.9) (63.5)
</TABLE>
Cash and cash equivalents as of December 31, 1999 and 1998 include $28.2
million and $114.2 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.
65
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the Company's fixed rate debt as of December 31, 1999 and
1998 was $1,295.2 million and $1,651.1 million, respectively (carrying amounts
of $1,329.0 million and $1,560.2 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 for the purchase of physical
quantities of crude oil and refined products as well as for the management of
crude oil costs. For the contracts designated as hedges, whereby physical
delivery of the crude oil, refined product or natural gas takes place, gains
and losses were recognized as a component of the related purchase. Unrealized
gains from the Company's hedging activities were approximately $1.7 million as
of December 31, 1999. For the commodity futures contracts that are closed
without taking physical delivery, the net gain in 1999 of $48.0 million has
been recognized currently in cost of products sold. During 1999, the Company's
crude oil purchases to supply its various refineries amounted to $3.7 billion.
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, 1999, the Company had outstanding commodity futures
contracts designated as hedges and price swap contracts to purchase $351.8
million and sell $194.0 million of crude oil and refined products or to settle
differences between a fixed price and market price on aggregate notional
quantities of 6.4 million barrels of crude oil and refined products which
mature on various dates through June 2002. As of December 31, 1998, the
Company had outstanding commodity futures contracts designated as hedges and
price swap contracts to purchase $319.9 million and sell $130.6 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 designated as hedges 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, 1999, the
Company had short-term foreign exchange contracts totaling $12.1 million and
commitments to purchase $34.2 million of U.S. dollars. 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.
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.
66
<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, 1999, the Company had no
significant concentrations of credit risk.
NOTE 17: Business Segments and Geographic Information
The Company has three reportable segments: Refining, Retail and
Petrochemical/NGL. The Refining segment includes refinery, wholesale, product
supply and distribution, and transportation operations. The Retail segment
includes Company-operated convenience stores, dealers/jobbers and truckstop
facilities, cardlock and home heating oil operations. The Petrochemical/NGL
segment includes earnings from Nitromite fertilizer, NGL marketing and certain
NGL pipeline operations. Equity income from Diamond-Koch and Skelly-Belvieu are
not included in operating income. Operations that are not included in any of
the three reportable segments are included in the Corporate category and
consist primarily of corporate office expenditures.
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. 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.
<TABLE>
<CAPTION>
Petrochemical/
Refining Retail NGL Corporate Total
-------- -------- -------------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Sales and other revenues
from external
customers.............. $7,967.6 $5,868.5 $135.1 $ -- $13,971.2
Intersegment sales...... 2,683.7 8.1 -- -- 2,691.8
EBITDA.................. 526.8 270.3 19.5 (132.1) 684.5
Depreciation and
amortization........... 168.2 67.8 1.4 3.4 240.8
Operating income
(loss)................. 358.6 202.5 3.5 (135.5) 429.1
Total assets............ 3,326.5 1,220.2 148.2 241.1 4,936.0
Capital expenditures.... 75.3 62.2 0.1 47.3 184.9
Year ended December 31,
1998:
Sales and other revenues
from external
customers.............. 5,377.8 5,499.3 255.1 -- 11,132.2
Intersegment sales...... 2,090.0 5.3 16.6 -- 2,111.9
EBITDA.................. 279.3 182.6 34.9 (189.6) 307.2
Depreciation and
amortization........... 160.4 67.2 7.1 2.7 237.4
Operating income
(loss)................. 118.9 115.4 20.4 (192.3) 62.4
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.............. 5,854.1 4,556.2 468.6 -- 10,878.9
Intersegment sales...... 1,822.8 4.0 45.1 -- 1,871.9
EBITDA.................. 482.6 218.9 49.0 (155.0) 595.5
Depreciation and
amortization........... 123.1 59.8 9.8 7.4 200.1
Operating income
(loss)................. 359.5 159.1 36.1 (162.4) 392.3
Total assets............ 3,675.8 1,478.3 239.2 201.4 5,594.7
Capital expenditures.... 127.1 114.3 20.5 6.0 267.9
</TABLE>
67
<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,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Sales and other revenues:
Total sales for reportable segments..... $16,663.0 $13,244.1 $12,750.8
Elimination of intersegment sales....... (2,691.8) (2,111.9) (1,871.9)
--------- --------- ---------
Consolidated sales and other
revenues............................. $13,971.2 $11,132.2 $10,878.9
========= ========= =========
Operating income:
Total operating income for reportable
segments............................... $ 564.6 $ 254.7 $ 554.7
Other unallocated expenses.............. (135.5) (192.3) (162.4)
--------- --------- ---------
Consolidated operating income......... $ 429.1 $ 62.4 $ 392.3
========= ========= =========
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C> <C>
Total assets:
Total assets for reportable segments.... $ 4,694.9 $ 5,127.8
Other unallocated assets................ 241.1 187.2
--------- ---------
Consolidated total assets............. $ 4,936.0 $ 5,315.0
========= =========
Geographic information by country for sales and other revenues from external
customers based on location of customer consisted of the following:
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
United States........................... $11,140.2 $ 8,818.6 $ 8,084.6
Canada.................................. 2,831.0 2,313.6 2,794.3
--------- --------- ---------
Consolidated sales and other
revenues............................. $13,971.2 $11,132.2 $10,878.9
========= ========= =========
Geographic information by country for property, plant and equipment, net
consisted of the following:
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
(in millions)
<S> <C> <C> <C>
United States........................... $ 2,539.6 $ 2,817.8
Canada.................................. 490.3 443.4
--------- ---------
Consolidated property, plant and
equipment, net....................... $ 3,029.9 $ 3261.2
========= =========
</TABLE>
NOTE 18: Subsequent Events (Unaudited)
On February 8, 2000, the Board of Directors declared a quarterly dividend of
$0.275 per Common Stock payable on March 2, 2000 to holders of record on
February 17, 2000.
As an alternative financing and growth vehicle, the Company is considering the
formation of a master limited partnership (MLP), which would operate most of
the Company's pipeline and terminal assets. A wholly-owned
68
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subsidiary of the Company would be the general partner of the MLP and operate
the assets on its behalf. It is contemplated that the MLP, through an initial
public offering, would sell limited partnership units to the public
representing a minority of the ownership interest. Management expects to form
the MLP and complete the initial public offering during the second quarter of
2000, subject to approval by the Board of Directors, acceptable market
conditions and other considerations.
NOTE 19: Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1999 Quarters
----------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Sales and other revenues......... $ 2,725.1 $ 3,386.5 $ 3,842.4 $ 4,017.2
Cost of products sold and
operating expenses.............. 1,806.5 2,370.1 2,751.7 3,049.5
Operating income................. 64.9 113.6 170.5 80.1
Net income....................... 16.0 48.4 84.2 24.6
Net income per share:
Basic........................... $ 0.18 $ 0.56 $ 0.97 $ 0.29
Diluted......................... 0.18 0.56 0.97 0.29
Weighted average number of shares
(in thousands):
Basic........................... 86,557 86,593 86,631 86,678
Diluted......................... 86,643 86,703 86,807 86,636
<CAPTION>
1998 Quarters
----------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Sales and other revenues......... $ 2,788.4 $ 3,038.5 $ 2,745.2 $ 2,560.1
Cost of products sold and
operating expenses.............. 1,909.2 2,014.4 1,779.3 1,745.5
Operating income (loss).......... 64.4 (17.2) 80.5 (65.3)
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
</TABLE>
In March 1999, the Company expensed $11.0 million of transaction costs
associated with the termination of the proposed Diamond 66 joint venture. Also
in the first quarter of 1999, the Company realized a gain of $11.3 million
from insurance recoveries and retail restructuring reserve reversals.
During the fourth quarter of 1999, the Company recognized:
. a gain of $97.6 million related to the sale of the Michigan retail,
pipeline and terminal operations;
. a gain of $25.8 million related primarily to the sale or closure of 142
convenience stores;
. a loss of $138.2 million related to the permanent closure of the Alma
Refinery in December 1999; and
. a gain of $18.4 million from reducing liabilities no longer necessary,
primarily for restructuring activities and future environmental clean up
obligations.
69
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, refining and pipeline operations and support services, and
. an $11.2 million charge for costs associated with the cancelled Petro-
Canada joint venture.
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.
70
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information appearing under the caption "Election of Directors Proposal"
and "Compensation of Executive Officers and Directors" in the Company's Proxy
Statement relating to its 2000 Annual Meeting of Stockholders as filed with
the Securities and Exchange Commission (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
Stock 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' Report
Balance Sheets--December 31, 1999 and 1998
Statements of Operations--Years Ended December 31, 1999, 1998 and 1997
Statements of Stockholders' Equity--Years Ended December 31, 1999, 1998 and
1997
Statements of Cash Flows--Years Ended December 31, 1999, 1998 and 1997
Statements of Comprehensive Income (Loss)--Years Ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements--Years Ended December 31, 1999,
1998 and 1997
All schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
(B) Reports on Form 8-K
None.
71
<PAGE>
(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 Annual Report on Form 10-K for the
Bylaws year ended December 31, 1998,
Exhibit 3.7
3.8 Amendment dated February 1, 2000 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 See Exhibit 3.8
4.10 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
4.11 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
4.12 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>
72
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
4.13 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
4.14 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
4.15 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
4.16 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
4.17 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) Form 10-K for the year ended
as amended by the First Amendment December 31, 1994, Exhibit 4.3
dated October 26, 1992 and the
Amendment dated May 10, 1994
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
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
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
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 1999
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
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
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
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
10.20 Employment Agreements dated as of +
October 23, 1996 between Diamond
Shamrock, Inc. and W. R. Klesse, T.
J. Fretthold, W. P. Eisman;
Employment Agreement dated as of
November 22, 1996 between Diamond
Shamrock, Inc. and R. S. Beadle
10.21 Employment Agreement dated as of +
November 27, 1996 between Ultramar
Corporation and Christopher Havens
10.22 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)
10.23 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)
10.24 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)
10.25 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
10.26 Supplemental Executive Retirement Registration Statement on Form 10 of
Plan of Diamond Shamrock, Inc. (the Diamond Shamrock Inc., Exhibit 10.16
DS SERP)
10.27 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
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
10.28 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
10.29 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
10.30 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
10.31 Form of Disability Benefit Agreement DS S-1, Exhibit 10.21
between Diamond Shamrock, Inc. and
certain of its executive officers
10.32 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
10.33 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
10.34 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
10.35 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
10.36 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
10.37 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
10.38 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
10.39 Diamond Shamrock, Inc. Nonqualified Registration Statement on Form S-8
401(k) Plan of Diamond Shamrock, Inc. (File
No.33-64645),
Exhibit 4.1
10.40 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Supplemental Executive Retirement
Plan, July 22, 1996
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
10.41 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Disability Benefit Agreement July
22, 1996
10.42 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Supplemental Death Benefit Agreement
July 22, 1996
10.43 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Excess Benefits Plan July 22, 1996
10.44 Amendment to Diamond Shamrock, Inc. DS 1996 Form 10-Q
Long-Term Incentive Plan July 22,
1996
10.45 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
10.46 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
10.47 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
10.48 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
10.49 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
10.50 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
10.51 Ultramar Diamond Shamrock Registration Statement on Form S-4
Corporation 1996 Long-Term Incentive (File No. 333-14807), Exhibit 10.2
Plan
10.52 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
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
10.53 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
10.54 Agreement between the Company and H. Annual Report on Form 10-K for the
Pete Smith dated effective March 3, year ended December 31, 1997,
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
10.55 Ultramar Diamond Shamrock Registration Statement on Form S-8
Corporation Non-Employee Director (No. 333-27697), Exhibit 4.1
Plan
10.56 Ultramar Diamond Shamrock +
Corporation Non-Employee Director
Plan, as amended effective January
1, 2000
10.57 Amendment No. 1 to Credit Agreement Annual Report on Form 10-K for the
described in Exhibit 10.48 dated year ended December 31, 1998,
December 31, 1998 Exhibit 10.60
10.58 Amending Agreement relating to Annual Report on Form 10-K for the
Credit Agreement described in year ended December 31, 1998,
Exhibit 10.50 dated November 7, 1997 Exhibit 10.61
10.59 Amendment No. 3 relating to Credit Annual Report on Form 10-K for the
Agreement described in Exhibit 10.50 year ended December 31, 1998,
dated December 31, 1998 Exhibit 10.62
10.60 Form of Employee Stock Purchase Loan +
Program Promissory Note between
Ultramar Diamond Shamrock
Corporation and certain of its
executive officers and employees
10.61 Ultramar Diamond Shamrock +
Corporation Employee Benefits Trust
Agreement dated November 9, 1999
10.62 Performance Support Agreement dated Quarterly Report on Form 10-Q for
March 29, 1999 among Ultramar quarter ended March 31, 1999,
Diamond Shamrock Corporation, Asset Exhibit 10.1
Securitization Cooperative
Corporation (ASCC)
and Canadian Imperial Bank of
Commerce (CIBC).
10.63 Credit Card Receivables Purchase Quarterly Report on Form 10-Q for
Agreement dated March 20, 1999 among quarter ended March 31, 1999,
Coyote Funding, L.L.C. (Coyote), Exhibit 10.2
Diamond Shamrock Refining and
Marketing Company (DSRMC), ASCC, and
CIBC.
10.64 Trade Receivables Purchase Agreement Quarterly Report on Form 10-Q for
dated March 29, 1999 among Coyote, quarter ended March 31, 1999,
DSRMC, ASCC, and CIBC Exhibit 10.3
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by Reference
Number Description to the Following Documents
- ------- ----------- --------------------------
<S> <C> <C>
21 Subsidiaries +
23.1 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.
79
<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 14, 2000.
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 14, 2000 by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Jean R. Gaulin President, Chief Executive Officer and
______________________________________ 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/ * 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
______________________________________
Russel H. Herman
/s/ * Director
______________________________________
Bob Marbut
/s/ * Director
______________________________________
Katherine D. Ortega
/s/ * Director
______________________________________
Madeleine Saint-Jacques
/s/ * Director
______________________________________
C. Barry Schaefer
</TABLE>
/s/ H. Pete Smith Attorney-in-Fact
*By: ____________________________
H. Pete Smith
80
<PAGE>
EXHIBIT 3.8
The following amendments to Article IV of the By-laws of Ultramar Diamond
Shamrock Corporation were adopted effective January 1, 2000:
SECTION 1. General. The officers of the Corporation shall be chosen by
--------
the Board of Directors and shall be a President, a Secretary, and a Treasurer.
The Board of Directors, in its discretion, may also choose a Chairman of the
Board of Directors (who must be a director), Chairman Emeritus of the Board of
Directors, and one or more Vice Presidents (including, without limitation,
Assistant, Executive, Senior, and Group), Assistant Secretaries, Assistant
Treasurers, and other officers. Any number of offices may be held by the same
person, unless otherwise prohibited by law, the Certificate of Incorporation, or
these By-laws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of Directors,
need such officers be directors of the Corporation.
SECTION 4. Chairman of the Board of Directors; Chairman Emeritus. The
------------------------------------------------------
Chairman of the Board of Directors, if there be one, shall preside at all
meetings of the stockholders and of the Board of Directors. He shall be the
Chief Executive Officer of the Corporation, and except where by law the
signature of the President is required, the Chairman of the Board of Directors
shall possess the same power as the President to sign all contracts,
certificates, and other instruments of the Corporation which may be authorized
by the Board of Directors. During the absence or disability of the President,
the Chairman of the Board of Directors shall exercise all the powers and
discharge all the duties of the President. The Chairman of the Board of
Directors shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him by these By-laws or by the
Board of Directors. The Board of Directors may appoint one or more persons to
the position of Chairman Emeritus of the Board of Directors. The position of
Chairman Emeritus shall be an honorary position. The Chairman Emeritus shall
perform such duties as may be requested from time to time by the Board of
Directors or the Chairman of the Board of Directors. The Chairman Emeritus
shall not be elected for a term, but will serve at the discretion of the Board
of Directors.
SECTION 5. President. The President shall, subject to the control of the
----------
Board of Directors and, if there be one, the Chairman of the Board of Directors,
have general supervision of the business of the Corporation and shall see that
all orders and resolutions of the Board of Directors are carried into effect.
He shall execute all bonds, mortgages, contracts, and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed or executed and except that
the other officers of the Corporation may sign and execute documents when so
authorized by these By-laws, the Board of Directors, or the President. In the
absence or disability of the Chairman of the Board of Directors, or if there be
none, the President shall preside at all meetings of the stockholders and the
Board of Directors. If there be no Chairman of the Board of Directors, the
President shall be the Chief Executive Officer of the Corporation. The
President shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him by these By-laws or by the
Board of Directors.
<PAGE>
SECTION 6. Vice Presidents. At the request of the President or in his
----------------
absence or in the event of his inability or refusal to act (and if there be no
Chairman of the Board of Directors), the Vice President or the Vice Presidents
if there is more than one (in the order designated by the Board of Directors)
shall perform the duties of the President, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the President. Each
Vice President shall perform such other duties and have such other powers as the
Board of Directors from time to time may prescribe. If there be no Chairman of
the Board of Directors and no Vice President, the Board of Directors shall
designate the officer of the Corporation who, in the absence of the President or
in the event of the inability or refusal of the President to act, shall perform
all the powers of and be subject to all the restrictions upon the President.
b-law amndmt
<PAGE>
EXHIBIT 10.11
1999
ANNUAL INCENTIVE PLAN
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 2
1999 ANNUAL INCENTIVE PLAN
TABLE OF CONTENTS
Criteria for Participation.............................................. 3
Target Bonus............................................................ 3
Performance Measures.................................................... 4
Annual Incentive Threshold.............................................. 6
Bonus Adjustments....................................................... 6
Bonus Payout............................................................ 6
Computation of Total Shareholder Return................................. 7
Total Shareholder Return Incentive Scale................................ 8
ROCE Performance Measure Scale.......................................... 9
Example of AIP Award Calculation.....................................10-15
Peer Group..............................................................16
Employee Stock Ownership Guidelines.....................................17
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 3
1999 ANNUAL INCENTIVE PLAN
Ultramar Diamond Shamrock Corporation's Annual Incentive Plan ("AIP") is
designed to incentivize participants to enhance shareholder value.
In establishing this AIP and making decisions regarding participation and
awards, the Board of Directors and the Company considers the following:
. providing substantial compensation incentive for AIP participants to
ensure they are focused 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"), return on capital employed
("ROCE"), safety and environmental excellence ("SEE"), and individual
performance achievement ("IPA"). The payment of any awards is conditioned on the
Company's earnings and financial condition.
Awards will be determined by the 1999 results of the total Company and business
units using TSR (where applicable), ROCE, and SEE performance measures, and the
participant's IPA (where applicable). 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.
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 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.
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 4
III. Performance Measures
For the Chief Executive Officer ("CEO"), 60% of the bonus is determined by
the TSR performance measure, 30% by the ROCE (at the "Total Company"
measurement level) performance measure, and 10% by the SEE measure (at the
"Total Company" measurement level).
In the case of Executive Committee Members (other than the CEO), 40% of the
bonus is determined by the TSR performance measure, 30% by the ROCE (at the
"Total Company" measurement level) performance measure, 20% by the IPA
measure, and 10% by the SEE measure (at the "Total Company" measurement
level).
In the case of other participants (other than the CEO and other Executive
Committee Members), 70% of the bonus is determined by ROCE (at the
specified Unit measurement level) performance measure, 20% by the IPA
measure, and 10% by the SEE measure (at the specified Unit measurement
level).
The TSR, ROCE, SEE, and IPA 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.
ROCE Performance Measure
------------------------
ROCE performance is measured on "normalized" refining margins. "Normalized
ROCE" compares ROCE for the year recalculated at 1997 industry refining
margins to the target ROCE. The ROCE performance measure is determined on a
full-year basis.
The target ROCE component is established for the Company ("Total Company)
and one or more Units. The Compensation Committee establishes the target
ROCE
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 5
performance measures for the year. For 1999, the following ROCE measures
have been established:
UDS Business Unit 1999 Target
----------------- -----------
West Coast 10.0%
Southwest 13.0%
Northeast 22.0%
Corporate (Total Company) 12.0%
The ROCE results are compared against the ROCE Performance Measure Scale
(Chart III). The scale for ROCE at normalized margins reaches a maximum
200% of target award.
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.
SEE Performance Measure
-----------------------
The SEE performance measure consists of two components. The first measure
is the Health and Safety component and the second measure is the
Environmental Excellence component.
The Health and Safety component is based on the Lost Workday Accident
Frequency Rate ("LWAF"). LWAF goals have been established for each major
operating facility/area. The LWAF Rate is the "Lost Workday" frequency per
100 employees. A Lost Workday case is any injury that results in days away
from work, restricted duty, or both.
Environmental Excellence objectives are designed to meet the highest
priority elements of a facility or operation and/or avoidance of
significant environmental risk or liability. Environmental Excellence goals
will be developed on a facility-by-facility basis.
The SEE performance measure is determined on a full-year basis. The two SEE
performance measure components are weighted equally to determine the total
SEE performance measure. The scale for SEE reaches a maximum 200% of target
award.
IPA Performance Measure
-----------------------
A participant's IPA 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 areas 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
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 6
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
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), participants with
three years of eligibility and who have had incentive factors greater than
10% are required to hold shares of Company stock sufficient to meet any
applicable stock ownership guidelines that have been approved by the
Compensation Committee. The current applicable stock ownership guidelines
are set out in Chart VI. If you do not own the required number of shares on
December 31, 1999, you must either elect to receive 25% of your gross AIP
bonus in restricted stock or elect to purchase UDS stock in the amount of
25% of your gross AIP bonus.
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 received by
David Rico in the San Antonio Compensation Department no later than
December 31st of the AIP year.
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 7
CHART I
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 Shareholder 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>
1999 ANNUAL INCENTIVE PLAN
Page 8
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>
1999 ANNUAL INCENTIVE PLAN
Page 9
CHART III
ROCE PERFORMANCE MEASURE SCALE/1/
------------------------------
-----------------------------------------------------------
ROCE Achieved at
Payout % of Target Normalized Refining
Award Margins
-----------------------------------------------------------
200/2/ 115
130 100
60 85
0 less than 85
Results between points on the scale will be interpolated.
- -----------------------------------
/1/ ROCE as a percentage of budget.
/2/ Scale not continued above 200%.
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 10
CHART IV
EXAMPLE OF AIP AWARD CALCULATION:
Vice Presidents and Senior Managers
-----------------------------------
Assume the following for this example:
. the participant is in the Total Company (Corporate) category
. the target normalized ROCE is 10.00%
. ROCE at normalized refining margins is 10.75%
. ROCE at normalized refining margins performance is 107.5%
(10.75%/10.00%)
For an AIP participant earning $100,000 per year and a 20% target bonus, the
award is determined as follows:
1. The ROCE performance measure (70% of total award) portion of the bonus
payout:
By referring to the applicable ROCE Performance Measure Scale (Chart
III):
. ROCE results at normalized refining margins at 107.5% of target =
165.0% of target award
ROCE Performance Measure Percentage of Salary =
[(165.0% percentage of target award)] X 20% target bonus X 70%
ROCE performance measure weight = 23.1%
ROCE Performance Measure Bonus Payout = 23.1% X $100,000 = $23,100
2. The IPA performance measure (20% of total award for this participant)
portion of the bonus payout:
IPA Performance Measure Percentage of Salary =
20% IPA performance measure weight x 20% of target bonus x 110%
percentage of target award = 4.4%
IPA Performance Measure Bonus Payout = 4.4% of $100,000 = $4,400
3. The SEE performance measure (10% of total award for this participant)
portion of the bonus payout
SEE Performance Measure Percentage of Salary =
10% SEE performance measure weight x 20% of target bonus x 100%
percentage of target award = 2.0%
SEE Performance Measure Bonus Payout = 2.0% of $100,000 = $2,000
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 11
In this example this participant's total bonus would be $23,100 + $4,400 +
$2,000 = $29,500.
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 12
CHART IV
EXAMPLE OF AIP AWARD CALCULATION:
----------------------------------
Executive Committee Members (Other Than CEO)
--------------------------------------------
Assume the following for this example:
. the participant is in the Total Company (Corporate) category
. the target normalized ROCE is 10.00%
. ROCE at normalized refining margins is 10.75%
. ROCE at normalized refining margins performance is 107.5%
(10.75%/10.00%)
For an AIP participant earning $150,000 per year and a 25% target bonus, the
award is determined as follows:
1. The ROCE performance measure (30% of total award) portion of the bonus
payout:
By referring to the applicable ROCE Performance Measure Scale (Chart
III):
. ROCE results at normalized refining margins at 107.5% of target =
165.0% of target award
ROCE Performance Measure Percentage of Salary =
[(165.0% percentage of target award)] X 25% target bonus X 30% ROCE
performance measure weight = 12.375%
ROCE Performance Measure Bonus Payout = 12.375% X $150,000 = $18,562.50
2. The TSR performance measure (40% of total award) portion of the bonus
payout:
The Company's TSR point spread (by calendar quarter):
- ------------------------------------------------------------------------------
Quarter Actual Point Spread % Target Award*
- ------------------------------------------------------------------------------
1st + 7.5% 180%
2nd - 3.0% 0%
3rd + 4.0% 140%
4th + 6.0% 160%
Total 480%
- ------------------------------------------------------------------------------
TSR Performance Measure Percentage of Salary =
40% TSR performance measure weight x 25% of target bonus x 120%
percentage of target award = 12%
TSR Performance Measure Bonus Payout = 12% of $150,000 = $18,000
- ---------------------------
*Annualized by multiplying the point spread by 4 and applying each quarter's
result 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>
1999 ANNUAL INCENTIVE PLAN
Page 13
3. The IPA performance measure (20% of total award for this participant)
portion of the bonus payout:
IPA Performance Measure Percentage of Salary =
20% IPA performance measure weight x 25% of target bonus x 110%
percentage of target award = 5.5%
IPA Performance Measure Bonus Payout = 5.5% of $150,000 = $8,250
4. The SEE performance measure (10% of total award for this participant)
portion of the bonus payout
SEE Performance Measure Percentage of Salary =
10% SEE performance measure weight x 25% of target bonus x 100%
percentage of target award = 2.5%
SEE Performance Measure Bonus Payout = 2.5% of $150,000 = $3,750
In this example this participant's total bonus would be $18,562.50 + $18,000 +
$8,250 + $3,750 = $48,562.50.
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 14
CHART IV
EXAMPLE OF AIP AWARD CALCULATION:
----------------------------------
CEO
---
Assume the following for this example:
. the participant is in the Total Company (Corporate) category
. the target normalized ROCE is 10.00%
. ROCE at normalized refining margins is 10.75%
. ROCE at normalized refining margins performance is 107.5%
(10.75%/10.00%)
For an AIP participant earning $200,000 per year and a 30% target bonus, the
award is determined as follows:
1. The ROCE performance measure (30% of total award) portion of the bonus
payout:
By referring to the applicable ROCE Performance Measure Scale (Chart
III):
. ROCE results at normalized refining margins at 107.5% of target =
165.0% of target award
ROCE Performance Measure Percentage of Salary =
[(165.0% percentage of target award)] X 30% target bonus X 30% ROCE
performance measure weight = 14.85%
ROCE Performance Measure Bonus Payout = 14.85% X $200,000 = $29,700
2. The TSR performance measure (60% of total award) portion of the bonus
payout:
The Company's TSR point spread (by calendar quarter):
- ------------------------------------------------------------------------------
Quarter Actual Point Spread % Target Award*
- ------------------------------------------------------------------------------
1st + 7.5% 180%
2nd - 3.0% 0%
3rd + 4.0% 140%
4th + 6.0% 160%
Total 480%
- ------------------------------------------------------------------------------
TSR Performance Measure Percentage of Salary =
60% TSR performance measure weight x 30% of target bonus x 120%
percentage of target award = 21.6%
TSR Performance Measure Bonus Payout = 21.6% of $200,000 = $43,200
- ------------------------
*Annualized by multiplying the point spread by 4 and applying each quarter's
result 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>
1999 ANNUAL INCENTIVE PLAN
Page 15
3. The SEE performance measure (10% of total award for this participant)
portion of the bonus payout
SEE Performance Measure Percentage of Salary =
10% SEE performance measure weight x 30% of target bonus x 100%
percentage of target award = 3.0%
Individual Performance Measure Bonus Payout = 3.0% of $200,000 = $6,000
In this example this participant's total bonus would be $29,700 + $43,200 +
$6,000 = $78,900.
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 16
CHART V
PEER GROUP
----------
CROWN CENTRAL PETROLEUM
GIANT INDUSTRIES INC.
HOLLY CORP.
SUN COMPANY INC.
TESORO PETROLEUM
TOSCO CORP.
USX-MARATHON GROUP
VALERO ENERGY CORP.
<PAGE>
1999 ANNUAL INCENTIVE PLAN
Page 17
CHART VI
EMPLOYEE STOCK OWNERSHIP REQUIREMENTS
-------------------------------------
----------------------------------------------------------------
Employee Group Guideline
----------------------------------------------------------------
CEO 3x Annual Base Pay
Senior Vice Presidents and Above 2x Annual Base Pay
Vice Presidents* 1x Annual Base Pay
Senior Managers** 1x Annual Base Pay
----------------------------------------------------------------
* Vice Presidents of UDS or any of its subsidiaries
** Participants with incentive factors greater than 10%
Shares to be counted toward ownership:
. personal or beneficially owned shares
. Company-sponsored program shares (e.g. ESOP, 401(k), Canadian Savings
Plan)
. restricted shares
. for senior managers only - the value of vested stock options which
exceed the exercise price
A Participant's ownership requirement becomes effective upon completion of three
years' participation in the Annual Incentive Plan with an incentive factor level
of greater than 10%. For example:
. If you began participating in the Annual Incentive Plan in 1997 and you
participated with an incentive factor level of 15% or higher in 1997,
1998, and 1999, your ownership requirement becomes effective on December
31, 1999.
. If you began participating in the Annual Incentive Plan in 1997 and
participated in 1997 with an incentive factor level of 10%, and in 1998
and 1999 with a factor of 15%, your ownership requirement becomes
effective on December 31, 2000.
Certification of ownership level will be required before AIP bonus payout.
<PAGE>
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of October 23,
1996, but effective as provided herein, is made and entered into by and between
Diamond Shamrock, Inc., a Delaware corporation (the "Company" or "Diamond
Shamrock, Inc.", as the context requires), and William R. Klesse (the
"Executive").
WHEREAS, the Executive has been serving as a senior executive
officer of Diamond Shamrock, Inc.;
WHEREAS, the Executive is a party to an Employment Agreement with
Diamond Shamrock, Inc., dated as of February 6, 1996 (the "Prior Agreement");
WHEREAS, pursuant to the Agreement and Plan of Merger between
Ultramar Corporation, a Delaware corporation ("Ultramar Corporation") and
Diamond Shamrock, Inc., dated as of September 22, 1996 (the "Merger Agreement"),
as of the effective time of the Merger (the "Effective Date"), Diamond Shamrock,
Inc. will be merged with and into Ultramar Corporation, with Ultramar
Corporation as the surviving entity (the "Merger");
WHEREAS, pursuant to the Merger Agreement, the Company is authorized
to enter into this Agreement with Executive;
WHEREAS, the Company considers it in the best interests of its
stockholders to foster the continuous employment of certain key management
personnel;
WHEREAS, the Company recognizes that, as is the case for most
publicly held companies, the possibility of a Change in Control (as defined
herein) exists;
WHEREAS, the Company wishes to assure itself of both present and
future continuation of management in light of the Merger and in the event of a
Change in Control subsequent to the Merger;
WHEREAS, the Company wishes to employ the Executive and the
Executive is willing to render services, both on the terms and subject to the
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained, it is agreed as follows:
<PAGE>
1. Employment.
1.1 The Company hereby agrees to employ the Executive and the
Executive hereby agrees to undertake employment with the Company upon the terms
and conditions herein set forth.
1.2 Employment will be for a term commencing on the Effective Date
and, subject to earlier expiration upon the Executive's termination under
Section 5, expiring three years from the Effective Date (the "Term").
Notwithstanding the previous sentence, this Agreement and the employment of the
Executive will be automatically renewed and the Term extended, subject to
Section 5, for successive one-year periods upon the terms and conditions set
forth herein, commencing on the third anniversary of the date of this Agreement,
and on each anniversary date thereafter, unless either party to this Agreement
gives the other party written notice (in accordance with Section 12.5) of such
party's intention to terminate this Agreement at least three months prior to the
end of such initial or extended term. For purposes of this Agreement, any
reference to the "Term" of this Agreement will include the original term and any
extension thereof.
2. Position and Duties.
2.1 Position and Duties. During the Term, the Executive will serve
as Executive Vice President, Logistics and Supply, of the Company and will have
such duties, functions, responsibilities and authority as are (i) consistent
with the Executive's position as Executive Vice President, Logistics and Supply,
of the Company; or (ii) assigned to his office in the Company's bylaws; or (iii)
reasonably assigned to him by the Company's Board of Directors (the "Board").
2.2 Commitment. During the Term, the Executive will be the Company's
full-time employee and, except as may otherwise be approved in advance in
writing by the Board, and except during vacation periods and reasonable periods
of absence due to sickness, personal injury or other disability, the Executive
will devote substantially all of his business time and attention to the
performance of his duties to the Company.
3. Place of Performance. In connection with his employment during the
Term, unless otherwise agreed by the Executive, the Executive will be based at
the Company's principal executive offices. The Executive will undertake normal
business travel on behalf of the Company.
4. Compensation and Related Matters.
4.1 Compensation and Benefits.
(i) Annual Base Salary. During the Term of this Agreement, the
Company will pay to the Executive an annual base
2
<PAGE>
salary of not less than $335,000, which annual base salary may be modified from
time to time by the Board (or the Compensation Committee thereof) in its sole
discretion, payable at the times and in the manner consistent with the Company's
general policies regarding compensation of executive employees. The Board may
from time to time authorize such additional compensation to the Executive, in
cash or in property, as the Board may determine in its sole discretion to be
appropriate.
(ii) Annual Incentive Compensation. If the Board (or the
Compensation Committee thereof) authorizes any cash incentive compensation or
approves any other management incentive program or arrangement, the Executive
will be eligible to participate in such plan, program or arrangement under the
general terms and conditions applicable to executive and management employees;
provided, however, that so long as the Executive remains employed by the Company
at the end of the applicable fiscal year, (a) the annual cash incentive
compensation paid by the Company to the Executive for the Company's fiscal year
that includes the Effective Date, aggregated with any other annual incentive
compensation earned by the Executive for calendar year 1996, will be in an
amount not less than the greater of (1) 40% of the Executive's highest annual
base salary rate during the fiscal year to which such incentive compensation
relates, and (2) the Executive's actual annual incentive compensation earned
during such fiscal year, as determined by the Company's Board (or the
Compensation Committee thereof), and (b) the cash incentive compensation paid to
the Executive for the Company's next succeeding fiscal year will be in an amount
not less than the greater of (1) 40% of the Executive's highest annual base
salary rate during the fiscal year to which such incentive compensation relates,
and (2) the Executive's actual annual incentive compensation during such fiscal
year, as determined by the Board (or the Compensation Committee thereof). Except
as set forth in the proviso to the preceding sentence, nothing in this Section
4.1(ii) will guarantee to the Executive any specific amount of incentive
compensation, or prevent the Board (or the Compensation Committee thereof) from
establishing performance goals and compensation targets applicable only to the
Executive.
4.2 Executive Benefits. In addition to the compensation described in
Section 4.1, the Company will make available to the Executive and his eligible
dependents, subject to the terms and conditions of the applicable plans,
including without limitation the eligibility rules, participation in all
Company-sponsored employee benefit plans including all employee retirement
income and welfare benefit policies, plans, programs or arrangements in which
senior executives of the Company participate, including any stock option, stock
purchase, stock appreciation, savings, pension, supplemental executive
retirement or other retirement income or welfare benefit, disability, salary
continuation, and any other deferred compensation, incentive compensation, group
and/or executive life, health,
3
<PAGE>
medical/hospital or other insurance (whether funded by actual insurance or
self-insured by the Company), expense reimbursement or other employee benefit
policies, plans, programs or arrangements or any equivalent successor policies,
plans, programs or arrangements that may now exist or be adopted hereafter by
the Company.
4.3 Expenses. The Company will promptly reimburse the Executive for
all travel and other business expenses the Executive incurs in order to perform
his duties to the Company under this Agreement in a manner commensurate with the
Executive's position and level of responsibility with the Company, and in
accordance with the Company's policy regarding substantiation of expenses.
5. Termination. Notwithstanding the Term specified in Section 1.2, the
termination of the Executive's employment hereunder will be governed by the
following provisions:
5.1 Death. In the event of the Executive's death during the Term,
the Company will pay to the Executive's beneficiaries or estate, as appropriate,
promptly after the Executive's death, (i) the unpaid annual base salary to which
the Executive is entitled, pursuant to Section 4.1, through the date of the
Executive's death, and (ii) for any accrued but unused vacation days, to the
extent and in the amounts, if any, provided under the Company's usual policies
and arrangements. This Section 5.1 will not limit the entitlement of the
Executive's estate or beneficiaries to any death or other benefits then
available to the Executive under any life insurance, stock ownership, stock
options, or other benefit plan or policy that is maintained by the Company for
the Executive's benefit.
5.2 Disability.
(i) If the Company determines in good faith that the Executive
has incurred a Disability (as defined below) during the Term, the Company may
give the Executive written notice of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company will
terminate effective on the 30th day after receipt of such notice by the
Executive, provided that within the 30 days after such receipt, the Executive
will not have returned to full-time performance of his duties. The Executive
will continue to receive his annual base salary and benefits until the date of
termination. In the event of the Executive's Disability, the Company will pay
the Executive, promptly after the Executive's termination, (a) the unpaid annual
base salary to which he is entitled, pursuant to Section 4.1, through the date
of the Executive's termination, (b) for any accrued but unused vacation days, to
the extent and in the amounts, if any, provided under the Company's usual
policies and arrangements, and (c) a lump sum in cash in an amount equal to 50%
of his annual base salary at the time of termination. This Section 5.2 will not
limit the entitlement of
4
<PAGE>
the Executive, the Executive's estate or beneficiaries to any disability or
other benefits then available to the Executive under any disability insurance or
other benefit plan or policy that is maintained by the Company for the
Executive's benefit.
(ii) For purposes of this Agreement, "Disability" will mean
the Executive's incapacity due to physical or mental illness substantially to
perform his duties on a full-time basis for six consecutive months and within 30
days after a notice of termination is thereafter given by the Company the
Executive will not have returned to the full-time performance of the Executive's
duties; provided, however, if the Executive disagrees with a determination to
terminate him because of Disability, the question of the Executive's disability
will be subject to the certification of a qualified medical doctor agreed to by
the Company and the Executive or, in the event of the Executive's incapacity to
designate a doctor, the Executive's legal representative. In the absence of
agreement between the Company and the Executive, each party will nominate a
qualified medical doctor and the two doctors will select a third doctor, who
will make the determination as to Disability. In order to facilitate such
determination, the Executive will, as reasonably requested by the Company, (a)
make himself available for medical examinations by a doctor in accordance with
this Section 5.2(ii), and (b) grant the Company and any such doctor access to
all relevant medical information concerning him, arrange to furnish copies of
medical records to such doctor and use his best efforts to cause his own doctor
to be available to discuss his health with such doctor.
5.3 Cause.
(i) The Company may terminate the Executive's employment
hereunder for Cause (as defined below). In the event of the Executive's
termination for Cause, the Company will promptly pay to the Executive (or his
representative) the unpaid annual base salary to which he is entitled, pursuant
to Section 4.1, through the date the Executive is terminated and the Executive
will be entitled to no other compensation, except as otherwise due to him under
applicable law.
(ii) For purposes of this Agreement, the Company will have
"Cause" to terminate the Executive's employment hereunder upon a finding by the
Board that (a) the Executive committed an illegal act or acts that were intended
to and did defraud the Company, (b) the Executive engaged in gross negligence or
gross misconduct against the Company or another employee, or in carrying out his
duties and responsibilities, or (c) the Executive materially breached any of the
express covenants set forth in Section 9.1, 9.2 or 9.3. The Company will not
have Cause unless and until the Company provides the Executive with written
notice that the Company intends to terminate his employment for Cause. Such
written notice will specify the particular act or acts, or failure to act, that
is or
5
<PAGE>
are the basis for the decision to so terminate the Executive's employment for
Cause. The Employee will be given the opportunity within 30 calendar days of the
receipt of such notice to meet with the Board to defend such act or acts, or
failure to act. The Executive's employment by the Company automatically will be
terminated under this Section 5.3 for Cause as of the receipt of the written
notice from the Company or, if later, the date specified in such notice. A
notice given under this Section 5.3 must set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment for Cause, and if the termination date is other than the
date of receipt of such notice, specify the date on which the Executive's
employment is to be terminated (which date will not be earlier than the date on
which such notice is given in accordance with Section 13.5). Such notice must be
given no later than 180 business days after a director of the Company (excluding
the Executive, if applicable) first has actual knowledge of the events
justifying the purported termination.
