1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 2001
REGISTRATION NO. 333-61756
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
VALERO ENERGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 2911 74-1828067
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
ONE VALERO PLACE
SAN ANTONIO, TEXAS 78212
(210) 370-2000
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
---------------------
JAY D. BROWNING
CORPORATE SECRETARY
VALERO ENERGY CORPORATION
ONE VALERO PLACE
SAN ANTONIO, TEXAS 78212
(210) 370-2000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------------
Copies To:
EDWARD D. HERLIHY, ESQ. LYLE G. GANSKE, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ JONES, DAY, REAVIS & POGUE
51 WEST 52ND STREET 901 LAKESIDE AVENUE
NEW YORK, NEW YORK 10019 CLEVELAND, OHIO 44114
(212) 403-1000 (216) 586-3939
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
satisfaction or waiver of all other conditions to the merger of Ultramar Diamond
Shamrock Corporation with and into the Registrant pursuant to the Agreement and
Plan of Merger described in the enclosed joint proxy statement/prospectus.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2
[VALERO LOGO] [UDS LOGO]
August 23, 2001
Dear Stockholder:
The Boards of Directors of Valero Energy Corporation and Ultramar Diamond
Shamrock Corporation have each approved the merger of UDS and Valero. Our
respective Boards of Directors believe that the combined company will have the
balanced assets, scale and financial flexibility to enhance its continued
profitable growth and will be a premier competitor in the domestic refining and
marketing business. We anticipate that, immediately after we complete the
merger, Valero stockholders will own approximately 60%, and UDS stockholders
will own approximately 40%, of the combined company.
Under the terms of the merger agreement, UDS stockholders will receive, at
their election and subject to proration as we describe in this document, cash,
Valero common stock or a combination of cash and stock, in each case with a
value per UDS share equal to the sum of $27.50 and the measurement period value
of 0.614 shares of Valero common stock. The measurement period value for the
Valero common stock is the average closing price for Valero common stock over a
ten consecutive trading-day period ending on the third business day prior to
completion of the merger. We expect the merger to be, in general, tax-free to
UDS stockholders, except for the cash received for shares of UDS common stock or
instead of fractional shares of Valero common stock. Please see "The Merger
Agreement -- Consideration To Be Received in the Merger" on page 62 for a
detailed description of the merger consideration.
Valero common stock is listed on the New York Stock Exchange under the
symbol "VLO," and UDS common stock is listed on the New York Stock Exchange
under the symbol "UDS."
We cannot complete the merger unless the stockholders of each of our
companies vote to approve the merger agreement. The Board of Directors of Valero
unanimously recommends that Valero stockholders vote "FOR" adoption of the
merger agreement and "FOR" approval of an amendment to Valero's certificate of
incorporation as described in this document. The Board of Directors of UDS
unanimously recommends that UDS stockholders vote "FOR" adoption of the merger
agreement.
Your vote is important, regardless of the number of shares you own. If you
fail to vote or if you abstain, it will have the same effect as a vote against
the merger. Please vote as soon as possible to make sure that your shares are
represented at the special meeting. To vote your shares, please complete and
return the enclosed proxy card. You also may cast your votes in person at the
appropriate special meeting.
Very truly yours,
VALERO ENERGY CORPORATION ULTRAMAR DIAMOND SHAMROCK
CORPORATION
/s/ WILLIAM E. GREEHEY /s/ JEAN R. GAULIN
William E. Greehey Jean R. Gaulin
President, Chief Executive Officer President, Chief Executive Officer
and Chairman of the Board and Chairman of the Board
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE VALERO COMMON STOCK TO BE ISSUED
UNDER THIS JOINT PROXY STATEMENT/ PROSPECTUS OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
WE URGE YOU TO READ THE SECTION ON "RISK FACTORS" BEGINNING ON PAGE 16 FOR
A DESCRIPTION OF POTENTIAL RISKS AND UNCERTAINTIES YOU SHOULD CONSIDER IN
EVALUATING THE PROPOSED TRANSACTION.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED AUGUST 23, 2001, AND IS
FIRST BEING MAILED TO STOCKHOLDERS ON OR ABOUT AUGUST 27, 2001.
3
[VALERO LOGO]
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 27, 2001
---------------------
To the Stockholders of Valero Energy Corporation:
We will hold a special meeting of stockholders of Valero Energy Corporation
at Valero's headquarters at One Valero Place, San Antonio, Texas 78212, on
Thursday, September 27, 2001, at 9:00 a.m., local time, for the purposes of
considering and voting on the following matters, as described in the
accompanying joint proxy statement/prospectus:
1. To consider and vote upon a proposal to adopt the Agreement and
Plan of Merger, dated as of May 6, 2001, between Valero and Ultramar
Diamond Shamrock Corporation, and the merger contemplated thereby. Pursuant
to the merger agreement, among other things, UDS will merge with and into
Valero and Valero will issue approximately 45.2 million shares of Valero
common stock to UDS stockholders in the merger, subject to the terms and
conditions of the merger agreement. This proposal is more fully described
in the accompanying joint proxy statement/prospectus.
2. To consider and vote upon a proposal to amend Valero's certificate
of incorporation to increase the number of authorized shares of common
stock from 150 million shares to 300 million shares. This proposal is also
more fully described in the accompanying joint proxy statement/prospectus.
Approval of the amendment to Valero's certificate of incorporation is not a
condition to Valero's obligation to complete the merger.
3. To transact any other business as may properly come before the
special meeting or any adjournments or postponements thereof.
Holders of record of Valero common stock at the close of business on August
13, 2001 will be entitled to notice of and to vote at the special meeting and
any adjournments or postponements thereof.
By Order of the Board of Directors,
/s/ JAY D. BROWNING
Jay D. Browning
Corporate Secretary
San Antonio, Texas
August 23, 2001
4
[UDS LOGO]
ULTRAMAR DIAMOND SHAMROCK CORPORATION
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 27, 2001
---------------------
To the Stockholders of Ultramar Diamond Shamrock Corporation:
We will hold a special meeting of the stockholders of Ultramar Diamond
Shamrock Corporation on Thursday, September 27, 2001, at 9:00 a.m., local time,
at our corporate headquarters, 6000 North Loop 1604 West, San Antonio, Texas
78249-1112, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of May 6, 2001, by and between Valero Energy
Corporation and UDS, and the merger contemplated thereby. Pursuant to the
merger agreement, among other things, UDS will merge with and into Valero,
subject to the terms and conditions of the merger agreement. This proposal
is more fully described in the accompanying joint proxy
statement/prospectus.
2. To transact any other business as may properly come before the
special meeting or any adjournments or postponements thereof.
Holders of record of UDS common stock at the close of business on August
13, 2001 will be entitled to notice of and to vote at the special meeting and
any adjournments or postponements thereof.
By Order of the Board of Directors,
/s/ TODD WALKER
Todd Walker
Corporate Secretary
San Antonio, Texas
August 23, 2001
5
ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important business and
financial information about Valero and UDS from other documents that are not
included in or delivered with this joint proxy statement/prospectus. This
information is available to you without charge upon your request. You can obtain
the documents incorporated by reference in this joint proxy statement/prospectus
by requesting them in writing or by telephone from the appropriate company at
one of the following addresses:
VALERO UDS
Valero Energy Corporation Ultramar Diamond Shamrock
One Valero Place Corporation
San Antonio, Texas 78212 6000 North Loop 1604 West
Attention: Jay D. Browning San Antonio, Texas 78249
Corporate Secretary Attention: Todd Walker
(210) 370-2000 Corporate Secretary
(210) 592-2000
or or
Georgeson Shareholder Morrow & Co., Inc.
Communications, Inc. 445 Park Avenue
17 State Street, 10th Floor New York, New York 10022
New York, New York 10004 Banks and Brokers, Please Call:
Banks and Brokers Call Collect: (800) 654-2468
(212) 440-9800 Shareholders Please Call:
All Others Call Toll-Free: (800) 607-0088
(800) 223-2064
IF YOU WOULD LIKE TO REQUEST ANY DOCUMENTS, PLEASE DO SO BY SEPTEMBER 20,
2001, IN ORDER TO RECEIVE THEM BEFORE YOUR SPECIAL MEETING.
See "Where You Can Find More Information" on page 109.
6
TABLE OF CONTENTS
PAGE
----
SUMMARY..................................................... 1
SELECTED HISTORICAL FINANCIAL DATA.......................... 12
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA........ 13
COMPARATIVE PER SHARE DATA.................................. 14
RECENT DEVELOPMENTS......................................... 15
RISK FACTORS................................................ 16
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 21
VALERO SPECIAL MEETING...................................... 22
General................................................... 22
Matters To Be Considered.................................. 22
Proxies................................................... 22
Solicitation of Proxies................................... 23
Record Date and Voting Rights............................. 24
Recommendation of the Valero Board of Directors........... 25
UDS SPECIAL MEETING......................................... 25
General................................................... 25
Matters To Be Considered.................................. 25
Proxies................................................... 25
Solicitation of Proxies................................... 26
Record Date and Voting Rights............................. 26
Recommendation of the UDS Board of Directors.............. 27
THE MERGER.................................................. 28
General................................................... 28
Background of the Merger.................................. 28
Recommendation of the Valero Board of Directors; Valero's
Reasons for the Merger................................. 30
Recommendation of the UDS Board of Directors; UDS's
Reasons for the Merger................................. 32
Financial Estimates of Valero and UDS Management.......... 34
Opinion of Valero's Financial Advisors.................... 35
Opinion of UDS's Financial Advisor........................ 47
Regulatory Approvals Required for the Merger.............. 54
Material U.S. Federal Income Tax Consequences............. 55
Accounting Treatment...................................... 57
Interests of Certain Persons in the Merger................ 58
Management and Operations Following the Merger............ 60
Financing the Transaction................................. 61
THE MERGER AGREEMENT........................................ 62
Consideration To Be Received in the Merger................ 62
Allocation Procedure...................................... 64
Completion of the Merger.................................. 70
Representations and Warranties............................ 70
Interim Operations........................................ 71
Additional Covenants...................................... 73
Conditions................................................ 77
Termination of the Merger Agreement....................... 77
Amendments, Extensions and Waivers........................ 80
PROPOSED AMENDMENT TO VALERO'S CERTIFICATE OF
INCORPORATION............................................. 81
PRICE RANGE OF COMMON STOCK AND DIVIDENDS................... 83
Valero.................................................... 83
UDS....................................................... 84
i
7
PAGE
----
INFORMATION ABOUT VALERO.................................... 85
General................................................... 85
Management and Additional Information..................... 85
INFORMATION ABOUT UDS....................................... 86
General................................................... 86
Management and Additional Information..................... 87
DESCRIPTION OF VALERO CAPITAL STOCK......................... 88
Valero Common Stock....................................... 88
Valero Rights Plan........................................ 88
COMPARISON OF STOCKHOLDER RIGHTS............................ 89
Authorized Capital Stock.................................. 89
Size of Board of Directors................................ 89
Cumulative Voting......................................... 90
Classes of Directors...................................... 90
Qualifications of Directors............................... 90
Filling Vacancies on the Board............................ 91
Removal of Directors...................................... 91
Nomination of Directors for Election...................... 92
Transactions with Interested Stockholders................. 93
Stockholder Rights Plan................................... 95
Stockholder Action Without a Meeting...................... 95
Calling Special Meetings of Stockholders.................. 95
Submission of Stockholder Proposals....................... 96
Notice of Stockholder Meetings............................ 96
Dividends................................................. 97
Stockholder Preemptive Rights............................. 97
Indemnification........................................... 97
Limitations on Directors' and Officers' Liability......... 98
Charter Amendments........................................ 98
Amendment of Bylaws....................................... 99
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.......... 100
LEGAL MATTERS............................................... 107
RIGHTS OF DISSENTING STOCKHOLDERS........................... 107
EXPERTS..................................................... 108
OTHER MATTERS............................................... 109
STOCKHOLDER PROPOSALS....................................... 109
INDEPENDENT AUDITORS........................................ 109
WHERE YOU CAN FIND MORE INFORMATION......................... 109
Appendix A -- Agreement and Plan of Merger.................. A-1
Appendix B -- Opinion of Morgan Stanley & Co.
Incorporated.............................................. B-1
Appendix C -- Opinion of Credit Suisse First Boston
Corporation............................................... C-1
Appendix D -- Opinion of Banc of America Securities LLC..... D-1
Appendix E -- Section 262 of the Delaware General
Corporation Law Appraisal Rights.......................... E-1
ii
8
SUMMARY
To fully understand the merger, you should carefully read this entire
document and the other documents to which this document refers. See "Where You
Can Find More Information" on page 109.
THE MERGER (PAGE 28)
We propose that Valero acquire UDS through the merger of UDS with and into
Valero, with Valero being the surviving corporation in the merger. We refer to
this transaction throughout this document as the merger. We have attached the
merger agreement as Appendix A to this document. We urge you to read the merger
agreement. It is the legal document that governs the merger. We currently expect
to complete the merger in the fourth quarter of the calendar year 2001, although
we cannot assure you that we will be able to complete the merger by that time.
WHY WE ARE PROPOSING TO MERGE (PAGES 30 TO 34)
The merger presents a unique opportunity for us to create what we believe
to be the premier independent U.S. oil refining and marketing company. For
example, based on year 2000 data published by the Oil & Gas Journal, the
combined company will have the largest refining capacity of any U.S. refiner
that does not have integrated crude oil exploration and production operations.
Following the merger, we believe we will have the balance of refining and
retailing assets and the greater scale and financial flexibility to pursue
opportunities for continued profitable growth, although we expect that the
financial results of the combined company will still remain influenced by
refining margins (the differences between the prices of refined products such as
gasoline and raw materials, such as crude oil), which are volatile. We
anticipate that we will become a stronger competitor in the domestic refining
and marketing business, and expect that our financial performance will benefit
from potential synergies, although our ability to achieve these synergies will
depend on our ability to integrate our two companies successfully, which is
subject to some risks and uncertainties as described under "Risk Factors". In
addition, each of the Valero Board of Directors and the UDS Board of Directors
also considered a number of other factors. Please see the detailed descriptions
of Valero's and UDS's reasons for the merger under the section "The Merger"
starting on page 28.
FOR A DISCUSSION OF POTENTIAL RISKS AND UNCERTAINTIES THAT YOU SHOULD
CONSIDER IN DECIDING HOW TO VOTE ON THE MERGER, PLEASE SEE "RISK FACTORS"
BEGINNING ON PAGE 16.
RECOMMENDATIONS TO STOCKHOLDERS (PAGES 25 AND 27)
Valero Stockholders
The Valero Board of Directors believes that the merger agreement is fair to
and in the best interests of Valero and Valero stockholders, and unanimously
recommends that Valero stockholders vote "FOR" adoption of the merger agreement.
The Valero Board of Directors believes that the amendment to Valero's
certificate of incorporation is fair to and in the best interests of Valero and
Valero stockholders, and unanimously recommends that Valero stockholders vote
"FOR" approval of the amendment to Valero's certificate of incorporation.
UDS Stockholders
The UDS Board of Directors believes that the merger agreement is fair to
and in the best interests of UDS stockholders, and unanimously recommends that
UDS stockholders vote "FOR" the adoption of the merger agreement. In considering
the recommendation of the UDS Board of Directors, you should be aware that
certain directors and officers of UDS have interests in the merger that are
different from, or in addition to, the interests of UDS stockholders as
stockholders. Please see "The Merger -- Interests of Certain Persons in the
Merger" beginning at page 58.
1
9
OPINIONS OF FINANCIAL ADVISORS (PAGES 35 TO 54)
Valero
Among other factors considered in deciding to approve and adopt the merger
agreement and the merger, the Valero Board of Directors received a written
opinion from each of Valero's financial advisors, Morgan Stanley & Co.
Incorporated and Credit Suisse First Boston Corporation, that, as of May 4,
2001, the date of the opinions, the merger consideration to be paid by Valero
pursuant to the merger agreement was fair from a financial point of view to
Valero. We have attached the full text of Morgan Stanley's and Credit Suisse
First Boston's written opinions as Appendix B and Appendix C, respectively, to
this document. You should read these opinions completely to understand the
assumptions made, matters considered and limitations on the review undertaken by
Morgan Stanley and Credit Suisse First Boston in providing their opinions. The
opinions of Morgan Stanley and Credit Suisse First Boston do not constitute a
recommendation as to how any stockholder of Valero should vote with respect to
any matter relating to the merger.
UDS
UDS's financial advisor, Banc of America Securities LLC, delivered a
written opinion on May 5, 2001 to the UDS Board as to the fairness, from a
financial point of view, to UDS stockholders of the consideration provided for
in the merger. The full text of the written opinion of Banc of America
Securities which sets forth the assumptions made, matters considered and limits
on review undertaken, has been attached as Appendix D to this document. You are
encouraged to read this opinion carefully and in its entirety. The opinion of
Banc of America Securities does not constitute a recommendation as to how any
stockholder of UDS should vote with respect to any matter relating to the
merger.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 62)
The value of the merger consideration to be received by UDS stockholders
when the merger is completed, whether in the form of cash or stock, and the mix
of cash and stock available for UDS stockholder election in the merger, will
depend on the market price of Valero common stock during a measurement period
ending shortly before we complete the merger, as described in this section and
under "The Merger Agreement -- Consideration To Be Received in the Merger"
beginning at page 62. UDS stockholders can obtain information on the value of
the merger consideration, including the exchange ratio for the stock
consideration, based on current Valero market stock prices by calling
1-800-607-0088 toll-free between the hours of 10:00 a.m. and 6:00 p.m., Monday
through Friday, Eastern Standard Time.
Conversion of UDS Common Stock into Cash, Valero Common Stock or a Combination
of Cash and Stock
If you are a UDS stockholder, upon completion of the merger, each of your
shares of UDS common stock automatically will be converted into the right to
receive cash, a number of shares of Valero common stock or a combination of cash
and stock, in each case with a value equal to the sum of $27.50 and a
measurement period value of 0.614 shares of Valero common stock. The measurement
period value is the average closing Valero common stock price over a ten
consecutive full trading-day period ending three business days prior to
completion of the merger. We currently expect that UDS stockholders, in the
aggregate, will own approximately 40%, and Valero stockholders, in the
aggregate, will own approximately 60%, of the outstanding Valero common stock
following the merger. The amount of cash and stock received by a stockholder
will be adjusted if necessary by Valero to maintain the tax-free nature of the
merger.
UDS shares held under the UDS 401(k) Retirement Savings Plan and the UDS
Employee Grantor Trust will all be converted into Valero common stock. In
addition, UDS stockholders will be paid cash instead of any fractional share of
Valero common stock to which they are otherwise entitled. Shares of Valero
common stock outstanding before the merger is completed will remain outstanding
and will not be changed as a result of the merger.
2
10
The following hypothetical examples illustrate the merger consideration for
various values of Valero common stock (summarized in the table below):
- Assume that the ten-day average Valero stock price on the third business
day prior to completion of the merger is $38.00, which was the closing
price for Valero on the NYSE on August 22, 2001 (the most recent
practicable date before we mailed this document to you). The per share
consideration UDS stockholders would receive would equal $50.83 ($27.50
plus $23.33, the measurement period value of 0.614 Valero shares). UDS
stockholders could elect to receive for each UDS share they own either
$50.83 in cash or 1.338 shares of Valero common stock (which at that
price would have a value of $50.83), or a combination of the foregoing.
- Assume that the ten-day average Valero stock price on the third business
day prior to completion of the merger is $41.00 (a hypothetical price not
intended to indicate the future price of Valero common stock). The per
share consideration UDS stockholders would receive would equal $52.67
($27.50 plus $25.17, the measurement period value of 0.614 Valero
shares). UDS stockholders could elect to receive for each UDS share they
own either $52.67 in cash or 1.285 shares of Valero common stock (which
at that price would have a value of $52.67), or a combination of the
foregoing.
- Assume that the ten-day average Valero stock price on the third business
day prior to completion of the merger is the same as the closing price on
the NYSE on Friday, May 4, 2001 ($45.47). The per share consideration UDS
stockholders would receive would equal $55.42 ($27.50 plus $27.92, the
measurement period value of 0.614 Valero shares). UDS stockholders could
elect to receive for each UDS share they own either $55.42 in cash or
1.219 shares of Valero common stock (which at that price would have a
value of $55.42), or a combination of the foregoing.
- Assume that the ten-day average Valero stock price on the third business
day prior to completion of the merger is $54.00 (a hypothetical price not
intended to indicate the future price of Valero common stock). The per
share consideration UDS stockholders would receive would equal $60.66
($27.50 plus $33.16, the measurement period value of 0.614 Valero
shares). UDS stockholders could elect to receive for each UDS share they
own either $60.66 in cash or 1.123 shares of Valero common stock (which
at that price would have a value of $60.66), or a combination of the
foregoing.
MEASUREMENT PERIOD VALUE VALUE OF MERGER CONSIDERATION
OF VALERO STOCK BEFORE ELECTING UDS STOCKHOLDERS WILL RECEIVE FOR PER UDS SHARE BASED ON
CLOSING EACH UDS SHARE CONSIDERATION OF EITHER... MEASUREMENT PERIOD VALUE
------------------------ ------------------------------------------- -----------------------------
$30.00 $45.92 cash 1.531 Valero shares $45.92
$35.00 $48.99 cash 1.400 Valero shares $48.99
$41.00 $52.67 cash 1.285 Valero shares $52.67
$45.47 $55.42 cash 1.219 Valero shares $55.42
$50.00 $58.20 cash 1.164 Valero shares $58.20
$54.00 $60.66 cash 1.123 Valero shares $60.66
These examples are not intended to indicate what the future price of Valero
common stock may actually be. We will not know the exact value of the cash
and/or Valero common stock you will receive in the merger at the time of the
stockholder meetings or at the time you submit your election form. The
measurement period value of Valero common stock is subject to change due to
market and other conditions, and may be greater or less than the market price of
Valero common stock on the date of this document, the date of the respective
stockholder meetings or the date you submit your election form. Valero and UDS
may not complete the merger until all of the conditions to the merger have been
satisfied or waived, including some conditions that we may not waive such as the
expiration of the waiting period under U.S. antitrust laws. Fluctuations in the
price of Valero common stock in the period between the date you vote on the
merger and the date the merger is completed will affect the value of the
consideration you receive at the time the merger is completed, whether received
in the form of cash or stock.
3
11
UDS Stockholders Can Elect to Receive Cash or Valero Stock
Each holder of UDS common stock (other than those holders who own or
control their UDS common stock under a UDS benefit plan or the UDS Grantor Trust
Stock Ownership Program) can elect to receive consideration in the form of cash,
Valero common stock or a combination of cash and stock. UDS stockholders who
make no election will receive cash, Valero common stock or some combination of
cash and stock based on the number of UDS shares for which stock and cash
elections are made. Whatever the form, the per share consideration paid to each
UDS stockholder will have the same pre-tax value when the stock component is
valued at the measurement period value. A form UDS stockholders can use to make
their elections is enclosed with this document, and this document also provides
instructions for properly submitting the form and the deadline for doing so.
The Ability of a UDS Stockholder to Elect to Receive Cash or Stock Is Subject
to Limitations
There are limits on the ability of UDS stockholders to elect to receive
cash or shares of Valero common stock in the merger, as the total amount of cash
and the total number of shares of Valero common stock that Valero will issue in
the merger is each fixed, except as described below. Unless one of the
exceptions described below applies, the total number of UDS shares that will be
converted into cash and stock will be as follows:
- The number of UDS shares for which Valero will pay cash in the merger
(including any dissenting UDS shares) will be equal to $27.50 times the
number of shares of UDS common stock outstanding immediately before we
complete the merger, divided by the applicable per share cash
consideration described in the preceding section of this summary. In any
event, Valero is not required to pay cash for more than half the number
of UDS shares outstanding immediately prior to the merger.
- The remainder of the UDS shares will be converted into shares of Valero
common stock in the merger.
If Valero common stock is oversubscribed, then UDS stockholders who have
elected stock will nevertheless receive cash for some of their stock elections,
on a pro rata basis, and vice versa, if cash is oversubscribed. Based on the
number of outstanding shares of UDS common stock as of August 13, 2001 and the
terms of the merger agreement, Valero currently expects to issue an aggregate of
approximately 45.2 million shares of common stock in the merger.
In limited circumstances, Valero may add more stock if needed to maintain
the tax-free treatment of the merger. Although the exact amount of this
additional stock issuance, if any, will not be determinable until the merger is
completed, after consultation with counsel to Valero and UDS, Valero and UDS
believe that the following table represents a reasonable estimate of the number
of additional shares that would be issued at the following hypothetical Valero
stock prices at closing:
HYPOTHETICAL VALERO CLOSING PRICE ADDITIONAL VALERO SHARES ISSUABLE
--------------------------------- ---------------------------------
$34 or higher None
$32 approximately 1.4 million
$30 approximately 3.2 million
The issuance of any additional shares of Valero common stock in the merger
in this circumstance will not increase the aggregate value of the cash and stock
consideration in the merger (when the Valero stock is valued at the measurement
period value), as any increased issuance of Valero stock will be offset by a
decrease in the aggregate amount of cash paid in the merger.
In addition, if the aggregate value of merger consideration payable in cash
were to exceed 50% of the total value of the merger consideration (based on the
measurement period value of 0.614 Valero shares), Valero could elect to reduce
the aggregate value of the merger consideration payable in cash to any lower
percentage, but not below 50%. If this happens, any UDS shares not converted
into cash as a result of this
4
12
election would be converted into the right to receive additional stock
consideration having a value, based on the measurement period value, equal to
the reduction in the aggregate amount of cash consideration.
TAX CONSEQUENCES OF THE EXCHANGE OF UDS SHARES FOR THE MERGER CONSIDERATION
(PAGE 55)
We expect that, for U.S. federal income tax purposes, a UDS stockholder's
receipt of shares of Valero common stock in exchange for shares of UDS common
stock in the merger will generally be tax-free. UDS stockholders will generally
pay tax on cash received as merger consideration (whether as the result of an
election to receive cash or proration) or instead of a fractional share of
Valero common stock.
Your tax consequences will depend on your personal situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the merger.
DISSENTERS' RIGHTS OF APPRAISAL (PAGE 107)
UDS Stockholders
Under Delaware law, UDS stockholders who properly exercise their appraisal
rights (including, but not limited to, not voting in favor of the merger) will
have dissenters' rights of appraisal in connection with the merger. Dissenting
stockholders who properly exercise their appraisal rights will receive such
consideration as may be determined pursuant to Delaware law. If UDS stockholders
lose or fail to perfect their appraisal rights, they will receive the merger
consideration and will be treated under the merger agreement as not having made
any election as to whether to receive consideration in the form of cash or
Valero common stock.
Valero Stockholders
Under Delaware law, Valero stockholders will not have dissenters' rights of
appraisal in connection with the merger or the amendment to Valero's certificate
of incorporation.
PROPOSED AMENDMENT TO VALERO'S RESTATED CERTIFICATE OF INCORPORATION (PAGE 81)
Valero stockholders also will vote on a proposal to approve an amendment to
Valero's certificate of incorporation to increase the number of shares of
authorized Valero common stock from 150 million shares to 300 million shares.
Approval of the amendment is not a condition to completion of the merger.
FINANCING OF THE MERGER (PAGE 61)
Valero currently intends to finance the cash portion of the merger
consideration through borrowings under various bank credit agreements that are
expected to be put in place over the next several months.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 77)
Completion of the merger depends on a number of conditions being met,
including:
- the approval of the merger agreement by UDS and Valero stockholders,
- the accuracy of the representations and warranties made by each company,
except where the failure to be accurate would not have a material adverse
effect,
- the performance of each party's obligations under the merger agreement,
- each party's receipt of an opinion from its counsel that the merger will
qualify as a reorganization for U.S. federal income tax purposes, and
- the receipt of regulatory approvals, including the expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
5
13
Where the law permits, a party to the merger agreement could elect to waive
a condition to its obligation to complete the merger although that condition has
not been satisfied. We cannot be certain when (or if) the conditions to the
merger will be satisfied or waived or that the merger will be completed.
REGULATORY APPROVALS (PAGE 54)
Under the federal antitrust law, we cannot complete the merger until we
furnish specified materials and information to the Antitrust Division of the
U.S. Department of Justice and the U.S. Federal Trade Commission and satisfy
waiting period requirements. We may also be required to obtain regulatory
approvals from, or make filings with, various state and foreign authorities in
connection with the merger. We expect that we will be able to obtain all
required regulatory approvals, but we cannot assure you when or if these
regulatory approvals will be obtained or what, if any, conditions the regulatory
authorities will place on the granting of such approvals.
THE SPECIAL MEETINGS; RECORD DATE; VOTE REQUIRED (PAGES 24 AND 26)
Valero Stockholders
- WHEN AND WHERE: The Valero special meeting will take place at Valero's
headquarters at One Valero Place, San Antonio, Texas 78212 on Thursday,
September 27, 2001, at 9:00 a.m., local time.
- WHAT YOU ARE BEING ASKED TO VOTE ON: At the Valero special meeting,
Valero stockholders will vote on a proposal to adopt the merger agreement
and on a proposal to approve an amendment to Valero's certificate of
incorporation to increase the number of authorized shares of Valero
common stock from 150 million shares to 300 million shares. Approval of
the amendment to Valero's certificate of incorporation is not a condition
to completion of the merger. Valero stockholders also may be asked to
consider other matters as may properly come before the special meeting.
At the present time, Valero knows of no other matters that will be
presented for consideration at the special meeting.
- WHO CAN VOTE: You can vote at the Valero special meeting if you owned
Valero common stock at the close of business on August 13, 2001. On that
date, there were 60,691,331 shares of Valero common stock outstanding and
entitled to vote. You can cast one vote for each share of Valero common
stock that you owned on that date.
- WHAT VOTE IS NEEDED: In order to adopt the merger agreement, the holders
of a majority of the outstanding shares of Valero common stock entitled
to vote on the merger agreement must vote in favor of it. In order to
approve the amendment to Valero's certificate of incorporation, the
holders of a majority of the outstanding shares of Valero common stock
entitled to vote must vote in favor of doing so.