5.4 Termination.
(i) Involuntary Termination. The Executive's employment
hereunder may be terminated by the Company for any reason by written notice as
provided in Section 12.5. The Executive will be treated for purposes of this
Agreement as having been involuntarily terminated by the Company other than for
Cause if the Executive terminates his employment with the Company for any of the
following reasons (each, a "Good Reason"): without the Executive's written
consent, (a) the Company has breached any material provision of this Agreement
and within 30 days after notice thereof from the Executive, the Company fails to
cure such breach; (b) a successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company fails to assume liability under the
Agreement; (c) at any time after the Company has notified the Executive pursuant
to Section 1.2 that the Company does not intend to renew the Agreement and the
Executive's employment at the end of the Term (including any previous renewals)
(rather than to allow the Agreement automatically to renew); (d) a material
reduction in the aggregate benefits described by Section 4.2 (other than
stock-based compensation) provided to the Executive, unless such decrease is
required by law or is applicable to all employees of the Company eligible to
participate in any employee benefit arrangement affected by such reduction; (e)
a significant reduction in the Executive's duties or the addition of duties,
which in either case are materially inconsistent with the Executive's title or
position; or (f) a reduction in the Executive's annual base salary.
(ii) Voluntary Termination. The Executive may voluntarily
terminate the Agreement at any time by notice to the Company as provided in
Section 12.5. The Executive's death or Disability (as defined in Section
5.2(ii)) during the term of the
6
<PAGE>
Agreement will constitute a voluntary termination of employment for purposes of
eligibility for termination payments and benefits as provided in Section 5.5,
but for no other purpose.
5.5 Termination Payments and Benefits.
(i) Form and Amount. Upon the Executive's involuntary
termination, other than for Cause, (a) subject to Section 5.5(iii), the Company
will pay or provide to the Executive (1) his annual base salary and benefits
until the date of termination, (2) within five business days after termination
of his employment, a lump sum cash payment equal in amount to three times the
sum of (x) the Executive's highest annual base salary in effect during the three
years prior to his date of termination, and (y) the highest annual incentive
compensation earned by the Executive during the same three-year period, (3)
three additional years of age and service credit under the qualified and
nonqualified defined benefit retirement plans of the Company in which the
Executive participates at the time of termination; provided, however, that in
the case of a qualified defined benefit pension plan, the present value of the
additional benefit the Executive would have accrued if he had been credited for
all purposes with the additional years of age and service under such plan as of
the Executive's date of termination with the Company will be paid in a lump sum
in cash within five business days after termination of the Executive's
employment, and (4) for a period of one year after termination of his
employment, the continuation of the employee welfare benefits set forth in
Section 4.2 except as offset by benefits paid by other sources as set forth in
Section 8, or as prohibited by law or as a condition of maintaining the
tax-favored status of any such benefits to the Company or its employees; (b) the
Executive's benefit under the applicable supplemental executive retirement plan
will be not less than the benefit the Executive would have received under the
terms of the corresponding plan (including any individual modifications thereof)
applicable to the Executive as in effect immediately prior to the Effective Date
determined as if the Executive had continued employment under the terms of such
corresponding plan (and modifications) until his actual termination of
employment. For purposes of Section 5.5(i) (a) (2), the three-year period will
include employment with Diamond Shamrock, Inc. or any of its affiliates.
(ii) Maintenance of Benefits. During the period set forth in
Section 5.5(i) (a) (4), the Company will use its best efforts to maintain in
full force and effect for the continued benefit of the Executive all referenced
benefits or will arrange to make available to the Executive benefits
substantially similar to those that the Executive would otherwise have been
entitled to receive if his employment had not been terminated. Such benefits
will be provided to the Executive on the same terms and conditions (including
employee contributions toward the premium payments) under which the Executive
was entitled to participate immediately prior to his termination.
7
<PAGE>
(iii) Release. No benefit will be paid or made available under
Section 5.5(i) (a) unless the Executive first executes a release in the form
attached as an exhibit to this Agreement, and (b) to the extent any portion of
such release is subject to the seven-day revocation period prescribed by the Age
Discrimination in Employment Act of 1967, as amended, or to any similar
revocation period in effect on the date of termination of Executive's
employment, such revocation period has expired.
6. Chance in Control Provisions.
6.1 Impact of Change in Control. In the event of a "Change in
Control" of the Company, as defined in Section 6.2, (i) the Company will cause
all cash benefits due under this Agreement to be secured by an irrevocable trust
for the benefit of the Executive, the assets of which will be subject to the
claims of the Company's creditors, and will transfer to such trust cash and
other property adequate to satisfy all of the expenses of the trust for at least
five years after the Change in Control and any of the Company's actual and
potential cash obligations under this Agreement, (ii) if the Executive's
employment is involuntarily terminated without Cause after the Change in
Control, (A) the covenants of Sections 9.1 and 10 will be inapplicable to the
Executive, and (B) the covenant of Section 9.2 will expire on the third
anniversary of the date of termination of the Executive's employment, and (iii)
the definition of Good Reason, as set forth in Section 5.4(i) above, will be
expanded to include the following:
(a) A good faith determination by the Executive that, as a
result of the Change in Control and a change in circumstances thereafter
significantly affecting his positions, including a change in the scope of
business or other activities for which he was responsible, he has been rendered
substantially unable to carry out, has been substantially hindered in the
performance of, or has suffered a substantial reduction in, any of the
authorities, powers, functions, responsibilities or duties attached to any of
the Executive's positions; the Executive's determination will be presumed to
have been made in good faith unless otherwise shown by the Company by clear and
convincing evidence;
(b) The relocation of the Company's principal executive
offices (but only if, immediately prior to the Change in Control, the
Executive's principal place of employment was at the Company's principal
executive offices), or requirement that the Executive have as his principal
location of work any location that is, in excess of 50 miles from the location
thereof immediately preceding the Change in Control or to travel away from his
home or office significantly more often that required immediately prior to the
Change in Control; or
8
<PAGE>
(c) For any reason, or without reason, during the 30-day
period immediately following the first anniversary of the first occurrence of a
Change in Control.
6.2 Definition of Change in Control. For purposes of this Agreement,
a "Change in Control" will be deemed to occur if at any time during the term of
the Agreement any of the following events will occur:
(i) The Company is merged, consolidated or reorganized into
or with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization, less than 50% of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate by the holders of
Voting Stock (as that term is hereafter defined) of the Company immediately
prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation or other legal person,
and as a result of such sale or transfer, less than 50% of the combined voting
power of the then-outstanding voting securities of such corporation or person
are held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale;
(iii) There is a report filed on Schedule 13D or Schedule
14D-l (or any successor schedule, form or report), each as promulgated pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any
person (as the term "person" is used in Section 13(d) (3) or Section 14(d) (2)
of the Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 20% or more of
the combined voting power of the then-outstanding securities of the Company
entitled to vote generally in the election of Directors of the Company ("Voting
Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or report
or item therein) that a change in control of the Company has or may have
occurred or will or may occur in the future pursuant to any then-existing
contract or transaction; or
(v) If during the period of two consecutive years
individuals who at the beginning of any such period constitute the Directors of
the Company cease for any reason to constitute at least a majority thereof
unless the election, or the nomination for election by the Company's
shareholders, of each Director of the Company first elected during such period
was approved by a vote of at least two-thirds of the Directors of the
9
<PAGE>
Company then still in office who were Directors of the Company at the beginning
of any such period (excluding for this purpose the election of any new Director
in connection with an actual or threatened election or proxy contest).
Notwithstanding the foregoing provisions of Section 6.2(iii) or (iv) hereof,
unless otherwise determined in a specific case by majority vote of the Board (or
the Compensation Committee thereof), a "Change in Control" will not be deemed to
have occurred for purposes of this Agreement solely because the Company, an
entity in which the Company directly or beneficially owns 50% or more of the
voting securities of such entity, any Company-sponsored employee stock ownership
plan or any other employee benefit plan of the Company either files or becomes
obligated to file a report or a proxy statement under or in response to Schedule
13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) under the Exchange Act, disclosing beneficial
ownership by it of shares of voting securities of the Company, whether in excess
of 20% or otherwise, or because the Company reports that a change in control of
the Company has or may have occurred or will or may occur in the future by
reason of such beneficial ownership. Notwithstanding the foregoing provisions of
Section 6.2, the Merger will not constitute a Change in Control.
7. Certain Additional Payments by the Company:
(i) Anything in this Agreement to the contrary notwithstanding, if
it is determined (as hereafter provided) that any payment or distribution by the
Company to or for the benefit of the Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise pursuant to or by reason of any other agreement, policy, plan, program
or arrangement, including without limitation any stock option, stock
appreciation right or similar right, or the lapse or termination of any
restriction on or the vesting or exercisability of any of the foregoing (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code (or any successor provision thereto) by reason of being "contingent on a
change in ownership or control" of Diamond Shamrock, Inc. or the Company, within
the meaning of Section 280G of the Code (or any successor provision thereto) or
to any similar tax imposed by state or local law, or any interest or penalties
with respect to such excise tax (such tax or taxes, together with any such
interest and penalties, are hereafter collectively referred to as the "Excise
Tax"), then the Executive will be entitled to receive an additional payment or
payments (a "Gross-Up Payment") in an amount such that, after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. No Gross-Up Payment will be made with respect to the
Excise Tax, if any, attributable to (a) any incentive
10
<PAGE>
stock option, as defined by Section 422 of the Code ("ISO") granted prior to the
execution of this Agreement (unless a comparable Gross-Up Payment has
theretofore been made available with respect to such option), or (b) any stock
appreciation or similar right, whether or not limited, granted in tandem with
any ISO described in clause (a).
(ii) Subject to the provisions of Section 7(vi) hereof, all
determinations required to be made under this Section 7, including whether an
Excise Tax is payable by the Executive and the amount of such Excise Tax and
whether a Gross-Up Payment is required and the amount of such Gross-Up Payment,
will be made by a nationally recognized firm of certified public accountants
(the "Accounting Firm") selected by the Executive in his sole discretion. The
Executive will direct the Accounting Firm to submit its determination and
detailed supporting calculations to both the Company and the Executive within 15
calendar days after the Termination Date, if applicable, and any other such time
or times as may be requested by the Company or the Executive. If the Accounting
Firm determines that any Excise Tax is payable by the Executive, the Company
will pay the required Gross-Up Payment to the Executive within five business
days after receipt of such determination and calculations. If the Accounting
Firm determines that no Excise Tax is payable by the Executive, it will, at the
same time as it makes such determination, furnish the Executive with an opinion
that he has substantial authority not to report any Excise Tax on his federal,
state, local income or other tax return. Any determination by the Accounting
Firm as to the amount of the Gross-Up Payment will be binding upon the Company
and the Executive. As a result of the uncertainty in the application of Section
4999 of the Code (or any successor provision thereto) and the possibility of
similar uncertainty regarding applicable state or local tax law at the time of
any determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 7(vi) hereof and the Executive thereafter is required to make a
payment of any Excise Tax, the Executive will direct the Accounting Firm to
determine the amount of the Underpayment that has occurred and to submit its
determination and detailed supporting calculations to both the Company and the
Executive as promptly as possible. Any such Underpayment will be promptly paid
by the Company to, or for the benefit of, the Executive within five business
days after receipt of such determination and calculations.
(iii) The Company and the Executive will each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm
11
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in connection with the preparation and issuance of the determination
contemplated by Section 7(ii) hereof.
(iv) The federal, state and local income or other tax returns
filed by the Executive will be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive will make proper payment of the amount of any
Excise Tax, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If prior
to the filing of the Executive's federal income tax return, or corresponding
state or local tax return, if relevant, the Accounting Firm determines that the
amount of the Gross-Up Payment should be reduced, the Executive will within
five business days pay to the Company the amount of such reduction.
(v) The fees and expenses of the Accounting Firm for its
services in connection with the determinations and calculations contemplated by
Sections 7(ii) and (iv) hereof will be borne by the Company. If such fees and
expenses are initially paid by the Executive, the Company will reimburse the
Executive the full amount of such fees and expenses within five business days
after receipt from the Executive of a statement therefor and reasonable evidence
of his payment thereof.
(vi) The Executive will notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification will be given as
promptly as practicable but no later than 10 business days after the Executive
actually receives notice of such claim and the Executive will further apprise
the Company of the nature of such claim and the date on which such claim is
requested to be paid (in each case, to the extent known by the Executive). The
Executive will not pay such claim prior to the earlier of (a) the expiration of
the 30-calendar-day period following the date on which he gives such notice to
the Company and (b) the date that any payment of amount with respect to such
claim is due. If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
will:
(1) provide the Company with any written records or documents
in his possession relating to such claim reasonably requested by the
Company;
(2) take such action in connection with contesting such claim
as the Company will reasonably request in writing from time to time,
including without limitation accepting legal representation with
respect to such
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claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(3) cooperate with the Company in good faith in order
effectively to contest such claim; and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company will bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and will indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section 7(vi), the Company will control all proceedings taken in connection with
the contest of any claim contemplated by this Section 7(vi) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company will determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company will advance the amount of such payment to the Executive on an
interest-free basis and will indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax, including interest or
penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
will be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive will be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(vii) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 7(vi) hereof, the Executive receives
any refund with respect to such claim, the Executive will (subject to the
Company's complying with the requirements of Section 7(vi) hereof) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after any taxes applicable thereto). If, after the receipt by
the Executive of an amount advanced by the Company
13
<PAGE>
pursuant to Section 7(vi) hereof, a determination is made that the Executive
will not be entitled to any refund with respect to such claim and the Company
does not notify the Executive in writing of its intent to contest such denial or
refund prior to the expiration of 30 calendar days after such determination,
then such advance will be forgiven and will not be required to be repaid and the
amount of such advance will offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid pursuant to this Section 7.
8. Mitigation and Offset. The Executive is under no obligation to mitigate
damages or the amount of any payment or benefit provided for hereunder by
seeking other employment or otherwise; provided, however, that the Executive's
coverage under the Company's welfare benefit plans will be reduced to the extent
that the Executive becomes covered under any comparable employee benefit plan
made available by another employer and covering the same type of benefits. The
Executive will report to the Company any such benefits actually received by him.
9. Competition; Confidentiality; Nonsolicitation
9.1 (i) Subject to Section 6.1(ii), the Executive hereby covenants
and agrees that during the Term and for one year following the Term he will not,
without the prior written consent of the Company, engage in Competition (as
defined below) with the Company. For purposes of this Agreement, if the
Executive takes any of the following actions he will be engaged in
"Competition": engaging in or carrying on, directly or indirectly, any
enterprise, whether as an advisor, principal, agent, partner, officer, director,
employee, stockholder, associate or consultant to any person, partnership,
corporation or any other business entity, that is principally engaged in the
business of refining and/or marketing oil or related products in States or
Provinces in which the Company (or any division or segment thereof) has
operations; provided, however, that "Competition" will not include (a) the mere
ownership of securities in any enterprise and exercise of rights appurtenant
thereto or (b) participation in management of any enterprise or business
operation thereof other than in connection with the competitive operation of
such enterprise.
(ii) Subject to Section 6.1(ii), the Executive hereby
covenants and agrees that during the Term and for three years following the Term
he will not assist a third party in preparing or making an unsolicited bid for
the Company, engaging in a proxy contest with the Company, or engaging in any
other similar activity.
9.2 During the Term, the Company agrees that it will disclose to
Executive its confidential or proprietary information (as defined in this
Section 9.2) to the extent necessary for Executive to carry out his obligations
under this Agreement. Subject to Section 6.1(ii), the Executive hereby covenants
and
14
<PAGE>
agrees that he will not, without the prior written consent of the Company,
during the Term or thereafter disclose to any person not employed by the
Company, or use in connection with engaging in Competition with the Company, any
confidential or proprietary information of the Company. For purposes of this
Agreement, the term "confidential or proprietary information" will include all
information of any nature and in any form that is owned by the Company and that
is not publicly available or generally known to persons engaged in businesses
similar or related to those of the Company. Confidential information will
include, without limitation, the Company's financial matters, customers,
employees, industry contracts, and all other secrets and all other information
of a confidential or proprietary nature. The foregoing obligations imposed by
this Section 9.2 will cease if such confidential or proprietary information will
have become, through no fault of the Executive, generally known to the public or
the Executive is required by law to make disclosure (after giving the Company
notice and an opportunity to contest such requirement).
9.3 Subject to Section 6.1(ii), the Executive hereby covenants and
agrees that during the Term and for one year thereafter he will not attempt to
influence, persuade or induce, or assist any other person in so persuading or
inducing, any employee of the Company to give up, or to not commence, employment
or a business relationship with the Company.
9.4 Executive acknowledges and agrees that the remedy at law
available to the Company for breach of any of his post-termination obligations
under Sections 9.1, 9.2 and 9.3 would be inadequate and that damages flowing
from such a breach may not readily be susceptible to being measured in monetary
terms. Accordingly, Executive acknowledges, consents and agrees that, in
addition to any other rights or remedies which the Company may have at law, in
equity or under this Agreement, upon adequate proof of his violation of any such
provision of this Agreement, the Company will be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened
or further breach, without the necessity of proof of actual damage.
10. Post-termination Assistance. Subject to Section 6.1(ii), the Executive
agrees that after his employment with the Company has terminated he will
provide, upon reasonable notice, such information and assistance to the Company
as may reasonably be requested by the Company in connection with any audit,
governmental investigation or litigation in which it or any of its affiliates is
or may become a party; provided, however, that (i) the Company agrees to
reimburse the Executive for any related out-of-pocket expenses, including travel
expenses, and to pay the Executive reasonable compensation for his time based on
his rate of annual salary at the time of termination and (ii) any such
assistance may not unreasonably interfere with the then-current employment of
the Executive.
15
<PAGE>
11. Survival. The expiration or termination of the Term will not impair
the rights or obligations of any party hereto that accrue hereunder prior to
such expiration or termination, except to the extent specifically stated herein.
In addition to the foregoing, the Executive's covenants contained in Sections
9.1, 9.2, 9.3 and 10 and the Company's obligations under Sections 5, 7 and 12.1
will survive the expiration or termination of Executive's employment.
12. Miscellaneous Provisions.
12.1 Legal Fees and Expenses. Without regard to whether the
Executive prevails, in whole or in part, in connection therewith, the Company
will pay and be financially responsible for 100% of any and all attorneys' and
related fees and expenses incurred by the Executive in connection with any
dispute associated with the interpretation, enforcement or defense of the
Executive's rights under this Agreement by litigation or otherwise; provided
that, in regard to such dispute, the Executive has not acted in bad faith or
with no colorable claim of success. All such fees and expenses will be paid by
the Company as incurred by the Executive on a monthly basis upon an undertaking
by the Executive to repay such advanced amounts if a court determines, in a
decision against which no appeal may be taken or with respect to which the time
period to appeal has expired, that he acted in bad faith or with no colorable
claim of success.
12.2 Binding on Successors. This Agreement will be binding upon and
inure to the benefit of the Company, the Executive and each of their respective
successors, assigns, personal and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable.
12.3 Governing Law. This Agreement will be governed, construed,
interpreted and enforced in accordance with the substantive laws of the State of
Delaware, without regard to conflicts of law principles.
12.4 Severability. Any provision of this Agreement that is deemed
invalid, illegal or unenforceable in any jurisdiction will, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provisions of this Agreement
invalid, illegal, or unenforceable in any other jurisdiction. If any covenant
should be deemed invalid, illegal or unenforceable because its scope is
considered excessive, such covenant will be modified so that the scope of the
covenant is reduced only to the minimum extent necessary to render the modified
covenant valid, legal and enforceable.
12.5 Notices. For all purposes of this Agreement, all
communications, including without limitation notices, consents,
16
<PAGE>
requests or approvals, required or permitted to be given hereunder will be in
writing and will be deemed to have been duly given when hand delivered or
dispatched by electronic facsimile transmission (with receipt thereof
confirmed), or five business days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid, or
three business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS, or Purolator, addressed to the
Company (to the attention of the Secretary of the Company) at its principal
executive offices and to the Executive at his principal residence, or to such
other address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address will be effective
only upon receipt.
(i) To The Company. If to the Company, addressed to the
attention of General Counsel at 9830 Colonnade Boulevard; San Antonio, Texas
78230.
(ii) To the Executive. If to the Executive, to him in care of
the Company at the above address.
12.6 Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same Agreement.
12.7 Entire Agreement. The terms of this Agreement are intended by
the parties to be the final expression of their agreement with respect to the
Executive's employment by the Company and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend that this
Agreement will constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative or other legal proceeding to vary the terms of this Agreement.
12.8 Amendments: Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, approved by the
Company and signed by the Executive and the Company. Failure on the part of
either party to complain of any action or omission, breach or default on the
part of the other party, no matter how long the same may continue, will never be
deemed to be a waiver of any rights or remedies hereunder, at law or in equity.
The Executive or the Company may waive compliance by the other party with any
provision of this Agreement that such other party was or is obligated to comply
with or perform only through an executed writing; provided, however, that such
waiver will not operate as a waiver of, or estoppel with respect to, any other
or subsequent failure.
12.9 No Inconsistent Actions. The parties will not voluntarily
undertake or fail to undertake any action or course of action that is
inconsistent with the provisions or essential
17
<PAGE>
intent of this Agreement. Furthermore, it is the intent of the parties hereto to
act in a fair and reasonable manner with respect to the interpretation and
application of the provisions of this Agreement.
12.10 Headings and Section References. The headings used in this
Agreement are intended for convenience or reference only and will not in any
manner amplify, limit, modify or otherwise be used in the construction or
interpretation of any provision of this Agreement. All section references are to
sections of this Agreement, unless otherwise noted.
13. Effectiveness. Prior Agreement and Consent. This Agreement will become
effective upon, and the Prior Agreement will terminate immediately prior to, the
Effective Date, whereupon all references to the "Company" herein will be treated
as references to Ultramar Corporation. By executing this Agreement, Executive
hereby consents to the assumption of this Agreement by Ultramar Corporation upon
the Effective Date. Notwithstanding any other provision of this Agreement, if
the Merger Agreement is terminated prior to the Effective Date, this Agreement
will have no further force or effect, and the Prior Agreement will continue in
effect as though this Agreement had not been entered into.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written but effective as provided in Section 13.
/s/ William R. Klesse
--------------------------------------
William R. Klesse
DIAMOND SHAMROCK, INC.,
a Delaware corporation
By: /s/ Roger R. Hemminghaus
----------------------------------
Roger R. Hemminghaus
Chief Executive Officer and
President
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Exhibit
GENERAL RELEASE OF ALL CLAIMS
This General Release of all Claims (this "Agreement") is entered into by
and between ______________ ("Executive") and Ultramar Diamond Shamrock
Corporation (including its subsidiaries) (collectively the "Company") effective
as of _______________________.
In consideration of the promises set forth in the employment agreement
between Executive and the Company, dated ____________ 1996, as amended as of the
effective date hereof (the "Employment Agreement"), as well as any promises set
forth in this Agreement, Executive and the Company agree as follows:
(1) Employment Agreement Entitlements
The Company will provide Executive the post-termination payments and
benefits to which he is entitled under the Employment Agreement.
(2) Return of Property
All Company files, access keys, desk keys, ID badges and credit cards, and
such other property of the Company as the Company may reasonably request,
in Executive's possession must be returned no later than the date of
Executive's termination from the Company (the "Termination Date").
(3) General Release and Waiver of Claims
Except as provided in the last sentence of this paragraph (3), Executive
hereby unconditionally and forever releases, discharges and waives any and
all claims of any nature whatsoever, whether legal, equitable or
otherwise, which Executive may have against the Company arising at any
time on or before the Termination Date, other than with respect to the
obligations of the Company to the Executive under the Employment
Agreement. This release of claims extends to any and all claims of any
nature whatsoever, other than with respect to the obligations of the
Company to the Executive under the Employment Agreement, whether known,
unknown or capable or incapable of being known as of the Termination Date
of thereafter. This Agreement is a release of all claims of any nature
whatsoever by Executive against the Company, other than with respect to
the obligations of the Company to the Executive under the Employment
Agreement, and includes, other than as herein provided, any and all
claims, demands, causes of action, liabilities whether known or unknown
including those caused by, arising from or related to Executive's
employment relationship with the Company
19
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including, but without limitation, any and all alleged discrimination or
acts of discrimination which occurred or may have occurred on or before
the Termination Date based upon race, color, sex, creed, national origin,
age, disability or any other violation of any Equal Employment Opportunity
Law, ordinance, rule, regulation or order, including, but not limited to,
Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights
Act of 1991; the Age Discrimination in Employment Act, as amended (as
further described in Section 7 below); the Americans with Disabilities
Act; claims under the Employee Retirement Income Security Act ("ERISA");
or any other federal, state or local laws or regulations regarding
employment discrimination or termination of employment. This also includes
claims for wrongful discharge, fraud, or misrepresentation under any
statute, rule, regulation or under the common law.
The Executive agrees and understands and knowingly agrees to this release
because it is his intent in executing this Agreement to forever discharge
the Company from any and all present, future, foreseen or unforeseen
causes of action except for the obligations of the Company set forth in
the Employment Agreement.
Notwithstanding the foregoing, Executive does not release, discharge or
waive any rights to indemnification that he may have under the By-Laws of
the Company, the laws of the State of Delaware, any indemnification
agreement between the Executive and the Company or any insurance coverage
maintained by or on behalf of the Company.
(4) Release and Waiver of Claims Under the Age Discrimination in Employment
Act
Executive acknowledges that the Company encouraged him to consult with an
attorney of his choosing, and through this Agreement encourages him to
consult with his attorney with respect to possible claims under the Age
Discrimination in Employment Act of 1967, as amended ("ADEA") and that
Executive acknowledges that he understands that the ADEA is a federal
statute that prohibits discrimination, on the basis of age, in employment,
benefits, and benefit plans. Executive wishes to waive any and all claims
under the ADEA that he may have, as of the Termination Date, against the
Company, its shareholders, employees, or successors and hereby waives such
claims. Executive further understands that by signing this Agreement he is
in fact waiving, releasing and forever giving up any claim under the ADEA
that may have existed on or prior to the Termination Date. Executive
acknowledges that the Company has informed him that he has at his option,
twenty-one (21) days in which to sign the waiver of this claim under ADEA,
and he does hereby knowingly and voluntarily waive said twenty-one (21)
day
20
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period. Executive also understands that he has seven (7) days following
the Termination Date within which to revoke the release contained in this
paragraph by providing a written notice of his revocation of the release
and waiver contained in this paragraph to the Company. Executive further
understands that this right to revoke the release contained in this
paragraph relates only to this paragraph and does not act as a revocation
of any other term of this Agreement.
(5) Proceedings
Executive has not filed, and agrees not to initiate or cause to be
initiated on his behalf, any complaint, charge, claim or proceeding
against the Company before any local, state or federal agency, court or
other body relating to his employment or the termination of his employment
(each -individually, a "Proceeding"), and agrees not to voluntarily
participate in any Proceeding. Executive waives any right he may have to
benefit in any manner from any relief (whether monetary or otherwise)
arising out of any Proceeding.
(6) Remedies
In the event Executive initiates or voluntarily participates in any
Proceeding, or if he fails to abide by any of the terms of this Agreement
or his post-termination obligations contained in the Employment Agreement,
or if he revokes the ADEA release contained in Paragraph 4 of this
Agreement within the seven-day period provided under Paragraph 4, the
Company may, in addition to any other remedies it may have, reclaim any
amounts paid to him under the termination provisions of the Employment
Agreement or terminate any benefits or payments that are subsequently due
under the Employment Agreement, without waiving the release granted
herein. Executive acknowledges and agrees that the remedy at law available
to the Company for breach of any of his post-termination obligations under
the Employment Agreement or his obligations under Paragraphs 3, 4, and 5
of this Agreement would be inadequate and that damages flowing from such a
breach may not readily be susceptible to being measured in monetary terms.
Accordingly, Executive acknowledges, consents and agrees that, in addition
to any other rights or remedies which the Company may have at law, in
equity or under this Agreement, upon adequate proof of his violation of
any such provision of this Agreement, the Company shall be entitled to
immediate injunctive relief and may obtain a temporary order restraining
any threatened or further breach, without the necessity of proof of actual
damage.
Executive understands that by entering into this Agreement he will be
limiting the availability of certain remedies
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that he may have against the Company and limiting also his ability to
pursue certain claims against the Company.
(7) Severability Clause
In the event any provision or part of this Agreement is found to be
invalid or unenforceable, only that particular provision or part so found,
and not the entire agreement, will be inoperative.
(8) Non-Admission
Nothing contained in this Agreement will be deemed or construed as an
admission of wrongdoing or liability on the part of the Company.
(9) Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, applicable to agreements made and to be
performed in that State; and the parties agree to the jurisdiction of the
U.S. District Court for the District of Delaware, and agree to appear in
any action in such courts by service of process by certified mail, return
receipt requested, at the following addresses:
To Company: ULTRAMAR DIAMOND SHAMROCK CORPORATION
9830 Colonnade Boulevard
San Antonio, Texas 78230
and
To Executive:
------------------------------------
------------------------------------
------------------------------------
THE EXECUTIVE ACKNOWLEDGES TEAT HE HAS READ THIS AGREEMENT AND THAT HE FULLY
KNOWS, UNDERSTANDS, AND APPRECIATES ITS CONTENTS, AND THAT HE HEREBY EXECUTES
THE SALE AND MAKES THIS AGREEMENT AND THE RELEASE AND AGREEMENTS PROVIDED FOR
HEREIN VOLUNTARILY AND OF HIS OWN FREE WILL.
22
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IN WITNESS WHEREOF, the parties have executed this AGREEMENT as of the
date first set forth above.
-----------------------------------
William R. Klesse
ULTRAMAR DIAMOND SHAMROCK CORPORATION,
a Delaware corporation
By:
------------------------------
Name:
-------------------------
Title:
------------------------
23
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EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of October 23,
1996, but effective as provided herein, is made and entered into by and between
Diamond Shamrock, Inc., a Delaware corporation (the "Company" or "Diamond
Shamrock, Inc.", as the context requires), and Timothy J. Fretthold (the
"Executive").
WHEREAS, the Executive has been serving as a senior executive
officer of Diamond Shamrock, Inc.;
WHEREAS, the Executive is a party to an Employment Agreement with
Diamond Shamrock, Inc., dated as of February 6, 1996 (the "Prior Agreement");
WHEREAS, pursuant to the Agreement and Plan of Merger between
Ultramar Corporation, a Delaware corporation ("Ultramar Corporation") and
Diamond Shamrock, Inc., dated as of September 22, 1996 (the "Merger Agreement"),
as of the effective time of the Merger (the "Effective Date"), Diamond Shamrock,
Inc. will be merged with and into Ultramar Corporation, with Ultramar
Corporation as the surviving entity (the "Merger");
WHEREAS, pursuant to the Merger Agreement, the Company is authorized
to enter into this Agreement with Executive;
WHEREAS, the Company considers it in the best interests of its
stockholders to foster the continuous employment of certain key management
personnel;
WHEREAS, the Company recognizes that, as is the case for most
publicly held companies, the possibility of a Change in Control (as defined
herein) exists;
WHEREAS, the Company wishes to assure itself of both present and
future continuation of management in light of the Merger and in the event of a
Change in Control subsequent to the Merger;
WHEREAS, the Company wishes to employ the Executive and the
Executive is willing to render services, both on the terms and subject to the
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained, it is agreed as follows:
<PAGE>
1. Employment.
1.1 The Company hereby agrees to employ the Executive and the
Executive hereby agrees to undertake employment with the Company upon the terms
and conditions herein set forth.
1.2 Employment will be for a term commencing on the Effective Date
and, subject to earlier expiration upon the Executive's termination under
Section 5, expiring three years from the Effective Date (the "Term").
Notwithstanding the previous sentence, this Agreement and the employment of the
Executive will be automatically renewed and the Term extended, subject to
Section 5, for successive one-year periods upon the terms and conditions set
forth herein, commencing on the third anniversary of the date of this Agreement,
and on each anniversary date thereafter, unless either party to this Agreement
gives the other party written notice (in accordance with Section 12.5) of such
party's intention to terminate this Agreement at least three months prior to the
end of such initial or extended term. For purposes of this Agreement, any
reference to the "Term" of this Agreement will include the original term and any
extension thereof.
2. Position and Duties.
2.1 Position and Duties. During the Term, the Executive will serve
as Executive Vice President and Chief Administrative Officer of the Company and
will have such duties, functions, responsibilities and authority as are (i)
consistent with the Executive's position as Executive Vice President and Chief
Administrative Officer of the Company; or (ii) assigned to his office in the
Company's bylaws; or (iii) reasonably assigned to him by the Company's Board of
Directors (the "Board").
2.2 Commitment. During the Term, the Executive will be the Company's
full-time employee and, except as may otherwise be approved in advance in
writing by the Board, and except during vacation periods and reasonable periods
of absence due to sickness, personal injury or other disability, the Executive
will devote substantially all of his business time and attention to the
performance of his duties to the Company.
3. Place of Performance. In connection with his employment during the
Term, unless otherwise agreed by the Executive, the Executive will be based at
the Company's principal executive offices. The Executive will undertake normal
business travel on behalf of the Company.
4. Compensation and Related Matters.
4.1 Compensation and Benefits.
(i) Annual Base Salary. During the Term of this Agreement, the
Company will pay to the Executive an annual base
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<PAGE>
salary of not less than $335,000, which annual base salary may be modified from
time to time by the Board (or the Compensation Committee thereof) in its sole
discretion, payable at the times and in the manner consistent with the Company's
general policies regarding compensation of executive employees. The Board may
from time to time authorize such additional compensation to the Executive, in
cash or in property, as the Board may determine in its sole discretion to be
appropriate.
(ii) Annual Incentive Compensation. If the Board (or the
Compensation Committee thereof) authorizes any cash incentive compensation or
approves any other management incentive program or arrangement, the Executive
will be eligible to participate in such plan, program or arrangement under the
general terms and conditions applicable to executive and management employees;
provided, however, that so long as the Executive remains employed by the Company
at the end of the applicable fiscal year, (a) the annual cash incentive
compensation paid by the Company to the Executive for the Company's fiscal year
that includes the Effective Date, aggregated with any other annual incentive
compensation earned by the Executive for calendar year 1996, will be in an
amount not less than the greater of (1) 40% of the Executive's highest annual
base salary rate during the fiscal year to which such incentive compensation
relates, and (2) the Executive's actual annual incentive compensation earned
during such fiscal year, as determined by the Company's Board (or the
Compensation Committee thereof), and (b) the cash incentive compensation paid to
the Executive for the Company's next succeeding fiscal year will be in an amount
not less than the greater of (1) 40% of the Executive's highest annual base
salary rate during the fiscal year to which such incentive compensation relates,
and (2) the Executive's actual annual incentive compensation during such fiscal
year, as determined by the Board (or the Compensation Committee thereof). Except
as set forth in the proviso to the preceding sentence, nothing in this Section
4.1(ii) will guarantee to the Executive any specific amount of incentive
compensation, or prevent the Board (or the Compensation Committee thereof) from
establishing performance goals and compensation targets applicable only to the
Executive.
4.2 Executive Benefits. In addition to the compensation described in
Section 4.1, the Company will make available to the Executive and his eligible
dependents, subject to the terms and conditions of the applicable plans,
including without limitation the eligibility rules, participation in all
Company-sponsored employee benefit plans including all employee retirement
income and welfare benefit policies, plans, programs or arrangements in which
senior executives of the Company participate, including any stock option, stock
purchase, stock appreciation, savings, pension, supplemental executive
retirement or other retirement income or welfare benefit, disability, salary
continuation, and any other deferred compensation, incentive compensation, group
and/or executive life, health,
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medical/hospital or other insurance (whether funded by actual insurance or
self-insured by the Company), expense reimbursement or other employee benefit
policies, plans, programs or arrangements or any equivalent successor policies,
plans, programs or arrangements that may now exist or be adopted hereafter by
the Company.
4.3 Expenses. The Company will promptly reimburse the Executive for
all travel and other business expenses the Executive incurs in order to perform
his duties to the Company under this Agreement in a manner commensurate with the
Executive's position and level of responsibility with the Company, and in
accordance with the Company's policy regarding substantiation of expenses.
5. Termination. Notwithstanding the Term specified in Section 1.2, the
termination of the Executive's employment hereunder will be governed by the
following provisions:
5.1 Death. In the event of the Executive's death during the Term,
the Company will pay to the Executive's beneficiaries or estate, as appropriate,
promptly after the Executive's death, (i) the unpaid annual base salary to which
the Executive is entitled, pursuant to Section 4.1, through the date of the
Executive's death, and (ii) for any accrued but unused vacation days, to the
extent and in the amounts, if any, provided under the Company's usual policies
and arrangements. This Section 5.1 will not limit the entitlement of the
Executive's estate or beneficiaries to any death or other benefits then
available to the Executive under any life insurance, stock ownership, stock
options, or other benefit plan or policy that is maintained by the Company for
the Executive's benefit.
5.2 Disability.
(i) If the Company determines in good faith that the Executive
has incurred a Disability (as defined below) during the Term, the Company may
give the Executive written notice of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company will
terminate effective on the 30th day after receipt of such notice by the
Executive, provided that within the 30 days after such receipt, the Executive
will not have returned to full-time performance of his duties. The Executive
will continue to receive his annual base salary and benefits until the date of
termination. In the event of the Executive's Disability, the Company will pay
the Executive, promptly after the Executive's termination, (a) the unpaid annual
base salary to which he is entitled, pursuant to Section 4.1, through the date
of the Executive's termination, (b) for any accrued but unused vacation days, to
the extent and in the amounts, if any, provided under the Company's usual
policies and arrangements, and (c) a lump sum in cash in an amount equal to 50%
of his annual base salary at the time of termination. This Section 5.2 will not
limit the entitlement of
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the Executive, the Executive's estate or beneficiaries to any disability or
other benefits then available to the Executive under any disability insurance or
other benefit plan or policy that is maintained by the Company for the
Executive's benefit.
(ii) For purposes of this Agreement, "Disability" will mean
the Executive's incapacity due to physical or mental illness substantially to
perform his duties on a full-time basis for six consecutive months and within 30
days after a notice of termination is thereafter given by the Company the
Executive will not have returned to the full-time performance of the Executive's
duties; provided, however, if the Executive disagrees with a determination to
terminate him because of Disability, the question of the Executive's disability
will be subject to the certification of a qualified medical doctor agreed to by
the Company and the Executive or, in the event of the Executive's incapacity to
designate a doctor, the Executive's legal representative. In the absence of
agreement between the Company and the Executive, each party will nominate a
qualified medical doctor and the two doctors will select a third doctor, who
will make the determination as to Disability. In order to facilitate such
determination, the Executive will, as reasonably requested by the Company, (a)
make himself available for medical examinations by a doctor in accordance with
this Section 5.2(ii), and (b) grant the Company and any such doctor access to
all relevant medical information concerning him, arrange to furnish copies of
medical records to such doctor and use his best efforts to cause his own doctor
to be available to discuss his health with such doctor.
5.3 Cause.
(i) The Company may terminate the Executive's employment
hereunder for Cause (as defined below). In the event of the Executive's
termination for Cause, the Company will promptly pay to the Executive (or his
representative) the unpaid annual base salary to which he is entitled, pursuant
to Section 4.1, through the date the Executive is terminated and the Executive
will be entitled to no other compensation, except as otherwise due to him under
applicable law.
(ii) For purposes of this Agreement, the Company will have
"Cause" to terminate the Executive's employment hereunder upon a finding by the
Board that (a) the Executive committed an illegal act or acts that were intended
to and did defraud the Company, (b) the Executive engaged in gross negligence or
gross misconduct against the Company or another employee, or in carrying out his
duties and responsibilities, or (c) the Executive materially breached any of the
express covenants set forth in Section 9.1, 9.2 or 9.3. The Company will not
have Cause unless and until the Company provides the Executive with written
notice that the Company intends to terminate his employment for Cause. Such
written notice will specify the particular act or acts, or failure to act, that
is or
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are the basis for the decision to so terminate the Executive's employment for
Cause. The Employee will be given the opportunity within 30 calendar days of the
receipt of such notice to meet with the Board to defend such act or acts, or
failure to act. The Executive's employment by the Company automatically will be
terminated under this Section 5.3 for Cause as of the receipt of the written
notice from the Company or, if later, the date specified in such notice. A
notice given under this Section 5.3 must set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment for Cause, and if the termination date is other than the
date of receipt of such notice, specify the date on which the Executive's
employment is to be terminated (which date will not be earlier than the date on
which such notice is given in accordance with Section 13.5). Such notice must be
given no later than 180 business days after a director of the Company (excluding
the Executive, if applicable) first has actual knowledge of the events
justifying the purported termination.