UDS Stockholders
- WHEN AND WHERE: The UDS special meeting will take place at UDS corporate
headquarters, 6000 North Loop 1604 West, San Antonio, Texas 78249-1112,
on Thursday, September 27, 2001, at 9:00 a.m., local time.
- WHAT YOU ARE BEING ASKED TO VOTE ON: At the UDS special meeting, UDS
stockholders will vote on a proposal to adopt the merger agreement. UDS
stockholders also may be asked to consider other matters as may properly
come before the special meeting. At the present time, UDS knows of no
other matters that will be presented for consideration at the special
meeting.
- WHO CAN VOTE: You can vote at the UDS special meeting if you owned UDS
common stock at the close of business on August 13, 2001. On that date,
there were 73,742,425 shares of UDS common stock outstanding and entitled
to vote. You can cast one vote for each share of UDS common stock that
you owned on that date.
6
14
- WHAT VOTE IS NEEDED: In order to adopt the merger agreement, the holders
of a majority of the outstanding shares of UDS common stock entitled to
vote must vote in favor of doing so.
VOTING YOUR SHARES (PAGES 24 AND 26)
After carefully reading and considering the information contained in this
joint proxy statement/ prospectus, please respond by completing, signing and
dating your proxy card or voting instructions and returning it in the enclosed,
postage-paid envelope, or, if available, by submitting your proxy or voting
instructions by telephone or Internet, as soon as possible so that your shares
may be represented at your special meeting. If your shares are held in "street
name," you should receive instructions from your broker requesting voting
instructions. If you do not provide your broker with instructions on how to vote
any shares you hold in "street name," your broker will not be permitted to vote
them. You should therefore be sure to provide your broker with instructions on
how to vote your shares. Please check the voting form used by your broker to see
if it offers you the opportunity to give your voting instructions by telephone
or Internet.
If you fail to return your proxy or fail to instruct your broker, or if you
vote to abstain, your action will have the same effect as a vote against the
proposals we describe in this document. If you sign and return your proxy card
but do not indicate how you want to vote, your proxy will be counted as a vote
in favor of our proposals.
You can change your vote at any time before your proxy is voted at your
special meeting. You can do this in one of three ways. First, you can revoke
your proxy. Second, you can submit a new proxy. If you choose either of these
two methods and you are a holder of record, you must submit your notice of
revocation or your new proxy to the Secretary of Valero or UDS, as appropriate,
before the applicable special meeting. However, if your shares are held in a
street name account at a brokerage firm or bank, you should contact your
brokerage firm or bank to change your vote. Third, if you are a holder of
record, or if your shares are held in street name and you receive a valid proxy
from your broker, you can attend your special meeting and vote in person.
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEES (PAGE 77)
We can mutually agree at any time to terminate the merger agreement without
completing the merger, even if UDS and Valero stockholders have approved the
merger agreement. In addition, either of us can decide, without the consent of
the other, to terminate the merger agreement in a number of situations,
including:
- the final denial of a required regulatory approval or a final
governmental order prohibiting the merger,
- failure to obtain stockholder approvals,
- specified circumstances relating to a withdrawal or modification by the
other party's Board of Directors of its recommendation to its
stockholders to approve the merger, or
- failure to complete the merger on or before May 3, 2002.
In addition, UDS may, before the UDS stockholder meeting occurs, terminate
the merger agreement in certain circumstances to enter into another transaction
that is financially superior to the merger in response to an unsolicited
acquisition proposal (provided that UDS complies with the "no solicitation"
provisions of the merger agreement and pays a termination fee, and Valero is
given an opportunity to respond to the alternative offer).
Each of Valero and UDS has agreed to pay a termination fee of $125 million
to the other party in the event that the merger is terminated under specified
circumstances relating to a competing acquisition proposal or a withdrawal or
change in such party's Board recommendation. A $125 million termination fee is
also payable by a party under specified circumstances relating to a breach by
that party of certain of its
7
15
obligations under the merger agreement, the failure to obtain its stockholders'
approval of the merger, or the failure of the merger to occur on or before May
3, 2002, but only if the party takes certain actions regarding an alternative
acquisition proposal within one year following such termination.
WAIVER AND AMENDMENT (PAGE 80)
We may jointly amend the merger agreement, and each of us may waive our
right to require the other party to adhere to the terms and conditions of the
merger agreement, to the extent legally permissible.
ACCOUNTING TREATMENT (PAGE 57)
The merger will be accounted for using the "purchase method" of accounting
for business combinations under U.S. generally accepted accounting principles.
CONVERSION OF UDS EQUITY-BASED AWARDS (PAGE 59)
Upon completion of the merger, each outstanding UDS employee stock option
will be converted into a stock option to purchase a number of shares of Valero
common stock that is equal to the product of the exchange ratio, multiplied by
the number of shares of UDS common stock that would have been obtained upon the
exercise of the UDS stock option before the merger, rounded to the nearest whole
share. The exercise price per share will be equal to the exercise price per
share of UDS common stock subject to the UDS stock option before the conversion
divided by the exchange ratio, rounded to the nearest whole cent. The exchange
ratio is determined by dividing the sum of $27.50 and the value of 0.614 shares
of Valero common stock (based on the average closing Valero common stock price
during the ten consecutive full trading days ending on the third business day
prior to the closing) by this ten-day average Valero stock price. All UDS
employee stock options, restricted shares of UDS common stock and performance
units are subject to accelerated vesting in connection with the merger.
SOME OF THE UDS DIRECTORS AND OFFICERS HAVE INTERESTS IN THE MERGER THAT ARE
DIFFERENT FROM YOUR INTERESTS (PAGES 58 TO 60)
In considering the recommendation of the UDS Board of Directors, you should
be aware that certain directors and officers of UDS have interests in the merger
that are different from, or in addition to, the interests of UDS stockholders as
stockholders. These interests include:
- severance and other additional benefits payable to certain UDS officers
in the event their employment is involuntarily terminated other than for
"cause" or terminated by the executive for "good reason" in connection
with the merger (we estimate that about $18.2 million in the aggregate
would be payable to the six highest paid UDS officers if they were
terminated in a manner entitling them to severance and benefits on the
date of this document);
- the accelerated vesting and payment of enhanced benefits and lump-sum
cash amounts under the supplemental retirement plans in which UDS
officers participate (we estimate that the aggregate amount of these
payments and benefits payable to the six highest paid UDS officers would
be about $27.2 million if the merger were completed on the date of this
document);
- the accelerated vesting and conversion of UDS stock options into Valero
stock options held by UDS officers and non-employee directors (we
estimate that about 1,806,936 UDS stock options held by the six highest
paid UDS officers and the UDS non-employee directors would accelerate if
the merger were to be completed on the date of this document, or have
previously accelerated in connection with the merger, having an aggregate
value of about $30.5 million based on the difference between the $47.40
closing stock price of UDS common stock on August 13, 2001 and each
option's exercise price); and
- cash payments for outstanding intermediate incentive awards and the lapse
of restrictions on restricted shares (we estimate that the aggregate
value of the incentive awards and restricted shares
8
16
held by the six highest paid UDS officers is about $24.8 million based on the
$47.40 closing stock price of UDS common stock on August 13, 2001).
When the merger is completed, Valero will expand the Valero Board of
Directors to 13 members and cause four of the current members of the UDS Board
of Directors to be appointed to the Valero Board of Directors. The four members
of the UDS Board of Directors to be appointed to the Valero Board of Directors
have not yet been selected.
Also, following completion of the merger, Valero will indemnify and provide
directors' and officers' insurance for the directors and officers of UDS for
events occurring before the merger, including events that are related to the
merger agreement.
The members of our respective Boards of Directors knew about these
additional interests, and considered them, among other matters, when they
approved and adopted the merger agreement and the merger.
LISTING OF VALERO COMMON STOCK
Valero will apply to have the Valero common stock issued in the merger
approved for listing on the NYSE, where Valero common stock currently is traded
under the symbol "VLO." If the merger is completed, UDS common stock will no
longer be listed on the NYSE or any other exchange.
THE COMPANIES (PAGES 85 AND 86)
VALERO ENERGY CORPORATION
ONE VALERO PLACE
SAN ANTONIO, TEXAS 78212
(210) 370-2000
Valero is a large and geographically diverse independent petroleum refining
and marketing company. We own and operate six refineries in Texas, California,
Louisiana and New Jersey with a combined throughput capacity of approximately
1,000,000 barrels per day (or 723,000 barrels per day of crude oil capacity). We
market our products in 34 states, including in California through about 350
retail locations. Headquartered in San Antonio, Texas, Valero has over 3,000
employees and had over $5.2 billion of assets at June 30, 2001, and over $14.6
billion of revenues in 2000.
For additional information about Valero and its business, see "Information
About Valero" on page 85 and "Where You Can Find More Information" on page 109.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
6000 NORTH LOOP 1604 WEST
SAN ANTONIO, TEXAS 78249
(210) 592-2000
UDS is an independent refiner and retailer of refined products and
convenience store merchandise in the central, southwest and northeast regions of
the United States and eastern Canada. UDS owns and operates seven refineries,
including two in Texas, two in California and one each in Oklahoma, Colorado and
Quebec. In the United States, UDS markets refined products and convenience store
merchandise under the Diamond Shamrock(R), Beacon(R), Ultramar(R) and Total(R)
brand names through a network of about 4,300 convenience stores across 17
central and southwest states. Headquartered in San Antonio, Texas, UDS has
approximately 20,000 employees, and had over $6.0 billion in assets as of June
30, 2001 and over $17.0 billion of revenues in 2000.
For additional information about UDS and its business, see "Information
About UDS" on page 86 and "Where You Can Find More Information" on page 109.
9
17
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
Shares of Valero and UDS stock are quoted on the NYSE. Valero is listed
under the symbol "VLO" and UDS is listed under the symbol "UDS." The closing
prices of Valero and UDS common stock on May 4, 2001, which was the last trading
day before we announced the merger, and August 21, 2001, which was the most
recent practicable trading day before we mailed this document to you, and the
implied value to be received in the merger by UDS stockholders for each share of
UDS common stock on those dates assuming for the sake of this table that the
measurement period value was equal to the closing price on that date, were as
follows:
VALUE OF MERGER
CONSIDERATION PER SHARE
VALERO COMMON STOCK UDS COMMON STOCK OF UDS COMMON STOCK
------------------- ---------------- -----------------------
May 4, 2001................. $45.60 $42.75 $55.50
August 22, 2001............. $38.00 $49.30 $50.83
The market value of the shares of Valero common stock that will be issued
in exchange for shares of UDS common stock upon the completion of the merger
will not be known at the time you vote on the adoption of the merger agreement
or submit your election form because the merger will not be completed by then.
The market prices of Valero and UDS common stock will fluctuate prior to the
merger, and the value of the per-share merger consideration, whether received in
the form of cash, Valero common stock or a combination of cash and stock, will
be related to the average closing price of Valero common stock during a ten
consecutive full trading-day measurement period ending three business days prior
to closing of the merger. You should obtain current stock price quotations for
Valero common stock and UDS common stock.
NEXT STEPS; COMPLETING YOUR ELECTION FORMS (PAGES 24 AND 26)
After carefully reading and considering the information contained in this
joint proxy statement/ prospectus, please respond by completing, signing and
dating your proxy card or voting instructions and returning it in the enclosed,
postage-paid envelope, or, if available, by submitting your proxy or voting
instructions by telephone or Internet, as soon as possible so that your shares
may be represented at your special meeting.
You do not need to send in your UDS stock certificates to vote on the
merger, but you are required to submit them if you would like to make an
election of the type of merger consideration you wish to receive. We have
included a form of election with this document that UDS stockholders must
complete if they wish to make an election to receive cash, Valero common stock
or a combination in the merger, and must return (together with their UDS stock
certificates or a form of guaranteed delivery) pursuant to the instructions in
this document prior to the election deadline, which is currently 5:00 p.m. New
York City time on the second business day before the closing date of the merger.
If you do not complete and return the election form pursuant to the
instructions, you will receive written information after the merger on the
exchange of your UDS certificates. If your shares are held in "street name,"
your broker will provide you with instructions on how to authorize it to
complete the election form on your behalf. Please be sure to provide these
instructions to your broker sufficiently in advance of the election deadline to
permit your broker to deliver the election form prior to the election deadline.
UDS stockholders can change their election by submitting a new election form at
any time prior to the election deadline. If your shares are held in "street
name," you must follow the directions provided by your broker to change your
election.
We will notify you of the exact date and time of the election deadline by
issuing a press release at least five business days prior to the election
deadline. If we change the election deadline, we will issue a press release or
make a public announcement of the new election deadline.
10
18
ADDITIONAL INFORMATION (PAGE 109)
If you have any questions about the merger or how to submit your proxy or
election form, or if you need additional copies of this joint proxy
statement/prospectus or the enclosed proxy cards, voting instructions or
election form, you should contact:
- If you are a Valero stockholder:
Georgeson Shareholder Communications, Inc.
Toll free: (800) 223-2064
- If you are a UDS stockholder:
Morrow & Co.
Toll Free: (800) 607-0088
11
19
SELECTED HISTORICAL FINANCIAL DATA
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
HOW WE PREPARED THE FINANCIAL STATEMENTS
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. We derived this information from the
audited financial statements of Valero and UDS for the years 1996 through 2000
and the unaudited financial statements of Valero and UDS for the six months
ended June 30, 2001 and 2000. This information is only a summary, and you should
read it together with our historical financial statements and related notes
contained in the annual reports and other information that we have filed with
the Securities and Exchange Commission, or SEC, and have incorporated by
reference in this document. See "Where You Can Find More Information."
VALERO ENERGY CORPORATION
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -----------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- --------- -------- -------- -------- --------
(UNAUDITED)
Operating revenues.................. $8,268.4 $6,301.1 $14,671.1 $7,961.2 $5,539.3 $5,756.2 $2,757.9
Income (loss) from continuing
operations........................ $ 410.9 $ 118.4 $ 339.1 $ 14.3 $ (47.3) $ 111.8 $ 22.5
Earnings (loss) per share of common
stock from continuing
operations........................ $ 6.73 $ 2.11 $ 5.79 $ .25 $ (.84) $ 2.16 $ .51
Earnings (loss) per share of common
stock from continuing
operations -- assuming dilution... $ 6.35 $ 2.05 $ 5.60 $ .25 $ (.84) $ 2.03 $ .44
Total assets........................ $5,214.2 $4,213.0 $ 4,307.7 $2,979.3 $2,725.7 $2,493.0 $1,985.6
Long-term debt, less current
maturities, capital lease
obligations and redeemable
preferred stock................... $1,327.6 $1,173.0 $ 1,042.4 $ 785.5 $ 822.3 $ 430.2 $ 354.5
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust.................. $ 172.5 $ 172.5 $ 172.5 $ -- $ -- $ -- $ --
Dividends per share of common
stock............................. $ .16 $ .16 $ .32 $ .32 $ .32 $ .42 $ .52
ULTRAMAR DIAMOND SHAMROCK CORPORATION
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- --------- --------- --------- --------- ---------
(UNAUDITED)
Operating revenues.............. $9,319.7 $7,654.9 $17,061.1 $13,939.3 $11,113.1 $10,860.5 $10,190.8
Income (loss) before
extraordinary loss............ $ 403.1 $ 197.6 $ 444.3 $ 173.2 $ (78.1) $ 159.6 $ (35.9)
Earnings (loss) per share of
common stock before
extraordinary loss............ $ 5.41 $ 2.28 $ 5.12 $ 2.00 $ (.89) $ 1.99 $ (.54)
Earnings (loss) per share of
common stock before
extraordinary loss -- assuming
dilution...................... $ 5.31 $ 2.27 $ 5.11 $ 2.00 $ (.89) $ 1.94 $ (.54)
Total assets.................... $6,073.1 $5,162.8 $ 5,988.4 $ 4,936.0 $ 5,315.0 $ 5,594.7 $ 4,420.0
Long-term debt, less current
maturities.................... $1,686.1 $1,336.5 $ 1,659.8 $ 1,327.6 $ 1,937.0 $ 1,877.5 $ 1,657.8
Company-obligated preferred
securities of subsidiary
trust......................... $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ --
Dividends per share of common
stock......................... $ .40 $ .55 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
12
20
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following selected unaudited pro forma combined financial data has been
derived from and should be read together with the unaudited pro forma combined
financial statements and related notes on page 100 through page 106. This
information is based on the historical consolidated balance sheets and related
historical consolidated statements of income of Valero (as adjusted to reflect
the effect of Valero's acquisition of its Benicia refinery and retail assets and
related financings, which were completed during the second quarter of 2000, as
if they had occurred on January 1, 2000) and UDS, giving effect to the merger
using the purchase method of accounting for business combinations. This
information is for illustrative purposes only.
The companies may have performed differently had they always been combined.
You should not rely on the selected unaudited pro forma combined financial data
as being indicative of the historical results that would have been achieved had
the companies always been combined or the future results that Valero will
experience after the merger.
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(MILLIONS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
Operating revenues...................................... $16,200.2 $29,790.0
Operating income(1)..................................... 1,407.8 1,441.5
Net income(1)........................................... 745.1 659.7
Earnings per common share(1)............................ 7.10 6.26
Earnings per common share -- assuming dilution(1)....... 6.77 6.13
AT JUNE 30, 2001
----------------
(MILLIONS OF
DOLLARS)
Total assets................................................ $ 14,354.8
Long-term debt, less current maturities, and capital lease
obligations............................................... 5,028.4
Company-obligated preferred securities of subsidiary
trusts.................................................... 372.5
-------------------------
(1) None of these amounts reflect the effect of anticipated synergies expected
to result from the merger that are discussed under "The Merger -- Management
and Operations Following the Merger."
13
21
COMPARATIVE PER SHARE DATA
Set forth below are net income, cash dividends and book value per common
share amounts for Valero and UDS on a historical basis, for Valero on a pro
forma combined basis, and on a pro forma combined basis per UDS-equivalent
common share. The exchange ratio is assumed to be 1.225 shares of Valero common
stock for each share of UDS common stock, based on the average of the closing
prices of Valero common stock during the period from two trading days prior to
announcement of the merger to two trading days following the announcement.
The Valero pro forma combined data was derived by combining the adjusted
historical consolidated financial information of Valero and the historical
consolidated financial information of UDS using the purchase method of
accounting for business combinations as described under "Unaudited Pro Forma
Combined Financial Information." Valero's historical statement of income for the
year ended December 31, 2000 has been adjusted to reflect the pro forma impact
of the Benicia acquisition and related financings, which were completed during
the second quarter of 2000, as if they had occurred on January 1, 2000.
The UDS-equivalent common share pro forma information shows the effect of
the merger from the perspective of an owner of UDS common stock. The information
was computed by multiplying the Valero pro forma information by the assumed
exchange ratio of 1.225.
You should read the information below together with our historical
financial statements and related notes contained in the annual reports and other
information that we have filed with the SEC and that we have incorporated by
reference in this document. See "Where You Can Find More Information." The
unaudited pro forma combined data below is for illustrative purposes only. The
financial results may have been different had the companies always been
combined. You should not rely on this information to be indicative of the
historical results that would have been achieved had the companies always been
combined or the future results that Valero will experience after the merger.
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
Valero historical data, per common share:
Earnings per common share................................. $ 6.73 $ 5.79
Earnings per common share -- assuming dilution............ 6.35 5.60
Cash dividends............................................ .16 .32
Book value at end of period............................... 32.04 25.10
Valero pro forma combined data, per Valero common share:
Earnings per common share(1).............................. 7.10 6.26
Earnings per common share -- assuming dilution(1)......... 6.77 6.13
Cash dividends............................................ .16 .32
Book value at end of period............................... 39.48 35.44
UDS historical data, per common share:
Earnings per common share................................. 5.41 5.12
Earnings per common share -- assuming dilution............ 5.31 5.11
Cash dividends............................................ .40 1.10
Book value at end of period............................... 22.22 20.98
Valero pro forma combined data, per UDS-equivalent common
share:
Earnings per common share................................. 8.70 7.67
Earnings per common share -- assuming dilution............ 8.29 7.51
Cash dividends............................................ .20 .39
Book value at end of period............................... 48.36 43.41
-------------------------
(1) None of these amounts reflect the effect of anticipated synergies expected
to result from the merger that are discussed under "The Merger -- Management
and Operations Following the Merger."
14
22
RECENT DEVELOPMENTS
VALERO SECOND QUARTER 2001 FINANCIAL RESULTS
On July 24, 2001, Valero announced unaudited results of its operations for
the three and six months ended June 30, 2001. Amounts are in millions except for
per-share amounts.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -------------------
2001 2000 2001 2000
--------- --------- -------- --------
Operating revenues........................... $4,499.1 $3,372.5 $8,268.4 $6,301.1
Income before income taxes................... 439.6 136.1 654.3 183.0
Net income................................... 274.8 87.7 410.9 118.4
Earnings per common share.................... 4.50 1.56 6.73 2.11
Earnings per common share -- assuming
dilution................................... 4.23 1.51 6.35 2.05
Weighted average shares outstanding (assuming
dilution).................................. 64.9 58.1 64.7 57.7
As described under "Risk Factors," Valero's financial results are primarily
affected by the margin between refined product prices and the prices for crude
oil and other feedstocks. Historically, refining margins have been volatile, and
they are likely to continue to be volatile in the future. In May, 2001, we
estimated earnings per share for the full 2001 fiscal year in the $9.73 range,
applying the margins implied by then-current crude and gasoline futures prices
for the remainder of the year. As we disclosed in our July 24, 2001 second
quarter earnings release, applying margins implied by more recent futures prices
for the remainder of the year results in an estimated earnings per share range
for the 2001 fiscal year of $8.00 per share. The reasons for this revised
outlook include the fact that, commencing in June 2001 and continuing through
July, gasoline margins weakened substantially from what Valero believes to be
the exceptionally strong levels during April and May of 2001. Valero believes
that the reduction in these margins is due to an increase in inventories as a
result of increased production following the completion of a number of refinery
turnarounds industry-wide, higher than normal levels of imports in response to
the earlier high domestic margins, and a decrease in demand resulting from the
earlier high retail gasoline prices and a slowing economy.
UDS SECOND QUARTER 2001 FINANCIAL RESULTS
On July 24, 2001, UDS announced unaudited results of its operations for the
three and six months ended June 30, 2001. Amounts are in millions except for
per-share amounts.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -------------------
2001 2000 2001 2000
--------- --------- -------- --------
Sales and other revenues..................... $5,105.6 $4,009.5 $9,319.7 $7,654.9
Income before income taxes................... 434.4 214.1 654.8 332.8
Net income................................... 266.4 128.5 403.1 197.6
Net income per share (basic)................. 3.72 1.48 5.41 2.28
Net income per share (diluted)............... 3.63 1.47 5.31 2.27
Weighted average number of shares
(diluted).................................. 73.4 87.0 75.9 86.9
15
23
RISK FACTORS
In addition to the other information contained in or incorporated by
reference in this document, you should carefully consider the following risk
factors in deciding whether to vote for approval of the merger.
THE AMOUNT OF CASH AND THE NUMBER OF SHARES OF VALERO COMMON STOCK THAT UDS
STOCKHOLDERS WILL RECEIVE IN EXCHANGE FOR EACH SHARE OF UDS COMMON STOCK WILL
NOT BE FIXED UNTIL AFTER THE VALERO AND UDS STOCKHOLDER MEETINGS.
In the merger, UDS stockholders will receive, at their election and subject
to proration as we describe in this document, cash, Valero common stock or a
combination of cash and stock, in each case with a value per UDS share equal to
the sum of $27.50 and the measurement period value of 0.614 shares of Valero
common stock. The measurement period value is the average closing Valero common
stock price over a ten consecutive full trading-day period ending three business
days prior to completing the merger. Because we cannot calculate the measurement
period value until the end of the measurement period, we cannot know at this
time the exact amount of consideration UDS stockholders will receive for each
share of UDS stock. The measurement period value of Valero common stock may be
greater or less than the market price of Valero common stock on the date of this
document, the date of the stockholder meetings or the date you submit your
election form, and will affect the value of the consideration you receive in the
merger. Please see "The Merger Agreement" for further explanation and for
illustrative examples of the determination of the consideration to be paid to
UDS stockholders in the merger.
THE ABILITY OF UDS STOCKHOLDERS TO CHOOSE TO RECEIVE STOCK OR CASH IN THE MERGER
MAY BE LIMITED.
Because the total number of Valero shares to be issued and the total amount
of cash to be paid in the merger to UDS stockholders as a group will each be
fixed, the cash and stock elections made by UDS stockholders will be subject to
proration to stay within those limits. If Valero common stock is oversubscribed,
then UDS stockholders who have elected stock will nevertheless receive cash for
some of their stock elections, on a pro rata basis, and vice versa if cash is
oversubscribed. For a detailed description of the election mechanism, please see
"The Merger Agreement" beginning on page 62.
VALERO MAY BE UNABLE TO SUCCESSFULLY INTEGRATE UDS'S OPERATIONS.
The merger involves the integration of two companies that previously have
operated independently. The difficulties of combining the operations of the
companies include:
- the necessity of coordinating geographically separate organizations; and
- integrating personnel with diverse business backgrounds.
The process of integrating operations could cause an interruption of, or
loss of momentum in, the activities of one or more of the combined company's
businesses and the loss of key personnel. The diversion of management's
attention and any delays or difficulties encountered in connection with the
merger and the integration of the two companies' operations could have an
adverse effect on the business, results of operations or financial condition of
the combined company, including by delaying the time at which synergies such as
cost savings can be realized and reducing management time and effort available
for other business matters and strategic opportunities.
OUR FINANCIAL RESULTS ARE AFFECTED BY VOLATILE REFINING MARGINS.
Valero's financial results are primarily affected by the relationship, or
margin, between refined product prices and the prices for crude oil and other
feedstocks. The cost to acquire our feedstocks and the price at which we can
ultimately sell refined products depend upon numerous factors beyond our
control. Historically, refining margins have been volatile, and they are likely
to continue to be volatile in the future. Over the past two years, there had
been an improvement in refining fundamentals and refining margins; however,
recently, refining margins have deteriorated. For example, in May 2001, we
estimated earnings
16
24
per share for 2001 in the $9.73 range, applying the margins implied by
then-current crude and gasoline futures prices for the remainder of the year. As
we disclosed in our July 24, 2001 second quarter earnings release, applying
margins implied by more recent futures prices for the remainder of the year
results in an estimated earnings per share range for 2001 of $8.00 per share.
This revised estimate speaks only as of the date it was made and will vary in
the future depending on refining margins and market conditions. See "Cautionary
Statement Concerning Forward-Looking Statements."
THE COMBINED COMPANY'S LEVERAGE MAY LIMIT ITS FINANCIAL FLEXIBILITY.
As of June 30, 2001, Valero had approximately $1.3 billion in total
indebtedness, including capital lease obligations. After giving effect to the
acquisition of UDS and currently anticipated financings, as of June 30, 2001, we
would have had total debt of approximately $5 billion (including capital lease
obligations), trust preferred securities in an aggregate liquidation amount of
$372.5 million, and stockholders' equity of approximately $4.1 billion,
resulting in a total debt to total capital ratio of 55.2%. We may also incur
additional indebtedness in the future, including in connection with other
acquisitions, although our ability to do so will be restricted by existing bank
credit facilities. The level of Valero's indebtedness will have several
important effects on our future operations, including, among others:
- a significant portion of our cash flow from operations will be dedicated
to the payment of principal and interest on our indebtedness and will not
be available for other purposes;
- covenants contained in our existing debt arrangements require us to meet
certain financial tests, which may affect our flexibility in planning
for, and reacting to, changes in our business, including possible
acquisition opportunities;
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate and other purposes may be
limited;
- we may be at a competitive disadvantage to our competitors that are less
leveraged; and
- our vulnerability to adverse economic and industry conditions may
increase.
Valero's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon our future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting our operations, many of which are beyond our
control. We cannot assure you that our business will continue to generate
sufficient cash flow from operations to service our indebtedness. If Valero is
unable to generate sufficient cash flow from operations, it may be required to
sell assets, to refinance all or a portion of its indebtedness or to obtain
additional financings. Such refinancing might not be possible and additional
financing might not be available on commercially acceptable terms or at all.
Our bank credit facility imposes financial and other restrictions on
Valero. Covenants contained in the credit facility and relating to certain other
indebtedness of Valero limit, among other things, the incurrence of funded
indebtedness by Valero and its subsidiaries and require maintenance of a minimum
net worth and fixed-charge coverage ratio and a maximum debt-to-capitalization
ratio. Failure to comply with such covenants may result in a default with
respect to the related debt under the credit facility or such other indebtedness
and could lead to acceleration of such debt or any instruments evidencing
indebtedness that contain cross-acceleration or cross-default provisions. In
such a case, Valero might not be able to refinance or otherwise repay such
indebtedness.
COMPLIANCE WITH AND CHANGES IN ENVIRONMENTAL LAWS COULD ADVERSELY AFFECT OUR
PERFORMANCE.
Valero is subject to extensive federal, state and local environmental laws
and regulations, including those relating to the discharge of materials into the
environment, waste management, pollution prevention measures and characteristics
and composition of gasoline and diesel fuels. If we violate or fail to comply
with these laws and regulations, we could be fined or otherwise sanctioned.
Because environmental laws and regulations are increasingly becoming more
stringent and new environmental laws and regulations are
17
25
continuously being enacted or proposed, such as those relating to methyl
tertiary butyl ether (MTBE), CARB gasoline, the Tier II gasoline and distillate
standards and the Maximum Available Control Technology rule (MACT II rule) under
the Clean Air Act, the level of future expenditures required for environmental
matters could increase in the future. In addition, any major upgrades in any of
our refineries could require material additional expenditures to comply with
environmental laws and regulations.
In February 2000, the Environmental Protection Agency's "Tier II" gasoline
standard was published in final form under the Clean Air Act. The standard
requires the sulfur content in gasoline to be reduced from approximately 300
parts per million to 30 parts per million. The regulation will be phased in
beginning in 2004. In addition, the EPA finalized its Tier II distillate
standard to reduce the sulfur content of diesel fuel sold to highway consumers
by 97%, from 500 parts per million to 15 parts per million, beginning June 1,
2006. The new Tier II specifications for the reduction of sulfur in both
gasoline and distillates are expected to cost the refining industry as much as
$16 billion. Valero has determined that modifications will be required at each
of its refineries as a result of the Tier II standards. Based on preliminary
estimates, we believe that the new Tier II specifications will require
approximately $270 million in capital expenditures for Valero's refineries to
comply, split evenly between expenditures to meet the gasoline standard and
expenditures to meet the distillate standard, but excluding the cost to install
hydrogen production facilities. Valero expects all modifications to be complete
by 2006.
DISRUPTION OF OUR ABILITY TO OBTAIN CRUDE OIL COULD ADVERSELY AFFECT OUR
OPERATIONS.
Over 70% of Valero's total crude oil feedstock requirements are purchased
through term crude oil feedstock contracts totaling approximately 605,000 BPD.
The remainder of our crude oil feedstock requirements are purchased on the spot
market. The term agreements include contracts to purchase feedstocks from
various foreign national companies and various domestic integrated oil
companies. In particular, a significant portion of our feedstock requirements
are satisfied through suppliers located in the Middle East, and we are,
therefore, subject to the political, geographic and economic risks attendant to
doing business with suppliers located in that area. In the event one or more of
our term contracts were terminated, it is possible that we would be unable to
find alternative sources of supply. If we are unable to obtain adequate crude
oil volumes or are only able to obtain such volumes at unfavorable prices, our
results of operations could be materially adversely affected, including as a
result of reduced sales volumes of refined products or reduced margins as a
result of higher crude oil costs.
COMPETITORS WHO PRODUCE THEIR OWN SUPPLY OF FEEDSTOCKS, WHO HAVE MORE EXTENSIVE
RETAIL OUTLETS OR WHO HAVE GREATER FINANCIAL RESOURCES MAY HAVE A COMPETITIVE
ADVANTAGE.
The refining and marketing industry is highly competitive with respect to
both feedstock supply and refined product markets. We compete with numerous
other companies for available supplies of crude oil and other feedstocks and for
outlets for our refined products. We do not produce any of our crude oil
feedstocks. Many of our competitors, however, obtain a significant portion of
their feedstocks from company-owned production and some have more extensive
retail outlets than the combined company is expected to have after the merger.
Competitors that have their own production or extensive retail outlets (and
brand-name recognition) are at times able to offset losses from refining
operations with profits from producing or retailing operations, and may be
better positioned to withstand periods of depressed refining margins or
feedstock shortages.
A number of our competitors also have materially greater financial and
other resources than we possess. Such competitors have a greater ability to bear
the economic risks inherent in all phases of the industry. In addition, we
compete with other industries that provide alternative means to satisfy the
energy and fuel requirements of our industrial, commercial and individual
consumers.
As a result of the proposed merger, Valero expects that it will be
increasing its presence in the California refining and marketing market at a
time when competition in the industry is increasing and new technology is making
refining more efficient. The addition of new refining and marketing companies to
the California market, as well as the addition of new retail product providers,
may increase the supply of
18
26
refined products available for sale in that state or increase competitive
pressure, or both, either of which could lead to lower prices and reduced
margins.
A SIGNIFICANT INTERRUPTION IN ONE OR MORE OF OUR REFINERIES COULD ADVERSELY
AFFECT OUR BUSINESS.
With the acquisition of UDS, our refining activities will be conducted at
thirteen major refineries in Texas, Louisiana, New Jersey, California, Oklahoma,
Colorado and Quebec. The refineries are expected to be the principal operating
assets of the combined company. As a result, our operations could be subject to
significant interruption if one or more of the refineries were to experience a
major accident, be damaged by severe weather or other natural disaster, or
otherwise be forced to shut down. If any refinery were to experience an
interruption in operations, earnings therefrom could be materially adversely
affected, including as a result of lost production and repair costs.
VALERO'S OPERATIONS EXPOSE IT TO MANY OPERATING RISKS, NOT ALL OF WHICH ARE
INSURED.
Valero's refining and marketing operations are subject to various hazards
common to the industry, including explosions, fires, toxic emissions, maritime
hazards, and uncontrollable flows of oil and gas. They are also subject to the
additional hazards of loss from severe weather conditions. As protection against
operating hazards, we maintain insurance coverage against some, but not all,
such potential losses. Losses could occur for uninsurable or uninsured risks or
in amounts in excess of our existing insurance coverage.
THE BANNING OF THE USE OF MTBE COULD ADVERSELY AFFECT VALERO.
The presence of MTBE in some water supplies in California and other states
due to gasoline leakage from underground and aboveground storage tanks,
automobile and tanker truck accidents, pipelines and certain other sources has
led to public concern that MTBE has contaminated drinking water supplies, and
thereby resulted in a possible health risk.
In 1999, the Governor of California ordered the ban of the use of MTBE as a
gasoline component by the end of 2002. The California Air Resources Board has
also finalized the specifications for CARB Phase III gasoline, which
specifications become effective at the end of 2002. Valero estimates that the
cost for permitting and modification of the Benicia refinery in order to comply
with CARB Phase III specifications and eliminate MTBE as a gasoline component is
approximately $20 million. In May 2000, Valero was served with a class action
complaint filed in the Southern District of New York. The complaint attempts to
certify a class action claim alleging that numerous gasoline suppliers,
including Valero, contaminated groundwater in the State of New York with MTBE.
In addition, numerous oil companies have been ordered by the Environmental
Protection Agency to help replace contaminated water supplies in California. It
is possible that we could be involved in this order in the future and that our
refineries could be involved in other future litigation or other proceedings
involving the environmental effects of MTBE. Heightened public awareness has
also resulted in other states and the EPA either passing or proposing
restrictions on, or banning the use of, MTBE. If MTBE were to be restricted or
banned throughout the U.S., we believe that modifying Valero's existing
MTBE-producing facilities, other than the Benicia refinery, to produce other
gasoline blendstocks or other petrochemicals would require a capital investment
of approximately $22 million. Because the volume of alternative products that
could be produced would be less than the current production of MTBE and the
price of such alternative products is currently lower than the price of MTBE,
Valero's results of operations could potentially be materially adversely
affected.
VALERO'S ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL AND MAY REQUIRE IT TO INCUR
ADDITIONAL FINANCING.
A substantial portion of our growth over the last several years has been
attributed to acquisitions. A principal component of our strategy going forward
is to continue to acquire assets or businesses that are
19
27
logical extensions of our existing assets or businesses in order to increase
cash flow and earnings. Our ability to achieve this goal will be dependent upon
a number of factors, including our ability to
- identify acceptable acquisition candidates,
- consummate acquisitions on favorable terms,
- successfully integrate acquired businesses and
- obtain financing to support our growth.
We may not be successful in implementing our acquisition strategy. In
addition, the financing of future acquisitions may require us to incur
additional indebtedness, which could limit our financial flexibility, or to
issue additional equity, which could result in further dilution of the ownership
interest of existing shareholders.
20
28
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus, including information incorporated
by reference in this document (see "Where You Can Find More Information"),
contains certain forward-looking statements with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of each of Valero and UDS, as well as certain information relating to
the merger, including, without limitation:
- statements relating to the synergies and accretion to reported earnings
estimated to result from the merger;
- statements with respect to various actions to be taken or requirements to
be met in connection with completing the merger or integrating Valero and
UDS after the merger;
- statements relating to revenue, income and operations of the combined
company after the merger; and
- statements preceded by, followed by or that include the words "believes,"
"expects," "anticipates," "estimates" or similar expressions.
These statements are subject to a number of factors and uncertainties that
could cause actual results to differ materially from those described in the
forward-looking statements. The following factors, among others, could cause
actual results to differ materially from those described in the forward-looking
statements:
- expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
- revenues following the merger may be lower than expected;
- changes may occur in the supply and demand for and the price of crude
oil, refined products or the other products or services provided or
consumed by our companies;
- costs or difficulties related to obtaining regulatory approvals for and
to completing the merger and, following the merger, to the integration of
the businesses of Valero and UDS, may be greater than expected;
- general economic conditions, either internationally or nationally or in
the jurisdictions in which Valero and UDS are doing business, may be less
favorable than expected;
- legislative or regulatory changes, including changes in environmental
regulation, may adversely affect the businesses in which Valero and UDS
are engaged;
- there may be environmental risks and liability under federal, state and
foreign environmental laws and regulations;
- changes may occur in the securities or capital markets; and
- other economic, business, competitive and/or regulatory factors may
affect Valero's and UDS's businesses generally as described in Valero's
and UDS's filings with the SEC.
21
29
VALERO SPECIAL MEETING
GENERAL
This document is first being mailed by Valero to the holders of Valero
common stock on or about August 27, and is accompanied by the notice of the
Valero special meeting and a form of proxy that is solicited by the Valero Board
of Directors for use at the Valero special meeting, to be held at Valero's
headquarters at One Valero Place, San Antonio, Texas 78212, on Thursday,
September 27, 2001, at 9:00 a.m., local time, and at any adjournments or
postponements of the Valero special meeting.
MATTERS TO BE CONSIDERED
The purpose of the Valero special meeting is:
(1) to consider and vote on a proposal to adopt the merger agreement;
(2) to consider and vote on a proposal to approve an amendment to
Valero's certificate of incorporation to increase the number of authorized
shares of Valero common stock from 150 million shares to 300 million
shares; and
(3) to consider any other matters that may properly come before the
Valero special meeting.
Valero stockholders also may be asked to vote upon a proposal to adjourn or
postpone the Valero special meeting. Valero could use any adjournment or
postponement of the Valero special meeting for the purpose, among others, of
allowing additional time for soliciting additional votes to adopt the merger
agreement or approve the increase in the number of authorized shares of Valero
common stock.
PROXIES
The Valero Board of Directors is soliciting your proxy to give you the
opportunity to vote at the Valero special meeting. When you deliver a valid
proxy, the shares represented by that proxy will be voted in accordance with
your instructions.
You may grant a proxy by:
(a) signing and mailing your proxy card;
(b) calling the toll-free telephone number shown on your proxy or
voting instruction card and following the recorded instructions; or
(c) transmitting your voting instructions over the Internet by going
to the address shown on your proxy or voting instruction card.
If you are a holder of record, or if your shares are held in street name and you
have a valid proxy from your broker, you also may cast your vote in person at
the meeting.
Mail
To grant your proxy by mail, please complete your proxy card, and sign,
date and return it in the enclosed, postage-paid envelope. To be valid, a
returned proxy card must be signed and dated. If you vote by telephone or the
Internet, do not mail back your proxy card.
22
30
Telephone
You may use the toll-free telephone number listed on your proxy card to
grant your proxy. You must have your proxy card ready and:
(a) dial the toll-free number;
(b) enter the control number located on your proxy card; and
(c) follow the recorded instructions.
Internet
You may transmit your voting instructions over the Internet by going to the
website address shown on your proxy card. You will be asked to enter the
six-digit control number you will find on your proxy card. Then follow the
instructions. (As with all Internet usage, the user must pay all access fees and
telephone charges).
In Person
If you attend the Valero special meeting in person, you may vote your
shares by ballot at the Valero special meeting if you are a holder of record, or
if your shares are held in street name and you have a valid proxy from your
broker.
You may revoke your proxy at any time prior to the closing of the polls at
the Valero special meeting by delivering to the Secretary of Valero a signed
notice of revocation or a later-dated signed proxy or by attending the Valero
special meeting and voting in person. Attendance at the Valero special meeting
will not in itself constitute the revocation of your proxy.
Written notices of revocation and other communications with respect to the
revocation of Valero proxies should be addressed to Valero Energy Corporation,
One Valero Place, San Antonio, Texas 78212, Attention: Corporate Secretary. All
shares represented by valid proxies received pursuant to this solicitation, and
not revoked before they are exercised, will be voted in the manner specified in
the proxies.
IF YOU MAKE NO SPECIFICATION ON YOUR PROXY, YOUR PROXY WILL BE VOTED IN
FAVOR OF THE ADOPTION OF THE MERGER AGREEMENT AND IN FAVOR OF THE APPROVAL OF
THE AMENDMENT TO VALERO'S CERTIFICATE OF INCORPORATION.
The Valero Board of Directors currently is unaware of any matters, other
than the matters we have described in this document, that may be presented for
action at the Valero special meeting. If other matters do properly come before
the Valero special meeting, however, it is intended that shares represented by
proxies will be voted, or not voted, by the individuals named in the proxies in
their discretion. No proxy that is voted against adoption of the merger
agreement or approval of the amendment to the Valero certificate of
incorporation will be voted in favor of any adjournment or postponement of the
Valero special meeting for the purpose of soliciting additional proxies for such
adoption or approval, as the case may be.
Participants in the Valero Thrift Plan
If you participate in the Valero Thrift Plan, your proxy card will
represent (in addition to any shares you held individually of record on the
record date) the number of shares allocated to your account under the Thrift
Plan. For those shares held under the Thrift Plan, the proxy card will
constitute an instruction to the Trustee of the Thrift Plan as to how those
shares are to be voted. Shares for which instructions are not received may be
voted by the Trustee in accordance with the terms of the Thrift Plan.
SOLICITATION OF PROXIES
Valero will bear the entire cost of soliciting proxies from Valero
stockholders, except that Valero and UDS each has agreed to pay one-half the
costs of filing, printing and mailing this joint proxy statement/ prospectus and
related proxy materials. In addition to the solicitation of proxies by mail,
Valero will
23
31
request that banks, brokers and other record holders send proxies and proxy
materials to the beneficial owners of Valero common stock held by them and
secure their voting instructions if necessary. Valero will reimburse those
record holders for their reasonable expenses in so doing. Valero has also made
arrangements with Georgeson Shareholder Communications, Inc. to assist it in
soliciting proxies, and has agreed to pay customary fees plus expenses for those
services. Valero also may use several of its regular employees, who will not be
specially compensated, to solicit proxies from Valero stockholders, either
personally or by telephone, telegram, facsimile or special delivery letter.
RECORD DATE AND VOTING RIGHTS
In accordance with the provisions of Delaware law, Valero's bylaws and the
rules of the New York Stock Exchange, Valero has fixed August 13, 2001, as the
record date for determining those Valero stockholders entitled to notice of and
to vote at the Valero special meeting. Accordingly, only Valero stockholders of
record at the close of business on the record date will be entitled to notice of
and to vote at the Valero special meeting. At the close of business on the
record date, there were 60,691,331 shares of Valero common stock outstanding
held by 4,835 holders of record. The presence, in person or by proxy, of a
majority of shares of Valero common stock outstanding and entitled to vote on
the record date is necessary to constitute a quorum at the Valero special
meeting. Each share of Valero common stock outstanding on the record date
entitles its holder to one vote.
Shares of Valero common stock held by persons attending the Valero special
meeting but not voting, and shares of Valero common stock for which Valero has
received proxies but with respect to which holders of those shares have
abstained from voting, will be counted as present at the Valero special meeting
for purposes of determining the presence or absence of a quorum for the
transaction of business at the Valero special meeting, but will have the same
effect as votes cast at the Valero special meeting against adoption of the
merger agreement or approval of the amendment of Valero's certificate of
incorporation. Brokers that hold shares of Valero common stock in nominee or
street name for customers who are the beneficial owners of those shares are
prohibited from giving a proxy to vote shares held for those customers on the
matters to be considered and voted upon at the Valero special meeting without
specific instructions from those customers. These "broker non-votes" will be
counted for purposes of determining whether a quorum exists.
Under applicable Delaware law, Valero's certificate of incorporation and
Valero's bylaws, adoption of the merger agreement and approval of the amendment
to Valero's certificate of incorporation each requires the affirmative vote of
the holders of a majority of the shares of Valero common stock outstanding and
entitled to vote. Because adoption of each of these proposals requires the
affirmative vote of a majority of the shares of Valero common stock outstanding
and entitled to vote thereon, abstentions and broker non-votes have the same
effect as a vote against adoption of the merger agreement or approval of the
amendment of the certificate of incorporation, as the case may be.
THE VALERO BOARD OF DIRECTORS URGES VALERO STOCKHOLDERS TO COMPLETE, DATE
AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE, TRANSMIT YOUR VOTING INSTRUCTIONS OVER THE INTERNET OR BY
TELEPHONE.
As of the Valero record date, directors and executive officers of Valero
beneficially owned 4,201,658 shares of Valero common stock (including shares
held in Valero thrift plans and 2,974,521 shares subject to Valero stock options
exercisable within 60 days). As of the Valero record date, shares held by
directors and executive officers of Valero entitle them to exercise
approximately 2 percent of the voting power of the Valero common stock entitled
to vote at the Valero special meeting. As of the Valero record date, directors
and executive officers of UDS owned less than 1% of the outstanding shares of
Valero common stock.
Additional information with respect to beneficial ownership of Valero
common stock by directors and executive officers of Valero is incorporated by
reference to Valero's Annual Report on Form 10-K for the year ended December 31,
2000. See "Where You Can Find More Information" on page 109.
24
32
RECOMMENDATION OF THE VALERO BOARD OF DIRECTORS
The Valero Board of Directors has unanimously declared the merger agreement
to be advisable and approved and adopted the merger agreement and the merger.
The Valero Board of Directors believes that the merger agreement is fair to and
in the best interests of Valero and Valero stockholders, and unanimously
recommends that Valero stockholders vote "FOR" adoption of the merger agreement
and "FOR" approval of the amendment to Valero's certificate of incorporation.
See "The Merger -- Recommendation of the Valero Board of Directors; Valero's
Reasons for the Merger."
UDS SPECIAL MEETING
GENERAL
This document is first being mailed by UDS to the holders of UDS common
stock on or about August 27, 2001, and is accompanied by the notice of the UDS
special meeting and a form of proxy that is solicited by the UDS Board of
Directors for use at the UDS special meeting, to be held on Thursday, September
27, 2001, at 9:00 a.m., local time, at UDS corporate headquarters, 6000 North
Loop 1604 West, San Antonio, Texas 78249-1112, and at any adjournments or
postponements of the UDS special meeting.
MATTERS TO BE CONSIDERED
The purpose of the UDS special meeting is to adopt the merger agreement,
and to consider any other matters that may properly come before the UDS special
meeting.
UDS stockholders also may be asked to vote upon a proposal to adjourn or
postpone the UDS special meeting. UDS could use any adjournment or postponement
of the UDS special meeting for the purpose, among others, of allowing additional
time for soliciting additional votes to adopt the merger agreement.
PROXIES
The UDS Board of Directors is soliciting your proxy to give you the
opportunity to vote at the UDS special meeting. When you deliver a valid proxy,
the shares represented by that proxy will be voted in accordance with your
instructions.
You may grant a proxy by:
(a) signing and mailing your proxy card; or
(b) transmitting your voting instructions over the Internet by going
to the address: www.proxyvote.com.
If you are a holder of record, or if your shares are held in street name and you
have a valid proxy from your broker, you also may cast your vote in person at
the meeting.
Mail
To grant your proxy by mail, please complete your proxy card, and sign,
date and return it in the enclosed, postage-paid envelope. To be valid, a
returned proxy card must be signed and dated.
Internet
You may transmit your voting instructions over the Internet by going to the
address: www.proxyvote.com. You will be asked to enter the control number you
will find on your proxy card. Then follow the instructions. You may also
indicate if you would like to receive future proxy materials through the
Internet. (As with all Internet usage, the user must pay all access fees and
telephone charges).
25
33
In Person
If you attend the UDS special meeting in person, you may vote your shares
by ballot at the UDS special meeting if you are a holder of record, or if your
shares are held in street name and you have a valid proxy from your broker.
You may revoke your proxy at any time prior to the closing of the polls at
the UDS special meeting by delivering to the Corporate Secretary of UDS a signed
notice of revocation or a later-dated signed proxy or by attending the UDS
special meeting and voting in person. Attendance at the UDS special meeting will
not in itself constitute the revocation of a proxy.
Written notices of revocation and other communications with respect to the
revocation of UDS proxies should be addressed to Ultramar Diamond Shamrock
Corporation, 6000 North Loop 1604 West, San Antonio, Texas 78249, Attention:
Corporate Secretary. All shares represented by valid proxies received pursuant
to this solicitation, and not revoked before they are exercised, will be voted
in the manner specified in the proxies.
IF YOU MAKE NO SPECIFICATION ON YOUR PROXY CARD, YOUR PROXY WILL BE VOTED
IN FAVOR OF THE ADOPTION OF THE MERGER AGREEMENT.
The UDS Board of Directors currently is unaware of any other matters that
may be presented for action at the UDS special meeting. If other matters do
properly come before the UDS special meeting, however, it is intended that the
shares represented by proxies will be voted, or not voted, by the individuals
named in the proxies in their discretion. No proxy that is voted against
adoption of the merger agreement will be voted in favor of any adjournment or
postponement of the UDS special meeting for the purpose of soliciting additional
proxies.
Participants in the UDS 401(k) Retirement Savings Plan and UDS Grantor Trust
Stock Ownership Program
If you participate in the UDS 401(k) Retirement Savings Plan or the UDS
Grantor Trust Stock Ownership Program, you will receive a separate proxy card
(in addition to a proxy card with respect to any shares you held individually of
record on the record date) with respect to the number of shares allocated to
your accounts under such plans. For those shares, your proxy card will
constitute an instruction to the applicable trustee of such plan as to how your
shares are to be voted. Shares for which instructions are not received may be
voted by the applicable trustee of the plan in accordance with the terms of the
plan.
SOLICITATION OF PROXIES
UDS will bear the entire cost of soliciting proxies from UDS stockholders,
except that Valero and UDS each has agreed to pay one-half the costs of filing,
printing and mailing this joint proxy statement/ prospectus and related proxy
materials. In addition to the solicitation of proxies by mail, UDS will request
that banks, brokers and other record holders send proxies and proxy materials to
the beneficial owners of UDS common stock held by them and secure their voting
instructions if necessary. UDS will reimburse those record holders for their
reasonable expenses in so doing. UDS has also made arrangements with Morrow &
Co., Inc. to assist it in soliciting proxies, and has agreed to pay customary
fees plus expenses for those services. UDS also may use several of its regular
employees, who will not be specially compensated, to solicit proxies from UDS
stockholders, either personally or by telephone, telegram, facsimile, Internet
or special delivery letter.
RECORD DATE AND VOTING RIGHTS
In accordance with the provisions of Delaware law, UDS's bylaws and the
rules of the New York Stock Exchange, UDS has fixed August 13, 2001, as the
record date for determining those UDS stockholders entitled to notice of and to
vote at the UDS special meeting. Accordingly, only UDS stockholders of record at
the close of business on the UDS record date will be entitled to notice of and
to vote at the UDS special meeting. At the close of business on the UDS record
date, there were
26
34
73,742,425 shares of UDS common stock outstanding held by 8,270 holders of
record. The presence, in person or by proxy, of shares of UDS common stock
representing a majority of UDS shares outstanding and entitled to vote on the
UDS record date is necessary to constitute a quorum at the UDS special meeting.
Each share of UDS common stock outstanding on the UDS record date entitles its
holder to one vote.
Shares of UDS common stock held by persons attending the UDS special
meeting but not voting, and shares of UDS common stock for which UDS has
received proxies but with respect to which holders of those shares have
abstained from voting, will be counted as present at the UDS special meeting for
purposes of determining the presence or absence of a quorum for the transaction
of business at the UDS special meeting, but will have the same effect as votes
against adoption of the merger agreement. Brokers that hold shares of UDS common
stock in nominee or street name for customers who are the beneficial owners of
those shares are prohibited from giving a proxy to vote shares held for those
customers on the matters to be considered and voted upon at the UDS special
meeting without specific instructions from those customers. These so-called
broker non-votes will be counted for purposes of determining whether a quorum
exists and will not be voted at the UDS special meeting.
Under applicable Delaware law and UDS's certificate of incorporation and
bylaws, the adoption of the merger agreement requires the affirmative vote of
the holders of a majority of the outstanding shares of UDS common stock entitled
to vote at the UDS special meeting. Because adoption of the merger agreement
requires the affirmative vote of the holders of a majority of the outstanding
shares of UDS common stock entitled to vote at the UDS special meeting,
abstentions and broker non-votes will have the same effect as votes against
adoption of the merger agreement.
THE UDS BOARD OF DIRECTORS URGES UDS STOCKHOLDERS TO COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE OR TRANSMIT YOUR VOTING INSTRUCTIONS OVER THE INTERNET.
As of the UDS record date, directors and executive officers of UDS
beneficially owned 2,516,101 shares of UDS common stock (including shares held
in UDS employee savings plans and 1,758,473 shares subject to UDS stock options
exercisable within 60 days). As of the UDS record date, shares held by directors
and executive officers of UDS entitle them to exercise approximately 1% of the
voting power of UDS common stock entitled to vote at the UDS special meeting. As
of the UDS record date, directors and executive officers of Valero owned less
than 1% of the outstanding shares of UDS common stock. Additional information
with respect to beneficial ownership of UDS common stock by directors and
executive officers of UDS is incorporated by reference to UDS's Annual Report on
Form 10-K for the year ended December 31, 2000. See "Where You Can Find More
Information."
RECOMMENDATION OF THE UDS BOARD OF DIRECTORS
The UDS Board of Directors has unanimously adopted the merger agreement and
approved the merger. The UDS Board of Directors believes that the merger
agreement and the merger are fair to and in the best interests of UDS and UDS
stockholders, and unanimously recommends that UDS stockholders vote "FOR"
adoption of the merger agreement. In considering the recommendation of the UDS
Board of Directors, you should be aware that certain directors and officers of
UDS have interests in the merger that are different from, or in addition to, the
interests of UDS stockholders as stockholders. Please see "The
Merger -- Interests of Certain Persons in the Merger" beginning at page 58. See
"The Merger -- Recommendation of the UDS Board of Directors; UDS's Reasons for
the Merger."
27
35
THE MERGER
GENERAL
Each of the Valero Board of Directors and the UDS Board of Directors has
approved and adopted the merger agreement and the merger. As a result of the
merger, UDS will merge with and into Valero, with Valero the surviving
corporation in the merger, and UDS stockholders will receive for each share of
UDS common stock they hold cash, Valero common stock or a combination thereof
with a value equal to the sum of $27.50 and 0.614 shares of Valero common stock
(based on the average Valero common stock price over a ten trading-day period
ending three days prior to completing the merger). Each share of Valero common
stock issued in the merger will include a right under the Valero shareholder
rights plan. See "Description of Valero Capital Stock -- Valero Rights Plan."
Shares of Valero common stock outstanding immediately before we complete the
merger will remain outstanding and will not be changed as a result of the
merger.
BACKGROUND OF THE MERGER
At each of our companies, the Board of Directors and management have
periodically had internal discussions regarding the evolving environment in
which our respective company conducts business and strategic options that may be
potentially available to enhance our company's competitive position and to
enhance stockholder value. These discussions have included, among other things,
exploratory analyses of various potential acquisition or business combination
transactions, including possible transactions with each other. In addition,
representatives of Valero and UDS have, from time to time including in the fall
of 2000, informally discussed the potential merits of a combination of the two
companies, although none of these discussions progressed to the point of
specific negotiations about the terms of a possible transaction or conducting
formal due diligence investigations.
Since the merger of Ultramar Corporation and Diamond Shamrock, Inc. in
1996, UDS has pursued various potential asset acquisitions, including the
acquisition of the Benicia refinery and retail assets of ExxonMobil and a joint
venture involving the refining, marketing and transportation assets of Phillips
Petroleum, which led to the signing of a letter of intent in 1998 that was later
terminated in 1999. In addition, UDS has engaged in exploratory discussions from
time to time with several refining and marketing companies about the potential
merits of a business combination transaction, although none of these discussions
resulted in a formal proposal regarding the terms of a possible transaction. The
UDS Board of Directors believed that it was important for UDS to carefully
consider the options available for participating in the consolidation of the
refining and marketing industry for the reasons stated in "-- Recommendation of
the UDS Board of Directors; UDS's Reasons for the Merger."
In mid-April, 2001, UDS's chief financial officer, Robert Shapard, had
dinner with a representative of Morgan Stanley at which the possibility of a
business combination between Valero and UDS was discussed, and Mr. Shapard later
requested that Morgan Stanley inquire into the possibility of a meeting between
William E. Greehey, Chairman and Chief Executive Officer of Valero, and Jean R.
Gaulin, Chairman and Chief Executive Officer of UDS. Following this meeting,
executives of UDS and Valero and their investment bankers, Banc of America
Securities and Morgan Stanley, respectively, had discussions concerning the
potential merits of a combination of Valero and UDS. On April 23, 2001, Mr.
Gaulin and Mr. Greehey, along with other senior executives from Valero and UDS,
met to discuss a potential business combination of Valero and UDS. Following
this meeting, Mr. Greehey and Mr. Gaulin determined that a merger of Valero and
UDS appeared to have potential merit and that further discussions between the
companies about this possibility would be appropriate. Subsequently,
representatives of Valero and UDS met to discuss the two companies, the
potential strategic and operational fit between them and the possible terms of a
business combination. Although no agreement was reached at the time, Valero
indicated that it was considering a 20-30% premium to the then-current trading
range for UDS common stock, depending on the outcome of the negotiations and due
diligence, with UDS responding that it would require a premium at the upper end
of that range, assuming satisfactory completion of a due diligence review of
Valero.
28
36
On April 23, 2001, representatives of the companies met and determined
that, based on their prior discussions, a merger of Valero and UDS would likely
have strategic benefits and the potential to enhance stockholder value, and
determined to commence mutual due diligence investigations and negotiations
regarding the terms of a potential merger. Also on this date, Valero and UDS
entered into a mutual confidentiality agreement. On April 24, 2001, Valero and
Morgan Stanley entered into a letter of agreement setting forth the terms of
Morgan Stanley's engagement.