5.4 Termination.
(i) Involuntary Termination. The Executive's employment
hereunder may be terminated by the Company for any reason by written notice as
provided in Section 12.5. The Executive will be treated for purposes of this
Agreement as having been involuntarily terminated by the Company other than for
Cause if the Executive terminates his employment with the Company for any of the
following reasons (each, a "Good Reason"): without the Executive's written
consent, (a) the Company has breached any material provision of this Agreement
and within 30 days after notice thereof from the Executive, the Company fails to
cure such breach; (b) a successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company fails to assume liability under the
Agreement; (c) at any time after the Company has notified the Executive pursuant
to Section 1.2 that the Company does not intend to renew the Agreement and the
Executive's employment at the end of the Term (including any previous renewals)
(rather than to allow the Agreement automatically to renew); (d) a material
reduction in the aggregate benefits described by Section 4.2 (other than
stock-based compensation) provided to the Executive, unless such decrease is
required by law or is applicable to all employees of the Company eligible to
participate in any employee benefit arrangement affected by such reduction; (e)
a significant reduction in the Executive's duties or the addition of duties,
which in either case are materially inconsistent with the Executive's title or
position; or (f) a reduction in the Executive's annual base salary.
(ii) Voluntary Termination. The Executive may voluntarily
terminate the Agreement at any time by notice to the Company as provided in
Section 12.5. The Executive's death or Disability (as defined in Section
5.2(ii)) during the term of the
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Agreement will constitute a voluntary termination of employment for purposes of
eligibility for termination payments and benefits as provided in Section 5.5,
but for no other purpose.
5.5 Termination Payments and Benefits.
(i) Form and Amount. Upon the Executive's involuntary
termination, other than for Cause, (a) subject to Section 5.5(iii), the Company
will pay or provide to the Executive (1) his annual base salary and benefits
until the date of termination, (2) within five business days after termination
of his employment, a lump sum cash payment equal in amount to three times the
sum of (x) the Executive's highest annual base salary in effect during the three
years prior to his date of termination, and (y) the highest annual incentive
compensation earned by the Executive during the same three-year period, (3)
three additional years of age and service credit under the qualified and
nonqualified defined benefit retirement plans of the Company in which the
Executive participates at the time of termination; provided, however, that in
the case of a qualified defined benefit pension plan, the present value of the
additional benefit the Executive would have accrued if he had been credited for
all purposes with the additional years of age and service under such plan as of
the Executive's date of termination with the Company will be paid in a lump sum
in cash within five business days after termination of the Executive's
employment, and (4) for a period of one year after termination of his
employment, the continuation of the employee welfare benefits set forth in
Section 4.2 except as offset by benefits paid by other sources as set forth in
Section 8, or as prohibited by law or as a condition of maintaining the
tax-favored status of any such benefits to the Company or its employees; (b) the
Executive's benefit under the applicable supplemental executive retirement plan
will be not less than the benefit the Executive would have received under the
terms of the corresponding plan (including any individual modifications thereof)
applicable to the Executive as in effect immediately prior to the Effective Date
determined as if the Executive had continued employment under the terms of such
corresponding plan (and modifications) until his actual termination of
employment. For purposes of Section 5.5(i)(a)(2), the three-year period will
include employment with Diamond Shamrock, Inc. or any of its affiliates.
(ii) Maintenance of Benefits. During the period set forth in
Section 5.5(i)(a)(4), the Company will use its best efforts to maintain in full
force and effect for the continued benefit of the Executive all referenced
benefits or will arrange to make available to the Executive benefits
substantially similar to those that the Executive would otherwise have been
entitled to receive if his employment had not been terminated. Such benefits
will be provided to the Executive on the same terms and conditions (including
employee contributions toward the premium payments) under which the Executive
was entitled to participate immediately prior to his termination.
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(iii) Release. No benefit will be paid or made available under
Section 5.5(i)(a) unless the Executive first executes a release in the form
attached as an exhibit to this Agreement, and (b) to the extent any portion of
such release is subject to the seven-day revocation period prescribed by the Age
Discrimination in Employment Act of 1967, as amended, or to any similar
revocation period in effect on the date of termination of Executive's
employment, such revocation period has expired.
6. Change in Control Provisions.
6.1 Impact of Change in Control. In the event of a "Change in
Control" of the Company, as defined in Section 6.2, (i) the Company will cause
all cash benefits due under this Agreement to be secured by an irrevocable trust
for the benefit of the Executive, the assets of which will be subject to the
claims of the Company's creditors, and will transfer to such trust cash and
other property adequate to satisfy all of the expenses of the trust for at least
five years after the Change in Control and any of the Company's actual and
potential cash obligations under this Agreement, (ii) if the Executive's
employment is involuntarily terminated without Cause after the Change in
Control, (A) the covenants of Sections 9.1 and 10 will be inapplicable to the
Executive, and (B) the covenant of Section 9.2 will expire on the third
anniversary of the date of termination of the Executive's employment, and (iii)
the definition of Good Reason, as set forth in Section 5.4(i) above, will be
expanded to include the following:
(a) A good faith determination by the Executive that, as a
result of the Change in Control and a change in circumstances thereafter
significantly affecting his positions, including a change in the scope of
business or other activities for which he was responsible, he has been rendered
substantially unable to carry out, has been substantially hindered in the
performance of, or has suffered a substantial reduction in, any of the
authorities, powers, functions, responsibilities or duties attached to any of
the Executive's positions; the Executive's determination will be presumed to
have been made in good faith unless otherwise shown by the Company by clear and
convincing evidence;
(b) The relocation of the Company's principal executive
offices (but only if, immediately prior to the Change in Control, the
Executive's principal place of employment was at the Company's principal
executive offices), or requirement that the Executive have as his principal
location of work any location that is, in excess of 50 miles from the location
thereof immediately preceding the Change in Control or to travel away from his
home or office significantly more often that required immediately prior to the
Change in Control; or
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(c) For any reason, or without reason, during the 30-day
period immediately following the first anniversary of the first occurrence of a
Change in Control.
6.2 Definition of Change in Control. For purposes of this Agreement,
a "Change in Control" will be deemed to occur if at any time during the term of
the Agreement any of the following events will occur:
(i) The Company is merged, consolidated or reorganized into
or with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization, less than 50% of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate by the holders of
Voting Stock (as that term is hereafter defined) of the Company immediately
prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation or other legal person,
and as a result of such sale or transfer, less than 50% of the combined voting
power of the then-outstanding voting securities of such corporation or person
are held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale;
(iii) There is a report filed on Schedule 13D or Schedule
14D-l (or any successor schedule, form or report), each as promulgated pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any
person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of
the Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 20% or more of
the combined voting power of the then-outstanding securities of the Company
entitled to vote generally in the election of Directors of the Company ("Voting
Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or report
or item therein) that a change in control of the Company has or may have
occurred or will or may occur in the future pursuant to any then-existing
contract or transaction; or
(v) If during the period of two consecutive years individuals
who at the beginning of any such period constitute the Directors of the Company
cease for any reason to constitute at least a majority thereof unless the
election, or the nomination for election by the Company's shareholders, of each
Director of the Company first elected during such period was approved by a vote
of at least two-thirds of the Directors of the
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Company then still in office who were Directors of the Company at the beginning
of any such period (excluding for this purpose the election of any new Director
in connection with an actual or threatened election or proxy contest).
Notwithstanding the foregoing provisions of Section 6.2(iii) or (iv) hereof,
unless otherwise determined in a specific case by majority vote of the Board (or
the Compensation Committee thereof), a "Change in Control" will not be deemed to
have occurred for purposes of this Agreement solely because the Company, an
entity in which the Company directly or beneficially owns 50% or more of the
voting securities of such entity, any Company-sponsored employee stock ownership
plan or any other employee benefit plan of the Company either files or becomes
obligated to file a report or a proxy statement under or in response to Schedule
13D, Schedule 14D-l, Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) under the Exchange Act, disclosing beneficial
ownership by it of shares of voting securities of the Company, whether in excess
of 20% or otherwise, or because the Company reports that a change in control of
the Company has or may have occurred or will or may occur in the future by
reason of such beneficial ownership. Notwithstanding the foregoing provisions of
Section 6.2, the Merger will not constitute a Change in Control.
7. Certain Additional Payments by the Company:
(i) Anything in this Agreement to the contrary
notwithstanding, if it is determined (as hereafter provided) that any payment or
distribution by the Company to or for the benefit of the Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise pursuant to or by reason of any other agreement, policy,
plan, program or arrangement, including without limitation any stock option,
stock appreciation right or similar right, or the lapse or termination of any
restriction on or the vesting or exercisability of any of the foregoing (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code (or any successor provision thereto) by reason of being "contingent on a
change in ownership or control" of Diamond Shamrock, Inc. or the Company, within
the meaning of Section 280G of the Code (or any successor provision thereto) or
to any similar tax imposed by state or local law, or any interest or penalties
with respect to such excise tax (such tax or taxes, together with any such
interest and penalties, are hereafter collectively referred to as the "Excise
Tax"), then the Executive will be entitled to receive an additional payment or
payments (a "Gross-Up Payment") in an amount such that, after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. No Gross-Up Payment will be made with respect to the
Excise Tax, if any, attributable to (a) any incentive
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stock option, as defined by Section 422 of the Code ("ISO") granted prior to the
execution of this Agreement (unless a comparable Gross-Up Payment has
theretofore been made available with respect to such option), or (b) any stock
appreciation or similar right, whether or not limited, granted in tandem with
any ISO described in clause (a).
(ii) Subject to the provisions of Section 7(vi) hereof, all
determinations required to be made under this Section 7, including whether an
Excise Tax is payable by the Executive and the amount of such Excise Tax and
whether a Gross-Up Payment is required and the amount of such Gross-Up Payment,
will be made by a nationally recognized firm of certified public accountants
(the "Accounting Firm") selected by the Executive in his sole discretion. The
Executive will direct the Accounting Firm to submit its determination and
detailed supporting calculations to both the Company and the Executive within 15
calendar days after the Termination Date, if applicable, and any other such time
or times as may be requested by the Company or the Executive. If the Accounting
Firm determines that any Excise Tax is payable by the Executive, the Company
will pay the required Gross-Up Payment to the Executive within five business
days after receipt of such determination and calculations. If the Accounting
Firm determines that no Excise Tax is payable by the Executive, it will, at the
same time as it makes such determination, furnish the Executive with an opinion
that he has substantial authority not to report any Excise Tax on his federal,
state, local income or other tax return. Any determination by the Accounting
Firm as to the amount of the Gross-Up Payment will be binding upon the Company
and the Executive. As a result of the uncertainty in the application of Section
4999 of the Code (or any successor provision thereto) and the possibility of
similar uncertainty regarding applicable state or local tax law at the time of
any determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 7(vi) hereof and the Executive thereafter is required to make a
payment of any Excise Tax, the Executive will direct the Accounting Firm to
determine the amount of the Underpayment that has occurred and to submit its
determination and detailed supporting calculations to both the Company and the
Executive as promptly as possible. Any such Underpayment will be promptly paid
by the Company to, or for the benefit of, the Executive within five business
days after receipt of such determination and calculations.
(iii) The Company and the Executive will each provide the
Accounting Firm access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the Accounting
Firm
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in connection with the preparation and issuance of the determination
contemplated by Section 7(ii) hereof.
(iv) The federal, state and local income or other tax returns
filed by the Executive will be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive will make proper payment of the amount of any
Excise Tax, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If prior
to the filing of the Executive's federal income tax return, or corresponding
state or local tax return, if relevant, the Accounting Firm determines that the
amount of the Gross-Up Payment should be reduced, the Executive will within five
business days pay to the Company the amount of such reduction.
(v) The fees and expenses of the Accounting Firm for its
services in connection with the determinations and calculations contemplated by
Sections 7(ii) and (iv) hereof will be borne by the Company. If such fees and
expenses are initially paid by the Executive, the Company will reimburse the
Executive the full amount of such fees and expenses within five business days
after receipt from the Executive of a statement therefor and reasonable evidence
of his payment thereof.
(vi) The Executive will notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification will be given as
promptly as practicable but no later than 10 business days after the Executive
actually receives notice of such claim and the Executive will further apprise
the Company of the nature of such claim and the date on which such claim is
requested to be paid (in each case, to the extent known by the Executive). The
Executive will not pay such claim prior to the earlier of (a) the expiration of
the 30-calendar-day period following the date on which he gives such notice to
the Company and (b) the date that any payment of amount with respect to such
claim is due. If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
will:
(1) provide the Company with any written records or documents
in his possession relating to such claim reasonably requested by the
Company;
(2) take such action in connection with contesting such claim
as the Company will reasonably request in writing from time to time,
including without limitation accepting legal representation with
respect to such
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claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(3) cooperate with the Company in good faith in order
effectively to contest such claim; and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company will bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and will indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section 7(vi), the Company will control all proceedings taken in connection with
the contest of any claim contemplated by this Section 7(vi) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company will determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company will advance the amount of such payment to the Executive on an
interest-free basis and will indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax, including interest or
penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
will be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive will be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(vii) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 7(vi) hereof, the Executive receives
any refund with respect to such claim, the Executive will (subject to the
Company's complying with the requirements of Section 7(vi) hereof) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after any taxes applicable thereto). If, after the receipt by
the Executive of an amount advanced by the Company
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pursuant to Section 7(vi) hereof, a determination is made that the Executive
will not be entitled to any refund with respect to such claim and the Company
does not notify the Executive in writing of its intent to contest such denial or
refund prior to the expiration of 30 calendar days after such determination,
then such advance will be forgiven and will not be required to be repaid and the
amount of such advance will offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid pursuant to this Section 7.
8. Mitigation and Offset. The Executive is under no obligation to mitigate
damages or the amount of any payment or benefit provided for hereunder by
seeking other employment or otherwise; provided, however, that the Executive's
coverage under the Company's welfare benefit plans will be reduced to the extent
that the Executive becomes covered under any comparable employee benefit plan
made available by another employer and covering the same type of benefits. The
Executive will report to the Company any such benefits actually received by him.
9. Competition; Confidentiality; Nonsolicitation
9.1 (i) Subject to Section 6.1(ii), the Executive hereby covenants
and agrees that during the Term and for one year following the Term he will not,
without the prior written consent of the Company, engage in Competition (as
defined below) with the Company. For purposes of this Agreement, if the
Executive takes any of the following actions he will be engaged in
"Competition": engaging in or carrying on, directly or indirectly, any
enterprise, whether as an advisor, principal, agent, partner, officer, director,
employee, stockholder, associate or consultant to any person, partnership,
corporation or any other business entity, that is principally engaged in the
business of refining and/or marketing oil or related products in States or
Provinces in which the Company (or any division or segment thereof) has
operations; provided, however, that "Competition" will not include (a) the mere
ownership of securities in any enterprise and exercise of rights appurtenant
thereto or (b) participation in management of any enterprise or business
operation thereof other than in connection with the competitive operation of
such enterprise.
(ii) Subject to Section 6.1(ii), the Executive hereby
covenants and agrees that during the Term and for three years following the Term
he will not assist a third party in preparing or making an unsolicited bid for
the Company, engaging in a proxy contest with the Company, or engaging in any
other similar activity.
9.2 During the Term, the Company agrees that it will disclose to
Executive its confidential or proprietary information (as defined in this
Section 9.2) to the extent necessary for Executive to carry out his obligations
under this Agreement. Subject to Section 6.1(ii), the Executive hereby covenants
and
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agrees that he will not, without the prior written consent of the Company,
during the Term or thereafter disclose to any person not employed by the
Company, or use in connection with engaging in Competition with the Company, any
confidential or proprietary information of the Company. For purposes of this
Agreement, the term "confidential or proprietary information" will include all
information of any nature and in any form that is owned by the Company and that
is not publicly available or generally known to persons engaged in businesses
similar or related to those of the Company. Confidential information will
include, without limitation, the Company's financial matters, customers,
employees, industry contracts, and all other secrets and all other information
of a confidential or proprietary nature. The foregoing obligations imposed by
this Section 9.2 will cease if such confidential or proprietary information will
have become, through no fault of the Executive, generally known to the public or
the Executive is required by law to make disclosure (after giving the Company
notice and an opportunity to contest such requirement).
9.3 Subject to Section 6.1(ii), the Executive hereby covenants and
agrees that during the Term and for one year thereafter he will not attempt to
influence, persuade or induce, or assist any other person in so persuading or
inducing, any employee of the Company to give up, or to not commence, employment
or a business relationship with the Company.
9.4 Executive acknowledges and agrees that the remedy at law
available to the Company for breach of any of his post-termination obligations
under Sections 9.1, 9.2 and 9.3 would be inadequate and that damages flowing
from such a breach may not readily be susceptible to being measured in monetary
terms. Accordingly, Executive acknowledges, consents and agrees that, in
addition to any other rights or remedies which the Company may have at law, in
equity or under this Agreement, upon adequate proof of his violation of any
such provision of this Agreement, the Company will be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened or
further breach, without the necessity of proof of actual damage.
10. Post-termination Assistance. Subject to Section 6.1(ii), the Executive
agrees that after his employment with the Company has terminated he will
provide, upon reasonable notice, such information and assistance to the Company
as may reasonably be requested by the Company in connection with any audit,
governmental investigation or litigation in which it or any of its affiliates is
or may become a party; provided, however, that (i) the Company agrees to
reimburse the Executive for any related out-of-pocket expenses, including travel
expenses, and to pay the Executive reasonable compensation for his time based on
his rate of annual salary at the time of termination and (ii) any such
assistance may not unreasonably interfere with the then-current employment of
the Executive.
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11. Survival. The expiration or termination of the Term will not impair
the rights or obligations of any party hereto that accrue hereunder prior to
such expiration or termination, except to the extent specifically stated herein.
In addition to the foregoing, the Executive's covenants contained in Sections
9.1, 9.2, 9.3 and 10 and the Company's obligations under Sections 5, 7 and 12.1
will survive the expiration or termination of Executive's employment.
12. Miscellaneous Provisions.
12.1 Legal Fees and Expenses. Without regard to whether the
Executive prevails, in whole or in part, in connection therewith, the Company
will pay and be financially responsible for 100% of any and all attorneys' and
related fees and expenses incurred by the Executive in connection with any
dispute associated with the interpretation, enforcement or defense of the
Executive's rights under this Agreement by litigation or otherwise; provided
that, in regard to such dispute, the Executive has not acted in bad faith or
with no colorable claim of success. All such fees and expenses will be paid by
the Company as incurred by the Executive on a monthly basis upon an undertaking
by the Executive to repay such advanced amounts if a court determines, in a
decision against which no appeal may be taken or with respect to which the time
period to appeal has expired, that he acted in bad faith or with no colorable
claim of success.
12.2 Binding on Successors. This Agreement will be binding upon and
inure to the benefit of the Company, the Executive and each of their respective
successors, assigns, personal and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable.
12.3 Governing Law. This Agreement will be governed, construed,
interpreted and enforced in accordance with the substantive laws of the State of
Delaware, without regard to conflicts of law principles.
12.4 Severability. Any provision of this Agreement that is deemed
invalid, illegal or unenforceable in any jurisdiction will, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provisions of this Agreement
invalid, illegal, or unenforceable in any other jurisdiction. If any covenant
should be deemed invalid, illegal or unenforceable because its scope is
considered excessive, such covenant will be modified so that the scope of the
covenant is reduced only to the minimum extent necessary to render the modified
covenant valid, legal and enforceable.
12.5 Notices. For all purposes of this Agreement, all
communications, including without limitation notices, consents,
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requests or approvals, required or permitted to be given hereunder will be in
writing and will be deemed to have been duly given when hand delivered or
dispatched by electronic facsimile transmission (with receipt thereof
confirmed), or five business days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid, or
three business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS, or Purolator, addressed to the
Company (to the attention of the Secretary of the Company) at its principal
executive offices and to the Executive at his principal residence, or to such
other address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address will be effective
only upon receipt.
(i) To The Company. If to the Company, addressed to the
attention of Chief Executive Officer at 9830 Colonnade Boulevard, San Antonio,
Texas 78230.
(ii) To the Executive. If to the Executive, to him in care of
the Company at the above address.
12.6 Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same Agreement.
12.7 Entire Agreement. The terms of this Agreement are intended by
the parties to be the final expression of their agreement with respect to the
Executive's employment by the Company and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend that this
Agreement will constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative or other legal proceeding to vary the terms of this Agreement.
12.8 Amendments; Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, approved by the
Company and signed by the Executive and the Company. Failure on the part of
either party to complain of any action or omission, breach or default on the
part of the other party, no matter how long the same may continue, will never be
deemed to be a waiver of any rights or remedies hereunder, at law or in equity.
The Executive or the Company may waive compliance by the other party with any
provision of this Agreement that such other party was or is obligated to comply
with or perform only through an executed writing; provided, however, that such
waiver will not operate as a waiver of, or estoppel with respect to, any other
or subsequent failure.
12.9 No Inconsistent Actions. The parties will not voluntarily
undertake or fail to undertake any action or course of action that is
inconsistent with the provisions or essential
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intent of this Agreement. Furthermore, it is the intent of the parties hereto to
act in a fair and reasonable manner with respect to the interpretation and
application of the provisions of this Agreement.
12.10 Headings and Section References. The headings used in this
Agreement are intended for convenience or reference only and will not in any
manner amplify, limit, modify or otherwise be used in the construction or
interpretation of any provision of this Agreement. All section references are to
sections of this Agreement, unless otherwise noted.
13. Effectiveness. Prior Agreement and Consent. This Agreement will become
effective upon, and the Prior Agreement will terminate immediately prior to, the
Effective Date, whereupon all references to the "Company" herein will be treated
as references to Ultramar Corporation. By executing this Agreement, Executive
hereby consents to the assumption of this Agreement by Ultramar Corporation upon
the Effective Date. Notwithstanding any other provision of this Agreement, if
the Merger Agreement is terminated prior to the Effective Date, this Agreement
will have no further force or effect, and the Prior Agreement will continue in
effect as though this Agreement had not been entered into.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written but effective as provided in Section 13.
/s/ Timothy J. Fretthold
----------------------------------------
Timothy J. Fretthold
DIAMOND SHAMROCK, INC.,
a Delaware corporation
By: /s/ Roger R. Hemminghaus
-------------------------------------
Roger R. Hemminghaus
Chief Executive Officer and
President
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Exhibit
GENERAL RELEASE OF ALL CLAIMS
This General Release of all Claims (this "Agreement") is entered into by
and between ______________ ("Executive") and Ultramar Diamond Shamrock
Corporation (including its subsidiaries) (collectively the "Company") effective
as of ___________________.
In consideration of the promises set forth in the employment agreement
between Executive and the Company, dated ______________ 1996, as amended as of
the effective date hereof (the "Employment Agreement"), as well as any promises
set forth in this Agreement, Executive and the Company agree as follows:
(1) Employment Agreement Entitlements
The Company will provide Executive the post-termination payments and
benefits to which he is entitled under the Employment Agreement.
(2) Return of Property
All Company files, access keys, desk keys, ID badges and credit cards, and
such other property of the Company as the Company may reasonably request,
in Executive's possession must be returned no later than the date of
Executive's termination from the Company (the "Termination Date").
(3) General Release and Waiver of Claims
Except as provided in the last sentence of this paragraph (3), Executive
hereby unconditionally and forever releases, discharges and waives any and
all claims of any nature whatsoever, whether legal, equitable or
otherwise, which Executive may have against the Company arising at any
time on or before the Termination Date, other than with respect to the
obligations of the Company to the Executive under the Employment
Agreement. This release of claims extends to any and all claims of any
nature whatsoever, other than with respect to the obligations of the
Company to the Executive under the Employment Agreement, whether known,
unknown or capable or incapable of being known as of the Termination Date
of thereafter. This Agreement is a release of all claims of any nature
whatsoever by Executive against the Company, other than with respect to
the obligations of the Company to the Executive under the Employment
Agreement, and includes, other than as herein provided, any and all
claims, demands, causes of action, liabilities whether known or unknown
including those caused by, arising from or related to Executive's
employment relationship with the Company
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including, but without limitation, any and all alleged discrimination or
acts of discrimination which occurred or may have occurred on or before
the Termination Date based upon race, color, sex, creed, national origin,
age, disability or any other violation of any Equal Employment Opportunity
Law, ordinance, rule, regulation or order, including, but not limited to,
Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights
Act of 1991; the Age Discrimination in Employment Act, as amended (as
further described in Section 7 below); the Americans with Disabilities
Act; claims under the Employee Retirement Income Security Act ("ERISA");
or any other federal, state or local laws or regulations regarding
employment discrimination or termination of employment. This also includes
claims for wrongful discharge, fraud, or misrepresentation under any
statute, rule, regulation or under the common law.
The Executive agrees and understands and knowingly agrees to this release
because it is his intent in executing this Agreement to forever discharge
the Company from any and all present, future, foreseen or unforeseen
causes of action except for the obligations of the Company set forth in
the Employment Agreement.
Notwithstanding the foregoing, Executive does not release, discharge or
waive any rights to indemnification that he may have under the By-Laws of
the Company, the laws of the State of Delaware, any indemnification
agreement between the Executive and the Company or any insurance coverage
maintained by or on behalf of the Company.
(4) Release and Waiver of Claims Under the Age Discrimination in Employment
Act
Executive acknowledges that the Company encouraged him to consult with an
attorney of his choosing, and through this Agreement encourages him to
consult with his attorney with respect to possible claims under the Age
Discrimination in Employment Act of 1967, as amended ("ADEA") and that
Executive acknowledges that he understands that the ADEA is a federal
statute that prohibits discrimination, on the basis of age, in employment,
benefits, and benefit plans. Executive wishes to waive any and all claims
under the ADEA that he may have, as of the Termination Date, against the
Company, its shareholders, employees, or successors and hereby waives such
claims. Executive further understands that by signing this Agreement he is
in fact waiving, releasing and forever giving up any claim under the ADEA
that may have existed on or prior to the Termination Date. Executive
acknowledges that the Company has informed him that he has at his option,
twenty-one (21) days in which to sign the waiver of this claim under ADEA,
and he does hereby knowingly and voluntarily waive said twenty-one (21)
day
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period. Executive also understands that he has seven (7) days following
the Termination Date within which to revoke the release contained in this
paragraph by providing a written notice of his revocation of the release
and waiver contained in this paragraph to the Company. Executive further
understands that this right to revoke the release contained in this
paragraph relates only to this paragraph and does not act as a revocation
of any other term of this Agreement.
(5) Proceedings
Executive has not filed, and agrees not to initiate or cause to be
initiated on his behalf, any complaint, charge, claim or proceeding
against the Company before any local, state or federal agency, court or
other body relating to his employment or the termination of his employment
(each individually, a "Proceeding"), and agrees not to voluntarily
participate in any Proceeding. Executive waives any right he may have to
benefit in any manner from any relief (whether monetary or otherwise)
arising out of any Proceeding.
(6) Remedies
In the event Executive initiates or voluntarily participates in any
Proceeding, or if he fails to abide by any of the terms of this Agreement
or his post-termination obligations contained in the Employment Agreement,
or if he revokes the ADEA release contained in Paragraph 4 of this
Agreement within the seven-day period provided under Paragraph 4, the
Company may, in addition to any other remedies it may have, reclaim any
amounts paid to him under the termination provisions of the Employment
Agreement or terminate any benefits or payments that are subsequently due
under the Employment Agreement, without waiving the release granted
herein. Executive acknowledges and agrees that the remedy at law available
to the Company for breach of any of his post-termination obligations
under the Employment Agreement or his obligations under Paragraphs 3, 4,
and 5 of this Agreement would be inadequate and that damages flowing from
such a breach may not readily be susceptible to being measured in monetary
terms. Accordingly, Executive acknowledges, consents and agrees that, in
addition to any other rights or remedies which the Company may have at
law, in equity or under this Agreement, upon adequate proof of his
violation of any such provision of this Agreement, the Company shall be
entitled to immediate injunctive relief and may obtain a temporary order
restraining any threatened or further breach, without the necessity of
proof of actual damage.
Executive understands that by entering into this Agreement he will be
limiting the availability of certain remedies
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<PAGE>
that he may have against the Company and limiting also his ability to
pursue certain claims against the Company.
(7) Severability Clause
In the event any provision or part of this Agreement is found to be
invalid or unenforceable, only that particular provision or part so found,
and not the entire agreement, will be inoperative.
(8) Non-Admission
Nothing contained in this Agreement will be deemed or construed as an
admission of wrongdoing or liability on the part of the Company.
(9) Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, applicable to agreements made and to be
performed in that State; and the parties agree to the jurisdiction of the
U.S. District Court for the District of Delaware, and agree to appear in
any action in such courts by service of process by certified mail, return
receipt requested, at the following addresses:
To Company: ULTRAMAR DIAMOND SHAMROCK CORPORATION
9830 Colonnade Boulevard
San Antonio, Texas 78230
and
To Executive:
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
THE EXECUTIVE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND THAT HE FULLY
KNOWS, UNDERSTANDS, AND APPRECIATES ITS CONTENTS, AND THAT HE HEREBY EXECUTES
THE SAME AND MAKES THIS AGREEMENT AND THE RELEASE AND AGREEMENTS PROVIDED FOR
HEREIN VOLUNTARILY AND OF HIS OWN FREE WILL.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this AGREEMENT as of the
date first set forth above.
----------------------------------------
Timothy J. Fretthold
ULTRAMAR DIAMOND SHAMROCK
CORPORATION,
a Delaware corporation
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
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EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of October 23,
1996, but effective as provided herein, is made and entered into by and between
Diamond Shamrock, Inc., a Delaware corporation (the "Company" or "Diamond
Shamrock, Inc.", as the context requires), and Paul Eisman (the "Executive").
WHEREAS, the Executive has been serving as a senior executive
officer of Diamond Shamrock, Inc.;
WHEREAS, the Executive is a party to an Employment Agreement with
Diamond Shamrock, Inc., dated as of February 6, 1996 (the "Prior Agreement");
WHEREAS, pursuant to the Agreement and Plan of Merger between
Ultramar Corporation, a Delaware corporation ("Ultramar Corporation") and
Diamond Shamrock, Inc., dated as of September 22, 1996 (the "Merger Agreement"),
as of the effective time of the Merger (the "Effective Date"), Diamond Shamrock,
Inc. will be merged with and into Ultramar Corporation, with Ultramar
Corporation as the surviving entity (the "Merger");
WHEREAS, pursuant to the Merger Agreement, the Company is authorized
to enter into this Agreement with Executive;
WHEREAS, the Company considers it in the best interests of its
stockholders to foster the continuous employment of certain key management
personnel;
WHEREAS, the Company recognizes that, as is the case for most
publicly held companies, the possibility of a Change in Control (as defined
herein) exists;
WHEREAS, the Company wishes to assure itself of both present and
future continuation of management in light of the Merger and in the event of a
Change in Control subsequent to the Merger;
WHEREAS, the Company wishes to employ the Executive and the
Executive is willing to render services, both on the terms and subject to the
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained, it is agreed as follows:
<PAGE>
1. Employment.
1.1 The Company hereby agrees to employ the Executive and the
Executive hereby agrees to undertake employment with the Company upon the terms
and conditions herein set forth.
1.2 Employment will be for a term commencing on the Effective Date
and, subject to earlier expiration upon the Executive's termination under
Section 5, expiring three years from the Effective Date (the "Term").
Notwithstanding the previous sentence, this Agreement and the employment of the
Executive will be automatically renewed and the Term extended, subject to
Section 5, for successive one-year periods upon the terms and conditions set
forth herein, commencing on the third anniversary of the date of this Agreement,
and on each anniversary date thereafter, unless either party to this Agreement
gives the other party written notice (in accordance with Section 12.5) of such
party's intention to terminate this Agreement at least three months prior to the
end of such initial or extended term. For purposes of this Agreement, any
reference to the "Term" of this Agreement will include the original term and any
extension thereof.
2. Position and Duties.
2.1 Position and Duties. During the Term, the Executive will serve
as Senior Vice President, Refining Southwest, of the Company and will have such
duties, functions, responsibilities and authority as are (i) consistent with the
Executive's position as Senior Vice President, Refining Southwest, of the
Company; or (ii) assigned to his office in the Company's bylaws; or (iii)
reasonably assigned to him by the Company's Board of Directors (the "Board").
2.2 Commitment. During the Term, the Executive will be the Company's
full-time employee and, except as may otherwise be approved in advance in
writing by the Board, and except during vacation periods and reasonable periods
of absence due to sickness, personal injury or other disability, the Executive
will devote substantially all of his business time and attention to the
performance of his duties to the Company.
3. Place of Performance. In connection with his employment during the
Term, unless otherwise agreed by the Executive, the Executive will be based at
the Company's principal executive offices. The Executive will undertake normal
business travel on behalf of the Company.
4. Compensation and Related Matters.
4.1 Compensation and Benefits.
(i) Annual Base Salary. During the Term of this Agreement, the
Company will pay to the Executive an annual base
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<PAGE>
salary of not less than $265,000, which annual base salary may be modified from
time to time by the Board (or the Compensation Committee thereof) in its sole
discretion, payable at the times and in the manner consistent with the Company's
general policies regarding compensation of executive employees. The Board may
from time to time authorize such additional compensation to the Executive, in
cash or in property, as the Board may determine in its sole discretion to be
appropriate.
(ii) Annual Incentive Compensation. If the Board (or the
Compensation Committee thereof) authorizes any cash incentive compensation or
approves any other management incentive program or arrangement, the Executive
will be eligible to participate in such plan, program or arrangement under the
general terms and conditions applicable to executive and management employees;
provided, however, that so long as the Executive remains employed by the Company
at the end of the applicable fiscal year, (a) the annual cash incentive
compensation paid by the Company to the Executive for the Company's fiscal year
that includes the Effective Date, aggregated with any other annual incentive
compensation earned by the Executive for calendar year 1996, will be in an
amount not less than the greater of (1) 40% of the Executive's highest annual
base salary rate during the fiscal year to which such incentive compensation
relates, and (2) the Executive's actual annual incentive compensation earned
during such fiscal year, as determined by the Company's Board (or the
Compensation Committee thereof), and (b) the cash incentive compensation paid to
the Executive for the Company's next succeeding fiscal year will be in an amount
not less than the greater of (1) 40% of the Executive's highest annual base
salary rate during the fiscal year to which such incentive compensation relates,
and (2) the Executive's actual annual incentive compensation during such fiscal
year, as determined by the Board (or the Compensation Committee thereof). Except
as set forth in the proviso to the preceding sentence, nothing in this Section
4.1(ii) will guarantee to the Executive any specific amount of incentive
compensation, or prevent the Board (or the Compensation Committee thereof) from
establishing performance goals and compensation targets applicable only to the
Executive.
4.2 Executive Benefits. In addition to the compensation described in
Section 4.1, the Company will make available to the Executive and his eligible
dependents, subject to the terms and conditions of the applicable plans,
including without limitation the eligibility rules, participation in all
Company-sponsored employee benefit plans including all employee retirement
income and welfare benefit policies, plans, programs or arrangements in which
senior executives of the Company participate, including any stock option, stock
purchase, stock appreciation, savings, pension, supplemental executive
retirement or other retirement income or welfare benefit, disability, salary
continuation, and any other deferred compensation, incentive compensation, group
and/or executive life, health,
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<PAGE>
medical/hospital or other insurance (whether funded by actual insurance or
self-insured by the Company), expense reimbursement or other employee benefit
policies, plans, programs or arrangements or any equivalent successor policies,
plans, programs or arrangements that may now exist or be adopted hereafter by
the Company.
4.3 Expenses. The Company will promptly reimburse the Executive for
all travel and other business expenses the Executive incurs in order to perform
his duties to the Company under this Agreement in a manner commensurate with the
Executive's position and level of responsibility with the Company, and in
accordance with the Company's policy regarding substantiation of expenses.
5. Termination. Notwithstanding the Term specified in Section 1.2, the
termination of the Executive's employment hereunder will be governed by the
following provisions:
5.1 Death. In the event of the Executive's death during the Term,
the Company will pay to the Executive's beneficiaries or estate, as appropriate,
promptly after the Executive's death, (i) the unpaid annual base salary to which
the Executive is entitled, pursuant to Section 4.1, through the date of the
Executive's death, and (ii) for any accrued but unused vacation days, to the
extent and in the amounts, if any, provided under the Company's usual policies
and arrangements. This Section 5.1 will not limit the entitlement of the
Executive's estate or beneficiaries to any death or other benefits then
available to the Executive under any life insurance, stock ownership, stock
options, or other benefit plan or policy that is maintained by the Company for
the Executive's benefit.
5.2 Disability.
(i) If the Company determines in good faith that the Executive
has incurred a Disability (as defined below) during the Term, the Company may
give the Executive written notice of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company will
terminate effective on the 30th day after receipt of such notice by the
Executive, provided that within the 30 days after such receipt, the Executive
will not have returned to full-time performance of his duties. The Executive
will continue to receive his annual base salary and benefits until the date of
termination. In the event of the Executive's Disability, the Company will pay
the Executive, promptly after the Executive's termination, (a) the unpaid annual
base salary to which he is entitled, pursuant to Section 4.1, through the date
of the Executive's termination, (b) for any accrued but unused vacation days, to
the extent and in the amounts, if any, provided under the Company's usual
policies and arrangements, and (c) a lump sum in cash in an amount equal to 50%
of his annual base salary at the time of termination. This Section 5.2 will not
limit the entitlement of
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<PAGE>
the Executive, the Executive's estate or beneficiaries to any disability or
other benefits then available to the Executive under any disability insurance or
other benefit plan or policy that is maintained by the Company for the
Executive's benefit.
(ii) For purposes of this Agreement, "Disability" will mean
the Executive's incapacity due to physical or mental illness substantially to
perform his duties on a full-time basis for six consecutive months and within 30
days after a notice of termination is thereafter given by the Company the
Executive will not have returned to the full-time performance of the Executive's
duties; provided, however, if the Executive disagrees with a determination to
terminate him because of Disability, the question of the Executive's disability
will be subject to the certification of a qualified medical doctor agreed to by
the Company and the Executive or, in the event of the Executive's incapacity to
designate a doctor, the Executive's legal representative. In the absence of
agreement between the Company and the Executive, each party will nominate a
qualified medical doctor and the two doctors will select a third doctor, who
will make the determination as to Disability. In order to facilitate such
determination, the Executive will, as reasonably requested by the Company, (a)
make himself available for medical examinations by a doctor in accordance with
this Section 5.2(ii), and (b) grant the Company and any such doctor access to
all relevant medical information concerning him, arrange to furnish copies of
medical records to such doctor and use his best efforts to cause his own doctor
to be available to discuss his health with such doctor.
5.3 Cause
(i) The Company may terminate the Executive's employment
hereunder for Cause (as defined below). In the event of the Executive's
termination for Cause, the Company will promptly pay to the Executive (or his
representative) the unpaid annual base salary to which he is entitled, pursuant
to Section 4.1, through the date the Executive is terminated and the Executive
will be entitled to no other compensation, except as otherwise due to him under
applicable law.
(ii) For purposes of this Agreement, the Company will have
"Cause" to terminate the Executive's employment hereunder upon a finding by the
Board that (a) the Executive committed an illegal act or acts that were intended
to and did defraud the Company, (b) the Executive engaged in gross negligence or
gross misconduct against the Company or another employee, or in carrying out his
duties and responsibilities, or (c) the Executive materially breached any of the
express covenants set forth in Section 9.1, 9.2 or 9.3. The Company will not
have Cause unless and until the Company provides the Executive with written
notice that the Company intends to terminate his employment for Cause. Such
written notice will specify the particular act or acts, or failure to act, that
is or
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<PAGE>
are the basis for the decision to so terminate the Executive's employment for
Cause. The Employee will be given the opportunity within 30 calendar days of the
receipt of such notice to meet with the Board to defend such act or acts, or
failure to act. The Executive's employment by the Company automatically will be
terminated under this Section 5.3 for Cause as of the receipt of the written
notice from the Company or, if later, the date specified in such notice. A
notice given under this Section 5.3 must set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment for Cause, and if the termination date is other than the
date of receipt of such notice, specify the date on which the Executive's
employment is to be terminated (which date will not be earlier than the date on
which such notice is given in accordance with Section 13.5). Such notice must be
given no later than 180 business days after a director of the Company
(excluding the Executive, if applicable) first has actual knowledge of the
events justifying the purported termination.
5.4 Termination.
(i) Involuntary Termination. The Executive's employment
hereunder may be terminated by the Company for any reason by written notice as
provided in Section 12.5. The Executive will be treated for purposes of this
Agreement as having been involuntarily terminated by the Company other than for
Cause if the Executive terminates his employment with the Company for any of the
following reasons (each, a "Good Reason"): without the Executive's written
consent, (a) the Company has breached any material provision of this Agreement
and within 30 days after notice thereof from the Executive, the Company fails to
cure such breach; (b) a successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company fails to assume liability under the
Agreement; (c) at any time after the Company has notified the Executive pursuant
to Section 1.2 that the Company does not intend to renew the Agreement and the
Executive's employment at the end of the Term (including any previous renewals)
(rather than to allow the Agreement automatically to renew); (d) a material
reduction in the aggregate benefits described by Section 4.2 (other than
stock-based compensation) provided to the Executive, unless such decrease is
required by law or is applicable to all employees of the Company eligible to
participate in any employee benefit arrangement affected by such reduction; (e)
a significant reduction in the Executive's duties or the addition of duties,
which in either case are materially inconsistent with the Executive's title or
position; or (f) a reduction in the Executive's annual base salary.