During the following period, representatives of Valero and UDS conducted
due diligence investigations of each other and engaged in negotiations regarding
the terms of a merger agreement. On April 26, 2001, Valero and UDS preliminarily
determined that the transaction would take the form of a part-stock, part-cash
merger in which Valero would issue aggregate consideration equating to $55 per
share in cash for half of the outstanding shares of UDS common stock and 1.228
shares of Valero common stock per UDS share for the other half of the
outstanding shares of UDS common stock, which represented a premium of
approximately 30% to the average UDS price from April 13, 2001 to April 26,
2001, consistent with the level of consideration UDS had earlier indicated it
would require. Valero and UDS also discussed the other key terms of an
agreement, including appropriate transaction protection provisions and
representation of UDS directors on the board of directors of the combined
company.
On April 30, 2001, the Valero Board of Directors held a special meeting at
which Valero management, together with representatives of Wachtell, Lipton,
Rosen & Katz and Morgan Stanley, reviewed the status of negotiations with UDS
and the preliminary proposed terms of the merger and reviewed in detail the
strategic rationale for the transaction, the anticipated financial impact of the
merger based on the preliminary analysis of each party and the anticipated
timetable and milestones for completing a transaction. Following questions
regarding the presentations and discussion among the members of the Valero Board
of Directors, the Board authorized Valero's management to continue discussions
with UDS and to negotiate a definitive agreement with respect to a merger of
Valero and UDS.
On April 30 and May 1, 2001, the UDS Board of Directors held a meeting at
which UDS management, together with representatives of Jones, Day, Reavis &
Pogue and Banc of America Securities, reviewed the status of negotiations with
Valero and the preliminary proposed terms of the merger. UDS management and its
financial advisor reviewed the strategic rationale for the transaction, the
strategic alternatives available to UDS separately and if it were to combine
with Valero, the anticipated financial impact of the merger and the anticipated
timetable and milestones for completing a transaction. Jones Day reviewed the
duties of directors in considering a possible business combination transaction.
Following questions regarding the presentations and discussion among the members
of the UDS Board of Directors, the Board authorized UDS's management to continue
discussions with Valero and to negotiate a definitive agreement with respect to
a merger of UDS and Valero.
During the period that followed, mutual due diligence investigations
continued and management of Valero and UDS and their respective legal counsel
commenced drafting and negotiating the terms of a definitive merger agreement,
including discussions concerning the ability of UDS stockholders to elect the
form of consideration they would receive in the merger (subject to the 50/50
aggregate mix of stock and cash). On May 2, 2001 Valero formally engaged Credit
Suisse First Boston for the purpose of rendering a fairness opinion to the
Valero Board of Directors in connection with the proposed transaction. Valero
decided to engage both Morgan Stanley and Credit Suisse First Boston as its
financial advisors in connection with the merger based on Valero's historical
relationship with these firms.
On the morning of May 4, 2001, the Valero Board of Directors held a special
meeting in San Antonio, Texas, at which senior management and advisors of Valero
reviewed their discussions and negotiations with UDS regarding a merger, as well
as the results of their due diligence investigation of UDS. Senior management
reviewed with the Valero Board of Directors detailed information with respect to
UDS, Valero and the proposed transaction. Morgan Stanley and Credit Suisse First
Boston each made a presentation to the Valero Board of Directors about financial
matters with respect to the proposed transaction and delivered their opinions
that the merger consideration to be paid by Valero pursuant to the
29
37
merger agreement was fair, from a financial point of view, to Valero. Wachtell,
Lipton, Rosen & Katz, Valero's legal counsel, reviewed with the Valero Board of
Directors its duties under Delaware law in connection with its consideration of
the proposed merger agreement, the terms of the proposed merger agreement and
the actions necessary to approve the transaction. Following questions regarding
the presentations and discussion among the directors, the Valero Board of
Directors unanimously resolved to approve and adopt the merger agreement and the
merger.
At the close of business on May 4, 2001, the last trading day before the
public announcement of the proposed merger, the closing price per share of UDS
common stock was $42.75 and the closing price per share of Valero common stock
was $45.60. The aggregate consideration of $55.50 per share based on this Valero
closing price represents a 29.8% premium to the UDS closing price on May 4,
2001.
On the morning of May 5, 2001, the UDS Board of Directors held a special
meeting at which senior management and advisors of UDS reviewed their
discussions and negotiations with Valero regarding a merger and the principal
terms of the draft merger agreement. Senior management and UDS's financial
advisor, Banc of America Securities, reviewed with the UDS Board of Directors
detailed financial information with respect to Valero, UDS and the potential
transaction. Senior management also reviewed the matters related to the
transaction in which certain directors or senior management had an interest
which could be said to be different from or in addition to the interests of UDS
stockholders in general. Banc of America Securities delivered its oral opinion,
which opinion was subsequently confirmed by delivery of a written opinion, to
the UDS Board of Directors that, as of such date, and based on and subject to
the limitations and considerations stated therein, the consideration in the
merger was fair, from a financial point of view, to UDS stockholders. Jones Day,
counsel to UDS, reviewed with the UDS Board of Directors its duties under
Delaware law in connection with its consideration of the proposed merger
agreement, the terms of the proposed merger agreement and the actions necessary
to approve the transaction. Following questions regarding the presentations and
discussion among the directors, the UDS Board of Directors unanimously resolved
to approve and adopt the merger agreement and the merger.
Thereafter, representatives of Valero and UDS resolved final technical
drafting points in the merger agreement, including updating cross-references,
obtaining final updated information for certain representations and warranties
and finalizing disclosure schedules. The merger agreement was executed by Valero
and UDS effective May 6, 2001 and the transaction was publicly announced on the
morning of Monday, May 7, 2001.
RECOMMENDATION OF THE VALERO BOARD OF DIRECTORS; VALERO'S REASONS FOR THE MERGER
The Valero Board of Directors believes that the merger is fair to and in
the best interests of Valero and Valero stockholders, has unanimously approved
and adopted the merger agreement and declared it to be advisable and unanimously
recommends that Valero stockholders vote "FOR" adoption of the merger agreement.
In reaching its decision, the Valero Board of Directors consulted with
Valero's management and its financial and legal advisors, and considered a
variety of factors, including the following factors:
- The Valero Board's familiarity with and review of conditions in the
refining and marketing industry and Valero's business, operations,
financial condition, earnings and prospects.
- The anticipated effectiveness of the merger in implementing and
accelerating Valero's strategy to be a leading refiner and marketer and
undertake favorable-return projects to grow its business.
- The business, operations, financial condition, earnings and prospects of
Valero and UDS, taking into account the results of Valero's due diligence
review of UDS.
- The scale, scope and strength of the combined company, including that it
is expected to be the leading independent U.S. refining and marketing
company, and the potential greater access to capital and greater
liquidity of the combined company's common stock.
30
38
- The expectation that the combined company's earnings would exhibit less
cyclicality relative to Valero on a stand-alone basis as a result of
greater asset diversification, including through UDS's extensive retail
operations.
- The anticipated financial impact of the proposed transaction on the
combined company's financial performance, including the anticipated
immediately accretive impact on the combined company's earnings per share
and the resulting company's capital structure.
- The expectation that the merger would result in synergies for the
combined company's operations. The Valero Board noted that, although no
assurances could be given that any particular level of cost synergies
will be achieved, the managements of Valero and UDS had identified
potential pretax synergies, when fully phased in, of approximately $240
million annually (see "-- Management and Operations Following the
Merger").
- The complementary nature of the businesses and geographical footprints of
Valero and UDS, including the expectation that UDS's west coast refining
operations would strengthen and make more efficient the combined
company's west coast operations, that UDS's mid-continent and eastern
Canada refineries would complement Valero's existing Gulf Coast and East
Coast operations and that the contribution of UDS's significant retail
business to the refining operations of the combined company would help to
improve earnings stability as refining margins change.
- The Board's belief and that of Valero's senior management that Valero and
UDS share a compatible business culture and a common vision as to the
importance of delivering financial performance and stockholder value and
that the management and employees of Valero and UDS possess complementary
skills and expertise.
- The structure of the merger and the financial and other terms of the
merger agreement, including the fact that Valero would be the surviving
company in the merger and the half-cash, half-stock consideration to be
paid in the merger, which the Valero Board of Directors viewed as
appropriately balancing Valero's desire for an accretive transaction with
acceptable pro forma debt-to-total capitalization.
- The anticipated tax treatment of the merger, which the Valero Board of
Directors viewed as advantageous in that the merger would be tax-free to
Valero and generally to UDS stockholders to the extent they receive
Valero common stock in the merger, subject to the possibility that Valero
would be required to issue more stock and pay less cash if necessary to
maintain the tax-free treatment of the merger; see "The Merger
Agreement -- Consideration To Be Received in the Merger" and "-- Material
U.S. Federal Income Tax Consequences."
- The anticipated management of the combined company, including that the
board of directors of the combined company would initially consist of
four members of the UDS Board and nine members of the Valero Board.
- The expected impact of the merger under employment agreements, benefit
plans and other compensatory arrangements of the companies; in
particular, the Valero Board of Directors noted that, as to Valero
employees, the merger was not expected to trigger any "change of control"
provisions of any benefit or compensation plans or agreements and that,
as to UDS employees, the merger would be expected to result in payments
and benefits being paid or potentially becoming payable; see
"-- Interests of Certain Persons in the Merger."
- The regulatory approvals that would be required in order to complete the
merger.
- The opinions of Morgan Stanley and Credit Suisse First Boston that, as of
the date of and based on and subject to the matters described in the
opinions, the merger consideration to be paid by Valero pursuant to the
merger agreement was fair from a financial point of view to Valero, and
the materials and analyses provided by Morgan Stanley and Credit Suisse
First Boston in connection with those opinions. See "-- Opinion of
Valero's Financial Advisors." The Valero Board of Directors considered
the opinions and analyses of each of Morgan Stanley and Credit Suisse
First
31
39
Boston in their entirety and determined that, overall, these opinions and
analyses supported a determination to enter into the merger agreement,
notwithstanding that any individual analysis described under "-- Opinion of
Valero's Financial Advisors", such as the "Comparable Companies Analysis"
performed by CSFB, may have implied a valuation range for UDS that was
lower than the value of the merger consideration based on the Valero stock
price as of the date the Valero Board of Directors met to consider the
merger.
The Valero Board of Directors generally considered these to be factors
supporting a decision to enter into the merger agreement. The Valero Board of
Directors also considered the factors described under "Risk Factors" on page 16.
The Valero Board of Directors generally considered these factors to be risks in
a decision to enter into the merger agreement. After considering these factors,
the Valero Board of Directors determined that the anticipated benefits of the
merger were expected to outweigh the anticipated risks.
The foregoing discussion of the information and factors considered by the
Valero Board of Directors is not exhaustive but does include the material
factors considered by the Valero Board of Directors. The Valero Board of
Directors did not quantify or assign any relative or specific weights to the
various factors that it considered. Rather, the Valero Board of Directors based
its recommendation on the totality of the information presented to and
considered by it. In addition, individual members of the Valero Board of
Directors may have given differing weights to different factors.
THE VALERO BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT VALERO
STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.
RECOMMENDATION OF THE UDS BOARD OF DIRECTORS; UDS'S REASONS FOR THE MERGER
The UDS Board of Directors believes that the merger is fair to and in the
best interests of UDS and UDS stockholders, has unanimously approved and adopted
the merger agreement and declared it to be advisable and unanimously recommends
that UDS stockholders vote "FOR" adoption of the merger agreement. In
considering the recommendation of the UDS Board of Directors, you should be
aware that certain directors and officers of UDS have interests in the merger
that are different from, or in addition to, the interests of UDS stockholders as
stockholders. Please see "-- Interests of Certain Persons in the Merger"
beginning at page 58.
In reaching its decision, the UDS Board of Directors consulted with UDS's
management and its financial and legal advisors, and considered a variety of
factors, including the following:
- The per share merger consideration in relation to historical and market
trading prices for UDS common stock and the fact that the merger
consideration represents a premium of approximately 30% based on the
closing sales price for the UDS common stock prior to the announcement of
the signing of the merger agreement.
- The fact that the merger consideration offers UDS stockholders both the
opportunity to participate in the growth and opportunities of the
combined company through the stock component and to realize cash for the
value of their shares through the cash component.
- The UDS Board's familiarity with and review of conditions in the refining
and marketing industry and UDS's business, operations, financial
condition, earnings and prospects as an independent company, and its
Board's consideration of the trend of further consolidation in the
refining and marketing industry and the number of suitable strategic
partners for UDS.
- The UDS Board's consideration of UDS's strategic plan as an independent
company, the constraints on UDS's ability to pursue its strategic
objectives due to its present size, and the belief that UDS's ability to
pursue its plan would be enhanced by the merger.
- The anticipated effectiveness of the merger in implementing and
accelerating UDS's strategy to be a leading refiner and marketer.
32
40
- The increased scale, scope and financial strength of the combined
company, the potential greater liquidity of the combined company's common
stock and the increased access to capital to pursue other opportunities
and to undertake capital-intensive and high-return projects to grow the
combined company's business.
- The business, operations, financial condition, earnings and prospects of
UDS and Valero, taking into account the results of UDS's due diligence
review of Valero.
- The anticipated financial impact of the proposed transaction on the
combined company's financial performance, including the anticipated
immediately accretive impact on the combined company's earnings per share
and the resulting company's capital structure.
- The expectation that the merger would result in synergies for the
combined company's operations. The UDS Board noted that, although no
assurances could be given that any particular level of cost synergies
will be achieved, the managements of Valero and UDS had identified
potential pretax synergies, when fully phased in, of approximately $240
million annually (see "-- Management and Operations Following the
Merger").
- The complementary nature of the businesses and geographical footprints of
UDS and Valero, including the expectation that Valero's west coast
refining and retail operations would strengthen and make more efficient
the combined company's west coast operations, that Valero's Gulf Coast
and East Coast operations would complement UDS's mid-continent and
eastern Canada operations and that the contribution of Valero's
significant refining operations would improve UDS's earnings due to
recent improvements in refining margins.
- The Board's belief and that of UDS's senior management that UDS and
Valero share a compatible business culture and a common vision as to the
importance of delivering financial performance and stockholder value and
that the management and employees of UDS and Valero possess complementary
skills and expertise.
- The structure of the merger and the financial and other terms of the
merger agreement, including the ability of UDS stockholders to elect the
form of merger consideration, subject to the allocation procedures in the
merger agreement.
- The anticipated tax treatment of the merger, which the UDS Board of
Directors viewed as advantageous in that the merger would be tax-free to
the combined company and generally to UDS stockholders to the extent they
receive Valero common stock in the merger; see "The Merger
Agreement -- Consideration To Be Received in the Merger" and "-- Material
U.S. Federal Income Tax Consequences."
- That the board of directors of the combined company would initially
consist of four members of the UDS Board and nine members of the Valero
Board.
- The fact that Valero agreed to honor all UDS employment agreements,
benefit plans and other compensatory arrangements and, for a period of
time following the merger, agreed to provide benefits to all UDS
employees that are, in the aggregate, not less favorable to UDS employees
than the benefits currently provided by UDS.
- The regulatory approvals that would be required in order to complete the
merger.
- The opinion of Banc of America Securities that, as of the date of its
opinion, and based on and subject to the limitations and considerations
stated therein, the consideration provided for in the merger agreement
was fair, from a financial point of view, to UDS's stockholders and the
financial presentation of Banc of America Securities in connection with
that opinion. See "-- Opinion of UDS's Financial Advisor." The UDS Board
of Directors considered the opinion and analyses of Banc of America
Securities in their entirety and determined that, overall, the opinion
and analyses supported a determination to enter into the merger
agreement, notwithstanding that any individual analysis described under
"-- Opinion of UDS's Financial Advisor," such as the Contribution
33
41
Analysis, may have implied a valuation range for UDS that was greater than the
value of the merger consideration based on the Valero stock price as of the date
the UDS Board of Directors met to consider the merger.
The UDS Board of Directors generally considered these to be factors
supporting a decision to enter into the merger agreement. The UDS Board of
Directors also considered the factors described under "Risk Factors" on page 16.
The UDS Board of Directors generally considered these factors to be risks in a
decision to enter into the merger agreement. After considering these factors,
the UDS Board of Directors determined that the anticipated benefits of the
merger were expected to outweigh the anticipated risks.
The foregoing discussion of the information and factors considered by the
UDS Board of Directors is not exhaustive but does include the material factors
considered by the UDS Board of Directors. The UDS Board of Directors did not
quantify or assign any relative or specific weights to the various factors that
it considered. Rather, the UDS Board of Directors based its recommendation on
the totality of the information presented to and considered by it. In addition,
individual members of the UDS Board of Directors may have given differing
weights to different factors.
THE UDS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT UDS STOCKHOLDERS
VOTE "FOR" ADOPTION OF THE MERGER AGREEMENT.
FINANCIAL ESTIMATES OF VALERO AND UDS MANAGEMENT
In the descriptions of the opinions of Morgan Stanley and Credit Suisse
First Boston Corporation, Valero's financial advisors, that follow, we refer to
a "management scenario," or "estimates" provided by or discussed with
management. These references are to Valero management's estimates, as of May 4,
2001 and using refining margins implied by then-prevailing futures prices for
crude oil and gasoline, as follows:
VALERO UDS
------------------------------- -------------------------------
2001 2002 2001 2002
-------------- -------------- -------------- --------------
Net Income....................... $625.9 million $795.6 million $578.7 million $663.6 million
Earnings per share............... $ 9.73 $ 12.33 $ 7.86 $ 9.25
Cash flow per share.............. $ 15.43 $ 17.20 $ 14.84 $ 17.20
In the description of the opinion of Banc of America Securities, UDS's
financial advisor, that follows, we refer to projections of the management of
UDS and to projections of the management of Valero. These references, which in
the case of UDS, are to estimates of UDS's management, as of May 3, 2001, and
utilized refining margins implied by then-prevailing futures prices for crude
oil and gasoline and, in the case of Valero, are to estimates of Valero's
management, as described above and as adjusted by UDS's management to reflect
the gross refining margins utilized by UDS's management in developing the
projections for UDS, are as follows:
VALERO UDS
------------------------------- -------------------------------
2001 2002 2001 2002
-------------- -------------- -------------- --------------
Net Income....................... $661.5 million $893.9 million $782.2 million $547.5 million
Earnings per share............... $ 10.25 $ 13.83 $ 8.74 $ 8.68
EBITDA........................... $ 1.40 billion $ 1.78 billion $ 1.45 billion $ 1.38 billion
REFINING MARGINS ARE VOLATILE AND CHANGES CAN AFFECT FINANCIAL RESULTS FOR
VALERO AND UDS. THE ESTIMATES AND PROJECTIONS DESCRIBED ABOVE SPEAK ONLY AS OF
THE DATE MADE AND NOT AS OF ANY LATER DATE, AND WERE SUBJECTIVE IN MANY
RESPECTS, AND SUCH ESTIMATES AND PROJECTIONS ARE SUSCEPTIBLE TO INTERPRETATIONS
AND PERIODIC REVISION BASED ON ACTUAL EXPERIENCE AND BUSINESS AND ECONOMIC
DEVELOPMENTS. SEE "SUMMARY -- RECENT DEVELOPMENTS" ON PAGE 15, "RISK FACTORS"
BEGINNING AT PAGE 16 AND "CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING
STATEMENTS" ON PAGE 21.
34
42
OPINION OF VALERO'S FINANCIAL ADVISORS
Opinion of Morgan Stanley
Pursuant to an engagement letter dated April 24, 2001, Valero retained
Morgan Stanley to act as its financial advisor in connection with a possible
acquisition of UDS. Morgan Stanley was selected by the Valero Board of Directors
to act as Valero's financial advisor based on Morgan Stanley's qualifications,
expertise and reputation and its knowledge of the business and affairs of Valero
and of UDS. At the May 4, 2001 meeting of the Valero Board of Directors, Morgan
Stanley rendered to the Valero Board of Directors an oral opinion, which was
confirmed in writing as of May 4, 2001, to the effect that as of such date and
based upon and subject to the various considerations set forth in its opinion,
the merger consideration to be paid by Valero pursuant to the merger agreement
was fair from a financial point of view to Valero.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN STANLEY, DATED MAY 4, 2001,
IS ATTACHED TO THIS DOCUMENT AS APPENDIX B AND IS INCORPORATED INTO THIS
DOCUMENT BY REFERENCE. THIS OPINION SHOULD BE READ CAREFULLY AND IN ITS
ENTIRETY. MORGAN STANLEY'S OPINION IS DIRECTED TO THE VALERO BOARD OF DIRECTORS
AND ADDRESSES ONLY THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL
POINT OF VIEW TO VALERO AS OF ITS DATE. THE OPINION DOES NOT ADDRESS ANY OTHER
ASPECT OF THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY PERSON AS
TO HOW TO VOTE WITH RESPECT TO THE MERGER. THE SUMMARY OF THE OPINION OF MORGAN
STANLEY DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING THE
SUMMARY OF THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE SCOPE OF THE REVIEW UNDERTAKEN BY MORGAN STANLEY, WHICH
DESCRIBES EACH OF THE MATERIAL PROVISIONS OF THE OPINION, IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In connection with rendering its opinion, Morgan Stanley, among other
things:
- reviewed certain publicly available financial statements and other
information of Valero and UDS;
- reviewed certain internal financial statements and other financial and
operating data concerning Valero and UDS prepared by the managements of
Valero and UDS, respectively;
- reviewed certain financial projections of Valero and UDS prepared by the
managements of Valero and UDS, respectively;
- discussed the past and current operations and financial condition and the
prospects of Valero and UDS, including information relating to certain
strategic, financial and operational benefits anticipated from the
merger, with senior executives of Valero and UDS, respectively;
- reviewed the pro forma impact of the merger on Valero's present and
projected financial performance and other financial ratios;
- discussed potential strategic and operational benefits of the merger with
senior executives of Valero and UDS;
- reviewed the reported prices and trading activity for Valero common stock
and UDS common stock;
- compared the financial performance of Valero and UDS and the prices and
trading activity of Valero common stock and UDS common stock with those
of certain other comparable publicly traded companies and their
securities;
- reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
- participated in discussions and negotiations among representatives of
Valero and UDS and their financial and legal advisors;
35
43
- reviewed a draft of the merger agreement and certain related documents;
and
- considered such other factors and performed such other analysis as Morgan
Stanley deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by it for the purposes of its opinion. With respect to the financial
projections, including information relating to strategic, financial and
operational benefits anticipated from the merger, Morgan Stanley assumed that
they were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of Valero and UDS.
Morgan Stanley assumed that, in connection with the receipt of all necessary
regulatory approvals, no restrictions will be imposed that would have a material
adverse effect on the contemplated benefits expected to be derived in the
proposed merger.
In addition, Morgan Stanley assumed that the merger will be consummated in
accordance with the terms set forth in the merger agreement, including among
other things, that the merger will be treated as a tax-free reorganization
and/or exchange, each pursuant to the Internal Revenue Code of 1986, as amended.
Morgan Stanley did not make any independent valuation or appraisal of the assets
or liabilities of UDS, nor was it furnished with any such appraisals. Morgan
Stanley's opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of its opinion.
The following is a brief summary of the material analyses performed by
Morgan Stanley in connection with rendering its oral opinion to the Valero Board
of Directors and its written opinion letter dated May 4, 2001. The market price
information used by Morgan Stanley in its analyses was as of May 2, 2001. Some
of these summaries of financial analyses include information presented in
tabular format. In order to understand fully the financial analyses used by
Morgan Stanley, the tables must be read together with the text of each summary.
The tables alone do not constitute a complete description of the financial
analyses.
Historical Exchange Ratio Analysis. Morgan Stanley compared the daily
closing share price of UDS common stock to the corresponding price of Valero
common stock over various periods during a two-year period beginning May 2,
1999, and ending May 2, 2001, and reviewed and analyzed the historical exchange
ratios implied by these comparisons. The following table presents the implied
exchange ratios during the periods covered and as of May 2, 2001. The table also
presents, for each implied exchange ratio other than that as of May 2, 2001, the
premium implied to the implied exchange ratio as of May 2, 2001 by the implied
historical exchange ratios.
PREMIUM OF CURRENT IMPLIED EXCHANGE RATIO TO
HISTORICAL AVERAGE IMPLIED EXCHANGE RATIO
EXCHANGE RATIO
IMPLIED OVER IMPLIED
PERIOD ENDING ON MAY 2, 2001 EXCHANGE RATIO EXCHANGE RATIO
---------------------------- -------------- --------------
May 2, 2001.............................................. 0.950 --
Last 10 Days............................................. 0.939 -1.1%
Last 30 Days............................................. 0.974 2.5%
Last 60 Days............................................. 0.978 3.0%
Last 90 Days............................................. 0.937 -1.3%
One Year................................................. 0.871 -8.4%
Two Years................................................ 0.984 3.6%
No company used in the peer group comparison analysis is identical to UDS.
In evaluating the peer group, Morgan Stanley made judgments and assumptions with
regard to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of UDS. These
other matters include the impact of competition on the business of UDS and the
industry generally, industry growth and the absence of any adverse material
change in the financial
36
44
condition and prospects of UDS or in the industry or financial markets in
general. Mathematical analysis, such as determining the average or median, is
not in itself a meaningful method of using peer group data.
UDS Common Stock Trading Range Analysis. Morgan Stanley determined the
present value of the anticipated pro forma pre-tax synergies to be realized by
Valero following the merger, which for purposes of its analysis Morgan Stanley
assumed to be $150 million per year. Morgan Stanley then estimated the
capitalized value of these synergies using three methods, including discounted
present value analysis and applying a range of multiples deemed appropriate by
Morgan Stanley to earnings before interest, taxes, depreciation and
amortization, or EBITDA, and the price-to-earnings multiple for 2001. Morgan
Stanley assumed in its analyses 72.3 million outstanding shares of UDS common
stock on a fully diluted basis and a tax rate of 40%. Using this method, the
capitalized value of the anticipated merger synergies was estimated to range
from $10 to $14 per share of UDS common stock. Morgan Stanley then applied the
range of per share synergy values to the price of UDS common stock as of May 2,
2001 of $41.24, which yielded a resulting valuation range of $51.24 to $55.24
per share of UDS common stock. Morgan Stanley noted that the implied offer price
as of May 2, 2001 was $54.14 per share.
Equity Research Analyst Price Targets Analysis. Morgan Stanley performed a
net present value analysis of the 12-month price target estimates for UDS of
several published equity research analysts, which Morgan Stanley determined have
a mean value of $47.93. This present value was then adjusted for the capitalized
value of the anticipated pro forma synergies resulting from the merger as
described under "-- UDS Common Stock Trading Range Analysis." The resulting
valuation range computed by Morgan Stanley implied a value per share of UDS
common stock, incorporating synergies, of $57.93 to $61.93.
Component Asset Purchase Analysis. Morgan Stanley analyzed operational and
financial information for each of UDS's substantial assets to arrive at an
equity valuation for the entire UDS business. The valuations for each of UDS's
refining, marketing and other assets were implied from several different
methodologies, depending on the type of asset.
For the refining assets, Morgan Stanley used a complexity valuation
methodology (which takes into consideration the relative degree of processing
required to produce various output products from a given barrel of crude oil
input) based on publicly available information on UDS's refinery capacity and
complexity. Morgan Stanley applied multiples of cost per daily complexity barrel
implied from precedent refinery asset sales that share similar characteristics
with various UDS refineries to the product of the corresponding UDS refinery's
daily crude oil capacity and its complexity. The multiples used in this analysis
ranged from $125 to $450 per daily complexity barrel.
As an additional reference, Morgan Stanley also calculated the value of
UDS's refining assets using a replacement cost valuation methodology. In this
method, Morgan Stanley based its replacement cost estimate for each of UDS's
refining assets on a Solomon Associates replacement cost study. A valuation
percentage was then applied to this replacement cost estimate based on precedent
refinery asset sales that shared similar characteristics with the various UDS
refineries. The multiples used in this analysis ranged from 15% to 40% of
replacement cost.
For the marketing segment, Morgan Stanley used a valuation methodology
based on publicly available information on precedent sales involving service
stations. Morgan Stanley applied the average price per service station (which
based on such precedent sales ranged between $250,000-$600,000 per service
station) to the various categories of UDS-owned service stations.
The sum of these asset valuations implied an equity value, post adjustment
of net debt, for the entire UDS business. This resulting equity value was then
adjusted for 50% of the anticipated pro forma synergies to be realized by Valero
following the merger, as described under "-- UDS Common Stock Trading Range
Analysis." The resulting valuation range computed by Morgan Stanley implied a
valuation per share of UDS common stock of between $42.23 and $61.49.
Precedent Transactions Analysis. Morgan Stanley used publicly available
information to calculate multiples of selected financial data paid in several
precedent transactions and applied these multiples to comparable financial data
of UDS. The transactions reviewed included Tosco Corporation/Phillips
37
45
Petroleum Company, Holly Corporation/Giant Industries Inc., Total Fina/Ultramar
Diamond Shamrock Corporation, Basis Petroleum/Valero Energy Corporation, Unocal
Corporation/Tosco Corporation and Diamond Shamrock, Inc./Ultramar Corporation.
For the acquired corporation in each of these transactions, Morgan Stanley
calculated (a) EBITDA, (b) cash flow and (c) earnings, in each case realized or
projected during the applicable transaction year and following year, without
giving effect to the impact of the transaction. Morgan Stanley then calculated
the multiples of the amounts paid by the acquiror applicable in each precedent
transaction and compared these multiples (ranging from 5.8x to 10.8x realized
EBITDA, 4.3x to 7.5x projected EBITDA, 5.7x to 8.3x realized cash flows, 4.9x to
7.1x projected cash flows, 13.7x to 28.5x realized earnings and 9.6x to 20.7x
projected earnings) to the corresponding UDS statistic estimate based on
publicly available Morgan Stanley equity research and assuming the repurchase by
UDS of 17 million shares of UDS common stock for an aggregate of $620 million
pursuant to UDS's announced share repurchase program. Based on this comparison,
Morgan Stanley determined an indicative valuation range per share of UDS common
stock of $55.00 to $70.00.