(ii) Voluntary Termination. The Executive may voluntarily
terminate the Agreement at any time by notice to the Company as provided in
Section 12.5. The Executive's death or Disability (as defined in Section 5.2(ii)
during the term of the
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<PAGE>
Agreement will constitute a voluntary termination of employment for purposes of
eligibility for termination payments and benefits as provided in Section 5.5,
but for no other purpose.
5.5 Termination Payments and Benefits.
(i) Form and Amount. Upon the Executive's involuntary
termination, other than for Cause, (a) subject to Section 5.5(iii), the Company
will pay or provide to the Executive (1) his annual base salary and benefits
until the date of termination, (2) within five business days after termination
of his employment, a lump sum cash payment equal in amount to three times the
sum of (x) the Executive's highest annual base salary in effect during the three
years prior to his date of termination, and (y) the highest annual incentive
compensation earned by the Executive during the same three-year period, (3)
three additional years of age and service credit under the qualified and
nonqualified defined benefit retirement plans of the Company in which the
Executive participates at the time of termination; provided, however, that in
the case of a qualified defined benefit pension plan, the present value of the
additional benefit the Executive would have accrued if he had been credited for
all purposes with the additional years of age and service under such plan as of
the Executive's date of termination with the Company will be paid in a lump sum
in cash within five business days after termination of the Executive's
employment, and (4) for a period of one year after termination of his
employment, the continuation of the employee welfare benefits set forth in
Section 4.2 except as offset by benefits paid by other sources as set forth in
Section 8, or as prohibited by law or as a condition of maintaining the
tax-favored status of any such benefits to the Company or its employees; (b) the
Executive's benefit under the applicable supplemental executive retirement plan
will be not less than the benefit the Executive would have received under the
terms of the corresponding plan (including any individual modifications thereof)
applicable to the Executive as in effect immediately prior to the Effective Date
determined as if the Executive had continued employment under the terms of such
corresponding plan (and modifications) until his actual termination of
employment. For purposes of Section 5.5(i) (a) (2), the three-year period will
include employment with Diamond Shamrock, Inc. or any of its affiliates.
(ii) Maintenance of Benefits. During the period set forth in
Section 5.5(i)(a)(4), the Company will use its best efforts to maintain in full
force and effect for the continued benefit of the Executive all referenced
benefits or will arrange to make available to the Executive benefits
substantially similar to those that the Executive would otherwise have been
entitled to receive if his employment had not been terminated. Such benefits
will be provided to the Executive on the same terms and conditions (including
employee contributions toward the premium payments) under which the Executive
was entitled to participate immediately prior to his termination.
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(iii) Release. No benefit will be paid or made available under
Section 5.5(i) (a) unless the Executive first executes a release in the form
attached as an exhibit to this Agreement, and (b) to the extent any portion of
such release is subject to the seven-day revocation period prescribed by the Age
Discrimination in Employment Act of 1967, as amended, or to any similar
revocation period in effect on the date of termination of Executive's
employment, such revocation period has expired.
6. Change in Control Provisions.
6.1 Impact of Change in Control. In the event of a "Change in
Control" of the Company, as defined in Section 6.2, (i) the Company will cause
all cash benefits due under this Agreement to be secured by an irrevocable trust
for the benefit of the Executive, the assets of which will be subject to the
claims of the Company's creditors, and will transfer to such trust cash and
other property adequate to satisfy all of the expenses of the trust for at least
five years after the Change in Control and any of the Company's actual and
potential cash obligations under this Agreement, (ii) if the Executive's
employment is involuntarily terminated without Cause after the Change in
Control, (A) the covenants of Sections 9.1 and 10 will be inapplicable to the
Executive, and (B) the covenant of Section 9.2 will expire on the third
anniversary of the date of termination of the Executive's employment, and (iii)
the definition of Good Reason, as set forth in Section 5.4(i) above, will be
expanded to include the following:
(a) A good faith determination by the Executive that, as a
result of the Change in Control and a change in circumstances thereafter
significantly affecting his positions, including a change in the scope of
business or other activities for which he was responsible, he has been rendered
substantially unable to carry out, has been substantially hindered in the
performance of, or has suffered a substantial reduction in, any of the
authorities, powers, functions, responsibilities or duties attached to any of
the Executive's positions; the Executive's determination will be presumed to
have been made in good faith unless otherwise shown by the Company by clear and
convincing evidence;
(b) The relocation of the Company's principal executive
offices (but only if, immediately prior to the Change in Control, the
Executive's principal place of employment was at the Company's principal
executive offices), or requirement that the Executive have as his principal
location of work any location that is, in excess of 50 miles from the location
thereof immediately preceding the Change in Control or to travel away from his
home or office significantly more often that required immediately prior to the
Change in Control; or
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(c) For any reason, or without reason, during the 30-day
period immediately following the first anniversary of the first occurrence of a
Change in Control.
6.2 Definition of Change in Control. For purposes of this
Agreement, a "Change in Control" will be deemed to occur if at any time during
the term of the Agreement any of the following events will occur:
(i) The Company is merged, consolidated or reorganized into
or with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization, less than 50% of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate by the holders of
Voting Stock (as that term is hereafter defined) of the Company immediately
prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation or other legal person,
and as a result of such sale or transfer, less than 50% of the combined voting
power of the then-outstanding voting securities of such corporation or person
are held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale;
(iii) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as promulgated pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any
person (as the term "person" is used in Section 13(d) (3) or Section 14(d) (2)
of the Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 20% or more of
the combined voting power of the then-outstanding securities of the Company
entitled to vote generally in the election of Directors of the Company ("Voting
Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or report
or item therein) that a change in control of the Company has or may have
occurred or will or may occur in the future pursuant to any then-existing
contract or transaction; or
(v) If during the period of two consecutive years
individuals who at the beginning of any such period constitute the Directors of
the Company cease for any reason to constitute at least a majority thereof
unless the election, or the nomination for election by the Company's
shareholders, of each Director of the Company first elected during such period
was approved by a vote of at least two-thirds of the Directors of the
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Company then still in office who were Directors of the Company at the beginning
of any such period (excluding for this purpose the election of any new Director
in connection with an actual or threatened election or proxy contest).
Notwithstanding the foregoing provisions of Section 6.2(iii) or (iv) hereof,
unless otherwise determined in a specific case by majority vote of the Board (or
the Compensation Committee thereof), a "Change in Control" will not be deemed to
have occurred for purposes of this Agreement solely because the Company, an
entity in which the Company directly or beneficially owns 50% or more of the
voting securities of such entity, any Company-sponsored employee stock ownership
plan or any other employee benefit plan of the Company either files or becomes
obligated to file a report or a proxy statement under or in response to Schedule
13D, Schedule 14D-l, Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) under the Exchange Act, disclosing beneficial
ownership by it of shares of voting securities of the Company, whether in excess
of 20% or otherwise, or because the Company reports that a change in control of
the Company has or may have occurred or will or may occur in the future by
reason of such beneficial ownership. Notwithstanding the foregoing provisions of
Section 6.2, the Merger will not constitute a Change in Control.
7. Certain Additional Payments by the Company:
(i) Anything in this Agreement to the contrary notwithstanding, if
it is determined (as hereafter provided) that any payment or distribution by the
Company to or for the benefit of the Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise pursuant to or by reason of any other agreement, policy, plan, program
or arrangement, including without limitation any stock option, stock
appreciation right or similar right, or the lapse or termination of any
restriction on or the vesting or exercisability of any of the foregoing (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code (or any successor provision thereto) by reason of being "contingent on a
change in ownership or control" of Diamond Shamrock, Inc. or the Company, within
the meaning of Section 280G of the Code (or any successor provision thereto) or
to any similar tax imposed by state or local law, or any interest or penalties
with respect to such excise tax (such tax or taxes, together with any such
interest and penalties, are hereafter collectively referred to as the "Excise
Tax"), then the Executive will be entitled to receive an additional payment or
payments (a "Gross-Up Payment") in an amount such that, after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. No Gross-Up Payment will be made with respect to the
Excise Tax, if any, attributable to (a) any incentive
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stock option, as defined by Section 422 of the Code ("ISO") granted prior to the
execution of this Agreement (unless a comparable Gross-Up Payment has
theretofore been made available with respect to such option), or (b) any stock
appreciation or similar right, whether or not limited, granted in tandem with
any ISO described in clause (a).
(ii) Subject to the provisions of Section 7(vi) hereof, all
determinations required to be made under this Section 7, including whether an
Excise Tax is payable by the Executive and the amount of such Excise Tax and
whether a Gross-Up Payment is required and the amount of such Gross-Up Payment,
will be made by a nationally recognized firm of certified public accountants
(the "Accounting Firm") selected by the Executive in his sole discretion. The
Executive will direct the Accounting Firm to submit its determination and
detailed supporting calculations to both the Company and the Executive within
15 calendar days after the Termination Date, if applicable, and any other such
time or times as may be requested by the Company or the Executive. If the
Accounting Firm determines that any Excise Tax is payable by the Executive, the
Company will pay the required Gross-Up Payment to the Executive within five
business days after receipt of such determination and calculations. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
will, at the same time as it makes such determination, furnish the Executive
with an opinion that he has substantial authority not to report any Excise Tax
on his federal, state, local income or other tax return. Any determination by
the Accounting Firm as to the amount of the Gross-Up Payment will be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code (or any successor provision thereto) and
the possibility of similar uncertainty regarding applicable state or local tax
law at the time of any determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts or fails
to pursue its remedies pursuant to Section 7(ii) hereof and the Executive
thereafter is required to make a payment of any Excise Tax, the Executive will
direct the Accounting Firm to determine the amount of the Underpayment that has
occurred and to submit its determination and detailed supporting calculations to
both the Company and the Executive as promptly as possible. Any such
Underpayment will be promptly paid by the Company to, or for the benefit of, the
Executive within five business days after receipt of such determination and
calculations.
(iii) The Company and the Executive will each provide the Accounting
Firm access to and copies of any books, records and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm
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in connection with the preparation and issuance of the determination
contemplated by Section 7(ii) hereof.
(iv) The federal, state and local income or other tax returns filed
by the Executive will be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive will make proper payment of the amount of any
Excise Tax, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If prior
to the filing of the Executive's federal income tax return, or corresponding
state or local tax return, if relevant, the Accounting Firm determines that the
amount of the Gross-Up Payment should be reduced, the Executive will within
five business days pay to the Company the amount of such reduction.
(v) The fees and expenses of the Accounting Firm for its services
in connection with the determinations and calculations contemplated by Sections
7(ii) and (iv) hereof will be borne by the Company. If such fees and expenses
are initially paid by the Executive, the Company will reimburse the Executive
the full amount of such fees and expenses within five business days after
receipt from the Executive of a statement therefor and reasonable evidence of
his payment thereof.
(vi) The Executive will notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of a Gross-Up Payment. Such notification will be given as
promptly as practicable but no later than 10 business days after the Executive
actually receives notice of such claim and the Executive will further apprise
the Company of the nature of such claim and the date on which such claim is
requested to be paid (in each case, to the extent known by the Executive). The
Executive will not pay such claim prior to the earlier of (a) the expiration of
the 30-calendar-day period following the date on which he gives such notice to
the Company and (b) the date that any payment of amount with respect to such
claim is due. If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
will:
(1) provide the Company with any written records or documents in
his possession relating to such claim reasonably requested by the Company;
(2) take such action in connection with contesting such claim as
the Company will reasonably request in writing from time to time,
including without limitation accepting legal representation with respect
to such
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claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(3) cooperate with the Company in good faith in order effectively to
contest such claim; and
(4) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company will bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and will indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section 7(vi), the Company will control all proceedings taken in connection
with the contest of any claim contemplated by this Section 7(vi) and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim (provided, however, that the Executive may participate therein at his
own cost and expense) and may, at its option, either direct the Executive to pay
the tax claimed and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company will determine; provided, however,
that if the Company directs the Executive to pay the tax claimed and sue for a
refund, the Company will advance the amount of such payment to the Executive on
an interest-free basis and will indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax, including interest or
penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
will be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive will be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(vii) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Section 7(vi) hereof, the Executive receives any
refund with respect to such claim, the Executive will (subject to the Company's
complying with the requirements of Section 7(vi) hereof) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after any taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company
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pursuant to Section 7(vi) hereof, a determination is made that the Executive
will not be entitled to any refund with respect to such claim and the Company
does not notify the Executive in writing of its intent to contest such denial or
refund prior to the expiration of 30 calendar days after such determination,
then such advance will be forgiven and will not be required to be repaid and the
amount of such advance will offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid pursuant to this Section 7.
8. Mitigation and Offset. The Executive is under no obligation to mitigate
damages or the amount of any payment or benefit provided for hereunder by
seeking other employment or otherwise; provided, however, that the Executive's
coverage under the Company's welfare benefit plans will be reduced to the extent
that the Executive becomes covered under any comparable employee benefit plan
made available by another employer and covering the same type of benefits. The
Executive will report to the Company any such benefits actually received by him.
9. Competition: Confidentiality: Nonsolicitation
9.1 (i) Subject to Section 6.1(ii), the Executive hereby covenants
and agrees that during the Term and for one year following the Term he will not,
without the prior written consent of the Company, engage in Competition (as
defined below) with the Company. For purposes of this Agreement, if the
Executive takes any of the following actions he will be engaged in
"Competition": engaging in or carrying on, directly or indirectly, any
enterprise, whether as an advisor, principal, agent, partner, officer, director,
employee, stockholder, associate or consultant to any person, partnership,
corporation or any other business entity, that is principally engaged in the
business of refining and/or marketing oil or related products in States or
Provinces in which the Company (or any division or segment thereof) has
operations; provided, however, that "Competition" will not include (a) the mere
ownership of securities in any enterprise and exercise of rights appurtenant
thereto or (b) participation in management of any enterprise or business
operation thereof other than in connection with the competitive operation of
such enterprise.
(ii) Subject to Section 6.1(ii), the Executive hereby
covenants and agrees that during the Term and for three years following the Term
he will not assist a third party in preparing or making an unsolicited bid for
the Company, engaging in a proxy contest with the Company, or engaging in any
other similar activity.
9.2 During the Term, the Company agrees that it will disclose to
Executive its confidential or proprietary information (as defined in this
Section 9.2) to the extent necessary for Executive to carry out his obligations
under this Agreement. Subject to Section 6.1(ii), the Executive hereby covenants
and
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agrees that he will not, without the prior written consent of the Company,
during the Term or thereafter disclose to any person not employed by the
Company, or use in connection with engaging in Competition with the Company, any
confidential or proprietary information of the Company. For purposes of this
Agreement, the term "confidential or proprietary information" will include all
information of any nature and in any form that is owned by the Company and that
is not publicly available or generally known to persons engaged in businesses
similar or related to those of the Company. Confidential information will
include, without limitation, the Company's financial matters, customers,
employees, industry contracts, and all other secrets and all other information
of a confidential or proprietary nature. The foregoing obligations imposed by
this Section 9.2 will cease if such confidential or proprietary information will
have become, through no fault of the Executive, generally known to the public or
the Executive is required by law to make disclosure (after giving the Company
notice and an opportunity to contest such requirement).
9.3 Subject to Section 6.1(ii), the Executive hereby covenants and
agrees that during the Term and for one year thereafter he will not attempt to
influence, persuade or induce, or assist any other person in so persuading or
inducing, any employee of the Company to give up, or to not commence, employment
or a business relationship with the Company.
9.4 Executive acknowledges and agrees that the remedy at law
available to the Company for breach of any of his post-termination obligations
under Sections 9.1, 9.2 and 9.3 would be inadequate and that damages flowing
from such a breach may not readily be susceptible to being measured in monetary
terms. Accordingly, Executive acknowledges, consents and agrees that, in
addition to any other rights or remedies which the Company may have at law, in
equity or under this Agreement, upon adequate proof of his violation of any such
provision of this Agreement, the Company will be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened or
further breach, without the necessity of proof of actual damage.
10. Post-termination Assistance. Subject to Section 6.1(ii), the Executive
agrees that after his employment with the Company has terminated he will
provide, upon reasonable notice, such information and assistance to the Company
as may reasonably be requested by the Company in connection with any audit,
governmental investigation or litigation in which it or any of its affiliates is
or may become a party; provided, however, that (i) the Company agrees to
reimburse the Executive for any related out-of-pocket expenses, including travel
expenses, and to pay the Executive reasonable compensation for his time based on
his rate of annual salary at the time of termination and (ii) any such
assistance may not unreasonably interfere with the then-current employment of
the Executive.
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11. Survival. The expiration or termination of the Term will not impair
the rights or obligations of any party hereto that accrue hereunder prior to
such expiration or termination, except to the extent specifically stated herein.
In addition to the foregoing, the Executive's covenants contained in Sections
9.1, 9.2, 9.3 and 10 and the Company's obligations under Sections 5, 7 and 12.1
will survive the expiration or termination of Executive's employment.
12. Miscellaneous Provisions.
12.1 Legal Fees and Expenses. Without regard to whether the
Executive prevails, in whole or in part, in connection therewith, the Company
will pay and be financially responsible for 100% of any and all attorneys' and
related fees and expenses incurred by the Executive in connection with any
dispute associated with the interpretation, enforcement or defense of the
Executive's rights under this Agreement by litigation or otherwise; provided
that, in regard to such dispute, the Executive has not acted in bad faith or
with no colorable claim of success. All such fees and expenses will be paid by
the Company as incurred by the Executive on a monthly basis upon an undertaking
by the Executive to repay such advanced amounts if a court determines, in a
decision against which no appeal may be taken or with respect to which the time
period to appeal has expired, that he acted in bad faith or with no colorable
claim of success.
12.2 Binding on Successors. This Agreement will be binding upon and
inure to the benefit of the Company, the Executive and each of their respective
successors, assigns, personal and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable.
12.3 Governing Law. This Agreement will be governed construed,
interpreted and enforced in accordance with the substantive laws of the State of
Delaware, without regard to conflicts of law principles.
12.4 Severability. Any provision of this Agreement that is deemed
invalid, illegal or unenforceable in any jurisdiction will, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provisions of this Agreement
invalid, illegal, or unenforceable in any other jurisdiction. If any covenant
should be deemed invalid, illegal or unenforceable because its scope is
considered excessive, such covenant will be modified so that the scope of the
covenant is reduced only to the minimum extent necessary to render the modified
covenant valid, legal and enforceable.
12.5 Notices. For all purposes of this Agreement, all
communications, including without limitation notices, consents,
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requests or approvals, required or permitted to be given hereunder will be in
writing and will be deemed to have been duly given when hand delivered or
dispatched by electronic facsimile transmission (with receipt thereof
confirmed), or five business days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid, or
three business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS, or Purolator, addressed to the
Company (to the attention of the Secretary of the Company) at its principal
executive offices and to the Executive at his principal residence, or to such
other address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address will be effective
only upon receipt.
(i) To The Company. If to the Company, addressed to the
attention of General Counsel at 9830 Colonnade Boulevard, San Antonio, Texas
78230.
(ii) To the Executive. If to the Executive, to him in care of
the Company at the above address.
12.6 Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same Agreement.
12.7 Entire Agreement. The terms of this Agreement are intended by
the parties to be the final expression of their agreement with respect to the
Executive's employment by the Company and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend that this
Agreement will constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative or other legal proceeding to vary the terms of this Agreement.
12.8 Amendments; Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, approved by the
Company and signed by the Executive and the Company. Failure on the part of
either party to complain of any action or mission, breach or default on the
part of the other party, no matter how long the same may continue, will never be
deemed to be a waiver of any rights or remedies hereunder, at law or in equity.
The Executive or the Company may waive compliance by the other party with any
provision of this Agreement that such other party was or is obligated to comply
with or perform only through an executed writing; provided, however, that such
waiver will not operate as a waiver of, or estoppel with respect to, any other
or subsequent failure.
12.9 No Inconsistent Actions. The parties will not voluntarily
undertake or fail to undertake any action or course of action that is
inconsistent with the provisions or essential
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intent of this Agreement. Furthermore, it is the intent of the parties hereto to
act in a fair and reasonable manner with respect to the interpretation and
application of the provisions of this Agreement.
12.10 Headings and Section References. The headings used in this
Agreement are intended for convenience or reference only and will not in any
manner amplify, limit, modify or otherwise be used in the construction or
interpretation of any provision of this Agreement. All section references are to
sections of this Agreement, unless otherwise noted.
13. Effectiveness. Prior Agreement and Consent. This Agreement will become
effective upon, and the Prior Agreement will terminate immediately prior to, the
Effective Date, whereupon all references to the "Company" herein will be treated
as references to Ultramar Corporation. By executing this Agreement, Executive
hereby consents to the assumption of this Agreement by Ultramar Corporation upon
the Effective Date. Notwithstanding any other provision of this Agreement, if
the Merger Agreement is terminated prior to the Effective Date, this Agreement
will have no further force or effect, and the Prior Agreement will continue in
effect as though this Agreement had not been entered into.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written but effective as provided in Section 13.
/s/ Paul Eisman
----------------------------------
Paul Eisman
DIAMOND SHAMROCK, INC.,
a Delaware corporation
By: /s/ Roger Hemminghaus
------------------------------
Roger Hemminghaus
Chief Executive Officer and President
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Exhibit
GENERAL RELEASE OF ALL CLAIMS
This General Release of all Claims (this "Agreement") is entered into by
and between ____________ ("Executive") and Ultramar Diamond Shamrock Corporation
(including its subsidiaries) (collectively the "Company") effective as of
________________.
In consideration of the promises set forth in the employment agreement
between Executive and the Company, dated _______________________ 1996, as
amended as of the effective date hereof (the "Employment Agreement"), as well as
any promises set forth in this Agreement, Executive and the Company agree as
follows:
(1) Employment Agreement Entitlements
The Company will provide Executive the post-termination payments and
benefits to which he is entitled under the Employment Agreement.
(2) Return of Property
All Company files, access keys, desk keys, ID badges and credit cards, and
such other property of the Company as the Company may reasonably request,
in Executive's possession must be returned no later than the date of
Executive's termination from the Company (the "Termination Date").
(3) General Release and Waiver of Claims
Except as provided in the last sentence of this paragraph (3), Executive
hereby unconditionally and forever releases, discharges and waives any and
all claims of any nature whatsoever, whether legal, equitable or
otherwise, which Executive may have against the Company arising at any
time on or before the Termination Date, other than with respect to the
obligations of the Company to the Executive under the Employment
Agreement. This release of claims extends to any and all claims of any
nature whatsoever, other than with respect to the obligations of the
Company to the Executive under the Employment Agreement, whether known,
unknown or capable or incapable of being known as of the Termination Date
of thereafter. This Agreement is a release of all claims of any nature
whatsoever by Executive against the Company, other than with respect to
the obligations of the Company to the Executive under the Employment
Agreement, and includes, other than as herein provided, any and all
claims, demands, causes of action, liabilities whether known or unknown
including those caused by, arising from or related to Executive's
employment relationship with the Company
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including, but without limitation, any and all alleged discrimination or
acts of discrimination which occurred or may have occurred on or before
the Termination Date based upon race, color, sex, creed, national origin,
age, disability or any other violation of any Equal Employment Opportunity
Law, ordinance, rule, regulation or order, including, but not limited to,
Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights
Act of 1991; the Age Discrimination in Employment Act, as amended (as
further described in Section 7 below); the Americans with Disabilities
Act; claims under the Employee Retirement Income Security Act ("ERISA");
or any other federal, state or local laws or regulations regarding
employment discrimination or termination of employment. This also includes
claims for wrongful discharge, fraud, or misrepresentation under any
statute, rule, regulation or under the common law.
The Executive agrees and understands and knowingly agrees to this release
because it is his intent in executing this Agreement to forever discharge
the Company from any and all present, future, foreseen or unforeseen
causes of action except for the obligations of the Company set forth in
the Employment Agreement.
Notwithstanding the foregoing, Executive does not release, discharge or
waive any rights to indemnification that he may have under the By-Laws of
the Company, the laws of the State of Delaware, any indemnification
agreement between the Executive and the Company or any insurance coverage
maintained by or on behalf of the Company.
(4) Release and Waiver of Claims Under the Age Discrimination in Employment
Act
Executive acknowledges that the Company encouraged him to consult with an
attorney of his choosing, and through this Agreement encourages him to
consult with his attorney with respect to possible claims under the Age
Discrimination in Employment Act of 1967, as amended ("ADEA") and that
Executive acknowledges that he understands that the ADEA is a federal
statute that prohibits discrimination, on the basis of age, in employment,
benefits, and benefit plans. Executive wishes to waive any and all claims
under the ADEA that he may have, as of the Termination Date, against the
Company, its shareholders, employees, or successors and hereby waives such
claims. Executive further understands that by signing this Agreement he is
in fact waiving, releasing and forever giving up any claim under the ADEA
that may have existed on or prior to the Termination Date. Executive
acknowledges that the Company has informed him that he has at his option,
twenty-one (21) days in which to sign the waiver of this claim under ADEA,
and he does hereby knowingly and voluntarily waive said twenty-one (21)
day
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period. Executive also understands that he has seven (7) days following
the Termination Date within which to revoke the release contained in this
paragraph by providing a written notice of his revocation of the release
and waiver contained in this paragraph to the Company. Executive further
understands that this right to revoke the release contained in this
paragraph relates only to this paragraph and does not act as a revocation
of any other term of this Agreement.
(5) Proceedings
Executive has not filed, and agrees not to initiate or cause to be
initiated on his behalf, any complaint, charge, claim or proceeding
against the Company before any local, state or federal agency, court or
other body relating to his employment or the termination of his employment
(each individually, a "Proceeding"), and agrees not to voluntarily
participate in any Proceeding. Executive waives any right he may have to
benefit in any manner from any relief (whether monetary or otherwise)
arising out of any Proceeding.
(6) Remedies
In the event Executive initiates or voluntarily participates in any
Proceeding, or if he fails to abide by any of the terms of this Agreement
or his post-termination obligations contained in the Employment Agreement,
or if he revokes the ADEA release contained in Paragraph 4 of this
Agreement within the seven-day period provided under Paragraph 4, the
Company may, in addition to any other remedies it may have, reclaim any
amounts paid to him under the termination provisions of the Employment
Agreement or terminate any benefits or payments that are subsequently due
under the Employment Agreement, without waiving the release granted
herein. Executive acknowledges and agrees that the remedy at law available
to the Company for breach of any of his post-termination obligations under
the Employment Agreement or his obligations under Paragraphs 3, 4, and 5
of this Agreement would be inadequate and that damages flowing from such a
breach may not readily be susceptible to being measured in monetary terms.
Accordingly, Executive acknowledges, consents and agrees that, in addition
to any other rights or remedies which the Company may have at law, in
equity or under this Agreement, upon adequate proof of his violation of
any such provision of this Agreement, the Company shall be entitled to
immediate injunctive relief and may obtain a temporary order restraining
any threatened or further breach, without the necessity of proof of actual
damage.
Executive understands that by entering into this Agreement he will be
limiting the availability of certain remedies
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that he may have against the Company and limiting also his ability to
pursue certain claims against the Company.
(7) Severability Clause
In the event any provision or part of this Agreement is found to be
invalid or unenforceable, only that particular provision or part so found,
and not the entire agreement, will be inoperative.
(8) Non-Admission
Nothing contained in this Agreement will be deemed or construed as an
admission of wrongdoing or liability on the part of the Company.
(9) Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, applicable to agreements made and to be
performed in that State; and the parties agree to the jurisdiction of the
U.S. District Court for the District of Delaware, and agree to appear in
any action in such courts by service of process by certified mail, return
receipt requested, at the following addresses:
To Company:
ULTRAMAR DIAMOND SHAMROCK CORPORATION
9830 Colonnade Boulevard
San Antonio, Texas 78230
and
To Executive:
--------------------------------------
--------------------------------------
--------------------------------------
THE EXECUTIVE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND THAT HE FULLY
KNOWS, UNDERSTANDS, AND APPRECIATES ITS CONTENTS, AND THAT HE HEREBY EXECUTES
THE SAME AND MAKES THIS AGREEMENT AND THE RELEASE AND AGREEMENTS PROVIDED FOR
HEREIN VOLUNTARILY AND OF HIS OWN FREE WILL.
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IN WITNESS WHEREOF, the parties have executed this AGREEMENT as of the
date first set forth above.
-------------------------------------------
Paul Eisman
ULTRAMAR DIAMOND SHAMROCK CORPORATION,
a Delaware corporation
By:
---------------------------------------
Name:
------------------------------
Title:
------------------------------
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EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of November
22, 1996, but effective as provided herein, is made and entered into by and
between Diamond Shamrock, Inc., a Delaware corporation (the "Company" or
"Diamond Shamrock, Inc.", as the context requires), and Robert Beadle (the
"Executive").
WHEREAS, the Executive has been serving as a senior executive
officer of Diamond Shamrock, Inc.;
WHEREAS, the Executive is a party to an Employment Agreement with
Diamond Shamrock, Inc., dated as of February 6, 1996 (the "Prior Agreement");
WHEREAS, pursuant to the Agreement and Plan of Merger between
Ultramar Corporation, a Delaware corporation ("Ultramar Corporation") and
Diamond Shamrock, Inc., dated as of September 22, 1996 (the "Merger Agreement"),
as of the effective time of the Merger (the "Effective Date"), Diamond Shamrock,
Inc. will be merged with and into Ultramar Corporation, with Ultramar
Corporation as the surviving entity (the "Merger");
WHEREAS, the Company considers it in the best interests of its
stockholders to foster the continuous employment of certain key management
personnel;
WHEREAS, the Company recognizes that, as is the case for most
publicly held companies, the possibility of a Change in Control (as defined
herein) exists;
WHEREAS, the Company wishes to assure itself of both present and
future continuation of management in light of the Merger and in the event of a
Change in Control subsequent to the Merger;
WHEREAS, the Company wishes to employ the Executive and the
Executive is willing to render services, both on the terms and subject to the
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained, it is agreed as follows:
<PAGE>
1. Employment.
1.1 The Company hereby agrees to employ the Executive and the
Executive hereby agrees to undertake employment with the Company upon the terms
and conditions herein set forth.
1.2 Employment will be for a term commencing on the Effective Date
and, subject to earlier expiration upon the Executive's termination under
Section 5, expiring three years from the Effective Date (the "Term").
Notwithstanding the previous sentence, this Agreement and the employment of the
Executive will be automatically renewed and the Term extended, subject to
Section 5, for successive one-year periods upon the terms and conditions set
forth herein, commencing on the third anniversary of the Effective Date, and on
each anniversary date thereafter, unless either party to this Agreement gives
the other party written notice (in accordance with Section 12.5) of such party's
intention to terminate this Agreement at least three months prior to the end of
such initial or extended term. For purposes of this Agreement, any reference to
the "Term" of this Agreement will include the original term and any extension
thereof.
2. Position and Duties.
2.1 Position and Duties. During the Term, the Executive will serve
as Senior Vice President-Retail Marketing of the Company and will have such
duties, functions, responsibilities and authority as are (i) consistent with the
Executive's position as Senior Vice President-Retail Marketing of the Company;
or (ii) assigned to his office in the Company's bylaws; or (iii) reasonably
assigned to him by the Company's Board of Directors (the "Board").
2.2 Commitment. During the Term, the Executive will be the Company's
full-time employee and, except as may otherwise be approved in advance in
writing by the Board, and except during vacation periods and reasonable periods
of absence due to sickness, personal injury or other disability, the Executive
will devote substantially all of his business time and attention to the
performance of his duties to the Company.
3. Place of Performance. In connection with his employment during the
Term, unless otherwise agreed by the Executive, the Executive will be based at
the Company's principal executive offices. The Executive will undertake normal
business travel on behalf of the Company.
4. Compensation and Related Matters.
4.1 Compensation and Benefits.
(i) Annual Base Salary. During the Term of this Agreement, the
Company will pay to the Executive an annual base
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salary of not less than $265,000, which annual base salary may be modified from
time to time by the Board (or the Compensation Committee thereof) in its sole
discretion, payable at the times and in the manner consistent with the Company's
general policies regarding compensation of executive employees. The Board may
from time to time authorize such additional compensation to the Executive, in
cash or in property, as the Board may determine in its sole discretion to be
appropriate.
(ii) Annual Incentive Compensation. If the Board (or the
Compensation Committee thereof) authorizes any cash incentive compensation or
approves any other management incentive program or arrangement, the Executive
will be eligible to participate in such plan, program or arrangement under the
general terms and conditions applicable to executive and management employees;
provided, however, that so long as the Executive remains employed by the
Company at the end of the applicable fiscal year, (a) the annual cash incentive
compensation paid by the Company to the Executive for the Company's fiscal year
that includes the Effective Date aggregated with any other annual incentive
compensation earned by the Executive for calendar year 1996, will be in an
amount not less than the greater of (1) 40% of the Executive's highest annual
base salary rate during the fiscal year to which such incentive compensation
relates, and (2) the Executive's actual annual incentive compensation earned
during such fiscal year, as determined by the Company's Board (or the
Compensation Committee thereof), and (b) the cash incentive compensation paid to
the Executive for the Company's next succeeding fiscal year will be in an amount
not less than the greater of (1) 40% of the Executive's highest annual base
salary rate during the fiscal year to which such incentive compensation relates,
and (2) the Executive's actual annual incentive compensation during such fiscal
year, as determined by the Board (or the Compensation Committee thereof). Except
as set forth in the proviso to the preceding sentence, nothing in this Section
4.1(ii) will guarantee to the Executive any specific amount of incentive
compensation, or prevent the Board (or the Compensation Committee thereof) from
establishing performance goals and compensation targets applicable only to the
Executive.
4.2 Executive Benefits. In addition to the compensation described in
Section 4.1, the Company will make available to the Executive and his eligible
dependents, subject to the terms and conditions of the applicable plans,
including without limitation the eligibility rules, participation in all
Company--sponsored employee benefit plans including all employee retirement
income and welfare benefit policies, plans, programs or arrangements in which
senior executives of the Company participate, including any stock option, stock
purchase, stock appreciation, savings, pension, supplemental executive
retirement or other retirement income or welfare benefit, disability, salary
continuation, and any other deferred compensation, incentive compensation, group
and/or executive life, health,
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medical/hospital or other insurance (whether funded by actual insurance or
self-insured by the Company), expense reimbursement or other employee benefit
policies, plans, programs or arrangements or any equivalent successor policies,
plans, programs or arrangements that may now exist or be adopted hereafter by
the Company.
4.3 Expenses. The Company will promptly reimburse the Executive for
all travel and other business expenses the Executive incurs in order to perform
his duties to the Company under this Agreement in a manner commensurate with the
Executive's position and level of responsibility with the Company, and in
accordance with the Company's policy regarding substantiation of expenses.
5. Termination. Notwithstanding the Term specified in Section 1.2, the
termination of the Executive's employment hereunder will be governed by the
following provisions:
5.1 Death. In the event of the Executive's death during the Term,
the Company will pay to the Executive's beneficiaries or estate, as appropriate,
promptly after the Executive's death, (i) the unpaid annual base salary to which
the Executive is entitled, pursuant to Section 4.1, through the date of the
Executive's death, and (ii) for any accrued but unused vacation days, to the
extent and in the amounts, if any, provided under the Company's usual policies
and arrangements. This Section 5.1 will not limit the entitlement of the
Executive's estate or beneficiaries to any death or other benefits then
available to the Executive under any life insurance, stock ownership, stock
options, or other benefit plan or policy that is maintained by the Company for
the Executive's benefit.
5.2 Disability.
(i) If the Company determines in good faith that the Executive
has incurred a Disability (as defined below) during the Term, the Company may
give the Executive written notice of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company will
terminate effective on the 30th day after receipt of such notice by the
Executive, provided that within the 30 days after such receipt, the Executive
will not have returned to full-time performance of his duties. The Executive
will continue to receive his annual base salary and benefits until the date of
termination. In the event of the Executive's Disability, the Company will pay
the Executive, promptly after the Executive's termination, (a) the unpaid annual
base salary to which he is entitled, pursuant to Section 4.1, through the date
of the Executive's termination, (b) for any accrued but unused vacation days, to
the extent and in the amounts, if any, provided under the Company's usual
policies and arrangements, and (c) a lump sum in cash in an amount equal to 50%
of his annual base salary at the time of termination. This Section 5.2 will not
limit the entitlement of
4
<PAGE>
the Executive, the Executive's estate or beneficiaries to any disability or
other benefits then available to the Executive under any disability insurance or
other benefit plan or policy that is maintained by the Company for the
Executive's benefit.
(ii) For purposes of this Agreement, "Disability" will mean
the Executive's incapacity due to physical or mental illness substantially to
perform his duties on a full-time basis for six consecutive months and within 30
days after a notice of termination is thereafter given by the Company the
Executive will not have returned to the full-time performance of the
Executive's duties; provided, however, if the Executive disagrees with a
determination to terminate him because of Disability, the question of the
Executive's disability will be subject to the certification of a qualified
medical doctor agreed to by the Company and the Executive or, in the event of
the Executive's incapacity to designate a doctor, the Executive's legal
representative. In the absence of agreement between the Company and the
Executive, each party will nominate a qualified medical doctor and the two
doctors will select a third doctor, who will make the determination as to
Disability. In order to facilitate such determination, the Executive will, as
reasonably requested by the Company, (a) make himself available for medical
examinations by a doctor in accordance with this Section 5.2(ii), and (b) grant
the Company and any such doctor access to all relevant medical information
concerning him, arrange to furnish copies of medical records to such doctor and
use his best efforts to cause his own doctor to be available to discuss his
health with such doctor.
5.3 Cause.
(i) The Company may terminate the Executive's employment
hereunder for Cause (as defined below). In the event of the Executive's
termination for Cause, the Company will promptly pay to the Executive (or his
representative) the unpaid annual base salary to which he is entitled, pursuant
to Section 4.1, through the date the Executive is terminated and the Executive
will be entitled to no other compensation, except as otherwise due to him under
applicable law.
(ii) For purposes of this Agreement, the Company will have
"Cause" to terminate the Executive's employment hereunder upon a finding by the
Board that (a) the Executive committed an illegal act or acts that were intended
to and did defraud the Company, (b) the Executive engaged in gross negligence or
gross misconduct against the Company or another employee, or in carrying out his
duties and responsibilities, or (c) the Executive materially breached any of the
express covenants set forth in Section 9.1, 9.2 or 9.3. The Company will not
have Cause unless and until the Company provides the Executive with written
notice that the Company intends to terminate his employment for Cause. Such
written notice will specify the particular act or acts, or failure to act, that
is or
5
<PAGE>
are the basis for the decision to so terminate the Executive's employment for
Cause. The Employee will be given the opportunity within 30 calendar days of the
receipt of such notice to meet with the Board to defend such act or acts, or
failure to act. The Executive's employment by the Company automatically will be
terminated under this Section 5.3 for Cause as of the receipt of the written
notice from the Company or, if later, the date specified in such notice. A
notice given under this Section 5.3 must set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment for Cause, and if the termination date is other than the
date of receipt of such notice, specify the date on which the Executive's
employment is to be terminated (which date will not be earlier than the date on
which such notice is given in accordance with Section 13.5). Such notice must be
given no later than 180 business days after a director of the Company
(excluding the Executive, if applicable) first has actual knowledge of the
events justifying the purported termination.
5.4 Termination.
(i) Involuntary Termination. The Executive's employment
hereunder may be terminated by the Company for any reason by written notice as
provided in Section 12.5. The Executive will be treated for purposes of this
Agreement as having been involuntarily terminated by the Company other than for
Cause if the Executive terminates his employment with the Company for any of the
following reasons (each, a "Good Reason"): without the Executive's written
consent, (a) the Company has breached any material provision of this Agreement
and within 30 days after notice thereof from the Executive, the Company fails to
cure such breach; (b) a successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company fails to assume liability under the
Agreement; (c) at any time after the Company has notified the Executive pursuant
to Section 1.2 that the Company does not intend to renew the Agreement and the
Executive's employment at the end of the Term (including any previous renewals)
(rather than to allow the Agreement automatically to renew); (d) a material
reduction in the aggregate benefits described by Section 4.2 (other than
stock-based compensation) provided to the Executive, unless such decrease is
required by law or is applicable to all employees of the Company eligible to
participate in any employee benefit arrangement affected by such reduction; (e)
a significant reduction in the Executive's duties or the addition of duties,
which in either case are materially inconsistent with the Executive's title or
position; or (f) a reduction in the Executive's annual base salary.