No transaction used as a comparison in the precedent transactions analysis
is identical to the merger. In evaluating the precedent transactions, Morgan
Stanley made judgments and assumptions with regard to industry performance,
general business, economic, market, and financial conditions and other matters,
many of which are beyond the control of UDS. These other matters include the
impact of competition on UDS and the industry generally, industry growth and the
absence of any adverse material change in the financial condition and prospects
of UDS or in the industry or financial markets in general. Mathematical
analysis, such as determining the average or median, is not in itself a
meaningful method of using precedent transaction data. For three of the
precedent transactions, certain multiples of acquisition price to financial
measures or estimates were not used when the information for the period to which
the multiples related was not publicly available (the Giant Industries/Holly
Corporation transaction, where there were no public analysts' estimates for the
target company) or, in Morgan Stanley's judgment, extraordinary items or events
had occurred in historical periods that made the resulting multiples potentially
misleading or not meaningful (the UDS/Total Fina transaction, where there were
extraordinary non-cash charges in the period for the target company and the
Valero/Basis Petroleum transaction, where the target company experienced an
extraordinary loss for the period).
Premiums Paid for Public Targets. Morgan Stanley reviewed the associated
premiums to unaffected stock price (the stock price four weeks prior to the
earliest of the deal announcement, announcement of a competing bid and market
rumors) as prepared by Thomson Financial Securities Data with respect to
transactions in which the acquisition consideration was all stock, all cash or a
mix of stock and cash. The transactions examined included a number of public
acquisitions announced during the period commencing January 1, 1990 through
March 31, 2001. Based on the foregoing data, Morgan Stanley determined that a
premium range of 30% to 40% over the unaffected stock price to be appropriate.
Applying this premium range to the price of UDS common stock as of May 2, 2001
of $41.24, Morgan Stanley determined a valuation range of $53.61 to $57.74 per
share of UDS common stock.
Discounted Cash Flow Analysis. Morgan Stanley performed a discounted cash
flow analysis to determine an indicative range of present values per share of
UDS common stock, assuming UDS continued to operate as a standalone entity. This
range was determined by adding (a) the present value of the estimated future
unlevered free cash flows that UDS could generate over the four-year period from
2001 to 2005, and (b) the present value of UDS's "terminal value" at the end of
year 2005, and then adjusting these aggregate values to equity values by
subtracting net debt. To determine the unlevered free cash flows and the UDS
terminal value, Morgan Stanley used financial projections provided by UDS
management, adjusted to reflect Morgan Stanley's pricing assumptions. The UDS
"terminal value" at the end of the period was determined by applying a range of
multiples of estimated 12-month trailing EBITDA for 2005. Morgan Stanley used a
multiple range of 4x to 6x and a discount rate range to discount cash flows back
to present value, reflecting UDS's weighted average cost of capital, of 8% to
9%. Based on this analysis, Morgan Stanley estimated a valuation range per share
of UDS common stock of $45.37 to $71.63.
38
46
Pro Forma Earnings and Cash Flow Impact Analysis. Morgan Stanley analyzed
the pro forma effects of the merger and computed the resulting
accretion/dilution to Valero's projected earnings per share and cash flow per
share during 2001 and 2002, based on the merger consideration. Such computations
used earnings and cash flow projections for both Valero and UDS based on (a) a
scenario using publicly available Morgan Stanley equity research estimates, (b)
a management scenario using estimates provided by Valero's management, as
described under "-- Financial Estimates of Valero and UDS Management" and (c) a
"normalized case" in which earnings were calculated based on five-year
historical average prices for both feedstocks and products. In connection with
its pro forma analysis, Morgan Stanley assumed pre-tax synergies described under
"-- UDS Common Stock Trading Range Analysis," a 40% tax rate and an interest
rate of 8.0% on borrowings used to finance the merger. With respect to the pro
forma analysis of earnings per share, Morgan Stanley also assumed that goodwill
created as a result of the merger would not be amortized, in accordance with the
anticipated changes in applicable generally accepted accounting principles for
accounting for mergers. The analysis indicated that, whether or not anticipated
merger synergies were taken into account, the merger would be accretive to
Valero's earnings and cash flow per share under each of the Morgan Stanley
Equity Research scenario, the management scenario and the "normalized case."
In connection with the review of the merger by the Valero Board of
Directors, Morgan Stanley performed a variety of financial and comparative
analyses for purposes of its opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. In arriving at its opinion, Morgan Stanley considered the
results of all of its analyses as a whole and did not attribute any particular
weight to any analysis or factor considered by it. Furthermore, Morgan Stanley
believes that selecting any portion of its analyses, without considering all
analyses, would create an incomplete view of the process underlying its opinion.
In addition, Morgan Stanley may have given various analyses and factors more or
less weight than other analyses and factors, and may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to be Morgan Stanley's view of the actual value of Valero or UDS.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic condition and
other matters, many of which are beyond the control of UDS or Valero. Any
estimates contained in Morgan Stanley's analyses are not necessarily indicative
of future results or actual values, which may be significantly more or less
favorable than those suggested by such estimates. The analyses performed were
prepared solely as part of Morgan Stanley's analysis of the fairness to Valero,
from a financial point of view, of the merger consideration to be paid pursuant
to the merger agreement. The analyses do not purport to be appraisals or to
reflect the prices at which Valero common stock or UDS common stock might
actually trade. The merger consideration and other terms of the merger agreement
were determined through arm's-length negotiations between Valero and UDS and
were approved by the Valero Board of Directors. Morgan Stanley provided advice
to Valero during such negotiations. However, Morgan Stanley did not recommend
any specific consideration to Valero or that any specific consideration
constituted the only appropriate consideration for the merger.
Morgan Stanley's opinion was one of the many factors taken into
consideration by the Valero Board of Directors in making its determination to
approve the merger. Morgan Stanley's analyses summarized above should not be
viewed as determinative of the opinion of the Valero Board of Directors with
respect to the value of UDS or of whether the Valero Board of Directors would
have been willing to agree to a different amount or form of merger
consideration.
Morgan Stanley is an internationally recognized investment banking and
advisory firm. Morgan Stanley, as part of its investment banking and financial
advisory business, is continuously engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. In addition, Morgan Stanley is a full-service securities firm engaged
in securities trading, brokerage and financing activities. In the ordinary
course of Morgan Stanley's trading and brokerage activities, Morgan Stanley or
its affiliates may at any time hold long or
39
47
short positions, and may trade or otherwise effect transactions for its own
account or the accounts of customers, in debt or equity securities or senior
loans of Valero or UDS.
Pursuant to an engagement letter, Valero agreed to pay Morgan Stanley a fee
of $14 million, which is contingent upon the closing of the merger, and to pay
Morgan Stanley a fee of $2 million if the merger is not completed and a
termination fee is paid under the terms of the merger agreement. Valero also
agreed to reimburse Morgan Stanley for any reasonable expenses incurred in
connection with Morgan Stanley's engagement and to indemnify Morgan Stanley and
related parties against certain liabilities and expenses, including certain
liabilities under the federal securities laws, arising out of Morgan Stanley's
engagement. Valero further agreed to offer to retain Morgan Stanley if Valero
engages in specified financing transactions relating to the merger. In the past,
Morgan Stanley and its affiliates have provided financial advisory services to
UDS and Valero and have received aggregate fees from Valero of approximately
$5.7 million in 1999 and 2000 for the rendering of these services.
Opinion of Credit Suisse First Boston
Pursuant to an engagement letter dated May 2, 2001, Valero formally engaged
Credit Suisse First Boston to render its opinion on the fairness, from a
financial point of view, of the consideration to be paid by Valero in the
merger. At the May 4, 2001 meeting of Valero's Board of Directors, Credit Suisse
First Boston delivered its written opinion to Valero's Board of Directors to the
effect that, as of that date and based on and subject to the matters described
in its opinion, the consideration to be paid by Valero in the merger was fair
from a financial point of view to Valero.
THE FULL TEXT OF CREDIT SUISSE FIRST BOSTON'S WRITTEN OPINION, DATED MAY 4,
2001, TO VALERO'S BOARD OF DIRECTORS IS ATTACHED AS APPENDIX C AND IS
INCORPORATED BY REFERENCE INTO THIS JOINT PROXY STATEMENT/PROSPECTUS. VALERO
STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. CREDIT
SUISSE FIRST BOSTON'S OPINION WAS RENDERED FOR THE INFORMATION OF VALERO'S BOARD
OF DIRECTORS IN CONNECTION WITH ITS CONSIDERATION OF THE MERGER AND RELATES ONLY
TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW TO VALERO OF THE CONSIDERATION TO
BE PAID BY VALERO IN THE MERGER. THE OPINION DOES NOT ADDRESS ANY OTHER ASPECT
OF THE PROPOSED MERGER OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER OF VALERO AS TO HOW TO VOTE OR ACT ON ANY
MATTER RELATING TO THE MERGER. THE SUMMARY OF CREDIT SUISSE FIRST BOSTON'S
OPINION IN THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING THE SUMMARY OF THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY CREDIT SUISSE FIRST BOSTON, WHICH DESCRIBES EACH OF THE
MATERIAL PROVISIONS OF THE OPINION, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF THE OPINION.
In arriving at its opinion, Credit Suisse First Boston reviewed a draft of
the merger agreement dated May 1, 2001, and certain related documents, as well
as publicly available business and financial information relating to UDS and
Valero. Credit Suisse First Boston also reviewed other information relating to
UDS and Valero, including financial forecasts, which UDS and Valero provided to
or discussed with Credit Suisse First Boston, and met with the managements of
UDS and Valero to discuss the businesses and prospects of UDS and Valero.
Credit Suisse First Boston also considered financial and stock market data
of UDS and Valero and compared those data with similar data for other publicly
held companies in businesses similar to UDS and Valero and considered, to the
extent publicly available, the financial terms of other business combinations
and other transactions that have recently been effected or announced. Credit
Suisse First Boston also considered other information, financial studies,
analyses and investigations and financial, economic and market criteria that it
deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the information that
was provided to, or otherwise reviewed by, it and relied on that information
being complete and accurate in all material respects. With respect to financial
forecasts, Credit Suisse First Boston was advised, and assumed, that the
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of UDS and Valero as to the
future financial performance of UDS and Valero, respectively, and the potential
40
48
synergies and strategic benefits anticipated to result from the merger,
including the amount, timing and achievability of those synergies and benefits.
Credit Suisse First Boston also assumed that the merger will qualify as a
tax-free reorganization for U.S. federal income tax purposes. In addition,
Credit Suisse First Boston assumed that the merger would be completed in
accordance with the terms of the merger agreement without any waiver, amendment
or modification and also assumed that in the course of obtaining the necessary
regulatory and third party approvals and consents for the proposed merger, there
will be no modifications, delays, limitations, restrictions or conditions
imposed that will have a material adverse effect on the contemplated benefits to
Valero of the proposed merger.
Credit Suisse First Boston was not requested to, and did not, make an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of UDS or Valero, and was not furnished with any such evaluations or
appraisals. Credit Suisse First Boston's opinion was based on financial,
economic, market and other conditions as they existed and could be evaluated by
Credit Suisse First Boston on the date of its opinion. Credit Suisse First
Boston's opinion did not address the relative merits of the merger as compared
to alternative transactions and business strategies that may be available to
Valero and did not address Valero's underlying business decision to engage in
the merger. Credit Suisse First Boston did not express any opinion as to the
actual value of Valero common stock when issued in the merger or the prices at
which shares of Valero common stock will trade at any time.
In preparing its opinion to Valero's Board of Directors, Credit Suisse
First Boston performed a variety of financial analyses, including those
described below. The preparation of a fairness opinion is a complex analytical
process and is not readily susceptible to summary description. In arriving at
its opinion, Credit Suisse First Boston considered the results of all of the
analyses it performed. Accordingly, Credit Suisse First Boston believes that its
analyses must be considered as a whole and that selecting portions of its
analyses could create a misleading or incomplete view of the analyses underlying
its opinion.
No company, transaction or business used in Credit Suisse First Boston's
analyses as a comparison is identical to UDS or Valero or the proposed merger.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions analyzed.
Analyses based on forecasts of future results are not necessarily
indicative of actual values or predictive of future results or values, which are
based on numerous factors and events beyond the control of the parties and their
financial advisors and inherently subject to uncertainty. Actual values and
future results may be significantly more or less favorable than those suggested
by the analyses. The analyses do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold.
Credit Suisse First Boston's opinion was one of many factors considered by
Valero's Board of Directors in its evaluation of the proposed merger and should
not be viewed as determinative of the views of Valero's Board of Directors with
respect to the consideration paid by Valero pursuant to the merger.
The following is a summary of the material analyses underlying Credit
Suisse First Boston's opinion to Valero's Board of Directors in connection with
the merger. The financial analyses summarized below include information
presented in tabular format which should be read together with the full
narrative description of the financial analyses, including the methodologies and
assumptions underlying the analyses of each summary. Not doing so could create a
misleading or incomplete view of Credit Suisse First Boston's financial
analyses.
Credit Suisse First Boston was engaged by Valero solely to render its
opinion with respect to the fairness from a financial point of view to Valero of
the consideration to be paid by Valero pursuant to the merger and did not
participate in the negotiation of the merger agreement or the determination of
the consideration or make any recommendations regarding those matters. Valero
selected Credit Suisse First Boston based on Credit Suisse First Boston's
experience as a financial advisor in connection with transactions similar to the
merger and familiarity with Valero's business. Credit Suisse First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings,
41
49
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
UDS Valuation Analyses. Credit Suisse First Boston conducted three types of
valuation analyses with respect to UDS:
- a discounted cash flow analysis;
- a comparable companies analysis; and
- a comparable transactions analysis.
Discounted Cash Flow Analysis. Credit Suisse First Boston analyzed the
present value of UDS's estimated stand-alone, unlevered, after-tax free cash
flows based on estimates of future financial and operating performance for
calendar years 2001 through 2005 provided by or discussed with the management of
UDS, as well as an adjusted case, based on discussions with UDS management, to
reflect, among other things, a possible decline in refining margins.
Ranges of estimated terminal values were calculated by multiplying
estimated calendar year 2006 earnings before interest, taxes, depreciation and
amortization, commonly referred to as "EBITDA," by terminal EBITDA multiples of
4.5x to 5.0x. The estimated unlevered after-tax free cash flows and estimated
terminal values were then discounted to present value using discount rates of
9.0 percent to 10.0 percent. This analysis indicated a valuation reference range
for UDS of $56.86 to $63.23 per share of UDS common stock for the base case and
$49.64 to $55.68 per share of UDS common stock for the adjusted case.
Credit Suisse First Boston estimated that the present value of the
anticipated synergies expected to result from the merger, which for purposes of
its analysis Credit Suisse First Boston assumed to be $150 to $200 million on a
pre-tax basis, was approximately $7.13 to $12.22 per share of UDS common stock.
Comparable Companies Analysis. Credit Suisse First Boston compared
financial, operating and stock market data of UDS to corresponding data of the
following major independent refining and marketing companies:
- Sunoco Inc.;
- Ashland Inc.;
- Tosco Corporation; and
- Valero Energy Corporation.
Credit Suisse First Boston's analysis involved a review of the following
multiples for the comparable companies:
- enterprise value as a multiple of estimated EBITDA for calendar years
2001 and 2002;
- market value as a multiple of estimated after-tax cash flow for calendar
years 2001 and 2002; and
- market value as a multiple of estimated net income for calendar years
2001 and 2002.
Market values were calculated by multiplying the May 2, 2001 stock price
for the relevant company by the fully diluted number of shares outstanding,
after taking into account option proceeds, and enterprise values were calculated
as market value plus net debt (including preferred stock and minority
interests). Estimated EBITDA, estimated after-tax cash flow and estimated net
income for purposes of determining public trading multiples for the selected
companies and for UDS were based on estimates published by Credit Suisse First
Boston equity research.
42
50
The analysis suggested the following reference ranges for the selected
multiples:
COMPARABLE COMPANIES
REFERENCE RANGE
--------------------
VALUATION PARAMETER LOW HIGH
------------------- ---- -----
Enterprise Value/2001E EBITDA............................... 4.5x - 5.2x
Enterprise Value/2002E EBITDA............................... 5.5x - 6.5x
Market Value/2001E After-tax Cash Flow...................... 3.8x - 4.3x
Market Value/2002E After-tax Cash Flow...................... 4.0x - 5.0x
Market Value/2001E Net Income............................... 8.0x - 10.0x
Market Value/2002E Net Income............................... 9.5x - 12.0x
Applying the indicated reference ranges of the selected multiples to
corresponding estimated financial data of UDS published by Credit Suisse First
Boston equity research indicated a valuation reference range for UDS of $38.99
to $51.20 per share of UDS common stock.
Comparable Transactions Analysis. Credit Suisse First Boston compared the
implied transaction multiples paid (or to be paid) in the following selected
merger and acquisition transactions involving major refining and marketing
companies and refining assets announced since September 1996:
DATE ACQUIROR ACQUIRED COMPANY OR ASSET
---- -------- -------------------------
September 23, 1996......... Ultramar Corporation Diamond Shamrock Inc.
November 18, 1996.......... Tosco Corporation Unocal Corporation's
Refining and Marketing
Assets
April 15, 1997............. Ultramar Diamond Shamrock Total Petroleum (North
Corporation America), Ltd.
November 3, 1997........... Blackstone Capital Partners Clark USA Inc.
L.P.
April 1, 1998.............. Tesoro Petroleum Shell Refining Holding
Corporation Company's Anacortes
Refinery
July 5, 2000............... Ultramar Diamond Shamrock Tosco Corporation's Avon
Corporation Refinery
July 13, 2000.............. Tosco Corporation BP Plc's Alliance Refinery
February 5, 2001*.......... Phillips Petroleum Company Tosco Corporation
---------------
* Pending.
Credit Suisse First Boston's analysis of the comparable transactions
involved a review of the purchase price as a multiple of "LTM" EBITDA (LTM being
the results of the latest 12 months through the end of the most recent publicly
available quarter) and the adjusted purchase price as a multiple of refining
capacity measured in barrels per day of total crude distillation capacity. The
purchase price for stock transactions was calculated by multiplying the publicly
announced transaction price per share of the acquired company's common stock by
the diluted number of shares outstanding, after taking into account option
proceeds, plus net debt assumed (including preferred stock and minority
interest). The purchase price for asset transactions was calculated as the
publicly announced total consideration paid, plus net debt assumed (including
preferred stock and minority interest). The adjusted purchase price was
determined by adjusting the purchase price to exclude the estimated value of any
retail assets associated with the acquired company or assets.
43
51
The analysis suggested the following reference ranges for the selected
multiples:
COMPARABLE TRANSACTIONS
REFERENCE RANGE
------------------------
VALUATION PARAMETER LOW HIGH
------------------- ------- -------
Purchase Price/LTM EBITDA................................... 5.5x - 6.5x
Adjusted Purchase Price/Capacity............................ $4,500 - $5,500
Applying the indicated reference ranges of the selected multiples to
corresponding financial and operating data of UDS indicated a valuation
reference range for UDS of $52.56 to $66.13 per share of UDS common stock.
Valero Energy Corporation Valuation Analyses. Credit Suisse First Boston
conducted three types of valuation analyses with respect to Valero:
- a discounted cash flow analysis;
- a comparable companies analysis; and
- a comparable transactions analysis.
Discounted Cash Flow Analysis. Credit Suisse First Boston analyzed the
present value of Valero's estimated stand-alone, unlevered, after-tax free cash
flows based on estimates of future financial and operating performance for
calendar years 2001 through 2005 provided by or discussed with the management of
Valero, as described under "-- Financial Estimates of Valero and UDS
Management," as well as an adjusted case, based on discussions with Valero
management, to reflect, among other things, a possible decline in refining
margins.
Ranges of estimated terminal values were calculated by multiplying
estimated calendar year 2006 EBITDA by terminal EBITDA multiples of 4.5x to
5.0x. The estimated unlevered after-tax free cash flows and estimated terminal
values were then discounted to present value using discount rates of 9.0 percent
to 10.0 percent. This analysis indicated a valuation reference range for Valero
of $65.05 to $72.34 per share of Valero common stock for the base case and
$43.05 to $49.15 per share of Valero common stock for the adjusted case.
Comparable Companies Analysis. Credit Suisse First Boston compared
financial, operating and stock market data of Valero to corresponding data of
the following major independent refining and marketing companies:
- Sunoco Inc.;
- Ashland Inc.;
- Tosco Corporation; and
- Ultramar Diamond Shamrock Corporation.
Credit Suisse First Boston's analysis involved a review of the following
multiples for the comparable companies:
- enterprise value as a multiple of estimated EBITDA for calendar years
2001 and 2002;
- market value as a multiple of estimated after-tax cash flow for calendar
years 2001 and 2002; and
- market value as a multiple of estimated net income for calendar years
2001 and 2002.
Market values were calculated by multiplying the May 2, 2001 stock price
for the relevant company by the fully diluted number of shares outstanding,
after taking into account option proceeds, and enterprise values were calculated
as market value plus net debt (including preferred stock and minority
interests). Estimated EBITDA, estimated after-tax cash flow and estimated net
income for purposes of determining
44
52
public trading multiples for the selected companies and for Valero were based on
estimates published by Credit Suisse First Boston equity research.
The analysis suggested the following reference ranges for the selected
multiples:
COMPARABLE
COMPANIES REFERENCE
RANGE
---------------------
VALUATION PARAMETER LOW HIGH
------------------- ----- ------
Enterprise Value/2001E EBITDA............................... 3.8x - 4.5x
Enterprise Value/2002E EBITDA............................... 5.5x - 6.5x
Market Value/2001E After-tax Cash Flow...................... 3.8x - 4.3x
Market Value/2002E After-tax Cash Flow...................... 4.0x - 5.0x
Market Value/2001E Net Income............................... 8.0x - 10.0x
Market Value/2002E Net Income............................... 9.5x - 12.0x
Applying the indicated reference ranges of the selected multiples to
corresponding estimated financial data of Valero published by Credit Suisse
First Boston equity research indicated a valuation reference range for Valero of
$41.94 to $51.22 per share of Valero common stock.
Comparable Transactions Analysis. Credit Suisse First Boston compared the
implied transaction multiples paid (or to be paid) in the following selected
merger and acquisition transactions involving major refining and marketing
companies and refining assets announced since September 1996:
DATE ACQUIROR ACQUIRED COMPANY OR ASSET
---- -------- -------------------------
September 23, 1996......... Ultramar Corporation Diamond Shamrock Inc.
November 18, 1996.......... Tosco Corporation Unocal Corporation's
Refining and Marketing
Assets
April 15, 1997............. Ultramar Diamond Shamrock Total Petroleum (North
Corporation America), Ltd.
November 3, 1997........... Blackstone Capital Partners Clark USA Inc.
L.P.
April 1, 1998.............. Tesoro Petroleum Shell Refining Holding
Corporation Company's Anacortes
Refinery
July 5, 2000............... Ultramar Diamond Shamrock Tosco Corporation's Avon
Corporation Refinery
July 13, 2000.............. Tosco Corporation BP Plc's Alliance Refinery
February 5, 2001*.......... Phillips Petroleum Company Tosco Corporation
---------------
* Pending.
Credit Suisse First Boston's analysis of the comparable transactions
involved a review of the purchase price as a multiple of LTM EBITDA and the
adjusted purchase price as a multiple of refining capacity measured in barrels
per day of total crude oil distillation capacity. The purchase price for stock
transactions was calculated by multiplying the publicly announced transaction
price per share of the acquired company's common stock by the diluted number of
shares outstanding, after taking into account option proceeds, plus net debt
assumed (including preferred stock and minority interest). The purchase price
for asset transactions was calculated as the publicly announced total
consideration paid, plus net debt assumed (including preferred stock and
minority interest). The adjusted purchase price was determined by adjusting the
purchase price to exclude the estimated value of any retail assets associated
with the acquired company or assets.
45
53
The analysis suggested the following reference ranges for the selected
multiples:
COMPARABLE
TRANSACTIONS
REFERENCE RANGE
---------------------
VALUATION PARAMETER LOW HIGH
------------------- ------ ------
Purchase Price/LTM EBITDA................................... 5.2x - 6.2x
Adjusted Purchase Price/Capacity............................ $4,500 - $5,500
Applying the indicated reference ranges of the selected multiples to
corresponding financial and operating data of Valero indicated a valuation
reference range for Valero of $57.41 to $72.88 per share of Valero common stock.
Historical Stock Trading Analysis. Credit Suisse First Boston reviewed the
historical exchange ratios implied by average daily closing stock prices for UDS
common stock and Valero common stock on May 2, 2001, and during the 30-day,
60-day, 90-day, 180-day, one-year and two-year periods preceding May 2, 2001.
The analysis indicated the following implied exchange ratios:
PERIOD IMPLIED EXCHANGE RATIO
------ ----------------------
May 2, 2001..................................... 0.95x
30-day preceding................................ 0.98x
60-day preceding................................ 0.97x
90-day preceding................................ 0.93x
180-day preceding............................... 0.87x
One year preceding.............................. 0.87x
Two years preceding............................. 0.98x
Pro Forma Merger Analysis. Credit Suisse First Boston analyzed the
potential pro forma effect of the merger on Valero's estimated diluted earnings
per share, commonly referred to as "diluted EPS," and estimated diluted
after-tax cash flow per share for calendar years 2001 and 2002, based on
management estimates of future financial and operating performance for Valero
and UDS as described under "-- Financial Estimates of Valero and UDS
Management," both before and after giving effect to the synergies anticipated to
result from the merger as described under "-- Opinion of UDS's Financial Advisor
-- Analysis of UDS -- Discounted Cash Flow Analysis." Assuming a transaction in
which 50% of the consideration paid is in cash and 50% of the consideration paid
is in shares of Valero common stock, the analysis indicated that, in each of the
years analyzed, the merger would be accretive, both with and without synergies,
to Valero on a diluted EPS basis and on a diluted after-tax cash flow per share
basis. The actual results achieved by the combined company may vary from
projected results and the variations may be material.
Miscellaneous. Pursuant to its engagement letter, Valero has agreed to pay
Credit Suisse First Boston $3,000,000 for rendering its opinion. In addition,
Valero has agreed to reimburse Credit Suisse First Boston periodically for all
reasonable out-of-pocket expenses, including the fees and expenses of legal
counsel and any other advisor retained by Credit Suisse First Boston, and to
indemnify Credit Suisse First Boston and related parties against liabilities
arising out of its engagement. Valero has also agreed to offer to retain Credit
Suisse First Boston if Valero engages in specified financing transactions
relating to the merger.
Credit Suisse First Boston and its affiliates have in the past provided,
and may in the future provide, investment banking and financial services to
Valero and its affiliates, for which services Credit Suisse First Boston and its
affiliates have received, and expect to receive, compensation. From May 1, 1999,
to May 6, 2001, Valero paid Credit Suisse First Boston approximately $3 million
for those services. Credit Suisse First Boston may also provide or otherwise
assist Valero in obtaining all or a portion of the financing Valero requires in
connection with the merger, for which Credit Suisse First Boston would expect to
receive compensation. In the ordinary course of business, Credit Suisse First
Boston and its affiliates may
46
54
actively trade the debt and equity securities of both UDS and Valero for their
own accounts and for the accounts of customers and, accordingly, may at any time
hold long or short positions in such securities.
OPINION OF UDS'S FINANCIAL ADVISOR
In April 2001, the UDS Board of Directors retained Banc of America
Securities LLC to act as its financial advisor in connection with the merger.
Banc of America Securities is a nationally recognized investment banking firm
and regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. UDS selected Banc of America
Securities to act as its financial advisor on the basis of Banc of America
Securities' experience and expertise in transactions similar to the merger, its
reputation in the investment community and its historical investment banking
relationship with UDS.
On May 5, 2001, Banc of America Securities delivered its oral opinion,
which opinion was subsequently confirmed by delivery of a written opinion dated
May 5, 2001, to the UDS Board that, as of such date, and based on and subject to
the limitations and considerations stated therein, the consideration in the
merger was fair from a financial point of view to UDS stockholders.
WE HAVE ATTACHED THE FULL TEXT OF BANC OF AMERICA SECURITIES' WRITTEN
OPINION TO THE UDS BOARD OF DIRECTORS AS APPENDIX D, WHICH IS INCORPORATED IN
ITS ENTIRETY. YOU SHOULD READ THIS OPINION CAREFULLY AND IN ITS ENTIRETY IN
CONNECTION WITH THIS PROXY STATEMENT/PROSPECTUS. HOWEVER, WE HAVE ALSO INCLUDED
THE FOLLOWING SUMMARY OF BANC OF AMERICA SECURITIES' OPINION, WHICH DESCRIBES
EACH OF THE MATERIAL PROVISIONS OF THE OPINION AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE OPINION.
BANC OF AMERICA SECURITIES' OPINION IS ADDRESSED TO THE UDS BOARD OF
DIRECTORS. IT DOES NOT CONSTITUTE A RECOMMENDATION TO UDS STOCKHOLDERS ON HOW TO
VOTE OR ACT WITH RESPECT TO ANY MATTERS RELATING TO THE PROPOSED MERGER OR AS TO
THE FORM OF CONSIDERATION TO BE ELECTED BY SUCH STOCKHOLDERS. THE OPINION
ADDRESSES ONLY THE FINANCIAL FAIRNESS OF THE CONSIDERATION TO UDS STOCKHOLDERS.
THE OPINION DOES NOT ADDRESS THE RELATIVE MERITS OF THE MERGER OR ANY
ALTERNATIVES TO THE MERGER, THE UNDERLYING DECISION OF THE UDS BOARD OF
DIRECTORS TO PROCEED WITH OR EFFECT THE MERGER OR ANY OTHER ASPECT OF THE
MERGER. THE OPINION DOES NOT ADDRESS THE PRICES AT WHICH UDS COMMON STOCK OR
VALERO COMMON STOCK WILL TRADE FOLLOWING THE ANNOUNCEMENT OR CONSUMMATION OF THE
MERGER. IN FURNISHING ITS OPINION, BANC OF AMERICA SECURITIES DID NOT ADMIT THAT
IT IS AN EXPERT WITHIN THE MEANING OF THE TERM "EXPERT" AS USED IN THE
SECURITIES ACT OF 1933, AS AMENDED, NOR DID BANC OF AMERICA SECURITIES ADMIT
THAT ITS OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933, AS AMENDED. STATEMENTS TO THAT EFFECT ARE INCLUDED IN
THE BANC OF AMERICA SECURITIES OPINION.