(ii) Voluntary Termination. The Executive may voluntarily
terminate the Agreement at any time by notice to the Company as provided in
Section 12.5. The Executive's death or Disability (as defined in Section
5.2(ii)) during the term of the
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Agreement will constitute a voluntary termination of employment for purposes of
eligibility for termination payments and benefits as provided in Section 5.5,
but for no other purpose.
5.5 Termination Payments and Benefits.
(i) Form and Amount. Upon the Executive's involuntary
termination, other than for Cause, (a) subject to Section 5.5(iii), the Company
will pay or provide to the Executive (1) his annual base salary and benefits
until the date of termination, (2) within five business days after termination
of his employment, a lump sum cash payment equal in amount to three times the
sum of (x) the Executive's highest annual base salary in effect during the three
years prior to his date of termination, and (y) the highest annual incentive
compensation earned by the Executive during the same three-year period, (3)
three additional years of age and service credit under the qualified and
nonqualified defined benefit retirement plans of the Company in which the
Executive participates at the time of termination; provided, however, that in
the case of a qualified defined benefit pension plan, the present value of the
additional benefit the Executive would have accrued if he had been credited for
all purposes with the additional years of age and service under such plan as of
the Executive's date of termination with the Company will be paid in a lump sum
in cash within five business days after termination of the Executive's
employment, and (4) for a period of one year after termination of his
employment, the continuation of the employee welfare benefits set forth in
Section 4.2 except as offset by benefits paid by other sources as set forth in
Section 8, or as prohibited by law or as a condition of maintaining the
tax-favored status of any such benefits to the Company or its employees; (b)
the Executive's benefit under the applicable supplemental executive retirement
plan will be not less than the benefit the Executive would have received under
the terms of the corresponding plan (including any individual modifications
thereof) applicable to the Executive as in effect immediately prior to the
Effective Date determined as if the Executive had continued employment under the
terms of such corresponding plan (and modifications) until his actual
termination of employment. For purposes of Section 5.5(i) (a) (2), the
three-year period will include employment with Diamond Shamrock, Inc. or any of
its affiliates.
(ii) Maintenance of Benefits. During the period set forth in
Section 5.5(i) (a) (4), the Company will use its best efforts to maintain in
full force and effect for the continued benefit of the Executive all referenced
benefits or will arrange to make available to the Executive benefits
substantially similar to those that the Executive would otherwise have been
entitled to receive if his employment had not been terminated. Such benefits
will be provided to the Executive on the same terms and conditions (including
employee contributions toward the premium payments) under which the Executive
was entitled to participate immediately prior to his termination.
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(iii) Release. No benefit will be paid or made available under
Section 5.5(i) (a) unless the Executive first executes a release in the form
attached as an exhibit to this Agreement, and (b) to the extent any portion of
such release is subject to the seven-day revocation period prescribed by the
Age Discrimination in Employment Act of 1967, as amended, or to any similar
revocation period in effect on the date of termination of Executive's
employment, such revocation period has expired.
6. Chancre in Control Provisions.
6.1 Impact of Change in Control. In the event of a "Change in
Control" of the Company, as defined in Section 6.2, (i) the Company will cause
all cash benefits due under this Agreement to be secured by an irrevocable trust
for the benefit of the Executive, the assets of which will be subject to the
claims of the Company's creditors, and will transfer to such trust cash and
other property adequate to satisfy all of the expenses of the trust for at least
five years after the Change in Control and any of the Company's actual and
potential cash obligations under this Agreement, (ii) if the Executive's
employment is involuntarily terminated without Cause after the Change in
Control, (A) the covenants of Sections 9.1 and 10 will be inapplicable to the
Executive, and (B) the covenant of Section 9.2 will expire on the third
anniversary of the date of termination of the Executive's employment, and (iii)
the definition of Good Reason, as set forth in Section 5.4(i) above, will be
expanded to include the following:
(a) A good faith determination by the Executive that, as a
result of the Change in Control and a change in circumstances thereafter
significantly affecting his positions, including a change in the scope of
business or other activities for which he was responsible, he has been rendered
substantially unable to carry out, has been substantially hindered in the
performance of, or has suffered a substantial reduction in, any of the
authorities, powers, functions, responsibilities or duties attached to any of
the Executive's positions; the Executive's determination will be presumed to
have been made in good faith unless otherwise shown by the Company by clear and
convincing evidence;
(b) The relocation of the Company's principal executive
offices (but only if, immediately prior to the Change in Control, the
Executive's principal place of employment was at the Company's principal
executive offices), or requirement that the Executive have as his principal
location of work any location that is, in excess of 50 miles from the location
thereof immediately preceding the Change in Control or to travel away from his
home or office significantly more often that required immediately prior to the
Change in Control; or
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(c) For any reason, or without reason, during the 30-day
period immediately following the first anniversary of the first occurrence of a
Change in Control.
6.2 Definition of Chancre in Control. For purposes of this
Agreement, a "Change in Control" will be deemed to occur if at any time during
the term of the Agreement any of the following events will occur:
(i) The Company is merged, consolidated or reorganized into
or with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization, less than 50% of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate by the holders of
Voting Stock (as that term is hereafter defined) of the Company immediately
prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation or other legal person,
and as a result of such sale or transfer, less than 50% of the combined voting
power of the then-outstanding voting securities of such corporation or person
are held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale;
(iii) There is a report filed on Schedule 13D or Schedule
14D--l (or any successor schedule, form or report), each as promulgated pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any
person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of
the Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 20% or more of
the combined voting power of the then-outstanding securities of the Company
entitled to vote generally in the election of Directors of the Company ("Voting
Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or report
or item therein) that a change in control of the Company has or may have
occurred or will or may occur in the future pursuant to any then-existing
contract or transaction; or
(v) If during the period of two consecutive years
individuals who at the beginning of any such period constitute the Directors of
the Company cease for any reason to constitute at least a majority thereof
unless the election, or the nomination for election by the Company's
shareholders, of each Director of the Company first elected during such period
was approved by a vote of at least two-thirds of the Directors of the
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Company then still in office who were Directors of the Company at the beginning
of any such period (excluding for this purpose the election of any new Director
in connection with an actual or threatened election or proxy contest).
Notwithstanding the foregoing provisions of Section 6.2(iii) or (iv) hereof,
unless otherwise determined in a specific case by majority vote of the Board (or
the Compensation Committee thereof), a "Change in Control" will not be deemed to
have occurred for purposes of this Agreement solely because the Company, an
entity in which the Company directly or beneficially owns 50% or more of the
voting securities of such entity, any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the Company either files or
becomes obligated to file a report or a proxy statement under or in response to
Schedule 13D, Schedule 14D-l, Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) under the Exchange Act, disclosing
beneficial ownership by it of shares of voting securities of the Company,
whether in excess of 20% or otherwise, or because the Company reports that a
change in control of the Company has or may have occurred or will or may occur
in the future by reason of such beneficial ownership. Notwithstanding the
foregoing provisions of Section 6.2, the Merger will not constitute a Change in
Control.
7. Certain Additional Payments by the Company:
(i) Anything in this Agreement to the contrary notwithstanding, if
it is determined (as hereafter provided) that any payment or distribution by the
Company to or for the benefit of the Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise pursuant to or by reason of any other agreement, policy, plan, program
or arrangement, including without limitation any stock option, stock
appreciation right or similar right, or the lapse or termination of any
restriction on or the vesting or exercisability of any of the foregoing (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code (or any successor provision thereto) by reason of being "contingent on a
change in ownership or control" of Diamond Shamrock, Inc. or the Company, within
the meaning of Section 280G of the Code (or any successor provision thereto) or
to any similar tax imposed by state or local law, or any interest or penalties
with respect to such excise tax (such tax or taxes, together with any such
interest and penalties, are hereafter collectively referred to as the "Excise
Tax"), then the Executive will be entitled to receive an additional payment or
payments (a "Gross-Up Payment") in an amount such that, after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. No Gross-Up Payment will be made with respect to the
Excise Tax, if any, attributable to (a) any incentive
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stock option, as defined by Section 422 of the Code ("ISO") granted prior to the
execution of this Agreement (unless a comparable Gross-Up Payment has
theretofore been made available with respect to such option), or (b) any stock
appreciation or similar right, whether or not limited, granted in tandem with
any ISO described in clause (a).
(ii) Subject to the provisions of Section 7(vi) hereof, all
determinations required to be made under this Section 7, including whether an
Excise Tax is payable by the Executive and the amount of such Excise Tax and
whether a Gross-Up Payment is required and the amount of such Gross-Up Payment,
will be made by a nationally recognized firm of certified public accountants
(the "Accounting Firm") selected by the Executive in his sole discretion. The
Executive will direct the Accounting Firm to submit its determination and
detailed supporting calculations to both the Company and the Executive within
15 calendar days after the Termination Date, if applicable, and any other such
time or times as may be requested by the Company or the Executive. If the
Accounting Firm determines that any Excise Tax is payable by the Executive, the
Company will pay the required Gross-Up Payment to the Executive within five
business days after receipt of such determination and calculations. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
will, at the same time as it makes such determination, furnish the Executive
with an opinion that he has substantial authority not to report any Excise Tax
on his federal, state, local income or other tax return. Any determination by
the Accounting Firm as to the amount of the Gross-Up Payment will be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code (or any successor provision thereto) and
the possibility of similar uncertainty regarding applicable state or local tax
law at the time of any determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts or fails
to pursue its remedies pursuant to Section 7(vi) hereof and the Executive
thereafter is required to make a payment of any Excise Tax, the Executive will
direct the Accounting Firm to determine the amount of the Underpayment that has
occurred and to submit its determination and detailed supporting calculations to
both the Company and the Executive as promptly as possible. Any such
Underpayment will be promptly paid by the Company to, or for the benefit of, the
Executive within five business days after receipt of such determination and
calculations.
(iii) The Company and the Executive will each provide the
Accounting Firm access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the Accounting
Firm
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<PAGE>
in connection with the preparation and issuance of the determination
contemplated by Section 7(ii) hereof.
(iv) The federal, state and local income or other tax returns
filed by the Executive will be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive will make proper payment of the amount of any
Excise Tax, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If prior
to the filing of the Executive's federal income tax return, or corresponding
state or local tax return, if relevant, the Accounting Firm determines that the
amount of the Gross-Up Payment should be reduced, the Executive will within five
business days pay to the Company the amount of such reduction.
(v) The fees and expenses of the Accounting Firm for its
services in connection with the determinations and calculations contemplated by
Sections 7(ii) and (iv) hereof will be borne by the Company. If such fees and
expenses are initially advanced by the Executive, the Company will reimburse the
Executive the full amount of such fees and expenses within five business days
after receipt from the Executive of a statement therefor and reasonable evidence
of his payment thereof.
(vi) The Executive will notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification will be given as
promptly as practicable but no later than 10 business days after the Executive
actually receives notice of such claim and the Executive will further apprise
the Company of the nature of such claim and the date on which such claim is
requested to be paid (in each case, to the extent known by the Executive). The
Executive will not pay such claim prior to the earlier of (a) the expiration of
the 30-calendar-day period following the date on which he gives such notice to
the Company and (b) the date that any payment of amount with respect to such
claim is due. If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
will:
(1) provide the Company with any written records or documents
in his possession relating to such claim reasonably requested by the
Company;
(2) take such action in connection with contesting such claim
as the Company will reasonably request in writing from time to time,
including without limitation accepting legal representation with
respect to such
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<PAGE>
claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(3) cooperate with the Company in good faith in order
effectively to contest such claim; and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company will bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and will indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this Section 7(vi), the Company will control all proceedings taken in connection
with the contest of any claim contemplated by this Section 7(vi) and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim (provided, however, that the Executive may participate therein at his
own cost and expense) and may, at its option, either direct the Executive to pay
the tax claimed and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company will determine; provided, however,
that if the Company directs the Executive to pay the tax claimed and sue for a
refund, the Company will advance the amount of such payment to the Executive on
an interest-free basis and will indemnify and hold the Executive harmless, on an
after--tax basis, from any Excise Tax or income tax, including interest or
penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
will be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive will be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(vii) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 7(vi) hereof, the Executive receives
any refund with respect to such claim, the Executive will (subject to the
Company's complying with the requirements of Section 7(vi) hereof) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after any taxes applicable thereto). If, after the receipt by
the Executive of an amount advanced by the Company
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<PAGE>
pursuant to Section 7(vi) hereof, a determination is made that the Executive
will not be entitled to any refund with respect to such claim and the Company
does not notify the Executive in writing of its intent to contest such denial or
refund prior to the expiration of 30 calendar days after such determination,
then such advance will be forgiven and will not be required to be repaid and the
amount of such advance will offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid pursuant to this Section 7.
8. Mitigation and Offset. The Executive is under no obligation to mitigate
damages or the amount of any payment or benefit provided for hereunder by
seeking other employment or otherwise; provided, however, that the Executive's
coverage under the Company's welfare benefit plans will be reduced to the extent
that the Executive becomes covered under any comparable employee benefit plan
made available by another employer and covering the same type of benefits. The
Executive will report to the Company any such benefits actually received by him.
9. Competition; Confidentiality; Nonsolicitation
9.1 (i) Subject to Section 6.1(ii), the Executive hereby covenants
and agrees that during the Term and for one year following the Term he will not,
without the prior written consent of the Company, engage in Competition (as
defined below) with the Company. For purposes of this Agreement, if the
Executive takes any of the following actions he will be engaged in
"Competition": engaging in or carrying on, directly or indirectly, any
enterprise, whether as an advisor, principal, agent, partner, officer, director,
employee, stockholder, associate or consultant to any person, partnership,
corporation or any other business entity, that is principally engaged in the
business of refining and/or marketing oil or related products in States or
Provinces in which the Company (or any division or segment thereof) has
operations; provided, however, that "Competition" will not include (a) the mere
ownership of securities in any enterprise and exercise of rights appurtenant
thereto or (b) participation in management of any enterprise or business
operation thereof other than in connection with the competitive operation of
such enterprise.
(ii) Subject to Section 6.1(ii), the Executive hereby
covenants and agrees that during the Term and for three years following the Term
he will not assist a third party in preparing or making an unsolicited bid for
the Company, engaging in a proxy contest with the Company, or engaging in any
other similar activity.
9.2 During the Term, the Company agrees that it will disclose to
Executive its confidential or proprietary information (as defined in this
Section 9.2) to the extent necessary for Executive to carry out his obligations
under this Agreement. Subject to Section 6.1(ii), the Executive hereby covenants
and
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<PAGE>
agrees that he will not, without the prior written consent of the Company,
during the Term or thereafter disclose to any person not employed by the
Company, or use in connection with engaging in Competition with the Company, any
confidential or proprietary information of the Company. For purposes of this
Agreement, the term "confidential or proprietary information" will include all
information of any nature and in any form that is owned by the Company and that
is not publicly available or generally known to persons engaged in businesses
similar or related to those of the Company. Confidential information will
include, without limitation, the Company's financial matters, customers,
employees, industry contracts, and all other secrets and all other information
of a confidential or proprietary nature. The foregoing obligations imposed by
this Section 9.2 will cease if such confidential or proprietary information will
have become, through no fault of the Executive, generally known to the public or
the Executive is required by law to make disclosure (after giving the Company
notice and an opportunity to contest such requirement).
9.3 The Executive hereby covenants and agrees that during the Term
and for one year thereafter he will not attempt to influence, persuade or
induce, or assist any other person in so persuading or inducing, any employee of
the Company to give up, or to not commence, employment or a business
relationship with the Company.
9.4 Executive acknowledges and agrees that the remedy at law
available to the Company for breach of any of his post-termination obligations
under Sections 9.1, 9.2 and 9.3 would be inadequate and that damages flowing
from such a breach may not readily be susceptible to being measured in monetary
terms. Accordingly, Executive acknowledges, consents and agrees that, in
addition to any other rights or remedies which the Company may have at law, in
equity or under this Agreement, upon adequate proof of his violation of any such
provision of this Agreement, the Company will be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened or
further breach, without the necessity of proof of actual damage.
10. Post-termination Assistance. Subject to Section 6.1(ii), the Executive
agrees that after his employment with the Company has terminated he will
provide, upon reasonable notice, such information and assistance to the Company
as may reasonably be requested by the Company in connection with any audit,
governmental investigation or litigation in which it or any of its affiliates is
or may become a party; provided, however, that (i) the Company agrees to
reimburse the Executive for any related out-of-pocket expenses, including
travel expenses, and to pay the Executive reasonable compensation for his time
based on his rate of annual salary at the time of termination and (ii) any such
assistance may not unreasonably interfere with the then-current employment of
the Executive.
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11. Survival. The expiration or termination of the Term will not impair
the rights or obligations of any party hereto that accrue hereunder prior to
such expiration or termination, except to the extent specifically stated herein.
In addition to the foregoing, the Executive's covenants contained in Sections
9.1, 9.2, 9.3 and 10 and the Company's obligations under Sections 5, 7 and 12.1
will survive the expiration or termination of Executive's employment.
12. Miscellaneous Provisions.
12.1 Legal Fees and Expenses. Without regard to whether the
Executive prevails, in whole or in part, in connection therewith, the Company
will pay and be financially responsible for 100% of any and all attorneys' and
related fees and expenses incurred by the Executive in connection with
any dispute associated with the interpretation, enforcement or defense of the
Executive's rights under this Agreement by litigation or otherwise; provided
that, in regard to such dispute, the Executive has not acted in bad faith or
with no colorable claim of success. All such fees and expenses will be paid by
the Company as incurred by the Executive on a monthly basis upon an undertaking
by the Executive to repay such advanced amounts if a court determines, in a
decision against which no appeal may be taken or with respect to which the time
period to appeal has expired, that he acted in bad faith or with no colorable
claim of success.
12.2 Binding on Successors. This Agreement will be binding upon and
inure to the benefit of the Company, the Executive and each of their respective
successors, assigns, personal and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable.
12.3 Governing Law. This Agreement will be governed, construed,
interpreted and enforced in accordance with the substantive laws of the State of
Delaware, without regard to conflicts of law principles.
12.4 Severability. Any provision of this Agreement that is deemed
invalid, illegal or unenforceable in any jurisdiction will, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provisions of this Agreement
invalid, illegal, or unenforceable in any other jurisdiction. If any covenant
should be deemed invalid, illegal or unenforceable because its scope is
considered excessive, such covenant will be modified so that the scope of the
covenant is reduced only to the minimum extent necessary to render the modified
covenant valid, legal and enforceable.
12.5 Notices. For all purposes of this Agreement, all
communications, including without limitation notices, consents,
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requests or approvals, required or permitted to be given hereunder will be in
writing and will be deemed to have been duly given when hand delivered or
dispatched by electronic facsimile transmission (with receipt thereof
confirmed), or five business days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid, or
three business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS, or Purolator, addressed to the
Company (to the attention of the Secretary of the Company) at its principal
executive offices and to the Executive at his principal residence, or to such
other address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address will be effective
only upon receipt.
(i) To The Company. If to the Company, addressed to the
attention of General Counsel at 9830 Colonnade Boulevard, San Antonio, Texas
78230.
(ii) To the Executive. If to the Executive, to him in care of
the Company at the above address.
12.6 Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same Agreement.
12.7 Entire Agreement. The terms of this Agreement are intended by
the parties to be the final expression of their agreement with respect to the
Executive's employment by the Company and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend that this
Agreement will constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative or other legal proceeding to vary the terms of this Agreement.
12.8 Amendments; Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, approved by the
Company and signed by the Executive and the Company. Failure on the part of
either party to complain of any action or omission, breach or default on the
part of the other party, no matter how long the same may continue, will never be
deemed to be a waiver of any rights or remedies hereunder, at law or in equity.
The Executive or the Company may waive compliance by the other party with any
provision of this Agreement that such other party was or is obligated to comply
with or perform only through an executed writing; provided, however, that such
waiver will not operate as a waiver of, or estoppel with respect to, any other
or subsequent failure.
12.9 No Inconsistent Actions. The parties will not voluntarily
undertake or fail to undertake any action or course of action that is
inconsistent with the provisions or essential
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intent of this Agreement. Furthermore, it is the intent of the parties hereto to
act in a fair and reasonable manner with respect to the interpretation and
application of the provisions of this Agreement.
12.10 Headings and Section References. The headings used in this
Agreement are intended for convenience or reference only and will not in any
manner amplify, limit, modify or otherwise be used in the construction or
interpretation of any provision of this Agreement. All section references are to
sections of this Agreement, unless otherwise noted.
13. Effectiveness, Prior Agreement and Consent. This Agreement will become
effective upon, and the Prior Agreement will terminate immediately prior to, the
Effective Date, whereupon all references to the "Company" herein will be
treated as references to Ultramar Corporation. By executing this Agreement,
Executive hereby consents to the assumption of this Agreement by Ultramar
Corporation upon the Effective Date. Notwithstanding any other provision of this
Agreement, if the Merger Agreement is terminated prior to the Effective Date,
this Agreement will have no further force or effect, and the Prior Agreement
will continue in effect as though this Agreement had not been entered into.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written but effective as provided in Section 13.
/s/ Robert Beadle
----------------------------------------
Robert Beadle
DIAMOND SHAMROCK, INC.,
a Delaware corporation
By: /s/ Roger R. Hemminghaus
-------------------------------------
Roger R. Heimminghaus
Chief Executive Officer and
President
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Exhibit
GENERAL RELEASE OF ALL CLAIMS
This General Release of all Claims (this "Agreement") is entered into by
and between _____________________ ("Executive") and Ultramar Diamond Shamrock
Corporation (including its subsidiaries) (collectively the "Company") effective
as of ______________________.
In consideration of the promises set forth in the employment agreement
between Executive and the Company, dated _____________, 1996, as amended as of
the effective date hereof (the "Employment Agreement"), as well as any promises
set forth in this Agreement, Executive and the Company agree as follows:
(1) Employment Agreement Entitlements
The Company will provide Executive the post-termination payments and
benefits to which he is entitled under the Employment Agreement.
(2) Return of Property
All Company files, access keys, desk keys, ID badges and credit cards, and
such other property of the Company as the Company may reasonably request,
in Executive's possession must be returned no later than the date of
Executive's termination from the Company (the "Termination Date").
(3) General Release and Waiver of Claims
Except as provided in the last sentence of this paragraph (3), Executive
hereby unconditionally and forever releases, discharges and waives any and
all claims of any nature whatsoever, whether legal, equitable or
otherwise, which Executive may have against the Company arising at any
time on or before the Termination Date, other than with respect to the
obligations of the Company to the Executive under the Employment
Agreement. This release of claims extends to any and all claims of any
nature whatsoever, other than with respect to the obligations of the
Company to the Executive under the Employment Agreement, whether known,
unknown or capable or incapable of being known as of the Termination Date
of thereafter. This Agreement is a release of all claims of any nature
whatsoever by Executive against the Company, other than with respect to
the obligations of the Company to the Executive under the Employment
Agreement, and includes, other than as herein provided, any and all
claims, demands, causes of action, liabilities whether known or unknown
including those caused by, arising from or related to Executive's
employment relationship with the Company
19
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including, but without limitation, any and all alleged discrimination or
acts of discrimination which occurred or may have occurred on or before
the Termination Date based upon race, color, sex, creed, national origin,
age, disability or any other violation of any Equal Employment Opportunity
Law, ordinance, rule, regulation or order, including, but not limited to,
Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights
Act of 1991; the Age Discrimination in Employment Act, as amended (as
further described in Section 7 below); the Americans with Disabilities
Act; claims under the Employee Retirement Income Security Act ("ERISA");
or any other federal, state or local laws or regulations regarding
employment discrimination or termination of employment. This also includes
claims for wrongful discharge, fraud, or misrepresentation under any
statute, rule, regulation or under the common law.
The Executive agrees and understands and knowingly agrees to this release
because it is his intent in executing this Agreement to forever discharge
the Company from any and all present, future, foreseen or unforeseen
causes of action except for the obligations of the Company set forth in
the Employment Agreement.
Notwithstanding the foregoing, Executive does not release, discharge or
waive any rights to indemnification that he may have under the By-Laws of
the Company, the laws of the State of Delaware, any indemnification
agreement between the Executive and the Company or any insurance coverage
maintained by or on behalf of the Company.
(4) Release and Waiver of Claims Under the Age Discrimination in Employment Act
Executive acknowledges that the Company encouraged him to consult with an
attorney of his choosing, and through this Agreement encourages him to
consult with his attorney with respect to possible claims under the Age
Discrimination in Employment Act of 1967, as amended ("ADEA") and that
Executive acknowledges that he understands that the ADEA is a federal
statute that prohibits discrimination, on the basis of age, in employment,
benefits, and benefit plans. Executive wishes to waive any and all claims
under the ADEA that he may have, as of the Termination Date, against the
Company, its shareholders, employees, or successors and hereby waives such
claims. Executive further understands that by signing this Agreement he is
in fact waiving, releasing and forever giving up any claim under the ADEA
that may have existed on or prior to the Termination Date. Executive
acknowledges that the Company has informed him that he has at his option,
twenty-one (21) days in which to sign the waiver of this claim under ADEA,
and he does hereby knowingly and voluntarily waive said twenty-one (21)
day
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period. Executive also understands that he has seven (7) days following
the Termination Date within which to revoke the release contained in this
paragraph by providing a written notice of his revocation of the release
and waiver contained in this paragraph to the Company. Executive further
understands that this right to revoke the release contained in this
paragraph relates only to this paragraph and does not act as a revocation
of any other term of this Agreement.
(5) Proceedings
Executive has not filed, and agrees not to initiate or cause to be
initiated on his behalf, any complaint, charge, claim or proceeding
against the Company before any local, state or federal agency, court or
other body relating to his employment or the termination of his
employment, other than with respect to the obligations of the Company to
the Executive under the Employment Agreement (each individually, a
"Proceeding"), and agrees not to voluntarily participate in any
Proceeding. Executive waives any right he may have to benefit in any
manner from any relief (whether monetary or otherwise) arising out of any
Proceeding.
(6) Remedies
In the event Executive initiates or voluntarily participates in any
Proceeding, or if he fails to abide by any of the terms of this Agreement
or his post-termination obligations contained in the Employment Agreement,
or if he revokes the ADEA release contained in Paragraph 4 of this
Agreement within the seven-day period provided under Paragraph 4, the
Company may, in addition to any other remedies it may have, reclaim any
amounts paid to him under the termination provisions of the Employment
Agreement or terminate any benefits or payments that are subsequently due
under the Employment Agreement, without waiving the release granted
herein. Executive acknowledges and agrees that the remedy at law available
to the Company for breach of any of his post-termination obligations under
the Employment Agreement or his obligations under Paragraphs 3, 4, and 5
of this Agreement would be inadequate and that damages flowing from such a
breach may not readily be susceptible to being measured in monetary terms.
Accordingly, Executive acknowledges, consents and agrees that, in addition
to any other rights or remedies which the Company may have at law, in
equity or under this Agreement, upon adequate proof of his violation of
any such provision of this Agreement, the Company shall be entitled to
immediate injunctive relief and may obtain a temporary order restraining
any threatened or further breach, without the necessity of proof of actual
damage.
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Executive understands that by entering into this Agreement he will be
limiting the availability of certain remedies that he may have against the
Company and limiting also his ability to pursue certain claims against the
Company.
(7) Severability Clause
In the event any provision or part of this Agreement is found to be
invalid or unenforceable, only that particular provision or part so found,
and not the entire agreement, will be inoperative.
(8) Non-Admission
Nothing contained in this Agreement will be deemed or construed as an
admission of wrongdoing or liability on the part of the Company.
(9) Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, applicable to agreements made and to be
performed in that State; and the parties agree to the jurisdiction of the
U.S. District Court for the District of Delaware, and agree to appear in
any action in such courts by service of process by certified mail, return
receipt requested, at the following addresses:
To Company: ULTRAMAR DIAMOND SHAMROCK CORPORATION
9830 Colonnade Boulevard
San Antonio, Texas 78230
and
To Executive: ________________________________________
________________________________________
________________________________________
THE EXECUTIVE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND THAT HE FULLY
KNOWS, UNDERSTANDS, AND APPRECIATES ITS CONTENTS, AND THAT HE HEREBY EXECUTES
THE SAME AND MAKES THIS AGREEMENT AND THE RELEASE AND AGREEMENTS PROVIDED FOR
HEREIN VOLUNTARILY AND OF HIS OWN FREE WILL.
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IN WITNESS WHEREOF, the parties have executed this AGREEMENT as of the
date first set forth above.
----------------------------------------
Robert Beadle
ULTRAMAR DIAMOND SHAMROCK CORPORATION,
a Delaware corporation
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
23
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EXHIBIT 10.21
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of November
27, 1996, but effective as provided herein, is made and entered into by and
between Ultramar Corporation, a Delaware corporation (the "Company"), and
Christopher Havens (the "Executive").
WHEREAS, the Executive has been serving as a senior executive
officer of Ultramar Energy Inc., a Delaware corporation and a direct wholly
owned subsidiary of the Company ("Ultramar Energy Inc.");
WHEREAS, the Executive is a party to an Employment Agreement with
Ultramar Corporation, dated as of March 15, 1994 (the "Prior Agreement");
WHEREAS, pursuant to the Agreement and Plan of Merger between
Ultramar Corporation and Diamond Shamrock, Inc., a Delaware corporation
("Diamond Shamrock, Inc."), dated as of September 22, 1996 (the "Merger
Agreement"), as of the effective time of the Merger (the "Effective Date"),
Diamond Shamrock, Inc. will be merged with and into Ultramar Corporation, with
Ultramar Corporation as the surviving entity (the "Merger");
WHEREAS, pursuant to the Merger Agreement, the Company is authorized
to enter into this Agreement with Executive;
WHEREAS, the Company considers it in the best interests of its
stockholders to foster the continuous employment of certain key management
personnel;
WHEREAS, the Company recognizes that, as is the case for most
publicly held companies, the possibility of a Change in Control (as defined
herein) exists;
WHEREAS, the Company wishes to assure itself of both present and
future continuation of management in light of the Merger and in the event of a
Change in Control subsequent to the Merger;
WHEREAS, the Company wishes to continue to employ the Executive and
to continue to provide his services to Ultramar Energy Inc., and the Executive
is willing to continue to render services, both on the terms and subject to the
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants herein contained, it is agreed as follows:
<PAGE>
1. Employment.
1.1. The Company hereby agrees to continue to employ the Executive
and the Executive hereby agrees to undertake employment with the Company upon
the terms and conditions herein set forth.
1.2. Employment will be for a term commencing on the Effective Date
and, subject to earlier expiration upon the Executive's termination under
Section 5, expiring three years from the Effective Date (the "Term").
Notwithstanding the previous sentence, this Agreement and the employment of the
Executive will be automatically renewed and the Term extended, subject to
Section 5, for successive one-year periods upon the terms and conditions set
forth herein, commencing on the third anniversary of the Effective Date, and on
each anniversary date thereafter, unless either party to this Agreement gives
the other party written notice (in accordance with Section 12.5) of such party's
intention to terminate this Agreement at least three months prior to the end of
such initial or extended term. For purposes of this Agreement, any reference to
the "Term" of this Agreement will include the original term and any extension
thereof.
2. Position and Duties.
2.1. Position and Duties. During the Term, the Executive will serve
as Senior Vice President - U.S. Wholesale and Northeast Retail of the Company,
and will have such duties, functions, responsibilities and authority as are (i)
consistent with the Executive's position as Senior Vice President - U.S.
Wholesale and Northeast Retail of the Company; or (ii) assigned to his office in
the Company's bylaws; or (iii) reasonably assigned to him by the Company's Board
of Directors (the "Board").
2.2. Commitment. During the Term, the Executive will be the
Company's full-time employee and, except as may otherwise be approved in advance
in writing by the Board, and except during vacation periods and reasonable
periods of absence due to sickness, personal injury or other disability, the
Executive will devote substantially all of his business time and attention to
the performance of his duties to the Company and Ultramar Energy Inc.
3. Place of Performance. In connection with his employment during the
Term, unless otherwise agreed by the Executive, the Executive will be based at
such location as may be determined by the Board. The Executive will undertake
normal business travel on behalf of the Company.
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4. Compensation and Related Matters.
4.1. Compensation and Benefits.
(i) Annual Base Salary. During the Term of this Agreement,
the Company will pay to the Executive an annual base salary of not less than
$265,000, which annual base salary may be modified from time to time by the
Board (or the Compensation Committee thereof) in its sole discretion, payable at
the times and in the manner consistent with the Company's general policies
regarding compensation of executive employees. The Board may from time to time
authorize such additional compensation to the Executive, in cash or in property,
as the Board may determine in its sole discretion to be appropriate.
(ii) Annual Incentive Compensation. If the Board (or the
Compensation Committee thereof) authorizes any cash incentive compensation or
approves any other management incentive program or arrangement, the Executive
will be eligible to participate in such plan, program or arrangement under the
general terms and conditions applicable to executive and management employees;
provided, however, that so long as the Executive remains employed by the Company
at the end of the applicable fiscal year, (a) the annual cash incentive
compensation paid by the Company to the Executive for the Company's fiscal year
that includes the Effective Date, aggregated with any other annual incentive
compensation earned by the Executive for calendar year 1996, will be in an
amount not less than the greater of (1) 40% of the Executive's highest annual
base salary rate during the fiscal year to which such incentive compensation
relates, and (2) the Executive's actual annual incentive compensation earned
during such fiscal year, as determined by the Company's Board (or the
Compensation Committee thereof), and (b) the cash incentive compensation paid to
the Executive for the Company's next succeeding fiscal year will be in an amount
not less than the greater of (1) 40% of the Executive's highest annual base
salary rate during the fiscal year to which such incentive compensation relates,
and (2) the Executive's actual annual incentive compensation during such fiscal
year, as determined by the Board (or the Compensation Committee thereof). Except
as set forth in the proviso to the preceding sentence, nothing in this Section
4.1(ii) will guarantee to the Executive any specific amount of incentive
compensation, or prevent the Board (or the Compensation Committee thereof) from
establishing performance goals and compensation targets applicable only to the
Executive.
4.2. Executive Benefits. In addition to the compensation described
in Section 4.1, the Company will make
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available to the Executive and his eligible dependents, subject to the terms and
conditions of the applicable plans, including without limitation the eligibility
rules, participation in all Company-sponsored employee benefit plans including
all employee retirement income and welfare benefit policies, plans, programs or
arrangements in which senior executives of the Company participate, including
any stock option, stock purchase, stock appreciation, savings, pension,
supplemental executive retirement or other retirement income or welfare benefit,
disability, salary continuation, and any other deferred compensation, incentive
compensation, group and/or executive life, health, medical/hospital or other
insurance (whether funded by actual insurance or self-insured by the Company),
expense reimbursement or other employee benefit policies, plans, programs or
arrangements or any equivalent successor policies, plans, programs or
arrangements that may now exist or be adopted hereafter by the Company.
4.3. Expenses. The Company will promptly reimburse the Executive for
all travel and other business expenses the Executive incurs in order to perform
his duties to the Company and Ultramar Energy Inc. under this Agreement in a
manner commensurate with the Executive's position and level of responsibility
with the Company, and in accordance with the Company's policy regarding
substantiation of expenses.
5. Termination. Notwithstanding the Term specified in Section 1.2, the
termination of the Executive's employment hereunder will be governed by the
following provisions:
5.1. Death. In the event of the Executive's death during the Term,
the Company will pay to the Executive's beneficiaries or estate, as appropriate,
promptly after the Executive's death, (i) the unpaid annual base salary to which
the Executive is entitled, pursuant to Section 4.1, through the date of the
Executive's death, and (ii) for any accrued but unused vacation days, to the
extent and in the amounts, if any, provided under the Company's usual policies
and arrangements. This Section 5.1 will not limit the entitlement of the
Executive's estate or beneficiaries to any death or other benefits then
available to the Executive under any life insurance, stock ownership, stock
options, or other benefit plan or policy that is maintained by the Company for
the Executive's benefit.
5.2. Disability.
(i) If the Company determines in good faith that the Executive
has incurred a Disability (as defined below) during the Term, the Company may
give the Executive written notice of its intention to terminate the Executive's
employment.
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In such event, the Executive's employment with the Company will terminate
effective on the 30th day after receipt of such notice by the Executive,
provided that within the 30 days after such receipt, the Executive will not have
returned to full-time performance of his duties. The Executive will continue to
receive his annual base salary and benefits until the date of termination. In
the event of the Executive's Disability, the Company will pay the Executive,
promptly after the Executive's termination, (a) the unpaid annual base salary to
which he is entitled, pursuant to Section 4.1, through the date of the
Executive's termination, (b) for any accrued but unused vacation days, to the
extent and in the amounts, if any, provided under the Company's usual policies
and arrangements, and (c) a lump sum in cash in an amount equal to 50% of his
annual base salary at the time of termination. This Section 5.2 will not limit
the entitlement of the Executive, the Executive's estate or beneficiaries to any
disability or other benefits then available to the Executive under any
disability insurance or other benefit plan or policy that is maintained by the
Company for the Executive's benefit.
(ii) For purposes of this Agreement, "Disability" will mean
the Executive's incapacity due to physical or mental illness substantially to
perform his duties on a full-time basis for six consecutive months and within
30 days after a notice of termination is thereafter given by the Company the
Executive will not have returned to the full-time performance of the
Executive's duties; provided, however, if the Executive disagrees with a
determination to terminate him because of Disability, the question of the
Executive's disability will be subject to the certification of a qualified
medical doctor agreed to by the Company and the Executive or, in the event of
the Executive's incapacity to designate a doctor, the Executive's legal
representative. In the absence of agreement between the Company and the
Executive, each party will nominate a qualified medical doctor and the two
doctors will select a third doctor, who will make the determination as to
Disability. In order to facilitate such determination, the Executive will, as
reasonably requested by the Company, (a) make himself available for medical
examinations by a doctor in accordance with this Section 5.2(ii), and (b) grant
the Company and any such doctor access to all relevant medical information
concerning him, arrange to furnish copies of medical records to such doctor and
use his best efforts to cause his own doctor to be available to discuss his
health with such doctor.
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5.3. Cause.
(i) The Company may terminate the Executive's employment
hereunder for Cause (as defined below). In the event of the Executive's
termination for Cause, the Company will promptly pay to the Executive (or his
representative) the unpaid annual base salary to which he is entitled, pursuant
to Section 4.1, through the date the Executive is terminated and the Executive
will be entitled to no other compensation, except as otherwise due to him under
applicable law.
(ii) For purposes of this Agreement, the Company will have
"Cause" to terminate the Executive's employment hereunder upon a finding by the
Board that (a) the Executive committed an illegal act or acts that were intended
to and did defraud the Company, (b) the Executive engaged in gross negligence
or gross misconduct against the Company or another employee, or in carrying out
his duties and responsibilities, or (c) the Executive materially breached any of
the express covenants set forth in Section 9.1, 9.2 or 9.3. The Company will not
have Cause unless and until the Company provides the Executive with written
notice that the Company intends to terminate his employment for Cause. Such
written notice will specify the particular act or acts, or failure to act, that
is or are the basis for the decision to so terminate the Executive's employment
for Cause. The Employee will be given the opportunity within 30 calendar days of
the receipt of such notice to meet with the Board to defend such act or acts, or
failure to act. The Executive's employment by the Company automatically will be
terminated under this Section 5.3 for Cause as of the receipt of the written
notice from the Company or, if later, the date specified in such notice. A
notice given under this Section 5.3 must set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment for Cause, and if the termination date is other than the
date of receipt of such notice, specify the date on which the Executive's
employment is to be terminated (which date will not be earlier than the date on
which such notice is given in accordance with Section 13.5). Such notice must be
given no later than 180 business days after a director of the Company (excluding
the Executive, i f applicable) first has actual knowledge of the events
justifying the purported termination.
5.4. Termination.
(i) Involuntary Termination. The Executive's employment
hereunder may be terminated by the Company for any reason by written notice as
provided in Section 12.5. The Executive will be treated for purposes of this
Agreement as having been involuntarily terminated by the Company other than
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for Cause if the Executive terminates his employment with the Company for any of
the following reasons (each, a "Good Reason"): without the Executive's written
consent, (a) the Company has breached any material provision of this Agreement
and within 30 days after notice thereof from the Executive, the Company fails to
cure such breach; (b) a successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company fails to assume liability under the
Agreement; (c) at any time after the Company has notified the Executive pursuant
to Section 1.2 that the Company does not intend to renew the Agreement and the
Executive's employment at the end of the Term (including any previous renewals)
(rather than to allow the Agreement automatically to renew); (d) a material
reduction in the aggregate benefits described by Section 4.2 (other than
stock-based compensation) provided to the Executive, unless such decrease is
required by law or is applicable to all employees of the Company eligible to
participate in any employee benefit arrangement affected by such reduction; (e)
a significant reduction in the Executive's duties or the addition of duties,
which in either case are materially inconsistent with the Executive's title or
position; (f) a reduction in the Executive's annual base salary or (g) provided
that the Executive has relocated to the location of the Company's principal
place of business prior to Jean Gaulin becoming Chief Executive Officer of the
Company, for any reason or without reason within 120 days after (1) the
termination of the employment of Mr. Gaulin prior to January 1, 1999, without
Mr. Gaulin becoming Chief Executive Officer of the Company if such termination
of employment is involuntary without "Cause" or voluntary with "Good Reason"
under the terms of Mr. Gaulin's employment agreement with the Company, or (2)
January 1, 1999, if Mr. Gaulin has not become the Chief Executive Officer of the
Company by such date.
(ii) Voluntary Termination. The Executive may voluntarily
terminate the Agreement at any time by notice to the Company as provided in
Section 12.5. The Executive's death or Disability (as defined in Section
5.2(ii)) during the term of the Agreement will constitute a voluntary
termination of employment for purposes of eligibility for termination payments
and benefits as provided in Section 5.5, but for no other purpose.
5.5. Termination Payments and Benefits.
(i) Form and Amount. Upon the Executive's involuntary
termination, other than for Cause, (a) subject to Section 5.5(iii), the Company
will pay or provide to the Executive (1) his annual base salary and benefits
until the date of termination, (2) within five business days after termination
of his employment, a lump sum cash payment equal in amount to
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three times the sum of (x) the Executive's highest annual base salary in effect
during the three years prior to his date of termination, and (y) the highest
annual incentive compensation earned by the Executive during the same
three-year period, (3) three additional years of age and service credit under
the qualified and nonqualified defined benefit retirement plans of the Company
in which the Executive participates at the time of termination; provided,
however, that in the case of a qualified defined benefit pension plan, the
present value of the additional benefit the Executive would have accrued if he
had been credited for all purposes with the additional years of age and service
under such plan as of the Executive's date of termination with the Company will
be paid in a lump sum in cash within five business days after termination of the
Executive's employment, and (4) for a period of one year after termination of
his employment, the continuation of the employee welfare benefits set forth in
Section 4.2 except as offset by benefits paid by other sources as set forth in
Section 8, or as prohibited by law or as a condition of maintaining the
tax-favored status of any such benefits to the Company or its employees; (b) the
Executive's benefit under the applicable supplemental executive retirement plan
will be not less than the benefit the Executive would have received under the
terms of the corresponding plan (including any individual modifications thereof)
applicable to the Executive as in effect immediately prior to the Effective Date
determined as if the Executive had continued employment under the terms of such
corresponding plan (and modifications) until his actual termination of
employment; and (c) if the Executive had theretofore relocated to San Antonio
and his employment has been terminated within two years after the Effective
Date, Executive will be reimbursed the costs of relocation from San Antonio to
any other location in the continental United States under the same policies and
procedures applicable to Executive's reimbursement for relocation to San
Antonio.
(ii) Maintenance of Benefits. During the period set forth in
Section 5.5(i) (a) (4), the Company will use its best efforts to maintain in
full force and effect for the continued benefit of the Executive all referenced
benefits or will arrange to make available to the Executive benefits
substantially similar to those that the Executive would otherwise have been
entitled to receive if his employment had not been terminated. Such benefits
will be provided to the Executive on the same terms and conditions (including
employee contributions toward the premium payments) under which the Executive
was entitled to participate immediately prior to his termination.
(iii) Release. No benefit will be paid or made available under
Section 5.5(i) (a) unless the Executive first executes a release in the form
attached as an exhibit to this
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Agreement, and (b) to the extent any portion of such release is subject to the
seven-day revocation period prescribed by the Age Discrimination in Employment
Act of 1967, as amended, or to any similar revocation period in effect on the
date of termination of Executive's employment, such revocation period has
expired.
6. Change in Control Provisions.
6.1. Impact of Change in Control. In the event of a "Change in
Control" of the Company, as defined in Section 6.2, (i) the Company will cause
all cash benefits due under this Agreement to be secured by an irrevocable trust
for the benefit of the Executive, the assets of which will be subject to the
claims of the Company's creditors, and will transfer to such trust cash and
other property adequate to satisfy all of the expenses of the trust for at least
five years after the Change in Control and any of the Company's actual and
potential cash obligations under this Agreement, (ii) if the Executive's
employment is involuntarily terminated without Cause after the Change in
Control, (A) the covenants of Sections 9.1 and 10 will be inapplicable to the
Executive, and (B) the covenant of Section 9.2 will expire on the third
anniversary of the date of termination of the Executive's employment, and (iii)
the definition of Good Reason, as set forth in Section 5.4(i) above, will be
expanded to include the following:
(a) A good faith determination by the Executive that, as a
result of the Change in Control and a change in circumstances thereafter
significantly affecting his positions, including a change in the scope of
business or other activities for which he was responsible, he has been rendered
substantially unable to carry out, has been substantially hindered in the
performance of, or has suffered a substantial reduction in, any of the
authorities, powers, functions, responsibilities or duties attached to any of
the Executive's positions; the Executive's determination will be presumed to
have been made in good faith unless otherwise shown by the Company by clear and
convincing evidence;
(b) The relocation of the Company's principal executive
offices (but only if, immediately prior to the Change in Control, the
Executive's principal place of employment was at the Company's principal
executive offices), or requirement that the Executive have as his principal
location of work any location that is, in excess of 50 miles from the location
thereof immediately preceding the Change in Control or to travel away from his
home or office significantly more often that required immediately prior to the
Change in Control; or
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(c) For any reason, or without reason, during the 30-day
period immediately following the first anniversary of the first occurrence of a
Change in Control.
6.2. Definition of Change in Control. For purposes of this
Agreement, a "Change in Control" will be deemed to occur if at any time during
the term of the Agreement any of the following events will occur:
(i) The Company is merged, consolidated or reorganized into
or with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization, less than 50% of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate by the holders of
Voting Stock (as that term is hereafter defined) of the Company immediately
prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation or other legal person,
and as a result of such sale or transfer, less than 50% of the combined voting
power of the then-outstanding voting securities of such corporation or person
are held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale;
(iii) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as promulgated pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any
person (as the term "person" is used in Section 13(d) (3) or Section 14(d) (2)
of the Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 20% or more of
the combined voting power of the then-outstanding securities of the Company
entitled to vote generally in the election of Directors of the Company ("Voting
Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or report
or item therein) that a change in control of the Company has or may have
occurred or will or may occur in the future pursuant to any then-existing
contract or transaction; or
(v) If during the period of two consecutive years
individuals who at the beginning of any such period constitute the Directors of
the Company cease for any reason to
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constitute at least a majority thereof unless the election, or the nomination
for election by the Company's shareholders, of each Director of the Company
first elected during such period was approved by a vote of at least two-thirds
of the Directors of the Company then still in office who were Directors of the
Company at the beginning of any such period (excluding for this purpose the
election of any new Director in connection with an actual or threatened election
or proxy contest).
Notwithstanding the foregoing provisions of Section 6.2(iii) or (iv) hereof,
unless otherwise determined in a specific case by majority vote of the Board (or
the Compensation Committee thereof), a "Change in Control" will not be deemed to
have occurred for purposes of this Agreement solely because the Company, an
entity in which the Company directly or beneficially owns 50% or more of the
voting securities of such entity, any Company-sponsored employee stock ownership
plan or any other employee benefit plan of the Company either files or becomes
obligated to file a report or a proxy statement under or in response to Schedule
13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) under the Exchange Act, disclosing beneficial
ownership by it of shares of voting securities of the Company, whether in excess
of 20% or otherwise, or because the Company reports that a change in control of
the Company has or may have occurred or will or may occur in the future by
reason of such beneficial ownership. Notwithstanding the foregoing provisions of
Section 6.2, the Merger will not constitute a Change in Control.
7. Certain Additional Payments by the Company:
(i) Anything in this Agreement to the contrary
notwithstanding, if it is determined (as hereafter provided) that any payment or
distribution by the Company to or for the benefit of the Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise pursuant to or by reason of any other agreement, policy,
plan, program or arrangement, including without limitation any stock option,
stock appreciation right or similar right, or the lapse or termination of any
restriction on or the vesting or exercisability of any of the foregoing (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code (or any successor provision thereto) by reason of being' contingent on a
change in ownership or control" of the Company, within the meaning of Section
280G of the Code (or any successor provision thereto) or to any similar tax
imposed by state or local law, or any interest or penalties with respect to such
excise tax (such tax or taxes, together with any such interest and penalties,
are hereafter collectively referred to as the "Excise Tax"), then the Executive
will be entitled to receive an
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additional payment or payments (a "Gross-Up Payment") in an amount such that,
after payment by the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax, imposed upon. the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. No Gross-Up Payment will be
made with respect to the Excise Tax, if any, attributable to (a) any incentive
stock option, as defined by Section 422 of the Code ("ISO") granted prior to the
execution of this Agreement (unless a comparable Gross-Up Payment has
theretofore been made available with respect to such option), or (b) any stock
appreciation or similar right, whether or not limited, granted in tandem with
any ISO described in clause (a).
(ii) Subject to the provisions of Section 7(vi) hereof, all
determinations required to be made under this Section 7, including whether an
Excise Tax is payable by the Executive and the amount of such Excise Tax and
whether a Gross-tip Payment is required and the amount of such Gross-Up
Payment, will be made by a nationally recognized firm of certified public
accountants (the "Accounting Firm") selected by the Executive in his sole
discretion. The Executive will direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within 15 calendar days after the Termination Date, if applicable, and
any other such time or times as may be requested by the Company or the
Executive. If the Accounting Firm determines that any Excise Tax is payable by
the Executive, the Company will pay the required Gross-Up Payment to the
Executive within five business days after receipt of such determination and
calculations. If the Accounting Firm determines that no Excise Tax is payable by
the Executive, it will, at the same time as it makes such determination, furnish
the Executive with an opinion that he has substantial authority not to report
any Excise Tax on his federal, state, local income or other tax return. Any
determination by the Accounting Firm as to the amount of the Gross-Up Payment
will be binding upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code (or any successor
provision thereto) and the possibility of similar uncertainty regarding
applicable state or local tax law at the time of any determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts or fails to pursue its remedies pursuant to .Section
7(vi) hereof and the Executive thereafter is required to make a payment of any
Excise Tax, the Executive will direct the Accounting Firm to determine the
amount of the Underpayment that has occurred and to submit its determination and
detailed
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supporting calculations to both the Company and the Executive as promptly as
possible. Any such Underpayment will be promptly paid by the Company to, or for
the benefit of, the Executive within five business days after receipt of such
determination and calculations.
(iii) The Company and the Executive will each provide the
Accounting Firm access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the Accounting
Firm in connection with the preparation and issuance of the determination
contemplated by Section 7(ii) hereof.
(iv) The federal, state and local income or other tax returns
filed by the Executive will be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive will make proper payment of the amount of any
Excise Tax, and at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If prior
to the filing of the Executive's federal income tax return, or corresponding
state or local tax return, if relevant, the Accounting Firm determines that the
amount of the Gross-Up Payment should be reduced, the Executive will within five
business days pay to the Company the amount of such reduction.
(v) The fees and expenses of the Accounting Firm for its
services in connection with the determinations and calculations contemplated by
Sections 7(ii) and (iv) hereof will be borne by the Company. If such fees and
expenses are initially advanced by the Executive, the Company will reimburse the
Executive the full amount of such fees and expenses within five business days
after receipt from the Executive of a statement therefor and reasonable evidence
of his payment thereof.
(vi) The Executive will notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-up Payment. Such notification will be given
as promptly as practicable but no later than 10 business days after the
Executive actually receives notice of such claim and the Executive will further
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid (in each case, to the extent known by the Executive) .
The
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Executive will not pay such claim prior to the earlier of (a) the expiration of
the 30-calendar-day period following the date on which he gives such notice to
the Company and (b) the date that any payment of amount with respect to such
claim is due. If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
will:
(1) provide the Company with any written records or
documents in his possession relating to such claim reasonably
requested by the Company;
(2) take such action in connection with contesting such
claim as the Company will reasonably request in writing from
time to time, including without limitation accepting legal
representation with respect to such claim by an attorney
competent in respect of the subject matter and reasonably
selected by the Company;
(3) cooperate with the Company in good faith in order
effectively to contest such claim; and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company will bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and will indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section 7(vi), the Company will control all proceedings taken in connection with
the contest of any claim contemplated by this Section 7(vi) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company will determine; provided, however, that if o
the Company directs the Executive to pay the tax claimed and sue for a refund,
the Company will advance the amount of such payment to the Executive on an
interest-free basis and will indemnify and hold the Executive harmless, on an
after-tax basis, from any
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Excise Tax or income tax, including interest or penalties with respect thereto,
imposed with respect to such advance; and provided further, however, that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which the contested amount is
claimed to be due is limited solely to such contested amount. Furthermore, the
Company's control of any such contested claim will be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and the Executive
will be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(vii) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 7(vi) hereof, the Executive receives
any refund with respect to such claim, the Executive will (subject to the
Company's complying with the requirements of Section 7(vi) hereof) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after any taxes applicable thereto). If, after the receipt by
the Executive of an amount advanced by the Company pursuant to Section 7(vi)
hereof, a determination is made that the Executive will not be entitled to any
refund with respect to such claim and the Company does not notify the Executive
in writing of its intent to contest such denial or refund prior to the
expiration of 30 calendar days after such determination, then such advance will
be forgiven and will not be required to be repaid and the amount of such advance
will offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid pursuant to this Section 7.
8. Mitigation and Offset. The Executive is under no obligation to mitigate
damages or the amount of any payment or benefit provided for hereunder by
seeking other employment or otherwise; provided, however, that the Executive's
coverage under the Company's welfare benefit plans will be reduced to the extent
that the Executive becomes covered under any comparable employee benefit plan
made available by another employer and covering the same type of benefits. The
Executive will report to the Company any such benefits actually received by him.
9. Competition; Confidentiality; Nonsolicitation.
9.1. (i) Subject to Section 6.1(ii), the Executive hereby
covenants and agrees that during the Term and for one year following the Term he
will not, without the prior written consent of the Company, engage in
Competition (as defined below) with the Company. For purposes of this Agreement,
if the Executive takes any of the following actions he will be engaged in
"Competition" engaging in or carrying on, directly or indirectly, any
15
<PAGE>
enterprise, whether as an advisor, principal, agent, partner, officer, director,
employee, stockholder, associate or consultant to any person, partnership,
corporation or any other business entity, that is principally engaged in the
business of refining and/or marketing oil or related products within the
territory of the Province of Quebec; provided, however, that "Competition" will
not include (a) the mere ownership of securities in any enterprise and exercise
of rights appurtenant thereto or (b) participation in management of any
enterprise or business operation thereof other than in connection with the
competitive operation of such enterprise.
(ii) Subject to Section 6.1(ii), the Executive hereby
covenants and agrees that during the Term and for three years following the Term
he will not assist a third party in preparing or making an unsolicited bid for
the Company, engaging in a proxy contest with the Company, or engaging in any
other similar activity.
9.2. During the Term, the Company agrees that it will disclose to
Executive its confidential or proprietary information (as defined in this
Section 9.2) to the extent necessary for Executive to carry out his obligations
under this Agreement. Subject to Section 6.1(ii), the Executive hereby covenants
and agrees that he will not, without the prior written consent of the Company,
during the Term or thereafter disclose to any person not employed by the
Company, or use in connection with engaging in Competition with the Company, any
confidential or proprietary information of the Company. For purposes of this
Agreement, the term "confidential or proprietary information" will include all
information of any nature and in any form that .is owned by the Company and that
is not publicly available or generally known to persons engaged in businesses
similar or related to those of the Company. Confidential information will
include, without limitation, the Company's financial matters, customers,
employees, industry contracts, and all other secrets and all other information
of a confidential or proprietary nature. The foregoing obligations imposed by
this Section 9.2 will cease if such confidential or proprietary information will
have become, through no fault of the Executive, generally known to the public or
the Executive is required by law to make disclosure (after giving the Company
notice and an opportunity to contest such requirement).
9.3. The Executive hereby covenants and agrees that during the Term
and for one year thereafter he will not attempt to influence, persuade or
induce, or assist any other person in so persuading or inducing, any employee of
the Company to give up, or to not commence, employment or a business
relationship with the Company.
16
<PAGE>
9.4. For purposes of the second sentence of Section 9.1(i), the
second and third sentences of Section 9.2, and Section 9.3 in its entirety, the
term "Company" will refer to both the Company and Ultramar Energy Inc.
9.5. Executive acknowledges and agrees that the remedy at law
available to the Company for breach of any of his post-termination obligations
under Sections 9.1, 9.2 and 9.3 would be inadequate and that damages flowing
from such a breach may not readily be susceptible to being measured in monetary
terms. Accordingly, Executive acknowledges, consents and agrees that, in
addition to any other rights or remedies which the Company may have at law, in
equity or under this Agreement, upon adequate proof of his violation of any such
provision of this Agreement, the Company will be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened or
further breach, without the necessity of proof of actual damage.
10. Post-termination Assistance. Subject to Section 6.1(ii), the Executive
agrees that after his employment with the Company has terminated he will
provide, upon reasonable notice, such information and assistance to the Company
as may reasonably be requested by the Company in connection with any audit,
governmental investigation or litigation in which it or any of its affiliates is
or may become a party; provided, however, that (i) the Company agrees to
reimburse the Executive for any related out-of-pocket expenses, including
travel expenses, and to pay the Executive reasonable compensation for his time
based on his rate of annual salary at the time of termination and (ii) any such
assistance may not unreasonably interfere with the then-current employment of
the Executive.
11. Survival. The expiration or termination of the Term will not impair
the rights or obligations of any party hereto that accrue hereunder prior to
such expiration or termination, except to the extent specifically stated herein.
In addition to the foregoing, the Executive's covenants contained in Sections
9.1, 9.2, 9.3 and 10 and the Company's obligations under Sections 5, 7 and 12.1
will survive the expiration or termination of Executive's employment.
12. Miscellaneous Provisions.
12.1. Legal Fees and Expenses. Without regard to o whether the
Executive prevails, in whole or in part, in connection therewith, the Company
will pay and be financially responsible for 100% of any and all attorneys' and
related fees and expenses incurred by the Executive in connection with any
17
<PAGE>
dispute associated with the interpretation, enforcement or defense of the
Executive's rights under this Agreement by litigation or otherwise; provided
that, in regard to such dispute, the Executive has not acted in bad faith or
with no colorable claim of success. All such fees and expenses will be paid by
the Company as incurred by the Executive on a monthly basis upon an undertaking
by the Executive to repay such advanced amounts if a court determines, in a
decision against which no appeal may be taken or with respect to which the time
period to appeal has expired, that he acted in bad faith or with no colorable
claim of success.
12.2. Binding on Successors. This Agreement will be binding upon and
inure to the benefit of the Company, the Executive and each of their respective
successors, assigns, personal and legal representatives, executors,
administrators heirs, distributees, devisees, and legatees, as applicable.
12.3. Governing Law. This Agreement will be governed, construed,
interpreted and enforced in accordance with the substantive laws of the State of
Delaware, without regard to conflicts of law principles.
12.4. Severability. Any provision of this Agreement that is deemed
invalid, illegal or unenforceable in any jurisdiction will, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provisions of this Agreement
invalid, illegal, or unenforceable in any other jurisdiction. If any covenant
should be deemed invalid, illegal or unenforceable because its scope is
considered excessive, such covenant will be modified so that the scope of the
covenant is reduced only to the minimum extent necessary to render the modified
covenant valid, legal and enforceable.
12.5. Notices. For all purposes of this Agreement, all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof confirmed), or five
business days after having been mailed by United States registered or certified
mail, return receipt requested, postage prepaid, or three business days after
having been sent by a nationally recognized overnight courier service such as
Federal Express, UPS, or Purolator, addressed to the Company (to the attention
of the Secretary of the Company) at its principal executive offices and to the
Executive at his principal residence, or to such other address as any party may
have
18
<PAGE>
furnished to the other in writing and in accordance herewith, except that
notices of changes of address will be effective only upon receipt.
(i) To The Company. If to the Company, addressed to the
attention of General Counsel at 9830 Colonnade Boulevard, San Antonio, Texas
78230.
(ii) To the Executive. If to the Executive, to him in care of
the Company at the above address.
12.6. Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same Agreement.
12.7. Entire Agreement. The terms of this Agreement are intended by
the parties to be the final expression of their agreement with respect to the
Executive's employment by the Company and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend that this
Agreement will constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative or other legal proceeding to vary the terms of this Agreement.
12.8. Amendments; Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, approved by the
Company and signed by the Executive and the Company. Failure on the part of
either party to complain of any action or omission, breach or default on the
part of the other party, no matter how long the same may continue, will never be
deemed to be a waiver of any rights or remedies hereunder, at law or in equity.
The Executive or the Company may waive compliance by the other party with any
provision of this Agreement that such other party was or is obligated to comply
with or perform only through an executed writing; provided, however, that such
waiver will not operate as a waiver of, or estoppel with respect to, any other
or subsequent failure.
12.9. No Inconsistent Actions. The parties will not voluntarily
undertake or fail to undertake any action or course of action that is
inconsistent with the provisions or essential intent of this Agreement.
Furthermore, it is the intent of the parties hereto to act in a fair and
reasonable manner with respect to the interpretation and application of the
provisions of this Agreement.
12.10. Headings and Section References. The headings used in this
Agreement are intended for convenience or reference
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<PAGE>
only and will not in any manner amplify, limit, modify or otherwise be used in
the construction or interpretation of any provision of this Agreement. All
section references are to sections of this Agreement, unless otherwise noted.
13. Effectiveness and Prior Agreement. This Agreement will become
effective upon, and the Prior Agreement will terminate immediately prior to, the
Effective Date. Notwithstanding any other provision of this Agreement, if the
Merger Agreement is terminated prior to the Effective Date, this Agreement will
have no further force or effect, and the Prior Agreement will continue in effect
as though this Agreement had not been entered into.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written but effective as provided in Section 13.
/s/ Christopher Havens
--------------------------
Christopher Havens
ULTRAMAR CORPORATION,
a Delaware corporation
By: /s/ Jean Gaulin
-----------------------
Jean Gaulin
Chief Executive Officer
20
<PAGE>
Exhibit
GENERAL RELEASE OF ALL CLAIMS
This General Release of all Claims (this "Agreement") is entered into by
and between ______________ ("Executive") and Ultramar Diamond Shamrock
Corporation (including its subsidiaries) (collectively the "Company") effective
as of _______ .
In consideration of the promises set forth in the employment agreement
between Executive and the Company, dated ____________ 1996, as amended as of the
effective date hereof (the "Employment Agreement"), as well as any promises set
forth in this Agreement, Executive and the Company agree as follows:
(1) Employment Agreement Entitlements
The Company will provide Executive the post-termination payments and
benefits to which he is entitled under the Employment Agreement.
(2) Return of Property
All Company files, access keys, desk keys, ID badges and credit cards, and
such other property of the Company as the Company may reasonably request,
in Executive's possession must be returned no later than the date of
Executive's termination from the Company (the "Termination Date")
(3) General Release and Waiver of Claims
Except as provided in the last sentence of this paragraph (3), Executive
hereby unconditionally and forever releases, discharges and waives any and
all claims of any nature whatsoever, whether legal, equitable or
otherwise, which Executive may have against the Company arising at any
time on or before the Termination Date, other than with respect to the
obligations of the Company to the Executive under the Employment
Agreement. This release of claims extends to any and all claims of any
nature whatsoever, other than with respect to the obligations of the
Company to the Executive under the Employment Agreement, whether known,
unknown or capable or incapable of being known as of the Termination Date
of thereafter. This Agreement is a release of all claims of any nature
whatsoever by Executive against the Company, other than with respect to
the obligations of the Company to the Executive under the Employment
Agreement, and
21
<PAGE>
includes, other than as herein provided, any and all claims, demands,
causes of action, liabilities whether known or unknown including those
caused by, arising from or related to Executive's employment relationship
with the Company including, but without limitation, any and all alleged
discrimination or acts of discrimination which occurred or may have
occurred on or before the Termination Date based upon race, color, sex,
creed, national origin, age, disability or any other violation of any
Equal Employment Opportunity Law, ordinance, rule, regulation or order,
including, but not limited to, Title VII of the Civil Rights Act of 1964,
as amended; the Civil Rights Act of 1991; the Age Discrimination in
Employment Act, as amended (as further described in Section 7 below); the
Americans with Disabilities Act; claims under the Employee Retirement
Income Security Act ("ERISA"); or any other federal, state or local laws
or regulations regarding employment discrimination or termination of
employment. This also includes claims for wrongful discharge, fraud, or
misrepresentation under any statute, rule, regulation or under the common
law.
The Executive agrees and understands and knowingly agrees to this release
because it is his intent in executing this Agreement to forever discharge
the Company from any and all present, future, foreseen or unforeseen
causes of action except for the obligations of the Company set forth in
the Employment Agreement.
Notwithstanding the foregoing, Executive does not .release, discharge or
waive any rights to indemnification that he may have under the By--Laws of
the Company, the laws of the State of Delaware, any indemnification
agreement between the Executive and the Company or any insurance coverage
maintained by or on behalf of the Company.
(4) Release and Waiver of Claims Under the Age Discrimination in Employment
Act
Executive acknowledges that the Company encouraged him to consult with an
attorney of his choosing, and through this Agreement encourages him to
consult with his attorney with respect to possible claims under the Age
Discrimination in Employment Act of 1967, as amended ("ADEA") and that
Executive acknowledges that he understands that the ADEA is a federal
statute that prohibits discrimination, on the basis of age, in employment,
benefits, and benefit plans. Executive wishes to waive any and all claims
under the ADEA that he may have, as of the Termination Date, against the
Company, its shareholders, employees, or successors and
22
<PAGE>
hereby waives such claims. Executive further understands that by signing
this Agreement he is in fact waiving, releasing and forever giving up any
claim under the ADEA that may have existed on or prior to the Termination
Date. Executive acknowledges that the Company has informed him that he has
at his option, twenty-one (21) days in which to sign the waiver of this
claim under ADEA, and he does hereby knowingly and voluntarily waive said
twenty-one (21) day period. Executive also understands that he has seven
(7) days following the Termination Date within which to revoke the release
contained in this paragraph by providing a written notice of his
revocation of the release and waiver contained in this paragraph to the
Company. Executive further understands that this right to revoke the
release contained in this paragraph relates only to this paragraph and
does not act as a revocation of any other term of this Agreement.
(5) Proceedings
Executive has not filed, and agrees not to initiate or cause to be
initiated on his behalf, any complaint, charge, claim or proceeding
against the Company before any local, state or federal agency, court or
other body relating to his employment or the termination of his
employment, other than with respect to the obligations of the Company to
the Executive under the Employment Agreement (each individually, a
"Proceeding"), and agrees not to voluntarily participate in any
Proceeding. Executive waives any right he may have to benefit in any
manner from any relief (whether monetary or otherwise) arising out of any
Proceeding.
(6) Remedies
In the event Executive initiates or voluntarily participates in any
Proceeding, or if he fails to abide by any of the terms of this Agreement
or his post-termination obligations contained in the Employment
Agreement, or if he revokes the ADEA release contained in Paragraph 4 of
this Agreement within the seven-day period provided under Paragraph 4, the
Company may, in addition to any other remedies it may have, reclaim any
amounts paid to him under the termination provisions of the Employment
Agreement or terminate any benefits or payments that are subsequently due
under the Employment Agreement, without waiving the release granted
herein. Executive acknowledges and agrees that the remedy at law
available to the Company for breach of any of his post-termination
obligations under the Employment Agreement or his obligations under
Paragraphs 3, 4, and 5 of this Agreement would be inadequate and that
damages flowing from
23
<PAGE>
such a breach may not readily be susceptible to being measured in monetary
terms. Accordingly, Executive acknowledges, consents and agrees that, in
addition to any other rights or remedies which the Company may have at
law, in equity or under this Agreement, upon adequate proof of his
violation of any such provision of this Agreement, the Company shall be
entitled to immediate injunctive relief and may obtain a temporary order
restraining any threatened or further breach, without the necessity of
proof of actual damage.
Executive understands that by entering into this Agreement he will be
limiting the availability of certain remedies that he may have against the
Company and limiting also his ability to pursue certain claims against the
Company.
(7) Severability Clause
In the event any provision or part of this Agreement is found to be
invalid or unenforceable, only that particular provision or part so found,
and not the entire agreement, will be inoperative.
(8) Non-Admission
Nothing contained in this Agreement will be deemed or construed as an
admission of wrongdoing or liability on the part of the Company.
(9) Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, applicable to agreements made and to be
performed in that State; and the parties agree to the jurisdiction of the
U.S. District Court for the District of Delaware, and agree to appear in
any action in such courts by service of process by certified mail, return
receipt requested, at the following addresses:
To Company: ULTRAMAR DIAMOND SHAMROCK CORPORATION
9830 Colonnade Boulevard
San Antonio, Texas 78230
and
To Executive:
-------------------------------------
-------------------------------------
-------------------------------------
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<PAGE>
THE EXECUTIVE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND THAT HE FULLY
KNOWS, UNDERSTANDS, AND APPRECIATES ITS CONTENTS, AND THAT HE HEREBY EXECUTES
THE SAME AND MAKES THIS AGREEMENT AND THE RELEASE AND AGREEMENTS PROVIDED FOR
HEREIN VOLUNTARILY AND OF HIS OWN FREE WILL.
IN WITNESS WHEREOF, the parties have executed this AGREEMENT as of the
date first set forth above.
----------------------------
Christopher Havens
ULTRAMAR DIAMOND SHAMROCK
CORPORATION,
a Delaware corporation
By:
-------------------------
Name:
--------------------
Title:
-------------------
25
<PAGE>
EXHIBIT 10.56
ULTRAMAR DIAMOND SHAMROCK CORPORATION
NON-EMPLOYEE DIRECTOR EQUITY PLAN
As amended effective January 1, 2000
1. Purpose; Definitions. The purposes of the Plan is to promote the long-term
success of the Company by providing the non-employee directors of the Company,
its subsidiaries and its affiliates with incentives to continue their
association with the Company and view the Company from a stockholder's
perspective. To accomplish such purpose, the Plan provides that the Company
shall grant Options and Restricted Shares.
Whenever the following terms are used in the Plan, they shall have the
meaning specified below unless the context clearly indicates to the contrary.
"Annual Meeting" shall mean an annual meeting of the stockholders of the
Company.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall have the meaning set forth in Section 6.
"Committee" shall mean the Compensation Committee of the Board appointed as
provided in Section 2.1.
"Company" shall mean Ultramar Diamond Shamrock Corporation, a Delaware
corporation, and any successor corporation.
"Effective Date" shall have the meaning set forth in Section 8.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" of a Share as of a given date shall mean (a) the closing
sale price per Share as reported on the principal exchange on which Shares are
then trading, if any, on such date, or if there are no sales on such date, on
the next preceding trading day during which a sale occurred, or (b) if clause
(a) does not apply, the fair market value of the Share as determined by the
Committee from time to time in good faith.
"Merger" shall have the meaning set forth in Section 8.1.
"Option" shall mean an option to purchase Shares granted pursuant to Section
5.
"Participant" shall mean a non-employee director of the Company to whom an
award is granted under the Plan.
"Plan" shall mean this Ultramar Diamond Shamrock Corporation Non-Employee
Director Equity Plan, as amended effective January 1, 2000 and from time to
time thereafter.
"Restricted Shares" shall mean Shares that are awarded to a Participant that
are subject to the restrictions described in Section 4.
"Restricted Share Amount" shall mean the dollar amount of the annual retainer
to be paid in Restricted Shares to a Participant.
"Rule 16b-3" shall mean Rule 16b-3 adopted by the Securities and Exchange
Commission under the Exchange Act.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Share" shall mean a share of the Company's Common Stock, $.01 par value.
<PAGE>
2. Administration
2.1 Compensation Committee. The Plan shall be administered by the Committee,
which shall consist of two or more individuals appointed by the Board and
holding office at the pleasure of the Board. All Committee members shall be
members of the Board, and must be "Non-Employee Directors," as such term is
defined in Rule 16b-3, if and as such Rule is in effect. Appointment of
Committee members shall be effective on acceptance of appointment. Committee
members may resign at any time by delivering written notice to the Board.
Vacancies in the Committee shall be filled by the Board.
2.2 Duties and Powers of Committee. It shall be the duty of the Committee to
conduct the general administration of the Plan in accordance with its terms and
provisions. The Committee shall have the power to interpret the Plan and to
adopt such rules for the administration, interpretation and application of the
Plan as are consistent therewith and to interpret, amend or revoke any such
rules. All actions taken and all interpretations and determinations made by the
Committee shall be binding upon all affected persons. The Committee may
delegate ministerial decisions, including, without limitation, the calculation
of amounts to be included in particular awards, to any officer of the Company.
2.3 Majority Rule. The Committee shall act by a majority of its members in
office. The Committee may act either by vote at a telephonic or other meeting
or by a memorandum or other written instrument signed by a majority of the
Committee.
2.4 Compensation; Professional Assistance; Good Faith Actions. Members of the
Committee shall receive such compensation for their services as members as may
be determined by the Board. All expenses and liabilities incurred by members of
the Committee in connection with the administration of the Plan shall be borne
by the Company. The Committee may, with the approval of the Board, employ
attorneys, consultants, accountants, appraisers or other persons. The
Committee, the Company and its officers and directors shall be entitled to rely
upon the advice, opinions or valuations of any such persons. No member of the
Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the awards
hereunder, and all members of the Committee shall be fully protected by the
Company in respect to any such action, determination or interpretation.
3. Shares Subject to the Plan.
3.1 Total Shares Reserved. Subject to adjustment pursuant to Section 3.3, the
total number of Shares that are issued or transferred under the Plan, as
amended, shall not in the aggregate exceed 350,000 Shares. Such Shares may be
treasury Shares or Shares of original issue or a combination of the foregoing.
3.2 Reissuance of Certain Shares. If the term of an Option expires with all
or a portion of such Option unexercised, any Shares that were covered by the
unexercised portion of such Option shall again be available for issuance or
transfer hereunder. Upon full or partial payment of the exercise price of any
Option by transfer to the Company of Shares, there shall be deemed to have been
issued or transferred under this Plan only the net number of Shares actually
issued or transferred by the Company determined by subtracting the number of
Shares so transferred or relinquished. If Restricted Shares are forfeited, the
corresponding Shares shall again be available for issuance or transfer
hereunder.
3.3 Changes in Company's Shares. In the event of any stock dividend,
extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase Shares at a price substantially below fair market
value, or other similar corporate event that affects the Restricted Shares or
the Options such that an adjustment is required in order to preserve the
benefits of potential benefits intended to be made available under this Plan,
then the Committee shall, in such manner as the Committee may deem equitable,
adjust any or all of (i) the number and kind of shares which thereafter may be
granted or optioned and sold in the aggregate or to any non-employee director,
(ii) the number and kind of shares subject to outstanding Options and
Restricted Shares, and (iii) the grant,
<PAGE>
exercise or conversion price with respect to any of the foregoing and/or, if
deemed appropriate, make provision for a cash payment to a non-employee
director; provided, however, that the number of Shares subject to any Option or
Restricted Shares will always be a whole number.
4. Restricted Shares.
4.1 Award of Restricted Shares.
(i) Grant of Restricted Shares. Subject to Section 4.1(iii), effective
January 1, 2000, each non-employee director elected to the Board shall be
granted Restricted Shares on the date of his or her election to the Board.
Such Restricted Shares shall be in lieu of at least $25,000.00 of the non-
employee director's annual retainer, without regard to amounts paid as
committee or meeting fees, to which he or she would otherwise be entitled
during the five years following the date of grant; provided however, that
if a non-employee director is elected to the Board on a date other than the
date of an Annual Meeting, such non-employee director's grant of Restricted
Shares will respect to the amount of his or her first year's annual
retainer shall be prorated to reflect his or her partial year of Board
membership. The non-employee director shall indicate the applicable
Restricted Share Amount by an election in writing made prior to the
commencement of the relevant period of service or prior to the initial
grant made pursuant to Section 4.1(iii), as the case may be.
(ii) Additional Grants. Each non-employee director shall be granted
additional Restricted Shares on the date of the fifth Annual Meeting that
follows the initial date of grant of Restricted Shares made pursuant to
this Section, and on each succeeding fifth Annual Meeting thereafter.
(iii) Initial Grant of Restricted Shares Under the Plan. The initial
grant of Restricted Shares under this Plan shall be made on the Effective
Date to each individual serving as a non-employee director of the Company
as of the close of the Effective Date. Such grant shall be determined as if
the non-employee director had first been elected to the Board on such date,
without regard to whether or not the director was so elected.
(iv) Written Agreement. Each grant of Restricted Shares shall be
evidenced by a written agreement in such form as approved by the Committee,
and shall be subject to the additional terms and conditions set forth in
this Section 4.
4.2 Increase in Annual Retainer. Any increase in annual retainer fees paid to
a non-employee director by the Company shall be reflected in an additional
grant for the balance of the vesting period remaining on such non-employee
director's outstanding grant made pursuant to this Section. The number of
Restricted Shares to be included in such grant and the vesting of such
Restricted Shares shall be determined in a manner consistent with the
provisions of Sections 4.1 and 4.4.
4.3 Calculation of Award of Restricted Shares. The total number of Restricted
Shares included in each grant shall be equal to: (i) the Restricted Share
Amount of the non-employee director's annual retainer for the five-year period
(or pro-rated period pursuant to Section 4.1), (ii) with the amount in clause
(i) divided by the Fair Market Value per Share on the date of grant of the
Restricted Shares, and (iii) with the result in clause (ii) rounded up to the
next whole number of Restricted Shares.
4.4 Lapse of Restrictions. Restricted Shares shall be forfeited or become
nonforfeitable on the following basis.
(i) One-fifth (20%) of the Restricted Shares subject to each grant shall
become transferable and nonforfeitable as of the first Annual Meeting
following the date of such grant. An additional one-fifth (20%) shall
become transferable and nonforfeitable as of the next four Annual Meetings
following the date of grant. If Restricted Shares are granted pursuant to
Section 4.2, those Restricted Shares shall vest, become transferable and
non-forfeitable over the balance of the vesting period remaining on such
non-employee director's outstanding grant. If a non-employee director is
elected to the Board on a date other
<PAGE>
than the date of an Annual Meeting, the number of Restricted Shares that
become transferable and nonforfeitable on the date of the Annual Meeting
following the date of such election shall be equal to the prorated number
of Restricted Shares granted with respect to the partial year of service as
a member of the Board for the period ending on the date of the Annual
Meeting that immediately follows the date of election; the remaining
Restricted Shares in the grant shall become transferable and nonforfeitable
ratably over the remainder of the vesting period of the grant as of each
succeeding Annual Meeting. A grant made pursuant to Section 4.1(iii) shall
be treated for purposes of this Section 4.4 as if the non-employee director
had first been elected to the Board on the date of such grant, without
regard to whether or not the director was so elected.
(ii) Upon termination of service as a non-employee director, (a) if
termination occurs other than as of an Annual Meeting, the number of
Restricted Shares that would have become vested and nonforfeitable at the
Annual Meeting that immediately follows such termination shall be reduced
ratably to reflect the number of months during which the non-employee
director was serving as a Board member during the period commencing on the
date of the immediately preceding Annual Meeting, and (b) any balance of
the Restricted Shares shall be forfeited.
4.5 Terms and Conditions of Awards of Restricted Shares.
(i) Rights as Stockholder. Each award of Restricted Shares shall
constitute a transfer of the ownership of Shares to the non-employee
director in consideration of the performance of services, entitling such
non-employee director to voting, dividend and other ownership rights, but
subject to the forfeiture and transfer restrictions provided in this
Section and in Section 8.1. No additional consideration shall be due in
connection with any such award.
(ii) Transfer Restrictions. Restricted Shares that have not yet become
non-forfeitable may not be sold, transferred (including, without
limitation, transfer by gift or donation), pledged or encumbered prior to
the date, if any, on which they become nonforfeitable and shall bear
appropriate legends.
(iii) Additional Securities. Any new or additional Shares or other
securities to which a non-employee director, by virtue of awards of
Restricted Shares hereunder, becomes entitled due to a stock dividend,
stock split, recapitalization, merger or other event shall be subject to
all terms and conditions of the Plan, including this Section.
5. Options.
5.1 Grant of Options.
(i) Number of Shares Subject to Grant. Each Option shall be with respect
to 2,000 Shares effective January 1, 2000.
(ii) Grant Dates. An Option shall be granted on the date of each Annual
Meeting after 1999 to each individual serving as a non-employee director of
the Company as of the close of such Annual Meeting.
(iii) Initial grant of Options Under the Plan. The initial grant of
Options under this Plan shall be made (a) on the Effective Date to each
individual serving as a non-employee director of the Company as of the
close of the Effective Date, and (b) with respect to a non-employee
director not described in clause (a) who is initially elected to the Board
prior to the 2000 Annual Meeting of the Company, on the date of the 2000
Annual Meeting of the Company.
(iv) Written Agreement. Each grant of Options shall be evidenced by a
written agreement in such form as approved by the Committee and shall be
subject to the additional terms and conditions set forth in this Section.