Banc of America Securities:
- reviewed publicly available financial statements and other business and
financial information of UDS and Valero;
- reviewed internal financial statements and other financial and operating
data concerning UDS and Valero;
- analyzed financial forecasts prepared by the managements of UDS and
Valero;
- reviewed and discussed with the managements of UDS and Valero information
relating to strategic, financial and operational benefits anticipated
from the merger, prepared by the managements of UDS and Valero;
- discussed the past and current operations, financial condition and
prospects of UDS with senior executives of UDS and discussed the past and
current operations, financial condition and prospects of Valero with
senior executives of Valero;
- reviewed the pro forma impact of the merger on Valero's earnings per
share, cash flow, consolidated capitalization and financial ratios;
47
55
- reviewed the reported prices and trading activity for the UDS common
stock and the Valero common stock;
- compared the financial performance of UDS and Valero and the prices and
trading activity of the UDS common stock and the Valero common stock with
that of other publicly traded companies that Banc of America Securities
deemed relevant;
- compared financial terms of the merger to corresponding financial terms,
to the extent publicly available, of other business combination
transactions that Banc of America Securities deemed relevant;
- participated in discussions among representatives of UDS and Valero and
their financial and legal advisors;
- reviewed a draft dated May 3, 2001 of the merger agreement and related
documents; and
- performed other analyses and considered other factors as Banc of America
Securities deemed appropriate.
Banc of America Securities assumed and relied on, without independent
verification, the accuracy and completeness of the financial and other
information provided to or discussed with or reviewed by it for the purposes of
its opinion. Banc of America Securities also made the following assumptions:
- with respect to the financial forecasts, including information relating
to strategic, financial and operational benefits anticipated from the
merger, Banc of America Securities assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
good faith judgments of the future performance of UDS and Valero;
- with respect to adjustments to the financial forecasts relating to Valero
provided to or discussed with us by the management of UDS, Banc of
America Securities assumed, at the direction of the management of UDS,
without independent verification or investigation, that such adjustments
and estimates were reasonably prepared on bases reflecting the best
available information, estimates and judgments of the management of UDS;
- that the final form of the merger agreement was substantially identical
to the May 3, 2001 draft reviewed by Banc of America Securities and that
no changes contained in the final form of such document was materially
adverse to UDS;
- that the merger will be treated as a tax-free reorganization and/or
exchange pursuant to the Internal Revenue Code of 1986, as amended; and
- that the terms of the merger and the transactions contemplated by the
merger agreement are the most beneficial terms from the perspective of
UDS that could under the circumstances be negotiated between the parties
to the merger.
In addition, for purposes of its opinion, Banc of America Securities:
- was not requested to and did not solicit any expressions of interest from
any other parties with respect to UDS or any other alternative
transaction;
- did not participate in negotiations with respect to the terms of the
merger or the transactions contemplated by the merger agreement, and does
not express any opinion as to whether any alternative transaction might
produce consideration for UDS's stockholders in an amount in excess of
that contemplated in the merger;
48
56
- was not requested to and did not provide advice concerning the structure,
the specific amount of the consideration, or any other aspect of the
merger or the transactions contemplated by the merger agreement, or to
provide services other than financial advisory services in connection
with the merger and the delivery of its opinion; and
- did not assume responsibility for making an independent valuation or
appraisal of the assets or liabilities of UDS, nor did Banc of America
Securities receive any appraisals. In addition, Banc of America
Securities has not assumed any obligation to conduct, nor has it
conducted, any physical inspection of the properties or facilities of UDS
or Valero.
Banc of America Securities' opinion was necessarily based on economic,
monetary and market and other conditions in effect on, and the information made
available to it as of, the date of its opinion. Accordingly, although subsequent
developments may affect its opinion, Banc of America Securities did not assume
any obligation to update, revise or reaffirm its opinion.
The following represents a brief summary of the material financial analyses
performed by Banc of America Securities in connection with providing its opinion
to the UDS Board of Directors. Some of the summaries of financial analyses
performed by Banc of America Securities include information presented in tabular
format. In order to understand fully the financial analyses performed by Banc of
America Securities, you should read the tables together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. Considering the data set forth in the tables without
considering the full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of the financial analyses performed by Banc of
America Securities. The following information, to the extent based on market
data, is as of May 2, 2001, and does not necessarily indicate current or future
market conditions.
Analysis of UDS
Banc of America Securities performed a "Latest Twelve-Month Trading Range
Analysis," a "Selected Comparable Public Companies Analysis," a "Precedent
Transactions Analysis," a "Selected Premiums Paid Analysis," a "Discounted Cash
Flow Analysis" and a "Sum-of-the-Parts Analysis" for UDS as described below.
Based on these valuation methodologies, Banc of America Securities derived the
following aggregate implied per share equity reference range for UDS common
stock, as compared to the merger consideration based on the closing price of
Valero common stock on May 2, 2001:
AGGREGATE IMPLIED MERGER CONSIDERATION
PER SHARE BASED ON CLOSING STOCK
EQUITY REFERENCE RANGE PRICES ON MAY 2, 2001
---------------------- ----------------------
$45.00 to $60.00 $54.15
Latest Twelve-Month Trading Range Analysis. Banc of America Securities
reviewed the share trading range of UDS common stock to provide a perspective on
current public market value based on UDS's trading performance for the latest
twelve-month trading period. Banc of America Securities reviewed the number of
shares of UDS common stock traded at specified prices during the twelve-month
period prior to May 2, 2001, as set forth below:
PERCENT OF
PRICE SHARES TRADED
----- -------------
$21.81 - $26.64.......................................... 33.2%
$26.64 - $31.47.......................................... 25.4%
$31.47 - $36.29.......................................... 15.6%
$36.29 - $41.12.......................................... 15.7%
$41.12 - $45.95.......................................... 10.1%
49
57
Banc of America Securities noted that the per-share public trading prices
of UDS common stock during the latest twelve-month trading period were in all
cases less than the merger consideration based on the closing price of Valero
common stock on May 2, 2001.
Selected Comparable Public Companies Analysis. Based on public and other
available information, Banc of America Securities calculated the multiples of
the aggregate value of UDS, which Banc of America Securities defined as equity
value plus debt, less cash and cash equivalents, to UDS's earnings before
interest, taxes, depreciation and amortization, commonly referred to as EBITDA,
and the multiples of share price to earnings per share, commonly referred to as
EPS, for each of the latest 12 months, estimated calendar year 2001 and
projected calendar year 2002, in each case under two scenarios. Scenario I was
based on publicly available research analysts estimates and Scenario II was
based on estimates of the management of UDS. Banc of America Securities then
compared those results to the results of similar calculations made with respect
to the following oil refining and marketing companies that Banc of America
Securities deemed to be comparable to UDS:
- Sunoco, Inc.
- Tesoro Petroleum Corporation
- Valero
Each company was selected because it had an active public trading market
for its equity securities, was an oil refining and marketing company and Banc of
America Securities believed the company had operating characteristics similar to
those of UDS. The comparable company analysis compared UDS to the comparable
companies on the basis that the companies selected were the most relevant given
the factors considered above. Consequently, Banc of America Securities did not
include every company that could be deemed to be a participant in the same
industry.
The following table sets forth multiples indicated by this analysis:
SELECTED COMPANIES UDS
------------------------------- ------------------------
RANGE MEDIAN AVERAGE SCENARIO I SCENARIO II
------------ ------ ------- ---------- -----------
Aggregate Value to:
Latest twelve months EBITDA.......... 3.9x to 4.2x 4.0x 4.0x 4.1x N/A
Estimated calendar year 2001
EBITDA............................ 3.8x to 4.6x 4.1x 4.2x 3.9x 3.4x
Projected calendar year 2002
EBITDA............................ 5.0x to 5.0x 5.0x 5.0x 4.7x 3.5x
Share Price to:
Latest twelve months EPS............. 6.0x to 6.7x 6.5x 6.4x 6.9x N/A
Estimated calendar year 2001 EPS..... 5.9x to 7.7x 7.1x 6.9x 6.3x 4.7x
Projected calendar year 2002 EPS..... 8.6x to 9.8x 9.0x 9.1x 7.7x 4.7x
Banc of America Securities then applied a range of selected multiples for
the selected companies to corresponding data of UDS.
No company used in the comparable company analysis is identical to UDS.
Accordingly, an analysis of the foregoing results is not mathematical. Rather,
it involves complex considerations and judgments concerning differences in
financial and operating characteristics of UDS and other factors that could
affect the public trading value of the companies to which UDS is being compared.
50
58
Precedent Transactions Analysis. Banc of America Securities reviewed the
consideration offered in the following 7 transactions:
ANNOUNCEMENT DATE ACQUIROR TARGET
----------------- -------- ------
02/04/01 Phillips Petroleum Company Tosco Corporation
01/18/00 El Paso Energy Corporation The Coastal Corporation
04/15/98 Giant Industries, Inc. Holly Corporation
04/15/97 UDS Total Petroleum (North America),
Ltd.
03/17/97 Valero Basis Petroleum, Inc.
11/18/96 Tosco Corporation 76 Products (Union Oil Company of
California)
09/23/96 Ultramar Corporation Diamond Shamrock, Inc.
The selected transactions were chosen because the target companies were oil
refining and marketing companies that, for purposes of this analysis, Banc of
America Securities considered generally comparable to UDS. Banc of America
Securities calculated the premiums offered relative to the stock prices of the
acquired companies one day and four weeks prior to the announcement of these
transactions. For three of the precedent transactions (the UDS/Total Petroleum
(North America), Ltd. transaction, the Valero/Basis Petroleum, Inc. transaction
and the Tosco Corporation/76 Products (Union Oil Company of California)
transaction), premiums offered relative to the stock prices of the acquired
companies were not available because the transactions did not involve the sale
of a public company.
Of the seven transactions generally reviewed by Banc of America Securities,
Banc of America Securities focused on the Phillips Petroleum Company/Tosco
Corporation transaction and the El Paso Energy Corporation/The Coastal
Corporation transaction, as they were the most recent transactions in the oil
refining and marketing industry that, like the proposed merger, involved the
merger of public companies. The following table sets forth the premium paid in
these two transactions:
PREMIUM TO STOCK PRICE
---------------------------------
1 DAY PRIOR TO 4 WEEKS PRIOR TO
ANNOUNCEMENT ANNOUNCEMENT
-------------- ----------------
Phillips/Tosco.......................................... 34.4% 45.0%
El Paso/Coastal......................................... 26.8% 27.3%
Banc of America Securities noted that the per share value of the
consideration to be received by UDS stockholders in connection with the merger
implied a premium of 31.3% over UDS's closing stock price on May 2, 2001 and
48.2% over UDS's closing stock price on April 3, 2001. Banc of America
Securities then applied the premiums implied by the Phillips/Tosco and the El
Paso/Coastal transactions to corresponding data of UDS.
No transaction used in the precedent transaction analysis is identical to
the merger. Accordingly, an analysis of the foregoing results is not
mathematical. Rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of UDS and
other factors that could affect the transactions to which the merger is being
compared.
51
59
Selected Premiums Paid Analysis. Banc of America Securities analyzed the
premiums paid in 53 all-cash acquisitions announced since 1997 in which 100% of
the target's stock was purchased and that had an aggregate value greater than $1
billion and 152 cash and stock acquisitions announced since 1997 in which 100%
of the target's stock was purchased and that had an aggregate value greater than
$1 billion. Banc of America Securities calculated the premiums offered relative
to the stock prices of the acquired companies one day and four weeks prior to
the announcement of the transactions. The following table sets forth the median
and mean of the premiums paid in these transactions:
PREMIUM TO STOCK PRICE
---------------------------------
1 DAY PRIOR TO 4 WEEKS PRIOR TO
ANNOUNCEMENT ANNOUNCEMENT
-------------- ----------------
53 All Cash Transactions
Median................................................ 26.1% 46.7%
Mean.................................................. 38.1% 48.4%
152 Cash and Stock Transactions
Median................................................ 26.1% 36.4%
Mean.................................................. 29.9% 41.6%
Banc of America Securities noted that the per share value of the
consideration to be received by UDS stockholders in connection with the merger
implied a premium of 31.3% over UDS's closing stock price on May 2, 2001 and
48.2% over UDS's closing stock price on April 3, 2001. Banc of America
Securities then applied a range of selected premiums for the selected
transactions to corresponding data of UDS.
Discounted Cash Flow Analysis. Banc of America Securities performed a
discounted cash flow analysis by using financial cash flow projections of UDS
for the second half of fiscal year 2001 through fiscal year 2005 prepared by the
management of UDS. In conducting this analysis, Banc of America Securities
assumed that the company would perform in accordance with these projections.
Banc of America Securities first estimated the terminal value of the projected
cash flows by applying multiples to UDS's projected 2005 EBITDA, which multiples
ranged from 4.0x to 5.0x. Banc of America Securities then calculated the present
values of the projected cash flows and the terminal values using discount rates
ranging from 9.0% to 11.0%. Based on the results of this analysis, Banc of
America Securities derived an implied equity reference range for UDS of
approximately $53.00 to $65.00 per share.
Sum-of-the-Parts Analysis. Banc of America Securities separately reviewed
the following primary business segments of UDS to derive implied enterprise and
per share equity value reference ranges of UDS: the refining assets segment, the
retail business segment, the pipelines and terminals segment and the
petrochemical business segment. In the case of the refining asset segment, Banc
of America Securities applied a range of prices per barrel to the complexity
adjusted barrels per day output of UDS, which was provided to Banc of America
Securities by the management of UDS. In the case of the retail business segment,
Banc of America Securities applied a range of selected multiples, derived from
selected comparable acquisitions and selected comparable companies, to the
estimated 2001 EBITDA of UDS, which was provided to Banc of America Securities
by the management of UDS. In the case of the pipelines and terminals segment,
Banc of America Securities received publicly available preliminary valuations of
the business. In the case of the petrochemicals business segment, Banc of
America Securities considered the proceeds estimated by management of UDS to be
received in a sale of the Diamond-Koch joint venture and the value of the
residual petrochemicals business. In addition, Banc of America Securities
analyzed the corporate overhead of UDS not attributable to any specific segment.
This analysis indicated an implied enterprise value reference range for UDS of
approximately $4.8 billion to $5.7 billion and an implied equity reference range
for UDS of approximately $47.00 to $58.00 per share.
Pro Forma Analyses
In addition, Banc of America Securities performed a "Contribution Analysis"
and an "Accretion/ Dilution Analysis" for the combined company as described
below.
52
60
Contribution Analysis. Banc of America Securities utilized the projections
of the management of UDS and the projections of the management of Valero, as
described under "-- Financial Estimates of Valero and UDS Management," to review
the estimated contribution of each company to the EBITDA and net income for each
of estimated calendar year 2001 and projected calendar year 2002, for the
combined company. This analysis did not take into account any potential
synergies following completion of the merger. The analysis indicated that UDS
would contribute the following percentages of the metric observed for the
combined company:
ON AN ESTIMATED ON A PROJECTED
CALENDAR YEAR 2001 BASIS CALENDAR YEAR 2002 BASIS
------------------------ ------------------------
Contribution to:
EBITDA................................... 50.9% 47.8%
Net Income............................... 54.2% 43.2%
Banc of America Securities then compared these percentages to the pro forma
share ownership of UDS stockholders in the combined company implied by the
transaction, based on Valero's closing stock price on May 2, 2001. Banc of
America Securities noted that on a pro forma basis, the implied ownership of UDS
stockholders in the combined company on a fully diluted basis was 41.1%.
Accretion/Dilution Analysis. Using financial forecasts based on the
projections of the management of UDS and the projections of the management of
Valero, as described under "-- Financial Estimates of Valero and UDS
Management," and assuming pre-tax operating synergies of $100 million in 2002
and $150 million in 2003, Banc of America Securities reviewed the pro forma
effects of the merger. Banc of America Securities compared the estimated EPS on
a stand-alone basis for Valero to the estimated EPS of the combined company for
projected calendar years 2002 through 2005. Banc of America Securities also
compared the estimated EPS on a stand-alone basis for UDS to the pro forma
estimated EPS of the combined company for projected calendar years 2002 through
2005 on a UDS equivalent share basis. This analysis indicated that the proposed
merger would be accretive to Valero's estimated EPS in calendar years 2002
through 2005. This analysis also indicated that the proposed merger, on a UDS
equivalent share basis, would be accretive to UDS's estimated EPS in calendar
years 2002 through 2005. The actual results achieved by the combined company may
vary from projected results and the variations may be material.
Other Factors
In the course of preparing its opinion, Banc of America Securities also
reviewed and considered other information and data, including:
- research analysts' reports for UDS common stock, including estimates of
various operational metrics;
- the historical price performance of Valero common stock;
- the relative price performance and trading characteristics of UDS common
stock and Valero common stock and the relationship between movements in
UDS common stock, movements in Valero common stock and movements in
selected stock indices; and
- the present value of the stand-alone, unlevered, after-tax free cash
flows that Valero could produce for the second half of fiscal year 2001
through fiscal year 2005 based on the projections of the management of
Valero, which were then adjusted to reflect the margin assumptions of the
management of UDS.
As noted above, the foregoing discussion is a summary of the material
analyses and examinations that Banc of America Securities performed in
connection with its opinion. The preparation of a fairness opinion is not
susceptible to partial analysis or summary description. Banc of America
Securities believes that its analyses and the summary above must be considered
as a whole. Banc of America Securities further believes that selecting portions
of its analyses and the factors considered, without considering all analyses
53
61
and factors, would create an incomplete view of the process underlying the
analyses set forth in its presentation to the UDS Board of Directors. Banc of
America Securities did not assign any specific weight to any of the analyses
described above. The fact that any specific analysis has been referred to in the
summary above is not meant to indicate that that analysis was given greater
weight than any other analysis. Accordingly, the ranges of valuations resulting
from any particular analysis described above should not be taken to be Banc of
America Securities' view of the actual value of UDS or Valero.
In performing its analyses, Banc of America Securities made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of UDS and
Valero, and involve the application of complex methodologies and educated
judgment. The analyses performed by Banc of America Securities are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than those suggested by these analyses.
These analyses were prepared solely as part of Banc of America Securities'
analysis of the financial fairness of the consideration to be received by UDS
stockholders in the merger and were provided to the UDS Board of Directors in
connection with the delivery of Banc of America Securities' opinion. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities have traded
or may trade at any time in the future, and these estimates are inherently
subject to uncertainty.
As described above, Banc of America Securities' opinion and presentation to
the UDS Board of Directors were among the many factors taken into consideration
by the UDS Board of Directors in making its determination to approve the merger,
and to recommend that UDS stockholders approve the merger agreement.
Under an engagement letter dated April 26, 2001, UDS agreed to pay Banc of
America Securities a fee of $12,500,000, of which $2,000,000 was payable upon
execution of the merger agreement and $10,500,000 of which is payable upon
consummation of the merger. The UDS Board of Directors was aware of this fee
structure and took it into account in considering Banc of America Securities'
fairness opinion and in approving the merger. The engagement letter calls for
UDS to reimburse Banc of America Securities for its reasonable out-of-pocket
expenses, including reasonable fees and disbursement of Banc of America
Securities' counsel, and UDS has agreed to indemnify Banc of America Securities
and related persons against certain liabilities, including liabilities under the
federal securities laws.
In the ordinary course of its business, Banc of America Securities or its
affiliates actively trade the debt and equity securities of UDS and Valero for
their own account and for the accounts of customers. Accordingly, Banc of
America Securities or its affiliates may at any time hold a long or short
position in those securities. Banc of America Securities and its affiliates
have, in the past, performed various financial advisory and financing services
for UDS, including acting as UDS's financial advisor, agent bank and a lender in
connection with a share repurchase transaction in February 2001, for which Banc
of America Securities has received aggregate fees of $1.6 million over the last
two years.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Valero and UDS have agreed to use their reasonable best efforts to obtain
all regulatory approvals required in order to consummate the merger. Valero and
UDS have either filed, or intend to file promptly after the date of this
document, applications and notifications to obtain the required regulatory
approvals. Valero and UDS cannot provide any assurances that the required
regulatory approvals will be obtained, as to what, if any, conditions the
regulatory authorities will place on the granting of the approvals that may
affect the combined company and, if obtained, as to the date of any of these
approvals or the absence of any litigation challenging them or the merger.
The HSR Act prohibits Valero and UDS from completing the merger until
certain information and materials have been provided to the U.S. Federal Trade
Commission and the Antitrust Division of the U.S. Department of Justice, and
certain waiting periods have expired or been terminated. On May 30, 2001, Valero
and UDS filed their Premerger Notification and Report Forms pursuant to the HSR
Act with the FTC and the Antitrust Division. On June 29, 2001, Valero and UDS
received a request for
54
62
additional information from the FTC. The waiting period therefore, will be
extended until 11:59 p.m., New York City time, on the thirtieth day after
substantial compliance by Valero and UDS with the request. Both Valero and UDS
are working diligently to comply with the request. Even after the waiting period
expires or has been terminated, the FTC or the Antitrust Division could take any
action under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the merger or to compel a divestiture of
the shares being acquired or substantial assets of Valero or UDS. Other parties,
including State Attorneys General, could also seek to review and/or challenge
the merger on antitrust grounds. Valero and UDS believe that the merger will
benefit competition and should receive the required approvals for the
transaction, although we cannot assure you that a challenge to the merger on
antitrust grounds will not be made by the FTC, a State Attorney General or any
other person.
Under the Competition Act (Canada), the merger is a notifiable transaction
and may not be completed unless Valero obtains an advance ruling certificate or
a waiver from pre-merger notification or Valero and UDS provide certain
information to the Canadian Commissioner of Competition and await the expiration
or early termination of the applicable waiting period. Valero obtained the
required advanced ruling certificate on June 29, 2001.
We also may be required to make filings and obtain regulatory approvals
from various other governmental authorities. Where necessary, the parties intend
to make such filings. See "The Merger Agreement -- Additional
Covenants -- Reasonable Best Efforts" and "The Merger Agreement -- Conditions."
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
In connection with the filing of the registration statement of which this
document is a part, Jones, Day, Reavis & Pogue has provided an opinion to UDS,
and Wachtell, Lipton, Rosen & Katz has provided an opinion to Valero. These
opinions are that the merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code.
In addition, it is the opinion of Jones, Day, Reavis & Pogue and Wachtell,
Lipton, Rosen & Katz that the material federal income tax consequences of the
merger will be as follows:
Holders Receiving Only Valero Common Stock. No gain or loss will be
recognized by a holder of UDS common stock as a result of the surrender of
shares of UDS common stock solely in exchange for shares of Valero common
stock pursuant to the merger, if such holder receives no cash pursuant to
the merger, except as discussed below with respect to cash received instead
of fractional shares of Valero common stock. The aggregate tax basis of the
shares of Valero common stock received in the merger (including any
fractional shares of Valero common stock deemed received) will be the same
as the aggregate tax basis of the shares of UDS common stock surrendered in
exchange for the Valero common stock. The holding period of the shares of
Valero common stock received (including any fractional shares of Valero
common stock deemed received) will include the holding period of shares of
UDS common stock surrendered in exchange for the Valero common stock.
Holders Receiving Only Cash. A holder of UDS common stock that does not
receive any shares of Valero common stock pursuant to the merger will
generally recognize gain or loss equal to the difference between the amount
of cash received and the holder's adjusted tax basis in the shares of UDS
common stock exchanged in the merger. Such gain or loss will generally be a
capital gain or loss, and will generally be a long-term capital gain or
loss to the extent that, at the effective time of the merger, the holder
has a holding period in such UDS common stock of more than one year.
55
63
Holders Receiving Both Cash and Valero Common Stock. If a holder of UDS
common stock receives both Valero common stock and cash (other than cash in
lieu of a fractional interest in Valero common stock) in the merger, that
holder will recognize gain equal to the lesser of
(a) the amount of cash received and
(b) the amount by which the sum of the amount of cash received and the
value of the Valero common stock received exceeds the holder's adjusted tax
basis in the shares of UDS common stock exchanged in the merger.
This gain will generally be capital gain unless the holder's exchange of
UDS common stock for cash and Valero common stock "has the effect of the
distribution of a dividend" after giving effect to the constructive ownership
rules of the Internal Revenue Code. This gain will generally be capital gain to
a holder of UDS common stock that, following the merger, actually or
constructively owns only a small percentage of the total outstanding Valero
common stock and exercises no control over Valero's affairs. The capital gain
recognized generally will be long-term capital gain to the extent that, at the
effective time of the merger, the holder has a holding period in the UDS common
stock exchanged in the merger of more than one year. The aggregate tax basis to
such a holder of the shares of Valero common stock received in the merger
(including any fractional shares of Valero common stock deemed received) will be
the same as the aggregate tax basis of the shares of UDS common stock
surrendered in exchange therefor in the merger, increased by the amount of gain
recognized and reduced by the amount of cash received. The holding period of the
shares of Valero common stock received (including any fractional share of Valero
common stock deemed received) will include the holding period of shares of UDS
common stock surrendered in exchange for the Valero common stock.
If a holder's tax basis in shares of UDS common stock exceeds the sum of
the amount of cash received and the value of the Valero common stock received in
exchange for the shares of UDS common stock, such a holder will not recognize
loss.
Holders Receiving Cash Instead of a Fractional Share. Holders of UDS
common stock who receive cash instead of a fractional share of Valero
common stock will be treated as having received the fractional share in the
merger and then as having the fractional share redeemed by Valero. These
holders will generally recognize gain or loss equal to the difference
between the tax basis of the fractional share and the amount of cash
received. The gain or loss generally will be capital gain or loss and
long-term capital gain or loss if the UDS stock exchanged has been held for
more than one year.
These opinions rely on factual representations contained in officer's
certificates of UDS and Valero and on the assumptions that:
- the merger will be completed in the manner described in this document and
in accordance with the provisions of the merger agreement
- the representations set forth in the merger agreement are presently true,
correct and complete and will continue to be true, correct and complete at
all times up to and including the effective time of the merger, and
- any representations in the officer's certificates of UDS and Valero or in
the merger agreement made to the knowledge of any person or similarly
qualified are presently true, correct and complete and will be true,
correct and complete at all times up to and including the effective time
of the merger as if made without such qualification.
If any of these assumptions or factual representations are inaccurate,
these opinions could be affected.
These opinions address the material U.S. federal income tax consequences of
the merger to holders of UDS common stock who hold their shares of UDS common
stock as capital assets. These opinions do not address all of the U.S. federal
income tax consequences that may be important to you in light of your
56
64
particular circumstances; nor do these opinions address the U.S. federal income
tax consequences that may be applicable to taxpayers subject to special
treatment under the Internal Revenue Code, such as:
- insurance companies
- financial institutions
- dealers in securities
- traders in securities that elect to apply a mark-to-market method of
accounting
- tax-exempt organizations
- stockholders who hold their shares as part of a hedge, constructive sale,
straddle or conversion transaction
- stockholders who acquired their shares through the exercise of options or
otherwise as compensation or through a tax-qualified retirement plan
- UDS stockholders who dissent from the merger, and
- foreign persons.
No information is provided in these tax opinions with respect to the tax
consequences, if any, of the merger under applicable foreign, state, local and
other tax laws. These tax opinions are based upon the provisions of the Internal
Revenue Code, applicable Treasury regulations, IRS rulings and judicial
decisions, as in effect as of the date of this document. There can be no
assurance that future legislative, administrative or judicial changes or
interpretations, which changes could apply retroactively, will not affect the
accuracy of these tax opinions. No rulings have been or will be sought from the
IRS concerning the tax consequences of the merger, and none of the opinions of
counsel received in connection with the merger will be binding on the IRS.
The parties will not be required to consummate the merger unless they
receive additional opinions of their respective counsel, dated the closing date
of the merger, confirming that the merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code. In rendering
its opinion, each counsel may rely upon customary assumptions and
representations reasonably satisfactory to that counsel, including
representations contained in certificates of officers of Valero and UDS. If
either Valero or UDS fails to receive this further opinion and decides to waive
this condition to the obligation to complete the merger, and the material
federal income tax consequences to UDS's stockholders are different from those
we describe above, UDS will resolicit its stockholders before completing the
merger.
THE PRECEDING DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR DISCUSSION OF
ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. ACCORDINGLY, UDS STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The merger is expected to be accounted for using purchase accounting. The
purchase price will be allocated to UDS's identifiable assets and liabilities
based on their estimated fair market values at the date of the completion of the
merger, and any excess of the purchase price over those fair market values will
be accounted for as goodwill. The results of final valuations of property, plant
and equipment and intangible and other assets and the finalization of any
potential plans of restructuring have not yet been completed. We may revise the
allocation of the purchase price when additional information becomes available.
The unaudited pro forma combined financial information contained in this
document has been prepared using the purchase method to account for the merger.
In June 2001, the Financial Accounting Standards Board issued its Statement 142,
Goodwill and Other Intangible Assets. The statement provides
57
65
that goodwill resulting from business combinations completed after June 30,
2001, should not be amortized but instead should be tested at least annually for
impairment. As a result, goodwill arising from the merger with UDS is not
amortized in the Unaudited Pro Forma Combined Statements of Income. See
"Unaudited Pro Forma Combined Financial Information."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the UDS Board of Directors with
respect to the merger, you should be aware that certain officers and directors
of UDS have interests in the merger that are different from, or in addition to,
your interests.
UDS Directors
UDS and Valero will designate four UDS directors to join the Valero Board
of Directors following the merger. These four directors have not yet been
selected. We expect to select these directors shortly before we complete the
merger.