<PAGE>
5.2 Terms and Exercise Options.
(i) Exercisability of Options. Except as provided in Section 5.2(iii)
below, 100% of the Option shall become exercisable (a) at the Annual
Meeting following the date of grant, or (b) in the case of an Option
granted pursuant to Section 5.1(iii)(a), on the first anniversary of the
date of grant.
(ii) Term. An Option shall expire ten years from the date the Option is
granted and shall be subject to earlier termination as hereinafter
provided. Once an Option becomes exercisable, it may thereafter be
exercised, wholly or in part, at any time prior to its expiration or
termination. In the event of the non-employee director's termination from
service on the Board, other than as provided in Section 5.2(iii), an
outstanding Option may be exercised only to the extent it was exercisable
on the date of such termination and shall expire five years after such
termination, or on its stated expiration date, whichever occurs first.
(iii) Early Vesting. Upon the occurrence of any of the following events,
the Option shall become immediately and fully exercisable:
(a) the death of the non-employee director;
(b) the disability of the non-employee director; or
(c) a Change in Control.
Upon the retirement of the non-employee director from the Board after
attaining age 70, the Option shall become immediately and fully exercisable
in proportion to the director's actual period of service during the vesting
period of the Option.
5.3 Exercise Price. The exercise price of an Option granted to a non-employee
director shall be equal to the Fair Market Value per Share on the date of
grant.
5.4 Payment. An Option may be exercised by a non-employee director only upon
payment to the Company in full of the exercise price of the Option
corresponding to the portion of the Option to be exercised. Such payment shall
be made in cash or in Shares previously owned by the non-employee director for
more than six months, or in a combination of cash and such Shares.
6. Change in Control. For purposes of this Plan, a "Change in Control" shall
be deemed to occur upon the occurrence of any of the following events:
6.1 The Company is merged, consolidated or reorganized into or with another
corporation or other legal person, and as a result of such merger,
consolidation or reorganization, less than 50% of the combined voting power of
the then-outstanding securities of such corporation or person immediately after
such transactions is held in the aggregate by the holders of Voting Stock (as
that term is hereafter defined) of the company immediately prior to such
transaction;
6.2 The Company sells or otherwise transfers all or substantially all of its
assets to any other corporation or other legal person, and as a result of such
sale or transfer, less than 50% of the combined voting power of the the-
outstanding voting securities of such corporation or person are held in the
aggregate by the holder of Voting Stock of the Company immediately prior to
such sale;
6.3 There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), each as promulgated pursuant to the
Exchange Act, disclosing that any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) o the Exchange Act) has become the
beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or
any successor rule or regulation promulgated under the Exchange Act) of
securities representing 20% or more of the combined voting power of the then-
outstanding securities of the Company entitled to vote generally in the
election of Directors of the Company ("Voting Stock");
<PAGE>
6.4 The Company files a report or proxy statement with the Securities and
Exchange Commission pursuant to the Exchange Act disclosing in response to Form
8-K or Schedule 14A (or any successor schedule, form or report or item therein)
that a change in control of the Company has or may have occurred or will or may
occur in the future pursuant to any then-existing contract or transaction; or
6.5 If during the period of two consecutive years individuals who at the
beginning of any such period constitute the directors of the Company cease for
any reason to constitute at least a majority thereof unless the election, or
the nomination for election by the Company's shareholders, of each director of
the Company first elected during such period was approved by a vote of at least
two-thirds of the directors of the Company then still in office who were
directors of the Company at the beginning of any such period (excluding for
this purpose the election of any new director in connection with an actual or
threatened election or proxy contest).
Notwithstanding the foregoing provisions of Section 6.3 or 6.4 hereof, a
"Change in Control" shall not be deemed to have occurred for purposes of this
Plan solely because the Company, an entity in which the Company directly or
beneficially owns 50% or more of the voting securities of such entity, any
Company-sponsored employee stock ownership plan or any other employee benefit
plan of the Company either files or becomes obligated to file a report or a
proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K
or Schedule 14A (or any successor schedule, form or report or item therein)
under the Exchange Act, disclosing beneficial ownership by it of shares of
voting securities of the Company, whether in excess of 20% or otherwise, or
because the Company reports that a change in control of the Company has or may
have occurred or will or may occur in the future by reason of such beneficial
ownership. Notwithstanding the foregoing provisions of this Section, the merger
shall not constitute a Change in Control.
7. Stock Ownership Guidelines. It is recommended that each non-employee
director own Shares with a Fair Market Value of not less than 300% of the non-
employee director's annual retainer (without regard to amounts paid as
committee or meeting fees). It is further recommended that each non-employee
director attain such level of ownership of Shares not later than the third
anniversary of his or her initial election to the Board (or of the Effective
Date, in the case of an individual serving as a non-employee director at the
close of the Effective Date), and maintain such level of stock ownership
thereafter while serving as a non-employee director of Company. For purposes of
applying the foregoing guidelines, a non-employee director shall be considered
as owning: (i) Shares personally or beneficially held; (ii) Shares held in a
Company-sponsored program; and (iii) Restricted Shares.
8. Miscellaneous
8.1 Effective Date. The Plan shall become effective (the "Effective Date") as
of January 1, 2000 subject to approval of the Plan by the stockholders of the
Company at the next annual stockholders meeting and shall continue in effect
until the tenth anniversary of such approval. Any award made under the Plan
shall be null and void and of no effect and any distributions theretofore made
with respect to Restricted Shares shall be forfeited if the Plan is not so
approved.
8.2 Amendment, Suspension or Termination of the Plan. This Plan may be wholly
or partially amended or otherwise modified, suspended or terminated at any time
or from time to time by the Board. An amendment to the Plan shall become
effective the date ratified by the Board; provided, however, that except as
provided in Section 3.3, no such amendment shall, without the further approval
of the stockholders of the Company, (a) increase the maximum number of Shares
specified in Section 3.1, (b) reprice previously issued stock options (other
than in connection one of the events described in Section 3.3) or (c) make such
other change as may require stockholder approval under the rules of any
exchange on which Shares are traded. Neither the amendment, suspension nor
termination of the Plan shall, without the consent of the Participant alter or
impair any rights or obligations under any award therefore granted. No awards
may be granted under the Plan during any period of suspension nor after
termination of the Plan, and in no event may any awards be granted under
<PAGE>
the Plan after ten years from the date the Plan, or the Plan as amended from
time to time, is approved by stockholders.
8.3 Transferability.
(i) No Option shall be assignable or transferable except by will or the
laws of descent and distribution, and no right or interest of any
Participant shall be subject to any lien, obligation or liability of the
Participant.
(ii) Notwithstanding the provisions of Section 8.3(a), an Option shall be
transferable by a non-employee director, without payment of consideration
therefor by the transferee, to any one or more members of the non-employee
director's Immediate Family (or to one or more trusts established solely
for the benefit of one or more members of the non-employee director's
Immediate Family or to one or more partnerships in which the only partners
are members of the non-employee director's Immediate Family); provided,
however, that (i) no such transfer shall be effective unless reasonable
prior notice thereof is delivered to the Company and such transfer is
thereafter effected in accordance with any terms and conditions that shall
have been made applicable thereto by the Company or the Board and (ii) any
such transferee shall be subject to the same terms and conditions hereunder
as the non-employee director. For this purpose, "Immediate Family" has the
meaning ascribed thereto in General Instruction A to Form S-8 under the
Exchange Act (or any successor provision to the same effect) as in effect
from time to time.
8.4 Effect on Other Compensation. The adoption and implementation of the Plan
shall not in any way limit the authority of the Company to make other awards of
Shares or rights related to Shares to its non-employee directors or other
persons on terms that are similar or dissimilar to those of the Plan.
8.5 Regulations and Other Approvals; Governing Law.
(i) The obligation of the Company to sell or deliver Shares with respect
to any award granted under the Plan shall be subject to all applicable
laws, rules and regulations, including all applicable federal and sate
securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
(ii) The Committee may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority.
(iii) Each award under the Plan is subject to the requirement that, if at
any time the Committee determines, in its sole discretion, that the
listing, registration or qualification of Shares issuable pursuant to the
Plan is required by any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the grant
of an Option or the issuance off Shares, no Options shall be granted or
payment made or Shares issues, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or
obtained free of any conditions as acceptable to the Committee.
(iv) In the event that the disposition of Shares acquired pursuant to the
Plan is not covered by a then current registration statement under the
Securities Act, and is not otherwise exempt from such registration, such
Shares shall be restricted against transfer to the extent required by the
Securities Act or regulations thereunder, and the Committee may require any
individual receiving Shares pursuant to the Plan, as condition precedent to
receipt of such Shares, to represent to the Company in writing that the
Shares acquired by such individual are acquired for investment only and not
with a view to distribution. The certificate for any Shares acquired
pursuant to the Plan shall include any legend that the Committee deems
appropriate to reflect any restrictions on transfer.
8.6 Governing Law. The Plan and the rights of all person claiming hereunder
will be construed and determined in accordance with the laws o the State of
Delaware without giving effect to the choice of law principles thereof.
<PAGE>
8.7 Right to Continued Service. Nothing contained herein shall be construed
to confer upon any non-employee director the right to continue to serve as a
director of the Company or in any other capacity.
8.8 Titles; Construction. Titles are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of the Plan. The
masculine pronoun shall include the feminine and neuter and the singular shall
include the plural, when the context so indicates. Any reference to a section
other than to a section of the Plan) shall also include a successor to such
section.
<PAGE>
EXHIBIT 10.60
EMPLOYEE STOCK PURCHASE LOAN PROGRAM
PROMISSORY NOTE
(DATE)
FOR VALUE RECEIVED, the UNDERSIGNED promises to pay to the order of
ULTRAMAR DIAMOND SHAMROCK CORPORATION ("Payee"), at 6000 N. Loop 1604 West, San
Antonio, Texas 78249-1112, or at such other address given to the UNDERSIGNED by
Payee, the principal amount of $(AMOUNT), in lawful money of the United States
of America, together with interest on the unpaid principal amount hereof
computed from the date of each such borrowing until maturity on the basis of a
365 or 366 day year, as the case may be, at a rate that adjusts monthly to the
then current Applicable Federal Rate for short-term loans as published in the
Revenue Rulings issued by the United States Department of Treasury provided,
however, that no such adjustment shall cause such rate to exceed 8% per annum.
Interest on the unpaid principal amount outstanding hereunder shall be due
and payable annually on December 31. The principal amount equal to the lesser
of 20% of the original principal amount and the entire principal which remains
outstanding shall be due and payable in annual installments commencing on the
first February 15th following the fifth anniversary hereof; provided, however,
notwithstanding the foregoing, the entire principal of this Note, together with
interest accrued from the last interest payment date, shall be due and payable
90 days after the UNDERSIGNED terminates employment for any reason (including
retirement, death, or disability) with Payee or any of its subsidiaries.
All past due principal and, to the extent permitted by applicable law,
interest upon this Note shall bear interest at a rate equal to the Indicated
Rate published by the Consumer Credit Commissioner of the State of Texas from
time to time.
No waiver by Payee of any of its rights or remedies hereunder shall be
considered a waiver of any other subsequent right or remedy of Payee; no delay
or omission in the exercise by Payee of any rights or remedies shall be
construed as a waiver of any right or remedy of Payee; and no exercise or
enforcement of any such right shall ever be held to exhaust any right or remedy
of Payee.
Should the principal of or interest on this Note or any other amount
payable hereunder become due and payable on a Saturday, Sunday, or legal holiday
in the State of Texas on which banks are closed for business in San Antonio,
payment in respect thereof may be made on the next succeeding day which is not a
Saturday, Sunday, or legal holiday, and such extension of time shall in such
case be included in computing interest, if any, in connection with such payment.
<PAGE>
The UNDERSIGNED reserves the right to prepay, the outstanding principal
balance of this Note in whole or in part, at any time or from time to time,
without premium or penalty. Any such prepayment shall be made together with
payment of interest accrued on the amount of principal being prepaid through the
date of such prepayment.
The UNDERSIGNED hereby waives presentment, demand for payment, notice,
protest and notice of protest of nonpayment of this Note, and diligence in
bringing suit against the UNDERSIGNED, and consents to the extension of the date
of payment any number of times without notice thereof.
The UNDERSIGNED has read this Note and by execution acknowledges receipt of
a copy of same.
THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
--------------------------------
(NAME & ADDRESS OF MAKER)
<PAGE>
GRID SCHEDULE
Attached to and made a part of the Promissory Note dated (DATE), issued by
(NAME) to Ultramar Diamond Shamrock Corporation ("Company") pursuant to the
Employee Stock Purchase Loan program of the Company.
UNPAID
AMOUNT PRINCIPAL PRINCIPAL
DATE OF BORROWING REPAYMENTS OUTSTANDING
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<PAGE>
EXHIBIT 10.61
================================================================================
EXECUTION COPY
ULTRAMAR DIAMOND SHAMROCK CORPORATION
EMPLOYEE BENEFITS TRUST AGREEMENT
Effective as of November 9, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
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Article I Trust, Trustee and Trust Fund....................................2
1.1 Trust............................................................2
1.2 Trustee..........................................................2
1.3 Trust Fund.......................................................2
1.4 Trust Fund Subject to Claims of Creditors........................2
1.5 Definitions......................................................3
Article II Contributions and Dividends......................................5
2.1 Contributions....................................................5
2.2 Prepayments......................................................6
2.3 Dividends........................................................6
Article III Purchase and Sale of Shares......................................7
3.1 Purchase and Sale................................................7
3.3 Delivery of Shares...............................................8
3.4 Company Records..................................................9
Article IV Release and Transfer of Company Stock............................9
4.1 Company Stock Made Available for Transfer from Trust.............9
4.2 Transfer from Trust of Released Shares and Cash Proceeds.........9
Article V Compensation, Expenses and Tax Withholding......................11
5.1 Compensation and Expenses.......................................11
5.2 Withholding of Taxes............................................12
Article VI Administration of Trust Fund....................................12
6.1 Management and Control of Trust Fund............................12
6.2 Investment of Funds.............................................12
6.3 Trustee's Administrative Powers.................................13
6.4 Rights Regarding Company Stock..................................15
6.5 Indemnification.................................................16
6.6 General Duty to Communicate to Committee........................17
Article VII Duties of Trustee...............................................18
7.1 Records and Accounts of Trustee.................................18
7.2 Reports of Trustee..............................................18
7.3 Final Statement.................................................19
Article VIII Succession of Trustee...........................................19
8.1 Resignation of Trustee..........................................19
ii
<PAGE>
8.2 Removal of Trustee..............................................19
8.3 Appointment of Successor Trustee................................19
8.4 Succession to Trust Fund Assets.................................19
8.5 Continuation of Trust...........................................20
8.6 Changes in Organization of Trustee..............................20
8.7 Continuance of Trustee's Powers in Event of Termination
of the Trust....................................................20
Article IX Amendment or Termination........................................20
9.1 Amendments......................................................20
9.2 Termination.....................................................21
9.3 Effect of Termination...........................................21
9.4 Form of Amendment or Termination................................21
Article X Miscellaneous...................................................22
10.1 Controlling Law.................................................22
10.2 Committee Action................................................22
10.3 Notices.........................................................22
10.4 Severability....................................................23
10.5 Protection of Persons Dealing with the Trust....................23
10.6 Tax Status of Trust.............................................23
10.7 ERISA Status of Trust...........................................23
10.8 Successors and Assigns; No Third Party Rights;
Plan Participants to Have No Interest in the Company
by Reason of the Trust..........................................23
10.9 Nonassignability of Trust Interests.............................24
10.10 Assignment of Trust.............................................24
10.11 Merger..........................................................24
10.12 Gender and Plurals..............................................24
10.13 Headings........................................................24
10.14 Entire Agreement; Counterparts..................................24
Schedule A Ultramar Diamond Shamrock Employee Benefit Programs
Schedule B Trustee's Compensation
Exhibit 1 Form of Common Stock Purchase Agreement
Exhibit 2 Form of Promissory Note
iii
<PAGE>
ULTRAMAR DIAMOND SHAMROCK CORPORATION
EMPLOYEE BENEFITS TRUST AGREEMENT
THIS TRUST AGREEMENT (the "Agreement"), is made effective as of
November 9, 1999, between Ultramar Diamond Shamrock Corporation, a Delaware
corporation (the "Company"), and Sterling National Bank, a national banking
association, as Trustee.
W I T N E S S E T H :
-------------------
WHEREAS, the Company desires to establish a trust (the "Trust") in
accordance with the laws of the State of New York and for the purposes stated in
this Agreement;
WHEREAS, the Trustee desires to act as trustee of the Trust, and to
hold legal title to the assets of the Trust, in trust, for the purposes
hereinafter stated and in accordance with the terms hereof;
WHEREAS, the Company or its subsidiaries have previously adopted the
Plans (as herein defined);
WHEREAS, the Company desires to provide for the availability of shares
of its common stock to satisfy certain of its obligations under the Plans and
intends to sell to the Trust such assets that shall be held therein, subject to
the claims of the Company's general creditors in the event of the Company's
Insolvency (as defined herein) until made available to the Plans, in such manner
and at such times as specified herein;
WHEREAS, the Company desires that the assets to be held in the Trust
Fund (as herein defined) should be principally or exclusively securities of the
Company except as where specifically otherwise provided and, therefore expressly
waives any diversification of investments that might otherwise be necessary,
appropriate or required pursuant to applicable provisions of law; and
WHEREAS, the Trustee has been appointed as trustee and has accepted
such appointment as of the date first set forth above.
NOW, THEREFORE, the parties hereto hereby establish the Trust and
agree that the Trust will be comprised, held and disposed of as follows:
<PAGE>
2
I
Trust, Trustee and Trust Fund
-----------------------------
1.1 Trust. The Trust created hereby shall be known as the Ultramar
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Diamond Shamrock Corporation Employee Benefits Trust. The parties intend that
the Trust will be an independent legal entity with title to and power to convey
all of its assets in accordance with the terms of the Trust. The parties hereto
further intend that the Trust not be subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and that the assets comprising the
Trust Fund shall not be "plan assets," as such term is described in ERISA and
Department of Labor regulations thereunder. The Trust is not a part of any of
the Plans and does not provide pension, welfare or any other benefits to any
Plan Participant (as herein defined). The assets of the Trust will be held,
invested and disposed of by the Trustee, in accordance with the terms of the
Trust. The Trust shall be irrevocable. No Plan Participant nor any Plan shall
have any preferred claim on, or any beneficial ownership interest in, any assets
of the Trust.
1.2 Trustee. The trustee named above, and its successor or successors, is
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hereby designated as the trustee hereunder, to receive, hold, invest, administer
and distribute the Trust Fund in accordance with this Agreement, the provisions
of which shall govern the powers, duties and responsibilities of the Trustee.
1.3 Trust Fund. The assets held at any time and from time to time under
----------
the Trust collectively are herein referred to as the "Trust Fund" and shall
consist of contributions received by the Trustee, proceeds of any loans,
investments and reinvestment thereof, the earnings and income thereon, less
disbursements therefrom. Except as herein otherwise provided, title to the
assets of the Trust Fund shall at all times be vested in the Trustee and
securities that are part of the Trust Fund shall be held in such manner that the
Trustee's name and the fiduciary capacity in which the securities are held are
fully disclosed, subject to the right of the Trustee to hold title in bearer
form or in the name of a nominee, and the interests of others in the Trust Fund
shall be only the right to have such assets received, held, invested,
administered and distributed in accordance with the provisions of the Trust.
1.4 Trust Fund Subject to Claims of Creditors. Notwithstanding any
-----------------------------------------
provision of this Agreement to the contrary, the Trust Fund shall at all times
remain subject to the claims of the Company's general creditors under Federal
and state law in the event of the Company's Insolvency (as herein defined).
In addition, the Board of Directors and Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing of the Company's
Insolvency. If a person claiming to be a creditor of the Company alleges in
writing to
<PAGE>
3
the Trustee that the Company has become Insolvent, the Trustee shall discontinue
transfers of Released Shares (as herein defined) pursuant to Article 4.
Unless the Trustee has actual knowledge of the Company's Insolvency,
which actual knowledge shall be deemed to exist only if an officer of the
Trustee with material and substantial responsibilities with respect to the Trust
Fund has actual knowledge thereof, or has received written notice from the
Company or a person claiming to be a Company creditor alleging that the Company
is Insolvent, the Trustee shall have no duty to inquire whether the Company is
Insolvent. The Trustee may in all events conclusively rely on a copy of a
Bankruptcy petition filed within a court.
If at any time the Trustee has determined that the Company is
Insolvent, the Trustee shall discontinue transfers of Released Shares pursuant
to Article 4 and shall hold the Trust Fund for the benefit of the Company's
general creditors. Nothing in this Agreement shall in any way diminish any
rights of employees as general creditors of the Company with respect to benefits
due under the Plans or otherwise.
In those cases in which a Bankruptcy petition has been filed, the
Trustee shall resume transfers of Released Shares pursuant to Article 4 only
after it receives a copy of the court order dismissing such Bankruptcy petition
or, in any other case, after the Trustee otherwise has determined that the
Company is not Insolvent (or is no longer Insolvent).
Notwithstanding anything herein to the contrary, in the event that the
Company is Insolvent, the Committee may, in its discretion and to the extent
permitted by applicable law, direct the Trustee to apply the Trust Fund to
satisfy the claims of the Company's creditors.
1.5 Definitions. In addition to the terms defined in the preceding or
-----------
subsequent portions of this Agreement, certain capitalized terms have the
meanings set forth below:
Board of Directors. "Board of Directors" means the board of directors
------------------
of the Company or a committee comprised of members thereof.
Code. "Code" means the Internal Revenue Code of 1986, as amended.
----
Committee. "Committee" means the Employee Benefits Committee of the
---------
Company.
Common Stock Purchase Agreement. "Common Stock Purchase Agreement"
-------------------------------
means the agreement between the Company and the Trustee, executed on even date
herewith and attached hereto as Exhibit 1.
<PAGE>
4
Company Stock. "Company Stock" means shares of common stock, par
-------------
value $.01 per share, of the Company, or any successor securities thereto.
Designated Plan Participant. "Designated Plan Participant" means, as
---------------------------
of the date of determination, each common-law employee of the Company, other
than any member of the Board of Directors of the Company, who is an active
employee who is a participant in the UDS 401(k) Retirement Savings Plan and who
has Company Stock credited to his account thereunder.
Effective Date. "Effective Date" means November 9, 1999.
--------------
Extraordinary Dividend. "Extraordinary Dividend" means any dividend
----------------------
or other distribution of cash or other property (other than Company Stock) made
with respect to Company Stock, which the Board of Directors declares generally
to be other than an ordinary dividend.
Fair Market Value. "Fair Market Value" means as of any date the
-----------------
closing price on such date (or if such date is not a trading day, then on the
most recent prior date which is a trading day) of a share of Company Stock as
reported on the composite tape, or similar reporting system, for issues listed
on the New York Stock Exchange (or, if the Company Stock is no longer traded on
the New York Stock Exchange, on such other national securities exchange on which
the Company Stock is listed or national securities or central market system upon
which transactions in Company Stock are reported, as either shall be designated
by the Committee for the purposes hereof) or if sales of Company Stock are not
reported in any manner specified above, the closing price on such date (or if
such date is not a trading day, then on the most recent prior date which is a
trading day) in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System or, if not so
reported, by the National Quotation Bureau, Incorporated or similar organization
selected by the Committee.
Insolvency or Insolvent. "Insolvency" or being "Insolvent" means (i)
-----------------------
inability of the Company to pay its debts as they become due, or (ii) the
Company being subject to a pending proceeding as a debtor under the provisions
of Title 11 of the United States Code (Bankruptcy Code).
Loan. "Loan" means the loan and extension of credit to the Trust from
----
the Company evidenced by the promissory note made by the Trustee of even date
herewith with which the Trustee purchased Company Stock, and any such other
loans or increase(s) in principal of the Loan the proceeds of which are used by
the Trustee for additional purchases of Company Stock.
<PAGE>
5
New Shares. "New Shares" means authorized but unissued shares of
----------
Company Stock, as defined in Section 3.1.
1933 Act. "1933 Act" means the Securities Act of 1933, as amended.
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Non-Stock Plans. "Non-Stock Plans" means the Plans identified as Non-
---------------
Stock Plans on Schedule A hereto.
Note. "Note" means the Promissory Note for the balance of the
----
purchase price in the form attached hereto as Exhibit 2.
Plan Participant. "Plan Participant" means a participant in any of
----------------
the Plans (or, if applicable, the beneficiary of such a participant).
Plans. "Plans" means the employee benefit plans, programs, contracts
-----
and compensation structures listed on Schedule A hereto, as the same may be
amended from time to time by the Committee in accordance with Section 9.1.
Released Shares. "Released Shares" shall have the meaning set forth
---------------
in Section 4.1.
Repurchased Shares. "Repurchased Shares" shall have the meaning set
------------------
forth in Section 3.1.
Stock Plans. "Stock Plans" means the Plans identified as Stock Plans
-----------
on Schedule A hereto.
Trust Year. "Trust Year" or "Fiscal Year" means the calendar year.
----------
Trustee. "Trustee" means Sterling National Bank, a national banking
-------
association, or any successor trustee.
II
Contributions and Dividends
---------------------------
2.1 Contributions. On the date of execution of this Agreement, if any
-------------
New Shares are to be purchased by the Trust at the First Closing (as defined in
Section 3.2(a)), the Company shall contribute to the Trust in cash the aggregate
par value of the New Shares. In addition, for each Trust Year, the Company shall
contribute to the Trust in cash such amount, which together with dividends, as
provided in Section 2.3, and any other earnings of the Trust, shall enable the
Trustee to
<PAGE>
6
make all payments of principal and interest under the Loan as they come due.
Unless otherwise expressly provided herein, the Trustee shall apply all such
contributions, dividends and earnings to the payment or prepayment of principal
and interest due under the Loan or to pay, in cash, the aggregate par value of
any additional New Shares purchased by the Trust. If, at the end of any Trust
Year, insufficient contributions have been made in cash, such contributions
shall be deemed to have been made in the form of forgiveness of principal and
interest on the Loan to the extent of the Company's failure to make
contributions as required by this Section 2.1. Such forgiveness shall be the
sole and absolute remedy that the Trust shall have against the Company for any
failure of the Company to make any contribution to the Trust. All contributions
made under the Trust shall be delivered to the Trustee. The Trustee shall be
accountable for all contributions received by it, but shall have no duty to
require any contributions to be made to it.
The Company in its sole discretion may at any time, or from time to
time, make additional deposits or contributions of cash or other property
acceptable to the Trustee to be held under the Trust by the Trustee to augment
the principal to be held, administered and disposed of by the Trustee as
provided in this Agreement. Neither the Trustee nor any Plan administrator,
Plan Participant or other third party shall have any right to compel such
additional deposits or contributions.
The Trustee shall have no responsibility to determine whether the
Company is making or has made required contributions or for ensuring or
enforcing the Company's making of required contributions, and the Trustee shall
have no liability arising out of any failure by the Company to make sufficient
contributions.
2.2 Prepayments. The Company may, from time to time, contribute cash
-----------
to the Trust in amounts sufficient to enable the Trustee to prepay, in whole or
in part, principal and interest of the Loan at any time or, in lieu of such
prepayment, the Committee may, from time to time, in accordance with the terms
of the Note direct that all or any part of such principal and/or interest of the
Loan shall be forgiven and the payment so directed shall be forgiven. The
Trustee shall use all such cash to prepay principal and/or interest on the Loan
in accordance with the terms of the Note.
2.3 Dividends. Except as otherwise provided in this paragraph,
---------
dividends paid in any Trust Year in cash on Company Stock held by the Trust
(including dividends paid on Released Shares that have not been transferred out
of the Trust at the time of such dividend payment) shall be applied, immediately
upon receipt thereof by the Trustee, (i) first to interest accrued and unpaid on
the Loan as of the date of any such payment and then, (ii) to the extent that
any such payment exceeds such accrued and unpaid interest on the Loan, to prepay
interest that accrues on the Loan after such payment through the end of such
Trust Year, and then, (iii) to pay principal installments due on the Loan within
such Trust Year and then, (iv) to
<PAGE>
7
additional installments of principal in the order of their scheduled maturity.
Extraordinary Dividends shall not be used to pay interest on or principal of the
Loan, but shall be invested in additional Company Stock, as soon as practicable,
except as otherwise provided in this Trust Agreement. Dividends which are not in
cash or in Company Stock (including Extraordinary Dividends, or portions
thereof) shall be reduced to cash by the Trustee and reinvested in Company Stock
as soon as practicable, except as otherwise provided in this Trust Agreement.
Company Stock purchased with the proceeds of an Extraordinary Dividend or with
the proceeds of a non-cash dividend shall, for purposes of this Agreement
(including, without limitation, Section 4.1 hereof), be deemed to have been
acquired with the proceeds of the Loan.
III
Purchase and Sale of Shares
---------------------------
3.1 Purchase and Sale. Subject to the terms and conditions set forth in
-----------------
the Common Stock Purchase Agreement, the Company will issue or sell to the
Trust, from time to time, and the Trust will purchase from the Company, from
time to time, Company Stock, pursuant to the procedures set forth in this
Article 3 up to an aggregate consideration (consisting of cash, if any, and the
principal amount under the Note) of $200 Million. The Company Stock may be (i)
previously authorized but unissued Company Stock (the "New Shares") or (ii)
Company Stock held in treasury which the Company had theretofore purchased, from
time to time, on the open market or otherwise (the "Repurchased Shares").
3.1.1 Shares. The consideration for the New Shares shall be cash and
------
principal amount of the Note (as provided in Section 3.2.2) in a combined amount
equal to the average closing price of the Company Stock for the five trading
days immediately preceding the First Closing (defined in Section 3.2.1) or, with
respect to each Subsequent Closing, the five trading days immediately preceding
the date the Sale Notice is given (defined in Section 3.2.2), as the case may
be, as reported in The Wall Street Journal (the "Average Market Price") as
-----------------------
certified in writing to the Trustee by the Company.
3.1.2 Repurchased Shares. The consideration for the Repurchased
------------------
Shares shall be a principal amount of the Note equal to the purchase price paid
by the Company to acquire such shares (excluding, however, all fees,
commissions, transfer taxes and other similar costs incurred in connection with
the Company's purchase of such shares), as certified in writing to the Trustee
by the Company.
<PAGE>
8
3.2 Closing.
-------
3.2.1 First Closing. The first closing of the sale and purchase
-------------
under the Common Stock Purchase Agreement (the "First Closing") will be held at
the offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the
Americas, New York, New York 10019, simultaneously with the execution of this
Agreement, or at such other time, date and place as may be mutually agreed upon
by the Company and the Trustee. At the First Closing, the Company shall sell,
and the Trust shall purchase, 3,740,000 shares of Company Stock for cash, if
any, and the Note in principal amount, aggregating $99,999,300.60. The Trust
shall pay the purchase price with respect to such Company Stock by (i) paying to
the Company at the First Closing $.01 per New Share, if any, by transfer of
immediately available funds, and (ii) delivering to the Company the Note in
principal amount equal to $99,999,300.60 minus the amount paid pursuant to
clause (i) of this sentence.
3.2.2 Subsequent Closings. The parties understand that, from
-------------------
time to time following the First Closing, the Company may sell, and the Trust
shall purchase if so instructed by the Company, additional Company Stock (each
closing of such subsequent transaction being referred to herein as a "Subsequent
Closing"). The Company shall give notice, as described below (the "Sale
Notice"), to the Trustee regarding each Subsequent Closing no later than two (2)
business days prior to the date of such Subsequent Closing, unless the Trustee
elects to waive such condition. The Sale Notice shall set forth (i) the date of
the Subsequent Closing, (ii) the number of Repurchased Shares and New Shares, if
any, to be sold to, and purchased by, the Trust and (iii) the aggregate
consideration to be paid by the Trust for such shares as determined pursuant to
Section 3.1 (a) and (b) hereof (the "Subsequent Purchase Amount"). The Trust
shall pay such Subsequent Purchase Amount by (i) paying to the Company at the
Subsequent Closing $.01 per New Share, if any, by wire transfer of immediately
available funds, and (ii) increasing (as of the date of such Subsequent Closing)
the principal amount outstanding under the Note by an amount equal to the
Subsequent Purchase Amount minus the amount paid pursuant to clause (i) of this
sentence. All Subsequent Closings will be held at the offices of Paul, Weiss,
Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New York, New York
10019, on the date identified in the Sale Notice, or at such other time, date
and place as may be mutually agreed upon by the Company and the Trustee. The
Company may defer the sale of Company Stock pursuant to this Section 3.2.1 if
the Company reasonably determines that there are sufficient legal, financial or
accounting reasons for the Company to defer the timing of such sale and notifies
the Trustee in writing of such deferral.
3.3 Delivery of Shares. At the First Closing and each Subsequent Closing
------------------
(hereinafter referred to as the "Closing" or "Closings"), the Company will cause
the transfer agent for the Company Stock to register, in book-entry form, the
<PAGE>
9
Company Stock sold at such Closing in the name of the Trustee, or the name of
its nominee. The Company will pay all stamp and other transfer taxes, if any,
that may be payable in respect of the sale and book-entry delivery of the
Company Stock.
3.4 Company Records. The Company is hereby authorized to record the price
---------------
owed by the Trust from time to time and all repayments of the principal of the
Note on the schedule attached to the Note.
IV
Release and Transfer of Company Stock
-------------------------------------
4.1 Company Stock Made Available for Transfer from Trust. Immediately
----------------------------------------------------
after each payment, prepayment or forgiveness, if any, of principal of the Loan
is made, a number of shares of Company Stock shall be made available for
transfer from the Trust ("Released Shares") in the manner set forth in Section
4.2. The number of such Released Shares shall equal the number of shares of
Company Stock held in the Trust immediately prior to such payment, prepayment or
forgiveness that have not already been deemed Released Shares pursuant to a
previous payment, prepayment or forgiveness of principal of the Loan, multiplied
by a fraction, the numerator of which shall be the amount of principal paid or
prepaid or deemed forgiven upon such payment or prepayment date or date of
forgiveness and the denominator of which shall be the sum of the numerator plus
the principal amount of the Loan remaining after such payment, prepayment or
forgiveness. No fractional shares shall be released. If the preceding
computation results in fractional shares, the number of Released Shares shall be
computed by rounding down to the next whole number. The Company shall make all
determinations provided for by this Section 4.1, and shall keep all such records
as may be necessary for it to do so. The number of Released Shares, determined
as aforesaid, shall be certified to the Trustee by the Committee.
4.2 Transfer from Trust of Released Shares and Cash Proceeds. Released
--------------------------------------------------------
Shares or other assets held in the Trust (other than unreleased Shares or the
proceeds thereof) shall be treated as follows. First, Released Shares shall be
transferred in kind by the Trustee, as directed by the Committee, directly to
one or more of the Stock Plans or directly to Plan Participants pursuant to the
terms of one or more of the Stock Plans, in satisfaction of the obligation of
the Stock Plans or the Company to pay compensation, benefits or any form of
remuneration thereunder. If, after satisfying all obligations of the Stock
Plans which are current at the time the Released Shares are made available for
transfer from the Trust pursuant to Section 4.1, there remains Released Shares
or other assets (other than unreleased Shares or the proceeds thereof) held in
the Trust, such assets shall be sold by the Trustee and the
<PAGE>
10
proceeds of such sale transferred by the Trustee, as directed by the Committee,
directly to one or more of the Non-Stock Plans or directly to Plan Participants
pursuant to the terms of one or more of the Non-Stock Plans, in satisfaction of
the obligation of the Non-Stock Plans or the Company to pay compensation,
benefits, any other form of remuneration or contributions due thereunder which
are current at the time the Released Shares are made available for transfer from
the Trust pursuant to Section 4.1.
If Released Shares or proceeds from the sale thereof or other assets
(other than unreleased Shares or the proceeds thereof) remain in the Trust after
the transfers or sales described above, such remaining Released Shares or
proceeds shall, as the Committee shall direct and within one year following the
time the Released Shares are made available for transfer from the Trust pursuant
to Section 4.1, be transferred to, or used by the Trustee for the benefit of the
Plans or such other employee benefits plans (or their participants and
beneficiaries) covering a broad cross-section of non-collectively bargained
employees of the Company or its subsidiaries as the Committee shall direct.
The Committee will direct the Trustee in writing as to the timing and
manner of any sales of Released Shares pursuant to this Section 4.2 in order to
comply with applicable law and to avoid, if possible, adverse effects on the
publicly traded market price of Company Stock. The Committee's determinations
as to such matters shall be final and binding, and the Trustee shall have no
duties or obligations with respect thereto, except to comply with the directions
of the Committee.
To facilitate sales of Released Shares pursuant to this Section 4.2,
if required, the Company shall register under the 1933 Act, such number of
Released Shares as the Committee may direct.
Released Shares directed by the Committee to be transferred to Plans
with respect to which trusts have been established shall be transferred to the
trustee thereof; if there is no trust established with respect to a Plan, the
shares allocated to such Plan shall be transferred to the plan administrator of
such Plan, to third party service providers for such Plans or such other person
as the Committee shall direct.
The Trustee will be under no liability or obligation to anyone with
respect to any failure on the part of the Company, the Committee or any other
person to perform any of their respective obligations under the Plans.
The Trustee shall not make any payments to Participants or their
beneficiaries from the Trust Fund except as provided in this Article 4 even
though it may be informed from a source other than the Committee (or its
delegate) that payments are due under a Plan. The Trustee shall have no duty to
determine the
<PAGE>
11
propriety or amount of such payments or the rights (if any) of any person in the
Trust Fund.
The Trustee shall not use any proceeds from the sale of Released
Shares to any Plans for the purpose of making payments of principal or interest
on the Loan.
The references to the Plans in this Agreement shall not cause the
Plans to become irrevocable and the Company retains sole discretion to modify or
amend any of the provisions of the Plans or to terminate any or all of them to
the extent provided therein and/or as permitted by applicable law.
V
Compensation, Expenses and Tax Withholding
------------------------------------------
5.1 Compensation and Expenses.
-------------------------
5.1.1 The Trustee shall be entitled to such reasonable
compensation for its services and to be reimbursed for its reasonable legal,
accounting and appraisal fees, expenses and other charges reasonably incurred in
connection with the administration, management, investment and distribution of
the Trust Fund all as may be agreed upon from time to time by the Company and
the Trustee. Initially, the agreement between the parties hereto as to such
compensation is as set forth on Schedule B hereto, and such agreement may be
changed only by written agreement between the Trustee and the Company. The
Trustee's compensation shall be paid, and such reimbursement shall be made, out
of the Trust Fund unless paid directly by the Company. The Company agrees to
either make such payments directly or make sufficient contributions to the Trust
to pay such amounts owing the Trustee in addition to those contributions
required by Section 2.1. No modification, cancellation or rescission of this
Agreement shall affect the right of the Trustee to retain the amount of any fee
which becomes payable prior to the effective date of any such modification,
cancellation or rescission.
5.1.2 In the event the Company fails to make the contributions
necessary to pay compensation and expenses owing to the Trustee, as contemplated
by this Section 5.1, the Trustee shall be entitled to seek payment of such
compensation and expenses directly from the Company. However, the Trustee shall
not be entitled to use contributions required by Section 2.1 in satisfaction of
amounts owing to the Trustee for the payments or its compensation and expenses
if such contributions are used immediately to repay the Loan, resulting in
additional Released Shares.
5.1.3 In addition to, and not in limitation or derogation of,
any remedies to which the Trustee may be entitled under this Agreement or
otherwise, in
<PAGE>
12
the event that the Company shall fail to fulfill its obligations under this
Section 5.1 in any respect and to any extent, then, within 10 days after written
notice and demand therefor, the Trustee may apply any or all of the assets of
the Trust Fund held by it hereunder to the amounts due it under this Section 5.1
to the extent necessary to satisfy such amounts due.
5.2 Withholding of Taxes. The Company shall on a timely basis provide the
--------------------
Trustee with written instructions for the reporting and withholding of any
federal, state, local and other taxes that may be required to be reported and
withheld with respect to any amount paid under this Agreement, and the Trustee
shall comply with such written instructions and shall pay any taxes withheld to
the appropriate taxing authorities. The Trustee may rely conclusively (and shall
be fully protected in such reliance) on the written instructions of the Company
as to all tax reporting and withholding requirements. If the Company fails to
provide withholding instructions to the Trustee in accordance with the preceding
sentence such that the Trustee has a reasonable opportunity to effect the
appropriate withholding, the Trustee shall retain the Company's outside auditor
at the Company's expense (provided such expense is reasonable) or, if such firm
refuses to serve, any other accounting firm selected by the Trustee, to advise
the Trustee as to the appropriate amount of withholding. If the Company fails to
pay such expense, the Trust shall pay such expense; and, if the Trustee ever
pays such expense, the provisions of Section 5.1 shall apply with respect to
such payment.
VI
Administration of Trust Fund
----------------------------
6.1 Management and Control of Trust Fund. Subject to the terms of this
------------------------------------
Agreement, the Trustee shall have exclusive authority and responsibility to
control the assets of the Trust Fund.