UDS Change in Control Arrangements
Executive Severance. Certain officers of UDS, including Messrs. Gaulin,
Eisman, Fretthold, Havens, Klesse and Shapard, have employment agreements that
provide severance benefits in the event their employment is involuntarily
terminated by UDS other than for "cause" or is terminated by the executive for
"good reason" (each as defined in the executive's employment agreement). If a
qualifying termination occurs after a "change in control" (as defined in the
employment agreements), the severance is the same as if the termination had
occurred prior to the change in control, but certain post-employment covenants
cease to apply or are limited as to duration. The filing by UDS with the SEC of
a Form 8-K on May 10, 2001 constituted a "change in control" for purposes of
each executive's employment agreement.
Under the terms of the executives' employment agreements, UDS is required
to pay and provide each executive officer who is terminated under circumstances
constituting a qualifying termination certain payments and benefits, including:
(a) the executive's annual base salary and benefits through the date of
termination, (b) a lump sum payment equal to three times the executive's highest
base salary and bonus over the three year period prior to termination, (c) a
lump sum payment equal to the present value of the additional benefits the
executive would have accrued had he been credited with, generally, three years
of additional age and service under the UDS tax-qualified and nonqualified
defined benefit pension plans in which the executive participates on the date of
his termination, (d) a lump sum payment equal to three times the maximum amount
UDS could have contributed to the qualified and nonqualified defined
contribution retirement plans the executive participated in on the date of his
termination, and (e) certain extended welfare benefits. No benefit will be paid
or made available unless the executive first executes a release and thereafter
does not revoke it within seven days of execution.
Under the employment agreements, the amounts estimated to be payable to Mr.
Gaulin, Mr. Eisman, Mr. Fretthold, Mr. Havens, Mr. Klesse and Mr. Shapard, the
six highest paid UDS executives, upon a qualifying termination are $6.1 million,
$2.1 million, $2.5 million, $2.5 million, $2.8 million, and $2.2 million,
respectively (excluding the payments made under UDS's supplemental executive
retirement plans, which are described below under "-- Supplemental Executive
Retirement Plans").
In the event that any of the payments or benefits described above (or any
payment made pursuant to UDS's supplemental executive retirement plans or its
long-term incentive plans, each as discussed below, or any other payment or
benefit) would subject the executive to an excise tax because such payments or
benefits are deemed to be "excess parachute payments" within the meaning of
Section 280G of the Internal Revenue Code, then the executive will be entitled
under the employment agreements to a tax gross-up payment for any excise tax
incurred on any parachute payment.
Supplemental Executive Retirement Plans. Certain officers of UDS are
entitled to retirement benefits under various supplemental executive retirement
plans. Under certain plans, the amount of the
58
66
supplemental retirement benefit is based upon the amount of additional benefit
that could otherwise have been paid to the executive under the UDS tax-qualified
defined benefit pension plan, in the absence of applicable Internal Revenue Code
limitations. Under other plans, the amount of the supplemental retirement
benefit is based on a percentage of the executive's final average monthly
compensation and the number of years of service with UDS, as offset by the
amount of benefits payable to the executive from other UDS defined benefit
pension plans.
In connection with the merger, unvested benefits under the supplemental
retirement plans will become fully vested. Because stockholder approval of the
merger will result in a "change in control" under the supplemental executive
retirement plans, each executive will receive a lump sum payment equal to the
present value of that executive's supplemental executive retirement plan
benefit, even if that person remains employed with Valero following completion
of the merger. The lump sum amounts will be determined after giving the
executive credit, as provided in the executive's employment agreement, for a
specified number of additional years of service (generally, three additional
years), and taking into account various additional changes in calculation
methodology which apply in connection with the merger (including, depending upon
the executive, a change in the specified interest and mortality assumptions, and
elimination of any reduction for early payment).
The amounts estimated to be payable to Mr. Gaulin, Mr. Eisman, Mr.
Fretthold, Mr. Havens, Mr. Klesse and Mr. Shapard pursuant to the supplemental
executive retirement plans, excluding the retention payments described below,
are $10.3 million, $1.8 million, $3.9 million, $2.6 million, $4.8 million, and
$1.3 million, respectively, if the merger were completed on the date of this
document. These amounts will be paid to the respective executives in connection
with a change of control even if such executives remain employed with Valero
following completion of the merger.
Messrs. Eisman, Fretthold, Havens, Klesse and Shapard will each receive a
$500,000 lump sum retention payment under the supplemental executive retirement
plans as of the earlier of 12 months after the date of stockholder approval of
the merger (provided they are still employed with Valero) or the involuntary
termination of the executive's employment.
UDS Equity-Based Awards Held by UDS Directors and Officers
In connection with the merger, all stock options awarded to UDS executives
and directors under the UDS stock option plans will become fully vested and will
be converted into options to purchase Valero common stock on the same terms and
conditions that were applicable to the options issued under UDS's long-term
incentive plans. Assuming the merger is completed on the date of this document,
1,806,936 shares of UDS common stock underlying stock options held by the six
highest paid UDS officers and the UDS non-employee directors have vested or will
vest in connection with the merger. The estimated value of the UDS stock options
to Mr. Gaulin, Mr. Eisman, Mr. Fretthold, Mr. Havens, Mr. Klesse and Mr. Shapard
based on the difference between the $47.40 closing stock price of UDS common
stock on August 13, 2001 and the respective exercise prices of the options are
approximately $13.4 million, $2.5 million, $4.0 million, $3.7 million, $5.0
million, and $1.9 million, respectively. The estimated value of the UDS stock
options to each of the UDS directors other than Mr. Gaulin (Messrs. Allumbaugh,
Biggs, Bradford, Christie, Clark, Schaefer, and Marbut, and Msdmes. Ortega and
Saint-Jacques), based on the difference between the $47.40 closing stock price
of UDS common stock on August 13, 2001 and the respective exercise prices of the
options, is approximately $6,000. All stock options awarded to UDS executives
and directors under the UDS stock option plans have or will become fully vested
and will be converted into options to purchase Valero common stock in connection
with the merger even if the holders of such options remain employed with Valero
following completion of the merger.
Certain of the option plans have special provisions that are triggered upon
a change in control (including the transactions contemplated by the merger). The
Ultramar Corporation 1992 Long-Term Incentive Plan and the award agreements
under the Ultramar Diamond Shamrock Corporation 1996 Long-Term Incentive Plan
provide that, if an executive's employment is involuntarily terminated without
cause
59
67
within two years of a change in control, then the executive will be entitled to
exercise any outstanding stock options granted under those option plans and
agreements for a period equal to the shorter of (a) five years from the date the
executive's employment is terminated or (b) the expiration date of the original
term of the stock option. In addition, due to the three additional years of age
and service credit that Mr. Fretthold will be entitled to receive under his
employment agreement upon certain qualifying terminations, he will qualify as a
retiree under the Diamond Shamrock Long-Term Incentive Plan and be entitled to
exercise any outstanding stock options under such plan for a period equal to the
shorter of (a) two years from date of his termination or (b) the expiration date
of the original term of the stock option.
For each intermediate incentive award granted to an executive under the UDS
Intermediate Incentive Program, the executive will receive in connection with a
change in control a lump-sum cash payment equal to one hundred percent of the
target payout amount for each award. In addition, all restrictions on the
restricted shares awarded under the Performance-Based Restricted Stock Incentive
Program will lapse in connection with a change in control.
The amounts estimated to be payable to Mr. Gaulin, Mr. Eisman, Mr.
Fretthold, Mr. Havens, Mr. Klesse and Mr. Shapard under the Intermediate
Incentive and Performance-Based Restricted Stock Incentive Programs, including
the value of restricted stock that will vest in connection with the merger,
based on the $47.40 closing stock price of UDS common stock on August 13, 2001,
are $9.4 million, $1.9 million, $2.5 million, $3.7 million, $3.8 million, and
$3.5 million, respectively. These amounts will be paid to the respective
executives in connection with a change of control even if such executives remain
employed with Valero following completion of the merger.
UDS Director and Officer Indemnification and Insurance
The merger agreement provides for the indemnification of UDS directors and
officers after closing as to matters arising before completion of the merger as
well as the provision of directors' and officers' insurance after closing. See
"The Merger Agreement -- Additional Covenants -- Insurance and Indemnification."
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
Valero expects that, initially following completion of the merger, the
business and operations of UDS will, except as described in this joint proxy
statement/prospectus, be continued substantially as they are currently being
conducted. Valero will continue to evaluate the business and operations of UDS
while the merger is pending and after the merger is completed, and will take
those actions it deems appropriate under the circumstances that then exist.
Valero intends to undertake a comprehensive review of UDS's business,
operations, capitalization and management with a view to optimizing development
of UDS's potential in conjunction with Valero's business.
While no assurances can be provided, Valero and UDS currently expect to be
able to achieve annual synergies of about $240 million by the second year
following completion of the merger. Roughly one-third of these cost savings are
expected to result from each of the following types of efficiencies:
- Crude sourcing and logistics, including reduced costs of purchasing and
transporting crude oil due to the opportunity to use and purchase crude
in larger amounts;
- Marketing, logistics and operating synergies, including the opportunity
to produce and sell a greater proportion of higher-margin and specialty
fuels, to supply UDS retail locations with gasoline produced by Valero
and to more flexibly tailor and optimize operations at each refinery in
the system to take better advantage of its particular capabilities; and
- Administrative synergies, including the opportunity to reduce material,
service contract and energy purchasing costs by purchasing for a greater
number of refineries, to implement more efficient operational practices
across a larger production base, and reduce general and administrative
expenses by eliminating redundant costs.
60
68
As described above, at the time the merger is completed, Valero will
appoint four of the members of the UDS Board of Directors to serve as directors
of Valero.
FINANCING THE TRANSACTION
Valero expects to finance the cash portion of the UDS acquisition,
currently estimated to be approximately $2.03 billion, with proceeds from a $1.5
billion bridge loan facility and borrowings under a new $1.5 billion revolving
bank credit facility. Valero anticipates finalizing both the bridge loan
facility and the revolving credit facility prior to completing the merger, but
expects that borrowing under those facilities will be simultaneous with and
contingent upon completion of the merger.
The bridge facility is expected to have a one year maturity at interest
rates and on other terms presently being negotiated. Valero currently expects to
repay the facility after the merger via a combination of proceeds from capital
market issuances of debt securities and cash flow from operations of the
combined company.
Valero currently expects that the revolving bank credit facility presently
being negotiated will provide for commitments of $750 million for a five-year
term and $750 million for a 364-day term and, subject to the commitment amounts
and terms, provide for borrowings thereunder to be made at various amounts,
maturities and interest rates, at the option of Valero. Valero expects the
revolving credit facility will also be used after the merger to finance the
combined company's working capital and other cash requirements. Valero currently
anticipates that the restrictive covenants for the facility will be more
favorable than those contained in Valero's existing $835 million revolving
credit facility. Valero currently expects to repay amounts borrowed under the
credit facility with cash flow from operations of the combined company.
At the date of this document, the arrangements described above are in a
preliminary stage and Valero has not yet entered into definitive agreements or
sought formal commitments for those arrangements. If Valero is unable to
finalize either or both of the above negotiations, it could seek to negotiate
with alternative lenders, undertake capital market issuances of debt securities
or a combination of those options and any of the above facilities. There are no
closing conditions relating to the financing of the cash portion of the UDS
acquisition.
61
69
THE MERGER AGREEMENT
The following is a summary of the material terms and provisions of the
merger agreement. The merger agreement is attached as Appendix A to this
document and incorporated by reference in this document. We encourage you to
carefully read the complete merger agreement for the precise legal terms of the
merger agreement and other information that may be important to you.
CONSIDERATION TO BE RECEIVED IN THE MERGER
The value of the merger consideration to be received by UDS stockholders
when the merger is completed, whether in the form of cash or stock, and the mix
of cash and stock available for UDS stockholder election in the merger, will
depend on the market price of Valero common stock during a measurement period
ending shortly before we complete the merger, as described in this section. UDS
stockholders can obtain information on the value of the merger consideration,
including the exchange ratio for the stock consideration, based on current
Valero market stock prices by calling 1-800-607-0088 toll-free between the hours
of 10:00 a.m. and 6:00 p.m., Monday through Friday, Eastern Standard Time.
At the effective time of the merger, each UDS stockholder will have the
right to receive, based on the election of that stockholder as indicated below
(subject to the allocation formulas described under the heading "-- Allocation
Procedure"), the following merger consideration:
Cash Election. You may elect to receive for each of your shares of UDS
common stock an amount of cash equal to the sum (which we refer to in this
document as the MERGER CONSIDERATION VALUE) of:
- $27.50 and
- the product of (1) 0.614 and (2) the average closing price of Valero
common stock for the ten consecutive full trading days ending three
business days prior to the closing date (which we refer to in this
document as the VALERO AVERAGE CLOSING PRICE or the MEASUREMENT PERIOD
VALUE).
We refer to this amount of cash in this document as the CASH CONSIDERATION.
Stock Election. You may elect to receive for each of your shares of UDS
common stock a number of shares of Valero common stock equal to the merger
consideration value divided by the Valero average closing price. We refer
to this number of shares of Valero common stock in this document as the
EXCHANGE RATIO. Valero will not issue fractional shares. Instead, you will
receive cash for any fractional share of Valero common stock owed to you
based on the closing price of a share of Valero common stock on the last
full trading day immediately preceding the merger.
Mixed Election. You may elect to receive a combination of:
- cash in the amount indicated above for a specified number of your UDS
shares and
- the number of Valero shares indicated above for each of your remaining
shares.
Non-Election. If you fail to make an election or fail to submit a valid
Form of Election prior to the election deadline described under the heading
"-- Allocation Procedure -- Election Procedure" for any of your UDS shares,
you will receive merger consideration for those shares according to the
allocation formulas described under the heading "-- Allocation Procedure."
We refer to such shares in this document as NON-ELECTING SHARES.
Shares of UDS common stock held under the UDS 401(k) Retirement Savings
Plan, whether in the UDS stock account or the ESOP I or II accounts, and the UDS
Grantor Trust Stock Ownership Program will not be subject to the election and
proration procedures described above and will be converted into Valero common
stock based on the exchange ratio.
Accompanying this document is a Form of Election and Letter of Transmittal,
which was sent to each holder of record of UDS common stock on the record date
for voting at the UDS special meeting. The Form of Election will permit you to
make a cash, stock or mixed election.
62
70
The following hypothetical examples illustrate the merger consideration for
various values of Valero common stock (summarized in the table below):
- Assume that the ten-day average Valero stock price on the third business
day prior to completion of the merger is $38.00, which was the closing
price for Valero on the NYSE on August 22, 2001 (the most recent
practicable date before we mailed this document to you). The per share
consideration UDS stockholders would receive would equal $50.83 ($27.50
plus $23.33, the measurement period value of 0.614 Valero shares). UDS
stockholders could elect to receive for each UDS share they own either
$50.83 in cash or 1.338 shares of Valero common stock (which at that
price would have a value of $50.83), or a combination of the foregoing.
- Assume that the ten-day average Valero stock price on the third business
day prior to completion of the merger is $41.00 (a hypothetical price not
intended to indicate the future price of Valero common stock). The per
share consideration UDS stockholders would receive would equal $52.67
($27.50 plus $25.17, the measurement period value of 0.614 Valero
shares). UDS stockholders could elect to receive for each UDS share they
own either $52.67 in cash or 1.285 shares of Valero common stock (which
at that price would have a value of $52.67), or a combination of the
foregoing.
- Assume that the ten-day average Valero stock price on the third business
day prior to completion of the merger is the same as the closing price on
the NYSE on Friday, May 4, 2001 ($45.47). The per share consideration UDS
stockholders would receive would equal $55.42 ($27.50 plus $27.92, the
measurement period value of 0.614 Valero shares). UDS stockholders could
elect to receive for each UDS share they own either $55.42 in cash or
1.219 shares of Valero common stock (which at that price would have a
value of $55.42), or a combination of the foregoing.
- Assume that the ten-day average Valero stock price on the third business
day prior to completion of the merger is $54.00 (a hypothetical price not
intended to indicate the future price of Valero common stock). The per
share consideration UDS stockholders would receive would equal $60.66
($27.50 plus $33.16, the measurement period value of 0.614 Valero
shares). UDS stockholders could elect to receive for each UDS share they
own either $60.66 in cash or 1.123 shares of Valero common stock (which
at that price would have a value of $60.66), or a combination of the
foregoing.
MEASUREMENT PERIOD VALUE VALUE OF MERGER CONSIDERATION
OF VALERO STOCK BEFORE ELECTING UDS STOCKHOLDERS WILL RECEIVE FOR EACH PER UDS SHARE BASED ON
CLOSING UDS SHARE CONSIDERATION OF EITHER... MEASUREMENT PERIOD VALUE
------------------------ ------------------------------------------------ -----------------------------
$30.00 $45.92 cash or 1.531 Valero shares $45.92
$35.00 $48.99 cash 1.400 Valero shares $48.99
$41.00 $52.67 cash 1.285 Valero shares $52.67
$45.47 $55.42 cash 1.219 Valero shares $55.42
$50.00 $58.20 cash 1.164 Valero shares $58.20
$54.00 $60.66 cash 1.123 Valero shares $60.66
These examples are not intended to indicate what the future price of Valero
common stock may actually be. We will not know the exact value of the cash
and/or Valero common stock you will receive in the merger at the time of the
stockholder meetings or at the time you submit your election form. The
measurement period value of Valero common stock is subject to change due to
market and other conditions, and may be greater or less than the market price of
Valero common stock on the date of this document, the date of the respective
stockholder meetings or the date you submit your election form. Valero and UDS
may not complete the merger until all of the conditions to the merger have been
satisfied or waived, including some conditions that we may not waive such as the
expiration of the waiting period under U.S. antitrust laws. Fluctuations in the
price of Valero common stock in the period between the date you vote on the
merger and the date the merger is completed will affect the value of the
consideration you receive at the time the merger is completed, whether received
in the form of cash or stock.
63
71
YOU SHOULD CAREFULLY CONSIDER THE TAX CONSEQUENCES OF MAKING AN ELECTION.
WE URGE YOU TO CONSULT WITH YOUR TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES
OF THE MERGER. SEE "MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES."
ALLOCATION PROCEDURE
The elections made by UDS stockholders to receive shares of Valero common
stock, cash or a combination of cash and stock will be subject to limits on the
total number of shares of UDS common stock that will be converted into the cash
or stock consideration. These limits will generally result in the aggregate
amount of cash and shares of Valero common stock being issued in the merger
being the same as would be the case if Valero were to pay $55.00 per share in
cash for half of the shares of UDS common stock outstanding immediately before
the merger is completed and issue 1.228 shares of Valero common stock for each
of the remaining shares of UDS common stock outstanding immediately before the
merger is completed. Based on the number of outstanding shares of UDS common
stock as of August 13, 2001 and the terms of the merger agreement, Valero
currently expects to issue an aggregate of approximately 45.2 million shares of
common stock and pay approximately $2.03 billion in cash as a result of the
merger, subject to possible adjustment to preserve the tax-free treatment of the
merger as described under "-- Limit on Number of UDS Shares To Be Converted to
Cash."
Limit on Number of UDS Shares To Be Converted to Cash. The maximum number
of shares of UDS common stock that will be converted into the right to receive
the cash consideration in the merger (plus the number of shares of UDS common
stock as to which dissenters' rights are perfected under Delaware law) will be
equal to a quotient obtained by dividing
- the product of 27.5 and the number of shares of UDS common stock
outstanding immediately prior to completion of the merger, by
- the cash consideration.
We refer in this document to the limit on cash consideration as the CASH
ELECTION LIMIT.
Despite the formula described above, if the quotient in that formula
exceeds 50% of the number of shares of UDS common stock outstanding immediately
prior to completion of the merger, Valero may reduce the maximum number of UDS
shares to be converted into the right to receive cash consideration to any lower
number, as long as it is not below 50% of the number of shares of UDS common
stock outstanding immediately prior to completion of the merger. If this
happens, UDS shares would be converted into the right to receive additional
stock consideration to the extent of the reduction in value of the aggregate
amount of cash consideration as a result of this adjustment.
The number of UDS shares to be converted into the cash consideration will
not be greater than the number that would permit Valero and UDS to receive the
tax opinions described below under "-- Conditions." If necessary, the number of
shares of UDS common stock to be converted into the right to receive Valero
common stock will be increased, and the number of shares of UDS common stock to
be converted into the right to receive cash will be decreased by an equal
amount, to the extent required to satisfy the condition.
Although the exact number of additional shares of Valero common stock that
could be issued as a result of this increase, if any, will not be determinable
until the merger is completed, after consultation with counsel to Valero and
UDS, Valero and UDS believe that the following table represents a reasonable
estimate of the number of additional shares that would be issued at the
following hypothetical Valero stock prices at closing:
HYPOTHETICAL VALERO CLOSING PRICE ADDITIONAL VALERO SHARES ISSUABLE
--------------------------------- ---------------------------------
$34 or higher None
$32 approximately 1.4 million
$30 approximately 3.2 million
64
72
The issuance of any additional shares of Valero common stock in the merger
in this circumstance will not increase the aggregate value of the cash and stock
consideration in the merger (when the Valero stock is valued at the measurement
period value), as any increased issuance of Valero stock will be offset by a
decrease in the aggregate amount of cash paid in the merger.
Limit on the Number of UDS Shares To Be Converted to Valero Stock. The
limit on the aggregate number of UDS shares that will be converted into the
right to receive shares of Valero common stock in the merger will be equal to
the number of shares of UDS common stock outstanding immediately prior to
completion of the merger, minus the cash election limit. We refer to this limit
in this document as the STOCK ELECTION LIMIT.
In order to calculate the cash election limit and the stock election limit,
we will not count as outstanding shares of UDS common stock that will be
cancelled in the merger without any consideration being paid for them. These
include any shares of UDS stock that are held by UDS in treasury or that are
owned by either of Valero or UDS or their wholly-owned subsidiaries.
Cash Over-Election. If the aggregate number of shares of UDS common stock
for which cash is elected, plus shares of UDS common stock as to which
dissenters' rights are perfected under Delaware law, exceeds the cash election
limit, then:
- those shares of UDS common stock for which Valero common stock is elected
and non-electing shares will be converted into the right to receive
Valero common stock; and
- those shares of UDS common stock for which cash is elected (but not
including any dissenting shares) will be converted into the right to
receive
(a) an amount of cash (rounded to the nearest cent), without interest,
equal to the product of (i) the cash consideration and (ii) a fraction, the
numerator of which is the cash election limit and the denominator of which
is the number of shares of UDS common stock for which cash was elected plus
any dissenting shares and
(b) a number of shares of Valero common stock equal to the product of
(i) the exchange ratio and (ii) a fraction equal to one (1) minus the
fraction described in clause (a)(ii) above.
Assuming the following facts:
- that the ten-day average Valero stock price at closing is $36.13, which
was the closing price for Valero on the NYSE on August 15, 2001;
- that there are 73,742,425 outstanding shares of UDS common stock at
closing, which was the number of shares of UDS common stock outstanding
(including shares held in the Grantor Trust Stock Ownership Program) as
of August 13, 2001;
- Valero does not exercise its option to reduce the cash election limit to
not less than 50% of the number of shares of UDS common stock outstanding
at the closing.
- that UDS stockholders elect in the aggregate to receive cash
consideration for 75% of the outstanding shares of UDS common stock; and
- no stockholders dissented from the merger;
then the shares of UDS common stock for which cash was elected would be
converted into the right to receive:
- $36.66 in cash, which was calculated by multiplying:
-- $49.68 and
-- the fraction obtained by dividing (a) 40,816,441 by (b) 55,306,819,
which is 0.738; and
- 0.3603 shares of Valero common stock, which was calculated by
multiplying:
-- 1.375 and
-- the fraction equal to one minus 0.738.
65
73
Stock Over-Election. If the aggregate number of shares of UDS common stock
for which Valero common stock is elected exceeds the stock election limit, then:
- those shares of UDS common stock for which cash is elected and
non-electing shares will be converted into the right to receive the cash
consideration; and
- those shares of UDS common stock for which Valero common stock is elected
will be converted into the right to receive
(a) a number of shares of Valero common stock equal to the product of
(i) the exchange ratio and (ii) a fraction, the numerator of which is the
stock election limit and the denominator of which is the number of shares
of UDS common stock for which Valero common stock was elected and
(b) an amount of cash (rounded to the nearest cent), without interest,
equal to the product of (i) the cash consideration and (ii) a fraction
equal to one (1) minus the fraction described in clause (a)(ii) above.
Assuming the following facts:
- that the ten-day average Valero stock price at closing is $36.13, which
was the closing price for Valero on the NYSE on August 15, 2001;
- that there are 73,742,425 outstanding shares of UDS common stock at
closing, which was the number of shares of UDS common stock outstanding
(including shares held in the Grantor Trust Stock Ownership Program) as
of August 13, 2001;
- Valero does not exercise its option to reduce the cash election limit to
not less than 50% of the number of shares of UDS common stock outstanding
at the closing.
- that UDS stockholders elect in the aggregate to receive Valero common
stock for 75% of the outstanding shares of UDS common stock; and
- no stockholders dissented from the merger;
then the shares of UDS common stock for which Valero common stock was elected
would be converted into the right to receive:
- 0.8186 shares of Valero common stock, which was calculated by
multiplying:
-- 1.375 and
-- the fraction obtained by dividing (a) 32,925,984 by (b) 55,306,819,
which is 0.5953; and
- $20.11 in cash, which was calculated by multiplying:
-- $49.68 and
-- the fraction equal to one minus 0.5953.
No Over-Election for Either Cash or Stock. In the event there is neither
an over-election of cash nor an over-election of Valero common stock, then:
- those shares of UDS common stock for which cash was elected will be
converted into the right to receive the cash consideration;
- those shares of UDS common stock for which Valero common stock was
elected will be converted into the right to receive Valero common stock
based on the exchange ratio; and
- non-electing shares will be converted into the right to receive
(a) an amount of cash (rounded to the nearest cent), without interest,
equal to the product of (i) the cash consideration and (ii) a fraction,
the numerator of which is the cash election limit minus the sum of the
number of shares of UDS common stock for which cash was elected plus any
dissenting shares, and the denominator of which is the number of
non-electing shares, and
(b) a number of shares of Valero common stock equal to the product of
(i) the exchange ratio and (ii) a fraction, the numerator of which is the
stock election limit less the number of shares of
66
74
UDS common stock for which Valero common stock was elected and the
denominator of which is the number of non-electing shares.
Assuming the following facts:
- that the ten-day average Valero stock price at closing is $36.13, which
was the closing price for Valero on the NYSE on August 15, 2001;
- that there are 73,742,425 outstanding shares of UDS common stock at
closing, which was the number of shares of UDS common stock outstanding
(including shares held in the Grantor Trust Stock Ownership Program) as
of August 13, 2001;
- Valero does not exercise its option to reduce the cash election limit to
not less than 50% of the number of shares of UDS common stock outstanding
at the closing.
- that UDS stockholders elect in the aggregate to receive Valero common
stock for 35% of the outstanding shares of UDS common stock and elect to
receive cash for 45% of the outstanding shares of UDS common stock, with
20% of the outstanding shares of UDS common stock not making any
election; and
- no stockholders dissented from the merger;
then the shares of UDS common stock for which no election was made would be
converted into the right to receive:
- $25.71 in cash, which was calculated by multiplying:
- 49.68 and
- the fraction obtained by dividing (a) 40,816,441 minus 33,184,091 and
(b) 14,748,485; and
- 0.6634 shares of Valero common stock, which was calculated by
multiplying:
- 1.375 and
- the fraction obtained by dividing (a) 32,925,984 minus 25,809,848 and
(b) 14,748,485.
Valero will make all computations related to the allocation formulas
described in this section, and all of those computations will be binding and
conclusive on all holders of UDS common stock.
UDS Stock Options. Upon completion of the merger, each outstanding UDS
stock option will be converted into an option to purchase a number of shares of
Valero common stock that is equal to the product of the exchange ratio
multiplied by the number of shares of UDS common stock that would have been
obtained before the merger upon the exercise of the UDS stock option, rounded to
the nearest whole share. The exercise price per share will be equal to the
exercise price per share of UDS common stock subject to the UDS stock option
before the conversion divided by the exchange ratio, rounded to the nearest
whole cent. All UDS stock options that have not vested under the UDS stock
option plans will vest upon completion of the merger. The other terms of each
UDS stock option will continue to apply. The conversion of UDS stock options
that qualify as "incentive stock options" under the Internal Revenue Code will
be effected in a manner that is consistent with Section 424(a) of the Internal
Revenue Code. UDS stock options are not subject to the election and proration
procedures described above.
UDS Common Stock Held in Certain Benefit Plans. Each share of UDS common
stock that is held as of the completion of the merger under the UDS Grantor
Trust Stock Ownership Program and under the UDS benefit plans, will be converted
into the right to receive a number of shares of Valero common stock equal to the
exchange ratio. Such shares are not subject to the election and proration
procedures described above.
67
75
Exchange of Shares
Prior to the completion of the merger, Valero will appoint Computershare
Trust Company of New York, or a commercial bank or trust company that is
acceptable to UDS, to act as the exchange agent. At or prior to the completion
of the merger, Valero will deposit with the exchange agent certificates
representing shares of Valero common stock and cash. Holders of unexchanged
shares of UDS common stock will not be entitled to receive any dividends or
other distributions payable by Valero until their certificates are surrendered
after the merger is completed. Upon surrender, however, subject to applicable
laws, the holders will receive accumulated dividends and distributions, without
interest, together with cash in lieu of fractional shares.
Election Procedure
Accompanying this proxy statement/prospectus is a Form of Election and
Letter of Transmittal, which includes instructions. All elections must be made
on the Form of Election. Any Form of Election submitted by a dissenting
stockholder will be invalid and will be rejected. If any dissenting stockholder
ceases to be a dissenting stockholder but does not submit a valid Form of
Election prior to the election deadline, then each UDS common share held by that
dissenting stockholder will be treated as a non-electing share.