6.2 Investment of Funds.
-------------------
6.2.1 Except as otherwise provided in Sections 2.3 and 5.1, and in
this Section 6.2, the Trustee shall invest and reinvest the Trust Fund
exclusively in Company Stock, including any accretions thereto resulting from
the proceeds of a tender offer, recapitalization or similar transaction which,
if not in Company Stock, shall be reduced to cash as soon as practicable. The
Trustee shall invest any portion of the Trust Fund temporarily pending
investment in Company Stock, distribution or payment of expenses in (i)
investments in United States Government obligations with maturities of less than
one year, (ii) interest-bearing accounts including but not limited to
certificates of deposit, time deposits, saving accounts and money market
accounts
<PAGE>
13
with maturities of less than one year in any bank, including the Trustee, with
aggregate capital at the time of such investment in excess of $1,000,000,000 and
a Moody's Investors Service Rating at the time of such investment of at least
P1, or an equivalent rating from a nationally recognized rating agency, which
accounts are insured by the Federal Deposit Insurance Corporation or other
similar federal agency, (iii) obligations issued or guaranteed by any agency or
instrumentality of the United States of America with maturities of less than one
year, (iv) short-term discount obligations of the Federal National Mortgage
Association, (v) the Sterling National Bank Temporary Cash Management Account
maintained exclusively for fiduciary accounts, or any successors thereto, or
(vi) a common, collective, or pooled trust fund maintained by any corporate
Trustee hereunder whose investments are limited to those described in (i), (ii),
(iii), (iv) and/or (v) of this paragraph, in which event such part of the Trust
Fund so transferred shall be subject to all the terms and provisions of the
common, collective, or pooled trust fund which contemplate the commingling of
such trust assets for investment purposes with trust assets of other trusts. The
Trustee shall have no responsibility to attempt to maximize the return from
among the investment alternatives set forth in the foregoing (i) through (vi).
6.2.2 The Trustee shall not be responsible in any manner for the
validity or sufficiency of any securities, cash, instruments, documents or any
other property delivered hereunder or for the value or collectability of any
note, check or other instrument or security so delivered, or for any
representations made or obligations assumed by any other party to this
Agreement.
6.2.3 Nothing herein contained shall be deemed to obligate the
Trustee to deliver any property out of the Trust Fund, unless the same shall
have first been received by the Trustee pursuant to this Agreement, and nothing
herein contained shall be construed as requiring the Trustee to make any payment
in excess of the amounts held in the Trust Fund at the time of such payment or
otherwise to risk its own funds.
6.2.4 Any purchase of Company Stock by the Trustee on behalf of
the Trust shall be directed by the Committee in writing and in specific detail
as to timing and manner (i.e., open-market purchases, private transactions or
----
from the Company). The Committee's directions shall be designed to cause such
purchases to comply with applicable law and to avoid, if possible, adverse
effects on the publicly traded market price of Company Stock. The Trustee shall
follow all such directions.
6.3 Trustee's Administrative Powers. Except as otherwise provided herein,
-------------------------------
and subject to the Trustee's duties hereunder, the Trustee shall have the
following powers and rights, in addition to those provided elsewhere in this
Agreement or by law:
<PAGE>
14
6.3.1 to retain any asset of the Trust Fund for the purposes set
forth herein;
6.3.2 subject to Section 2.3, Article 4, Section 6.2, Section 6.4 and
Section 9.3, to sell, transfer, mortgage, pledge, lease or otherwise dispose of,
or grant options with respect to, any Trust Fund assets at public or private
sale, as necessary to perform its obligations hereunder;
6.3.3 to borrow from the Company pursuant to the Loan to acquire
Company Stock as authorized by this Agreement, and to enter into agreements upon
such terms (including reasonable interest and security for the Loan and rights
to renegotiate and prepay such Loan); provided, however, that any collateral
-------- -------
given by the Trustee for the Loan shall be limited to cash and property
contributed by the Company to the Trust and dividends paid on Company Stock held
in the Trust and shall not include Company Stock acquired with the proceeds of
the Loan;
6.3.4 with the consent of the Committee, to settle, submit to
arbitration, compromise, contest, prosecute or abandon claims and demands in
favor of or against the Trust Fund;
6.3.5 to vote or to give any consent with respect to any securities,
including any Company Stock, held by the Trust either in person or by proxy for
any purpose, as directed by the Committee; provided that the Trustee shall vote,
tender or exchange all shares of Company Stock as provided in Section 6.4;
6.3.6 to employ such accountants, actuaries, attorneys, investment
bankers, appraisers, other advisors and agents as may be reasonably necessary in
collecting, managing, administering, investing, valuing, distributing and
protecting the Trust Fund or the assets thereof or any borrowings of the Trustee
made in accordance with Section 6.3(c); and to pay their reasonable fees and
expenses, which shall be deemed to be expenses of the Trust and for which the
Trustee shall be reimbursed in accordance with Section 5.1;
6.3.7 to cause any asset of the Trust Fund to be issued, held or
registered in the Trustee's name or in the name of its nominee, or in such form
that title will pass by delivery, provided that the records of the Trustee shall
indicate the true ownership of such asset;
6.3.8 to utilize another entity as custodian to hold, but not invest
or otherwise manage or control, some or all of the assets of the Trust Fund; and
6.3.9 to consult with legal counsel of its own choosing (who may also
be counsel for the Trustee or the Company generally) with respect to any of
<PAGE>
15
its duties or obligations hereunder; and to pay the reasonable fees and expenses
of such counsel, which shall be deemed to be expenses of the Trust and for which
the Trustee shall be reimbursed in accordance with Section 5.1.
Notwithstanding any power granted to the Trustee pursuant to the foregoing or
under applicable law, neither the Trust nor the Trustee shall have any power to,
and shall not, engage in any trade or business (solely in its capacity as
Trustee of the Trust) and, in particular, the Trustee shall not have any power
that could give the Trust the objective of carrying on a business and dividing
the gains therefrom, within the meaning of Treas. Reg. (S) 301.7701-2.
6.4 Rights Regarding Company Stock.
------------------------------
6.4.1 Voting Rights. The Trustee shall follow the directions of
-------------
the Designated Plan Participants with respect to the manner of voting of Company
Stock held by the Trust. Prior to each annual or special shareholders' meeting
of the Company, or deadline for the return of action by written consent of
shareholders in lieu of a meeting, the Committee shall cause to be furnished to
each person who is a Designated Plan Participant as of the record date for such
action, at the expense of the Company, a copy of the proxy solicitation material
sent generally to shareholders, together with a form requesting confidential
instructions on how such Designated Plan Participant directs the Trustee to vote
with respect to each matter pending before such meeting or written consent of
shareholders. The Committee shall be deemed to have complied with the preceding
sentence with respect to any such Designated Plan Participant if it timely
causes to be mailed or delivered by electronic means such proxy solicitation
material and form to the Designated Plan Participant's last known address on the
records of the Company. The Trustee shall collect the confidential instruction
forms and shall vote (or abstain or withhold voting authority with respect to)
the Company Stock held in the Trust in the same proportion as the directions
actually and timely received from such Designated Plan Participants, on a "one-
person, one-vote" basis.
6.4.2 Tender or Exchange Offer. If a tender or exchange offer is
------------------------
commenced for Company Stock, the Trustee shall, at the expense of the Company,
notify each person who is a Designated Plan Participant as of the date of
commencement of such tender or exchange offer of such offer and utilize its best
efforts to distribute or cause to be distributed to each such Designated Plan
Participant, in a timely manner, all information distributed to shareholders of
the Company in connection with such offer together with a form requesting
confidential instructions and shall tender or exchange that number of shares of
Company Stock held in the Trust equal to the total number of such shares
multiplied by a fraction, the numerator of which is the number of such
Designated Plan Participants who affirmatively direct the Trustee to tender or
exchange, and the denominator of which is the total number of
<PAGE>
16
such Designated Plan Participants (including such Designated Plan Participants
who provide no instructions).
6.4.3 Confidentiality. The instructions of each individual
---------------
Designated Plan Participant made to the Trustee pursuant to the foregoing
paragraphs (a) and (b) shall be held confidential by the Trustee and shall not
be divulged or released to any person, including officers and employees of the
Company and its affiliates, except as otherwise required by law or pursuant to
order of a court of competent jurisdiction.
6.4.4 Trustee Action. The Trustee shall not make any
--------------
recommendations regarding the manner of exercising any rights under this Section
6.4, including whether or not such rights should be exercised.
6.5 Indemnification.
---------------
6.5.1 To the maximum extent lawfully allowable, the Company
shall and hereby does indemnify and hold harmless the Trustee (which shall
include for purposes of this Section 6.5 its officers, employees and agents)
from and against any claims, demands, actions, administrative or other
proceedings, causes of action, liability, loss, costs, damage or expense
(including reasonable attorneys' fees), which may be asserted against it, in any
way arising out of or incurred as a result of its action or failure to act in
connection with the operation and administration of the Trust or in any way
arising out of or incurred as a result of the transactions contemplated by this
Agreement, including without limitation any claim made by a Plan Participant
with respect to payments made or to be made under a Plan, and any claim made by
the Company that this Agreement is invalid or ultra vires; provided that such
--------
indemnification shall not apply to the extent that such claims, loss, demands,
actions, proceedings, causes of actions, liability, loss, costs, damage or
expense has been determined by a final judgment of a court of competent
jurisdiction to be the result of the negligence (in which case this
indemnification shall apply in its entirety except that the Trustee must
promptly return to the Company its most recently paid annual fee), gross
negligence or willful misconduct of the Trustee.
6.5.2 Without limiting the foregoing, the Trustee shall be under
no liability to any person for any loss of any kind which may result (i) by
reason of any action taken by it in accordance with any direction of the
Committee or pursuant to Section 6.4, (ii) by reason of its failure to exercise
any power or authority or to take any action hereunder because of the failure of
the Committee to give directions to the Trustee, as provided for in this
Agreement, (iii) by reason of any act or omission of the Committee with respect
to its duties under this Trust, or (iv) if such loss is not the result of the
Trustee's gross negligence or willful misconduct. The Trustee shall be fully
protected in acting upon any instrument, certificate or paper delivered by the
<PAGE>
17
Committee or the trustee or administrator of any Plan and believed by the
Trustee to be genuine and to be signed or presented by the proper person or
persons, and reasonably to assume that any person purporting to give any notice
or instructions in accordance with the provisions hereof has been duly
authorized to do so, and the Trustee shall be under no duty to make any
investigation or inquiry as to any statement contained in any such writing, but
may accept the same as conclusive evidence of the truth and accuracy of the
statements therein contained. The Trustee acts hereunder only as directed
(except as may otherwise be expressly set forth herein), and is not responsible
or liable in any manner whatever for the sufficiency, correctness, genuineness
or validity of any instrument deposited with it, or for the form of any
instrument deposited with it, or for the form of execution of such instruments
or for the identify, authority or right of any person executing of depositing
the same or for the terms and conditions of any instrument pursuant to which the
Trustee or the parties can act. The Trustee shall not have any duties or
responsibilities except those expressly set forth in this Agreement (and,
without limitation, shall have no duties or responsibilities under, or be in any
way subject to the provisions of, any Plan), and no implied covenant or
obligation will be read into this Agreement against the Trustee.
6.5.3 In the event that the Trustee shall be uncertain as to its
duties or rights hereunder or shall receive instructions, claims or demands from
any of the parties hereto or from third persons with respect to the Trust or the
property comprising the Trust Fund, which, in its reasonable opinion, are in
conflict with any provision of this Agreement, it shall promptly inform the
Company of such in writing and shall be entitled, in its sole discretion, to
refrain from taking any action (other than to keep such property), and in so
doing, the Trustee shall not be or become liable, in any way or to any person
for its failure or refusal to comply with such instructions, claims or demands,
and the Trustee shall be entitled to continue so to refrain from acting and so
refuse to act until it shall be directed otherwise in writing by the Company or
the Committee, as applicable, and such third persons, if any, or by a final
order or judgment of a court of competent jurisdiction. Further, in the event
that the Trustee shall learn that a litigation over entitlement to any of the
property comprising the Trust Fund has been commenced, the Trustee may deposit
the same with the Clerk of the court in which such litigation is pending or the
Trustee may (but shall not be required to) take such affirmative steps as it
may, in its sole reasonable discretion, elect in order to substitute another
impartial party to hold such property and to terminate its duties as the Trustee
with respect to such property in accordance with the provisions of Section 8.1,
including, but not limited to, the deposit of the same in a court of competent
jurisdiction and the commencement of an action for interpleader.
6.5.4 Without limiting the generality of Section 6.5.1 or any
other provision of this Section 6.5, the Company shall and hereby does indemnify
and hold harmless the Trustee from and against any claims, demands, actions,
administrative or other proceedings, causes of action, liability, loss, costs,
damage or
<PAGE>
18
expense (including reasonable attorneys' fees) in any way arising out of or
incurred as a result of any determination, or claim or assertion, that the Trust
or its assets are subject to ERISA or Section 4975 of the Code.
6.5.5 To the extent that the Company has not fulfilled its
obligations under the foregoing provisions of this Section 6, the Trustee may
set up reasonable reserves for the payment of such obligations and,
notwithstanding any other provision hereof, pending final resolution of the
dispute, such reserve need not be paid over to any person and, if the applicable
amount is not paid by the Company, shall be paid to the Trustee in the event of
a final resolution in favor of the Trustee.
6.5.6 This section shall survive termination of this Agreement.
6.6 General Duty to Communicate to Committee. The Trustee shall promptly
----------------------------------------
notify the Committee of all communications with or from any governmental agency
or with respect to any legal proceeding with regard to the Trust and with or
from any Plan Participants concerning their alleged entitlements under the Plans
or the Trust.
VII
Duties of Trustee
-----------------
7.1 Records and Accounts of Trustee. The Trustee shall maintain accurate
-------------------------------
and detailed records and accounts of all transactions of the Trust, which shall
be available at all reasonable times for inspection or audit by any person
designated by the Company and which shall be retained.
7.2 Reports of Trustee.
------------------
7.2.1 Within thirty (30) days following the close of each Fiscal Year
and each quarter of each Fiscal Year, the Trustee shall deliver to the Committee
a statement for the period ending on the last day of such Fiscal Year and/or
quarter of such Fiscal Year, as the case may be, listing all securities and
other property acquired or disposed of and all receipts, disbursements and other
transactions effected by the Trust during such period, and further listing all
cash, securities, and other property held by the Trust, together with the Fair
Market Value thereof, as of the end of such period. Any statement, when approved
by the Company or the Committee, will be binding and conclusive on the Company,
the Committee and all other persons, and the Trustee will thereby be released
and discharged from any liability or accountability to the Company, the
Committee and all persons with respect to all matters set forth therein.
Omission by the Company or the Committee to object in writing to any
<PAGE>
19
specific items in any such statement within 90 days after its delivery will
constitute approval of the statement by the Company and the Committee. No other
accounts or reports shall be required to be given to the Company, the
Administrator or a Participant except as stated herein or except as otherwise
agreed to in writing by the Trustee. Except as otherwise provided in the next
sentence, all tax returns and other regulatory filings, if any, required by the
Trust shall be prepared by or at the direction of the Company at its own expense
and submitted to the Trustee for its review at least thirty (30) days before the
due date (including any extension thereof) for filing such tax return or other
regulatory filing. To the extent any such return or filing is prepared by the
Company for the Trustee's signature, the Trustee shall be fully protected in
executing and submitting the same. The Trustee may, upon written notice to the
Company, and upon the Company's consent (which shall not be unreasonably
withheld), assume the responsibility for preparing any tax return or other
regulatory filing required by the Trust, in which case the Company shall pay all
the expenses of the Trustee in connection therewith (such expenses to be
included as expenses under Section 5.1).
7.2.2 Nothing contained in this Agreement shall be construed as
depriving the Trustee of the right to have a judicial settlement of its
accounts, and upon any proceeding for judicial settlement of the Trustee's
accounts or for instructions the only necessary parties thereto in addition to
the Trustee shall be the Company.
7.3 Final Statement. In the event of the resignation or removal of a
---------------
Trustee hereunder, the Committee may request and the Trustee shall with
reasonable promptness submit, for the period ending on the effective date of
such resignation or removal, a statement similar in form and purpose to, and
with the same effect as, that described in Section 7.2.
VIII
Succession of Trustee
---------------------
8.1 Resignation of Trustee. The Trustee or any successor thereto may
----------------------
resign as Trustee hereunder at any time upon delivering a written notice of such
resignation, to take effect 60 days after the delivery thereof to the Committee,
unless the Committee accepts shorter notice; provided, however, that no such
-------- -------
resignation shall be effective until a successor Trustee has assumed the office
of Trustee hereunder.
8.2 Removal of Trustee. The Trustee or any successor thereto may be
------------------
removed by the Company by delivering to the Trustee so removed an instrument
executed by the Committee. Such removal shall take effect at the date specified
in such instrument, which shall not be less than 60 days after delivery of the
instrument, unless
<PAGE>
20
the Trustee accepts shorter notice; provided, however, that no such removal
-------- -------
shall be effective until a successor Trustee has assumed the office of Trustee
hereunder.
8.3 Appointment of Successor Trustee. Whenever the Trustee or any
--------------------------------
successor thereto shall resign or be removed or a vacancy in the position shall
otherwise occur, the Committee shall use its best efforts to appoint a successor
Trustee as soon as practicable after receipt by the Committee of a notice
described in Section 8.1, or the delivery to the Trustee of a notice described
in Section 8.2, as the case may be, but in no event more than 60 days after
receipt or delivery, as the case may be, of such notice. A successor Trustee's
appointment shall not become effective until such successor shall accept such
appointment by delivering its acceptance in writing to the Company. If a
successor is not appointed within such 60 day period, the Trustee, at the
Company's expense, may petition a court of competent jurisdiction for
appointment of a successor. In any event, only an entity with trust powers
under applicable law, which is not an affiliate of the Company, may be a
successor trustee hereunder.
8.4 Succession to Trust Fund Assets. The title to all property held
-------------------------------
hereunder shall vest in any successor Trustee acting pursuant to the provisions
hereof without the execution or filing of any further instrument, but a
resigning or removed Trustee shall, at the expense of the Company, execute all
instruments and do all acts necessary to vest title in the successor Trustee.
Each successor Trustee shall have, exercise and enjoy all of the powers, both
discretionary and ministerial, herein conferred upon its predecessors. A
successor Trustee shall not be obliged to examine or review the accounts,
records, or acts of, or property delivered by, any previous Trustee and shall
not be responsible for any action or any failure to act on the part of any
previous Trustee.
8.5 Continuation of Trust. In no event shall the legal disability,
---------------------
resignation or removal of a Trustee terminate the Trust, but the Committee shall
forthwith appoint a successor Trustee in accordance with Section 8.3 to carry
out the terms of the Trust.
8.6 Changes in Organization of Trustee. In the event that any corporate
----------------------------------
Trustee hereunder shall be converted into, shall merge or consolidate with, or
shall sell or transfer substantially all of its assets and business to another
corporation, the corporation resulting from such conversion, merger or
consolidation, or the corporation to which such sale or transfer shall be made,
shall thereafter become and be the Trustee under the Trust with the same effect
as though originally so named but only if such corporation is qualified to be a
successor trustee hereunder.
8.7 Continuance of Trustee's Powers in Event of Termination of the Trust.
--------------------------------------------------------------------
In the event of the termination of the Trust, as provided herein, the Trustee
shall dispose of the Trust Fund in accordance with the provisions hereof. Until
the
<PAGE>
21
final distribution of the Trust Fund, the Trustee shall continue to have all
powers provided hereunder as necessary or expedient for the orderly liquidation
and distribution of the Trust Fund.
IX
Amendment or Termination
------------------------
9.1 Amendments. Except as otherwise provided herein, the Company, by
----------
action of the Board of Directors or the Committee, with the written consent of
the Trustee (which shall not be unreasonably withheld in the case of amendments
that do not change the Trustee's duties, potentially increase the Trustee's
responsibilities or liabilities, or decrease the Trustee's rights), may amend
the Trust at any time and from time to time in any manner which it deems
desirable, provided, however:
-------- -------
9.1.1 no amendment that would adversely affect the contingent rights
of Plan Participants may change, without the affirmative consent of a majority
of all Plan Participants,:
9.1.1.1 the formula contained in Section 4.1 or Section 4.2 so
as to change the number of Released Shares in any Trust Year;
9.1.1.2 the terms of Sections 2.1, 2.2, 2.3, 4.2, 6.4, 9.1,
9.2 or 9.3; and
9.1.2 no amendment may alter the terms of Section 1.1 to make the
Trust revocable.
Notwithstanding the foregoing, the Company, acting in good faith taking
into account the best interests of a broadly-based population of individuals
employed by the Company or broadly-based employee benefit plans in which such
persons participate, shall retain the power under all circumstances to amend the
Trust to add employee benefit plans to, or delete Plans from, Schedule A, and to
clarify any ambiguities or similar issues of interpretation in this Agreement
that do not involve or affect the obligations or responsibilities of the
Trustee.
9.2 Termination. The Trust shall terminate upon the earlier of (i) the
-----------
tenth anniversary of the Effective Date or (ii) the date on which the Trust no
longer holds any assets. The Board of Directors may terminate the Trust at any
time prior to the date the Trust terminates pursuant to the preceding sentence;
provided, however, termination of the Trust shall not effect a revocation of the
- -------- -------
terms hereof.
<PAGE>
22
9.3 Effect of Termination. As promptly as practicable following
---------------------
termination of the Trust, the Trustee shall (i) sell sufficient remaining assets
of the Trust so that the proceeds of such sale, together with any other
available cash, can be applied to pay in full any expenses of the Trust
(including without limitation under Section 5.1) not paid by the Company, (ii)
second, act with respect to Released Shares then held in the Trust in accordance
with Section 4.2, (iii) third, sell sufficient remaining assets of the Trust so
that the proceeds of such sale, together with any other available cash, can be
applied to pay in full the remaining principal amount(s) of the Loan and any
accrued but unpaid interest thereon, and (iv) fourth, sell sufficient remaining
assets of the Trust so that the proceeds of such sale, together with any other
available cash, can be applied to satisfy in full any then-current obligations
to or under the Plans. The Committee shall direct the Trustee as to the timing
and manner of such sale in order to comply with applicable law and to avoid, if
possible, adverse effects on the publicly-traded market price of Company Stock.
In the event the proceeds of the sale shall be insufficient to discharge the
Loan in its entirety, the Company shall be deemed to have forgiven all amounts
which shall remain due and owing thereon. Any assets or Company Stock remaining
in the Trust after the payments hereinabove provided for shall be distributed to
or for the benefit of any employee benefit plan (including one or more of the
Plans) in which a broad cross-section of non-collectively bargained employees of
the Company or its subsidiaries participate as the Committee shall, in its sole
discretion, determine and so notify the Trustee in writing.
9.4 Form of Amendment or Termination. Any amendment or termination of the
--------------------------------
Trust shall be evidenced by an instrument in writing signed by an authorized
officer of the Company or a member of the Committee, certifying that said
amendment or termination has been authorized and directed by the Board of
Directors or the Committee, as applicable.
X
Miscellaneous
-------------
10.1 Controlling Law. The laws of the State of New York shall be the
---------------
controlling law in all matters relating to the Trust, without regard to
conflicts of law.
10.2 Committee Action. Any action required or permitted to be taken by the
----------------
Committee may be taken on behalf of the Committee by any individual so
authorized (which individual does not have to be a member of the Committee).
The Company shall furnish to the Trustee the name and specimen signature of each
member of the Committee upon whose statement of a decision or direction the
Trustee is authorized to conclusively rely. A certificate containing the
initial names and specimen signatures thereof is attached hereto as Exhibit 2.
Until notified of a change in the
<PAGE>
23
identity of such person or persons, the Trustee shall act upon the assumption
that there has been no change.
10.3 Notices. All notices, requests, or other communications required or
-------
permitted to be delivered hereunder shall be in writing, delivered by registered
or certified mail, return receipt requested, telecopier or hand delivery as
follows:
To the Company:
Ultramar Diamond Shamrock Corporation
6000 N. Loop 1604 W
San Antonio, Texas 78249-1112
Attn: Treasurer
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attn: Michael J. Segal, Esq.
To the Trustee:
Sterling National Bank
430 Park Avenue
New York, New York 10022
Attn: Trust Department
with a copy to:
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166-0153
Attn: Andrew L. Oringer, Esq.
Any party hereto may from time to time, by written notice given as aforesaid,
designate any other address to which notices, requests or other communications
addressed to it shall be sent.
10.4 Severability. If any provision of the Trust shall be held illegal,
------------
invalid or unenforceable for any reason, such provision shall not affect the
remaining parts hereof, but the Trust shall be construed and enforced as if said
provision had never been inserted herein.
<PAGE>
24
10.5 Protection of Persons Dealing with the Trust. No person dealing with
--------------------------------------------
the Trustee shall be required or entitled to monitor the application of any
money paid or property delivered to the Trustee, or determine whether or not the
Trustee is acting pursuant to authorities granted to it hereunder or to
authorizations or directions herein required.
10.6 Tax Status of Trust. The Trust is intended to be a grantor trust, of
-------------------
which the Company is the grantor, within the meaning of subpart E, part 1,
subchapter J, chapter 1, subtitle A of the Code, and this Trust Agreement shall
be construed accordingly. Until advised otherwise, the Trustee and the Company
may presume that the Trust is so characterized for Federal income tax purposes
and the Trustee shall make all filings of tax returns on that presumption.
10.7 ERISA Status of Trust. Neither the Trust, nor the assets held
---------------------
therein, are intended to be subject to ERISA, and this Agreement shall be
construed accordingly.
10.8 Successors and Assigns; No Third Party Rights; Plan Participants to
-------------------------------------------------------------------
Have No Interest in the Company by Reason of the Trust. This Agreement shall
- ------------------------------------------------------
inure to the benefit of, and be binding upon, the parties hereto and their
respective heirs, distributees, legal representatives, successors and assigns.
Neither this Agreement nor the Trust shall confer upon any person other than the
parties hereto any rights, remedy or claim with respect to the assets of the
Trust or otherwise. Neither the creation of the Trust nor anything contained in
the Trust shall be construed as giving any person, including any individual
employed by the Company or any subsidiary of the Company, any equity or interest
in the assets, business or affairs of the Company or any Plan Participant a
right to any benefit available under any of the Plans.
10.9 Nonassignability of Trust Interests. No right or interest, if any, of
-----------------------------------
any person to receive distributions from the Trust shall be assignable or
transferable, in whole or in part, either directly or by operation of law or
otherwise, including, but not by way of limitation, by execution, levy,
garnishment, attachment, pledge, or bankruptcy, but excluding death or mental
incompetency, and, to the fullest extent permitted by applicable law, no right
or interest, if any, of any person to receive distributions from the Trust shall
be subject to any obligation or liability of any such person, including claims
for alimony or the support of any spouse or child.
10.10 Assignment of Trust. The Trust may be assigned by the Board of
-------------------
Directors to any successor of substantially all the business or assets of the
Company. Following any such assignment, the term "Company" hereunder shall
refer to such assignee; provided that the Company shall thereafter be jointly
and severally liable with the assignee for the obligations to the Trustee under
Section 6.5 for any actions,
<PAGE>
25
omissions or conditions which occurred or arose up to 60 days following the date
notice is given to the Trustee of such assignment.
10.11 Merger. If the Company is merged into another corporation or another
------
corporation is merged into the Company then (a) the surviving corporation shall
become the grantor of the Trust, (b) the assets of the Trust shall be subject to
the claims of the creditors of the surviving corporation in accordance with
Article 1, above, (c) the provisions of this Agreement which apply to Company
Stock (including without limitation the provisions of Article 4, above) shall
apply to the stock of the surviving corporation held hereunder or transferred to
the Trust and (d) without limiting the Trustee's rights without regard to this
Section 10.11(d), the surviving corporation shall be responsible for the
obligations of the Company under Section 6.5.
10.12 Gender and Plurals. Whenever the context requires or permits, the
------------------
masculine general shall include the feminine gender and the singular form shall
include the plural form and shall be interchangeable.
10.13 Headings. The headings in this Agreement are for reference only and
--------
shall not affect the interpretation of this Agreement.
10.14 Entire Agreement; Counterparts. This Agreement, together with the
------------------------------
Common Stock Purchase Agreement and the Note, constitutes the entire agreement
among all the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings (written or oral) of the
parties in connection herewith. This Agreement may be executed in any number of
counterparts, each of which shall be considered an original.
<PAGE>
26
IN WITNESS WHEREOF, the Company and the Trustee have caused this
Agreement to be signed, and their seals affixed hereto, by their authorized
officers all as of the day, month and year first above written.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
By: /s/ Timothy J. Fretthold
--------------------------------------
Name: Timothy J. Fretthold
Title: Executive Vice President
STERLING NATIONAL BANK, a national banking
association, solely in its capacity as
Trustee hereunder
By: /s/ Kenneth J. Marte
--------------------------------------
Name: Kenneth J. Marte
Title: VP and Senior Trust Officer
<PAGE>
SCHEDULE A
Ultramar Diamond Shamrock Corporation
Employee Benefit Programs - As of 11/1/99
I. STOCK PLANS
Title Plan Type
----- ---------
UDS 401(k) Retirement Savings Plan - UDS Stock 401(k) Plan
Portion Only
Ultramar Diamond Shamrock Corporation 1996 Omnibus Stock Plan
Long-Term Incentive Plan
Diamond Shamrock, Inc. Long-Term Incentive Plan Omnibus Stock Plan
Ultramar Corporation 1992 Long-Term Incentive Plan Omnibus Stock Plan
Diamond Shamrock R&M, Inc. 1987 Long-Term Omnibus Stock Plan
Incentive Plan
II. NON-STOCK PLANS
Title Plan Type
----- ---------
UDS 401(k) Retirement Savings Plan - Non-UDS 401(k) Plan
Stock Portion Only
UDS Pension Plan Defined Benefit Pension
Plan
Diamond Shamrock, Inc. Excess Benefits Plan Defined Benefit
Supplemental Retirement
Plan
Ultramar Corporation U.S. Employees Retirement Defined Benefit
Restoration Plan Supplemental Retirement
Plan
Diamond Shamrock R&M, Inc. Supplemental Executive Defined Benefit
Retirement Plan Supplemental Retirement
Plan
<PAGE>
2
Title Plan Type
----- ---------
Ultramar Corporation Supplemental Executive Defined Benefit
Retirement Plan Supplemental Retirement
Plan
Total Petroleum, Inc. Supplemental Executive Defined Benefit
Retirement Plan Supplemental Retirement
Plan
Ultramar Diamond Shamrock Corporation Excess 401(k)-type
Nonqualified 401(k) Plan Company Match and
Employee Contributions
Diamond Shamrock, Inc. Deferred Compensation Nonqualified Deferred
Plan for Executives and Directors Compensation Plan
Ultramar Diamond Shamrock Corporation Separation Severance Plan
Pay Plan
Ultramar Diamond Shamrock Corporation Annual Annual Bonus Plan
Incentive Plan
UDS Medical Plan Welfare Plan
UDS Dental Plan Welfare Plan
UDS Dependent Life Insurance, Co Paid Life Welfare Plan
Insurance & Additional Group Life Insurance Plans
UDS Travel Accident Insurance Plans Welfare Plan
UDS Voluntary Accidental Death & Dismemberment Welfare Plan
Plan
UDS Corporation Long-Term Disability Plan Welfare Plan
UDS Resource Account Plan Welfare Plan
UDS Vision Care Plan Welfare Plan
UDS Tuition Refund Program Welfare Plan
Sickness & Accident Plan, Short-Term Disability Plan Welfare Plan
(Starbridge)
UDS Employee Assistance Program Welfare Plan
UDS Retail Store Employee Occupational AD&D Plan Welfare Plan
<PAGE>
3
Title Plan Type
----- ---------
UDS Prepaid Legal Services Plan Welfare Plan
Diamond Shamrock Work Injury Program Welfare Plan
UDS Income Replacement Plan Welfare Plan
UDS Dialogue Legal Consultation Plan Welfare Plan
UDS Corporation Merger General Severance & Welfare Plan
Retention Incentive Plans
UDS Vacation Plan Welfare Plan
UDS Family Resource Service Welfare Plan
CAREington Dental Plan Welfare Plan
UDS Student Loan Program Welfare Plan
Any Retirement or Welfare Plan maintained pursuant to a Collective Bargaining
Agreement between the Company and any union.
<PAGE>
SCHEDULE B
----------
Trustee's Compensation
----------------------
1. The Trustee shall be entitled to a minimum annual fee of $50,000.
Payment of the first year's fee shall be made in advance upon the "First
Closing." Payment of each successive year's fee shall be made in advance
on a quarterly basis, in equal installments, beginning with the first
anniversary date of the "First Closing." Any annual fee (for the first
year) and quarterly fee (for subsequent years) so paid shall be retained
regardless of whether or not the Trustee continues to act as such for the
full duration of the year or quarter, respectively, for which payment is
received.
2. In the event that additional shares are purchased after the "First
Closing," the Trustee shall be entitled to an increase in its annual fee
in an amount calculated by multiplying $50,000 by the percentage
represented by the purchase price of the additional shares over $100
million. For example, should a "Subsequent Closing" result in the sale
to the Trust of additional shares having an aggregate purchase price of
$50 million, the increase in the Trustee's annual fee attributable to
that "Subsequent Closing" would amount to $25,000. [$50 million over $100
million = 1/2, 1/2 x $50,000 = $25,000]. Payment of the additional fee
attributable to each "Subsequent Closing" shall be made in advance on a
quarterly basis, in equal installments, beginning with the applicable
"Subsequent Closing." Any additional quarterly fee so paid shall be
retained regardless of whether or not the Trustee continues to act as
such for the full duration of the year or quarter, respectively, for
which payment is received.
<PAGE>
EXHIBIT 21
Ultramar Diamond Shamrock Corporation Subsidiaries
--------------------------------------------------
3007152 NOVA SCOTIA COMPANY
AUTOTRONIC SYSTEMS, INC.
BAY AREA PETROCHEMICALS COMPANY, L.L.C.
BELVEX, INC.
BIG DIAMOND, INC.
BIG DIAMOND NUMBER 1, INC.
BIOREMETEC INC.
CANADIAN ULTRAMAR COMPANY
CANADIAN ULTRAMAR HOLDING CORP.
COLONNADE ASSURANCE LIMITED
COLONNADE VERMONT INSURANCE COMPANY
COLORADO REFINING COMPANY
CORPORATE CLAIMS MANAGEMENT, INC.
COYOTE FUNDING, L.L.C.
D-S MONT BELVIEU, INC.
D-S SYSTEMS, INC.
D-S UNITED, INC.
D-S VENTURE COMPANY, L.L.C.
D. S. E. PIPELINE COMPANY
D-K DIAMOND-KOCH, L.L.C.
DIAMOND-KOCH, L.P.
DIAMOND-KOCH II, L.P.
DIAMOND-KOCH III, L.P.
DIAMOND REFORMING, INC.
DIAMOND SECURITY SYSTEMS, INC.
DIAMOND SHAMROCK ARIZONA, INC.
DIAMOND SHAMROCK BOLIVIANA, LTD.
DIAMOND SHAMROCK LEASING, INC.
DIAMOND SHAMROCK OF BOLIVIA, INC.
DIAMOND SHAMROCK PIPELINE COMPANY
DIAMOND SHAMROCK REFINING AND MARKETING COMPANY
DIAMOND SHAMROCK REFINING COMPANY, L.P.
DIAMOND SHAMROCK STATIONS, INC.
DSRM NATIONAL BANK
EASTERN CANADA RESPONSE CORPORATION LTD.
EMERALD CORPORATION
EMERALD MARKETING, INC.
EMERALD PIPE LINE CORPORATION
GEO WILLIAMSON FUELS LTD.
HANOVER PETROLEUM CORPORATION
INTEGRATED PRODUCT SYSTEMS, INC.
LA PORTE PIPELINE COMPANY, L.P.
LA PORTE PIPELINE GP, L.L.C.
METRO OIL CO.
NATIONAL CONVENIENCE STORES INCORPORATED
NATIONAL MONEY ORDERS INCORPORATED
NATURAL/TOTAL LIMITED LIABILITY COMPANY
OCEANIC TANKERS AGENCY LIMITED
PETRO/CHEM ENVIRONMENTAL SERVICES, INC.
SCHEPPS FOOD STORES, INC.
SHAMROCK LOGISTICS GP, LLC
SHAMROCK LOGISTICS, L.P.
SHAMROCK LOGISTICS OPERATIONS, L.P.
SHAMROCK VENTURES, LTD.
SIGMOR BEVERAGE, INC.
<PAGE>
SIGMOR CORPORATION
SIGMOR NUMBER 5, INC.
SIGMOR NUMBER 11, INC.
SIGMOR NUMBER 24, INC.
SIGMOR NUMBER 43, INC.
SIGMOR NUMBER 79, INC.
SIGMOR NUMBER 80, INC.
SIGMOR NUMBER 103, INC.
SIGMOR NUMBER 105, INC.
SIGMOR NUMBER 111, INC.
SIGMOR NUMBER 119, INC.
SIGMOR NUMBER 125, I NC.
SIGMOR NUMBER 140, INC.
SIGMOR NUMBER 156, INC.
SIGMOR NUMBER 170, INC.
SIGMOR NUMBER 178, INC.
SIGMOR NUMBER 181, INC.
SIGMOR NUMBER 196, INC.
SIGMOR NUMBER 206, INC.
SIGMOR NUMBER 228, INC.
SIGMOR NUMBER 229, INC.
SIGMOR NUMBER 232, INC.
SIGMOR NUMBER 238, INC.
SIGMOR NUMBER 239, INC.
SIGMOR NUMBER 259, INC.
SIGMOR NUMBER 306, INC.
SIGMOR NUMBER 363, INC.
SIGMOR NUMBER 422, INC.
SIGMOR NUMBER 605, INC.
SIGMOR NUMBER 606, INC.
SIGMOR NUMBER 611, INC.
SIGMOR NUMBER 613, INC.
SIGMOR PIPELINE COMPANY
SKELLY-BELVIEU PIPELINE COMPANY, L.L.C.
SKIPPER BEVERAGE COMPANY, INC.
STOP 'N GO MARKETS OF GEORGIA, INC.
STOP 'N GO MARKETS OF TEXAS, INC.
SUNSHINE BEVERAGE COMPANY
TEXAS SUPER DUPER MARKETS, INC.
THE SHAMROCK PIPE LINE CORPORATION
TOC-DS COMPANY
TPI PETROLEUM, INC.
TPI PIPELINE CORPORATION
UDS CAPITAL I
UDS CAPITAL II
UDS CORPORATION
UDS FUNDING I, L.P.
UDS FUNDING II, L.P.
ULTRAMAR ACCEPTANCE INC.
ULTRAMAR CREDIT CORPORATION
ULTRAMAR D.S., INC.
ULTRAMAR ENERGY INC.
ULTRAMAR INC.
ULTRAMAR LTEE / ULTRAMAR LTD.
ULTRAMAR SERVICES, INC.
WEST EMERALD PIPE LINE CORPORATION
XCEL PRODUCTS COMPANY, INC.
<PAGE>
Exhibit 23.1
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 14, 2000
<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, and 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, 1999, including without
limitation the power 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 substitutes, or any of
them, shall do or cause to be done by virtue hereof.
<TABLE>
<S> <C>
/s/ Jean Gaulin /s/ Byron Allumbaugh
____________________________________ ____________________________________
Jean Gaulin Byron Allumbaugh
/s/ E. Glenn Biggs /s/ H. Frederick Christie
____________________________________ ____________________________________
E. Glenn Biggs H. Frederick Christie
/s/ W. E. Bradford /s/ Russell H. Herman
____________________________________ ____________________________________
W. E. Bradford Russell H. Herman
/s/ W. H. Clark /s/ Madeleine Saint-Jacques
____________________________________ ____________________________________
W. H. Clark Madeleine Saint-Jacques
/s/ Bob Marbut /s/ C. Barry Schaefer
____________________________________ ____________________________________
Bob Marbut C. Barry Schaefer
/s/ Katherine D. Ortega
____________________________________ ____________________________________
Katherine D. Ortega H. Pete Smith
</TABLE>
Dated: February 8, 2000
<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, 1999, 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
President, CEO, Chairman of the Board
Dated: February 9, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 92,800
<SECURITIES> 0
<RECEIVABLES> 619,900
<ALLOWANCES> (3,400)
<INVENTORY> 556,800
<CURRENT-ASSETS> 1,396,800
<PP&E> 4,345,800
<DEPRECIATION> (1,315,900)
<TOTAL-ASSETS> 4,936,000
<CURRENT-LIABILITIES> 1,258,100
<BONDS> 1,327,600
200,000
0
<COMMON> 900
<OTHER-SE> 1,492,400
<TOTAL-LIABILITY-AND-EQUITY> 4,936,000
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<EPS-BASIC> 2.00
<EPS-DILUTED> 2.00
</TABLE>