If you hold UDS common stock in "street name" through a broker or other
nominee, your broker or other nominee must make an election on your behalf. You
will receive separate instructions from your broker or other nominee instructing
you on how to instruct your broker or other nominee to fill out the form of
election. You will need to provide these instructions to your broker
sufficiently in advance of the election deadline to permit your broker to
deliver the form of election prior to the election deadline.
Holders of UDS common stock who "constructively own" shares held by each
other by virtue of Section 318(a) of the Internal Revenue Code and who so
certify to Valero's satisfaction, and any single holder of UDS common stock who
holds the shares in two or more different names and who so certifies to Valero's
satisfaction, may submit a joint Form of Election covering the aggregate number
of shares of UDS common stock owned by the holders or single holder and will be
considered a single holder for purposes of the allocation formulas described
above. Record holders who are nominees, and who certify at the request of Valero
that they hold UDS common stock as a nominee, may submit a separate Form of
Election for each beneficial owner of UDS common stock held by that nominee, and
each of those beneficial owners will be treated as a separate holder for
purposes of the allocation formulas described above.
You may change or revoke your election by submitting a properly completed
and signed Form of Election that is received by the Exchange Agent prior to the
election deadline. You may revoke your election and withdraw the share
certificates representing your UDS common stock by providing written notice to
the Exchange Agent by the close of business on the day prior to the election
deadline. If your shares are held in "street name," you must follow the
directions provided by your broker to change your election. The Exchange Agent
will upon request make a Form of Election available to all UDS stockholders who
become holders of UDS common stock after the record date for the UDS special
meeting and before the election deadline.
For an election to be validly made, the Exchange Agent must have received a
valid, properly completed and executed Form of Election by the election
deadline. An election will be validly made only if the Form of Election is
properly completed and executed by the stockholder in accordance with the
instructions contained in that form (with the signature or signatures guaranteed
to the extent required by the Form of Election) accompanied by the share
certificate or certificates representing all of the UDS common stock owned by
that stockholder, duly endorsed in blank or in another form acceptable to
Valero. If share certificates are not available when the Form of Election is
sent to the Exchange Agent, the stockholder may provide a Guarantee of Delivery
from a member of a national securities exchange, a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust company
68
76
located in the United States. A Guarantee of Delivery in effect guarantees to
Valero that those share certificates will be delivered to the Exchange Agent.
The election deadline will be 5:00 p.m., New York City time, on the second
business day preceding the date that the merger is consummated. At least five
business days before the election deadline, Valero will issue a press release or
make some other form of public announcement of the election deadline. Valero may
extend the election deadline by similar notice to another date and time
following the previously scheduled election deadline.
Valero has the right to make reasonable determinations and to establish
reasonable procedures in guiding the Exchange Agent in its determination as to
the validity of Forms of Election. None of UDS, Valero or the Exchange Agent is
under any obligation to notify any UDS stockholder of any defect in a Form of
Election. If you have questions related to the Form of Election and Letter of
Transmittal, or if you require additional copies of the Form of Election and
Letter of Transmittal, please contact the Exchange Agent at (800) 245-7630.
THE FORM OF ELECTION AND LETTER OF TRANSMITTAL IS INCLUDED WITH THIS PROXY
STATEMENT/PROSPECTUS. YOU SHOULD COMPLETE IT IN ACCORDANCE WITH ITS INSTRUCTIONS
AND RETURN IT TO THE EXCHANGE AGENT PRIOR TO THE ELECTION DEADLINE. YOU SHOULD
INCLUDE YOUR SHARE CERTIFICATES OR AN APPROPRIATE GUARANTEE OF DELIVERY OF YOUR
SHARE CERTIFICATES AS SET FORTH IN THE FORM OF ELECTION. IF YOU DO NOT PROPERLY
COMPLETE AND RETURN TO THE EXCHANGE AGENT A FORM OF ELECTION PRIOR TO THE
ELECTION DEADLINE, YOUR UDS COMMON STOCK WILL BE TREATED AS NON-ELECTING SHARES,
AND THE FORM OF MERGER CONSIDERATION YOU WILL BE ENTITLED TO RECEIVE WILL BE
DETERMINED BY THE APPROPRIATE ALLOCATION PROVISIONS OF THE MERGER AGREEMENT.
Dividends
Holders of UDS common stock will not be entitled to receive any dividends
or other distributions payable by Valero in respect of Valero common stock until
they exchange their UDS stock certificates for shares of Valero common stock.
After they deliver their UDS stock certificates to the exchange agent, those
stockholders will receive, subject to applicable law, accumulated dividends and
distributions, and cash in lieu of any fractional shares of Valero common stock,
without interest.
Fractional Shares
No fractional shares of Valero common stock will be issued upon the
surrender of UDS stock certificates. No dividend or other distribution of Valero
will relate to any fractional share of Valero common stock that would otherwise
be issuable in the merger, and those fractional shares of Valero common stock
will not entitle the owner thereof to any voting or other rights of a Valero
stockholder.
Holders of UDS common stock otherwise entitled to fractional shares of
Valero common stock will receive, upon surrender of all of their UDS common
stock certificates, a cash payment instead of the fractional shares of Valero
common stock they would otherwise be entitled to. The amount of cash they
receive will be equal to the value of their fractional interests, determined
based on the closing price of a share of Valero common stock on the NYSE on the
last full trading day before the completion of the merger.
Antidilution Adjustments
If, before the merger is completed, there is a reclassification, stock
split, split-up, stock dividend, combination or exchange of shares with respect
to, or rights issued in respect of, UDS common stock or Valero common stock, the
exchange ratio and the formula for determining the cash consideration will be
adjusted to provide the holders of UDS common stock the same economic effect as
of immediately before the relevant event.
69
77
Additional Exchange Related Matters
Promptly after the completion of the merger, the Exchange Agent will mail
to holders of unexchanged UDS stock certificates (other than UDS stock
certificates representing dissenting shares) a letter of transmittal and
instructions for surrendering UDS stock certificates in exchange for the merger
consideration that a holder of non-electing shares is entitled to receive, along
with any dividends and other distributions and any cash in lieu of fractional
shares. After a holder of UDS stock certificates sends the UDS stock
certificates to the Exchange Agent together with the properly completed letter
of transmittal or form of election, and any other documents that the Exchange
Agent may reasonably require, the holder of UDS stock certificates will be
entitled to receive such consideration. No interest will be paid or will accrue
on any cash paid to holders of UDS stock certificates.
If there has been a transfer of ownership of UDS common stock that is not
registered in the transfer records of UDS, such holder must present to the
Exchange Agent the certificate representing such shares of UDS common stock,
along with all documents required to evidence and effect the transfer of
ownership and to evidence that any applicable stock transfer taxes have been
paid prior to receiving any merger consideration.
For a description of the differences between the rights of holders of
Valero common stock and holders of UDS common stock, see "Comparison of
Stockholder Rights."
COMPLETION OF THE MERGER
The merger will be completed at the time and date stated in the certificate
of merger that will be filed with the Secretary of State of the State of
Delaware (the state of incorporation of UDS and Valero). Under the merger
agreement, this will occur on the second business day following the satisfaction
or waiver of all conditions to the merger, unless otherwise agreed to by the
parties. We currently anticipate that the merger will be completed during the
fourth quarter of calendar 2001.
Completion of the merger could be delayed if there is a delay in obtaining
the required regulatory approvals or in satisfying other conditions to the
merger. There can be no assurances as to whether, and on what date, Valero and
UDS will obtain those approvals or that Valero and UDS will complete the merger.
If the merger is not completed on or before May 3, 2002, either Valero or UDS
may terminate the agreement, with the exception that a party may not terminate
the merger agreement if that party's failure to perform its obligations under
the merger agreement is the primary cause of the merger not being completed by
that date. See "-- Conditions." Delays in completing the merger will generally
delay the ability of the combined company to integrate operations and,
accordingly, delay the realization of expected merger synergies.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, Valero and UDS make representations and warranties
to each other about their respective companies related to, among other things:
- corporate existence, qualification to conduct business and corporate
power;
- ownership of subsidiaries;
- capital structure;
- corporate authority to enter into, and carry out the obligations under,
the merger agreement, and enforceability of the merger agreement;
- absence of a breach of charter documents, bylaws, laws or material
agreements as a result of the merger;
- required governmental consents and approvals;
- filings with the SEC;
70
78
- financial statements;
- absence of undisclosed liabilities;
- absence of specified changes or events since December 31, 2000;
- legal proceedings;
- compliance with laws;
- material contracts;
- environmental liability;
- employee benefit plans;
- intellectual property;
- inapplicability to the merger of state anti-takeover laws;
- inapplicability to the merger of its rights plan;
- receipt of an opinion from its financial advisor;
- Board of Directors approval;
- payment of fees to finders or brokers in connection with the merger;
- tax matters;
- qualification of the merger as a reorganization under U.S. federal tax
laws;
- information supplied for use in this joint proxy statement/prospectus;
and
- labor relations.
Valero also represented and warranted to UDS that Valero would have
available on the date of completion of the merger sufficient funds to enable it
to consummate the transactions contemplated by the merger agreement.
The representations and warranties contained in the merger agreement are
subject to materiality and knowledge qualifications in many respects, and do not
survive the completion of the merger.
INTERIM OPERATIONS
Restrictions on Valero's and UDS's Interim Operations
In the merger agreement, Valero and UDS have agreed to specified
restrictions on their respective activities until either the completion of the
merger or the termination of the merger agreement. In general, they are required
to conduct their respective businesses in the ordinary course consistent with
past practices in all material respects, in substantially the same manner as
previously conducted, and to use their reasonable best efforts to:
- keep available the services of their current officers and other key
employees;
- preserve intact their present lines of business, maintain their rights
and franchises; and
- preserve their relationships with customers, suppliers and others having
business dealings with them;
in each case, with the intention that their ongoing businesses are not impaired.
71
79
Additional Restrictions on UDS's Interim Operations
UDS has agreed to specific restrictions that prohibit it from:
- entering into any new material lines of business;
- without the prior written consent of Valero, not to be unreasonably
withheld, incurring or committing to any capital expenditures or related
liabilities, other than those not exceeding $25 million individually or
$100 million in the aggregate, or as contemplated by UDS's 2001 capital
budget;
- declaring or paying dividends other than regular quarterly dividends not
in excess of $0.125 per share of UDS common stock, accrued amounts on the
8.32% Trust Originated Preferred Securities of UDS Capital I, a wholly
owned subsidiary of UDS, or intracompany dividends, in accordance with
past practice;
- splitting, combining or reclassifying its capital stock or issuing
securities in respect of, in lieu of or in substitution for its capital
stock, other than such transactions by a wholly owned subsidiary of UDS
which remains a wholly owned subsidiary after the transaction;
- repurchasing, redeeming or otherwise acquiring its capital stock;
- issuing, delivering, selling, pledging or disposing of any shares of its
capital stock, voting debt or convertible securities (or corporate
actions related thereto), other than in connection with the exercise of
UDS stock options or other stock-based awards, in connection with UDS's
rights plan, or in connection with certain issuances by its subsidiaries;
- amending UDS's corporate governance documents;
- making any acquisitions, other than acquisitions in the ordinary course
of business consistent with past practice that do not exceed $25 million
individually or $100 million in the aggregate, without prior written
consent of Valero, not to be unreasonably withheld;
- disposing of assets (including the capital stock of its subsidiaries),
other than in the ordinary course of business consistent with past
practice;
- making loans, advances, capital contributions or investments in any
person other than specified intercompany loans or immaterial loans made
in the ordinary course of business consistent with past practice, and
only if those otherwise permitted loans do not present a material risk of
making it more difficult to obtain any regulatory approval that is
required in connection with the merger;
- incurring debt, other than in the ordinary course of business consistent
with past practice;
- taking any action that would prevent or impede the merger from qualifying
as a reorganization under U.S. federal tax laws;
- increasing the compensation or paying any severance to any director,
officer or key employee, or increasing any employee benefits, granting
any options to purchase UDS common stock, amending or adopting any UDS
benefit plan, other than in the ordinary course consistent with past
practice or as required by applicable law or an agreement existing on May
6, 2001;
- changing its accounting methods, changing its fiscal year, or making any
material tax election, except as disclosed in UDS's SEC documents filed
prior to May 6, 2001 or except as may be required by a governmental
authority or by changes in U.S. generally accepted accounting principles;
and
- taking any action for the purpose of preventing, delaying or impeding
completion of the merger.
72
80
Additional Restrictions on Valero's Interim Operations
Valero has agreed to specific restrictions that prohibit it from:
- declaring or paying dividends other than regular quarterly dividends or
intracompany dividends consistent with past dividend practice;
- splitting, combining or reclassifying its capital stock, or issuing
securities in respect of, in lieu of or in substitution for its capital
stock, other than such transactions by a wholly owned subsidiary of
Valero which remains a wholly owned subsidiary after the transaction;
- amending Valero's corporate governance documents, other than to increase
the number of shares of Valero common stock authorized by Valero's
certificate of incorporation or as otherwise permitted by the merger
agreement;
- taking any action that would prevent or impede the merger from qualifying
as a reorganization under U.S. federal tax laws; and
- taking any action for the purpose of preventing, delaying or impeding the
completion of the merger.
ADDITIONAL COVENANTS
In addition to the covenants relating to the conduct of the parties'
businesses before completion of the merger, each of Valero and UDS has agreed to
perform additional specified covenants in the merger agreement. The principal
additional covenants are as follows.
Valero Board of Directors
Valero has agreed to expand its Board of Directors by up to four members at
the completion of the merger and cause four of the current members of the UDS
Board of Directors to be appointed to its Board of Directors. Valero has agreed
to nominate and recommend the UDS Board designees for reelection to the Valero
Board of Directors at the next annual meeting of Valero stockholders following
completion of the merger, with at least one of the UDS Board designees serving
in each class of Valero Directors and no more than two UDS Board designees in
the same class of Valero Directors.
No Solicitation
UDS agreed in the merger agreement that neither it nor any of its
subsidiaries, officers or directors will, and that it will use reasonable best
efforts to ensure that it and its subsidiaries' employees, agents and
representatives do not:
- initiate, solicit, encourage or knowingly facilitate any inquiries or the
making of an acquisition proposal;
- have any discussion with, or provide any confidential information or data
to, any person relating to an acquisition proposal, or engage in any
negotiations concerning an acquisition proposal, or knowingly facilitate
any effort or attempt to make or implement an acquisition proposal;
- approve or recommend, or propose publicly to approve or recommend, an
acquisition proposal; or
- approve or recommend, or propose to approve or recommend, or enter into,
any letter of intent, agreement in principle, merger agreement,
acquisition agreement, option agreement or other similar agreement or
propose publicly or agree to do any of the foregoing related to an
acquisition proposal.
An "acquisition proposal" means any proposal or offer relating to, or a
transaction to effect:
- a merger, reorganization, share exchange, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction involving UDS or any of its significant subsidiaries;
- any purchase or sale of 20% or more of the consolidated assets of UDS,
including stock of its subsidiaries; or
73
81
- any purchase or sale of, or tender or exchange offer for, the equity
securities of UDS that would result in any other person (or stockholders
of such other person) beneficially owning securities representing 20% or
more of the total voting power of UDS (or of the surviving parent entity
in the transaction) or any of its significant subsidiaries.
The merger agreement permits UDS, subject to the conditions described
below, to:
- engage in discussions or negotiations with, or provide information to, a
person who submits an unsolicited bona fide written acquisition proposal
that the UDS Board of Directors concludes in good faith is reasonably
likely to constitute a "superior proposal"; and/or
- make a change in board recommendation, if UDS has received an unsolicited
bona fide written acquisition proposal and the UDS Board of Directors
concludes in good faith that the acquisition proposal constitutes a
"superior proposal."
A "superior proposal" means a bona fide written acquisition proposal for
UDS that is on terms that the UDS Board of Directors in good faith concludes,
after receipt of the advice of its financial advisors and outside counsel:
- would result in a transaction more favorable to UDS stockholders from a
financial point of view than the merger; and
- is reasonably capable of being completed.
A "change in board recommendation" means withdrawing, modifying or
qualifying, or proposing to withdraw, modify or qualify, in any manner adverse
to the other party, the recommendation of the party's Board of Directors that
its stockholders vote in favor of the approval of the merger agreement and the
merger, or take any action or make any statement in connection with the
stockholders' meeting inconsistent with such recommendation. Each of the Valero
Board of Directors and the UDS Board of Directors may make a change in board
recommendation only as provided in the merger agreement.
UDS may take the actions described immediately above only if:
- the special meeting of its stockholders to vote on the approval of the
merger agreement and the merger has not occurred;
- the UDS Board of Directors determines in good faith, after consultation
with outside counsel, that there is a reasonable probability that the
failure to take that action would be inconsistent with its fiduciary
duties under law;
- before providing any information or data to any person in connection with
an acquisition proposal by that person, the person making the proposal
enters into a customary confidentiality agreement (if the confidentiality
agreement contains terms that are less restrictive than the
confidentiality agreement between Valero and UDS, the confidentiality
agreement between Valero and UDS will be so modified automatically); and
- before providing any information or data to any person or entering into
discussions with any person, UDS promptly:
-- notifies Valero of inquiries or offers received by, any information
requested from, or any discussions sought to be initiated or continued
with, any of its representatives, and
-- notifies Valero of the name of the person and the material terms and
conditions of any inquiries or offers.
In addition, the merger agreement permits UDS to disclose to its
stockholders a position with respect to a tender offer, as required by law.
UDS has agreed that:
- it will promptly keep Valero reasonably informed of the status and terms
of any inquiries, offers or discussions, including the identity of the
person making the inquiry, proposal or offer;
74
82
- it will, and its officers, directors and representatives will,
immediately terminate any activities or discussions existing as of May 6,
2001, the date of the merger agreement, with any persons conducted before
that date regarding any acquisition proposal; and
- it will use reasonable best efforts to promptly inform its directors,
officers, key employees, agents and representatives of the obligations
described in this section.
Special Meetings
Each of Valero and UDS has agreed to hold special meetings of its
respective stockholders as soon as practicable to consider and vote upon
approval of the merger agreement and the merger. Valero has agreed, subject to
the proper exercise of its fiduciary duties, that it will recommend to its
stockholders the adoption of the merger agreement and not change its
recommendation or take any action inconsistent with its recommendation unless
UDS changes its recommendation to its stockholders. UDS has agreed that, except
as described under "-- No Solicitation" above, it will recommend to its
stockholders the adoption of the merger agreement and not change its
recommendation or take any action inconsistent with its recommendation.
Reasonable Best Efforts
Each of Valero and UDS has agreed to use its reasonable best efforts to
take all actions and do all things necessary or advisable under the merger
agreement or applicable law to complete the merger and the other transactions
contemplated by the merger agreement as soon as practicable. This cooperation
may include contesting and resisting any action or proceeding that would make
the merger illegal or would otherwise prohibit or materially impair completion
of the merger or require the combined company to dispose of assets or conduct
business in a specified manner in response to the requirements imposed by
antitrust authorities.
Employee Matters
Until the earlier of one year after completion of the merger or December
31, 2002, Valero has agreed with UDS to maintain compensation and employee
benefits that overall are no less generous than those generally provided to UDS
employees as of May 6, 2001. After that period has expired, Valero will provide
compensation and benefit plans to UDS employees that overall are at least as
generous as those generally provided to similarly situated employees of Valero.
During the period referred to above, Valero has agreed with UDS to provide
severance benefits to UDS employees that are not less than the severance
benefits payable to those employees under the UDS severance plans or policies
disclosed to Valero before May 6, 2001.
Valero has also agreed with UDS to:
- make each UDS employee eligible to participate, without any waiting time,
in all Valero employee benefit plans replacing benefit plans of UDS
employees after completion of the merger;
- credit each UDS employee for his or her years of service with UDS and its
subsidiaries and predecessor employers before the completion of the
merger, if the UDS employee was entitled, before the merger, to credit
for that service under any similar UDS benefit plans, unless that credit
would result in a duplication of benefits;
- generally waive any limitations regarding preexisting conditions and
actively-at-work requirements under the welfare benefit plans in which
UDS employees may participate after completion of the merger; and
- credit the eligible expenses incurred by the UDS employees under the UDS
plans for purposes of satisfying their annual deductibles, co-insurance
and out-of-pocket requirements under any plans that replace the UDS
welfare benefit plans.
75
83
Insurance and Indemnification
Valero has agreed to:
- indemnify and hold harmless, and provide advancement of expenses to, all
past and present directors, officers and employees of UDS and its
subsidiaries, just as those individuals were indemnified or had a right
to advancement of expenses on May 6, 2001, under UDS's certificate of
incorporation, bylaws and indemnification agreements, for acts or
omissions occurring prior to the merger;
- for a period of six years after the merger, cause Valero's certificate of
incorporation and bylaws to contain provisions regarding elimination of
liability for directors and indemnification of officers, directors and
employees that overall are no less generous than those included in the
current UDS certificate of incorporation and bylaws; and
- for a period of six years after the merger, maintain the current policies
of directors' and officers' liability insurance and fiduciary liability
insurance maintained by UDS, or comparable policies, with respect to
claims arising from facts or events that occurred prior to the merger.
Valero will not be required to expend an annual amount in excess of 200%
of the current annual premiums for this insurance, and if the annual
premiums exceed this limit, Valero will obtain a policy with the greatest
coverage available for that amount.
Expenses
Each of UDS and Valero has agreed to pay its own costs and expenses
incurred as a result of the merger and the merger agreement. UDS and Valero
will, however, share equally the costs associated with printing and mailing this
joint proxy statement/prospectus and the expenses incurred with filing this
document with the SEC.
Section 16 Matters
Each of Valero and UDS has agreed to take all required steps to exempt any
dispositions of UDS common stock or acquisitions of Valero common stock in
connection with the merger from the SEC's "short-swing profit" rules.
New York Stock Exchange
Valero will cause the Valero common stock to be issued in the merger to be
approved for listing on the New York Stock Exchange.
Affiliates
UDS will cause each of its affiliates to enter into a written agreement
providing that they will not offer or sell any of the shares of Valero common
stock issued to them in the merger in violation of the Securities Act or the
related SEC rules.
Rights Plans
UDS and Valero have each agreed to take all necessary action, including
amending their respective rights plans, to render the UDS and Valero rights
inapplicable to the merger. UDS has further agreed not to take any action
relating to UDS's rights plan, without the prior written consent of Valero, in
order to facilitate an acquisition proposal.
Indebtedness
Upon completion of the merger, Valero has agreed with UDS to assume, by
supplemental indenture or other instrument, any UDS indebtedness issued under
indentures qualified under the Trust Indenture
76
84
Act of 1939, as amended, and any other UDS indebtedness that by its terms Valero
is required to assume in order to prevent a default under the applicable debt
instrument.
CONDITIONS
Each of our respective obligations to complete the merger is subject to the
satisfaction or waiver of various conditions, including:
- the approval of the merger agreement and the merger by UDS and Valero
stockholders;
- the absence of any law, order or injunction having the effect of making
the merger illegal or otherwise prohibiting completion of the merger;
- the expiration or termination of the applicable waiting period under the
HSR Act;
- the receipt of all other governmental and regulatory consents, approvals
and authorizations required to complete the merger, unless not obtaining
those consents or approvals would not reasonably be expected to have a
material adverse effect on Valero or UDS;
- the approval for listing on the New York Stock Exchange of the Valero
common stock to be issued in the merger;
- the absence of any stop order issued by the SEC suspending the
effectiveness of this joint proxy statement/prospectus and the absence of
any proceedings initiated or threatened by the SEC for that purpose;
- the accuracy of each party's representation and warranties, other than
inaccuracies not reasonably expected to have a material adverse effect on
the party making such representation and warranty, and the other party
has received a certificate of an executive officer of the representing
party to that effect;
- the other party having performed or complied with its agreements and
covenants in the merger agreement in all material respects, and the
receipt of a certificate of an executive officer of the other party to
that effect; and
- the receipt of an opinion from the party's counsel that the merger will
qualify as a reorganization for U.S. federal income tax purposes.
TERMINATION OF THE MERGER AGREEMENT
Termination by Valero or UDS
Either of our respective Boards of Directors may terminate the merger
agreement and abandon the merger at any time prior to completion of the merger
if:
- UDS and Valero agree to terminate by mutual written consent;
- the merger has not been completed on or before May 3, 2002, except that a
party may not terminate the merger agreement if that party's failure to
perform its obligations under the merger agreement is the primary cause
of the merger not being completed by that date;
- a court or another governmental authority has issued a final and
nonappealable order, decree or ruling or taken other action permanently
restraining, enjoining or otherwise prohibiting the merger, but only if
the terminating party has satisfied its obligation to avoid or remove the
prohibition and if the primary cause of the action of the court or other
governmental authority was not the failure of the terminating party to
comply with its obligations described under "-- Additional Covenants
-- Reasonable Best Efforts";
- a court or another governmental authority has failed to issue an order or
ruling that is necessary to satisfy the conditions to the merger, and the
denial of a request to issue this order or ruling has become final and
nonappealable, but only if the terminating party has satisfied its
obligation to
77
85
obtain the order or ruling and if the primary cause of the inaction of
the court or other governmental authority was not the failure of the
terminating party to comply with its obligations described under
"-- Additional Covenants -- Reasonable Best Efforts"; or
- UDS or Valero stockholders have failed to approve the merger agreement,
at the applicable special meeting.
Termination by Valero
The Valero Board of Directors may terminate the merger agreement and
abandon the merger at any time prior to completion of the merger if:
- the UDS Board of Directors:
-- fails to recommend to UDS stockholders the approval of the merger
agreement and the merger;
-- withdraws (or proposes to withdraw) its recommendation to UDS
stockholders to approve the merger agreement and the merger; or
-- modifies or qualifies (or proposes to modify or qualify), in any manner
adverse to Valero, its recommendation to UDS stockholders to approve
the merger agreement and the merger;
- UDS breaches its obligation to call the UDS special meeting; or
- UDS breaches its representations, warranties or covenants contained in
the merger agreement so that the conditions described above relating to
the absence of a breach of representation, warranty or covenant by UDS
are not capable of being satisfied on or before May 3, 2002.
Termination by UDS
The UDS Board of Directors may terminate the merger agreement and abandon
the merger at any time prior to completion of the merger if:
- the Valero Board of Directors:
-- fails to recommend to Valero stockholders the approval of the merger
agreement and the merger;
-- withdraws (or proposes to withdraw) its recommendation to Valero
stockholders to approve the merger agreement and the merger; or
-- modifies or qualifies (or proposes to modify or qualify), in any manner
adverse to UDS, its recommendation to Valero stockholders to approve
the merger agreement and the merger;
- Valero breaches its obligation to call the Valero special meeting;
- Valero breaches its representations, warranties or covenants contained in
the merger agreement so that the conditions described above relating to
the absence of a breach of representation, warranty or covenant by Valero
are not capable of being satisfied on or before May 3, 2002; or
- the UDS Board of Directors gives written notice to Valero that it intends
to enter into a binding written agreement for a superior proposal, but
only if:
-- UDS has complied with the no solicitation provisions of the merger
agreement in all material respects;
-- UDS has notified Valero in writing that it has received a superior
proposal and that it intends to enter into a binding agreement with
respect to that superior proposal, and has attached the most current
version (or a summary of material terms) of the superior proposal to
that notice;
-- Valero does not make, within five business days after receipt of UDS's
written notice, an offer that the UDS Board of Directors reasonably
concludes in good faith (following consultation
78
86
with its financial advisor and legal counsel) to be as favorable to UDS
stockholders as the superior proposal; and
-- UDS pays the termination fee described below upon entering into a
binding written agreement for the superior proposal.
Termination Fee To Be Paid by UDS
UDS has agreed to pay Valero a termination fee of $125 million if:
- Valero terminates the merger agreement as the result of the UDS Board of
Directors:
-- failing to recommend that UDS stockholders approve the merger agreement
and the merger,
-- withdrawing its recommendation to UDS stockholders to approve the
merger agreement and the merger, or
-- modifying or qualifying, in any manner adverse to Valero, its
recommendation to UDS stockholders to approve the merger agreement and
the merger;
- Valero terminates the merger agreement because UDS has breached its
obligation to call the UDS special meeting;
- either party terminates the merger agreement because UDS stockholders
have failed to approve the merger agreement and the merger at the UDS
special meeting, or because the merger has not been completed on or
before May 3, 2002 and the UDS special meeting has not occurred, and
-- at any time after May 6, 2001, and before the termination of the merger
agreement, an acquisition proposal with respect to UDS has been
publicly announced or otherwise communicated to the senior management,
Board of Directors or stockholders of UDS, and
-- within 12 months of the termination of the merger agreement, UDS or any
of its subsidiaries enters into a definitive agreement with respect to
or completes an acquisition proposal or UDS's Board of Directors
recommends that its stockholders approve an acquisition proposal;
- Valero terminates the merger agreement after UDS has breached its
representations, warranties or covenants contained in the merger
agreement so that the condition described above relating to the absence
of a breach of representation, warranty or covenant by UDS is not capable
of being satisfied on or before May 3, 2002, and
-- at any time after May 6, 2001, and before the termination of the merger
agreement, an acquisition proposal with respect to UDS has been
publicly announced or otherwise communicated to the senior management,
UDS Board of Directors or UDS stockholders, and
-- within 12 months of the termination of the merger agreement, UDS or any
of its subsidiaries enters into a definitive agreement with respect to
or completes an acquisition proposal or UDS's Board of Directors
recommends that its stockholders approve an acquisition proposal; or
- UDS terminates the merger agreement upon entering into a definitive
agreement in response to an unsolicited superior proposal (provided that
UDS has complied with the applicable restrictions in the merger agreement
relating to a termination for this reason).
Termination Fee To Be Paid by Valero
Valero has agreed to pay UDS a termination fee of $125 million if:
- UDS terminates the merger agreement as the result of the Valero Board of
Directors:
-- failing to recommend that Valero stockholders approve the merger
agreement and the merger;
-- withdrawing its recommendation to Valero stockholders to approve the
merger agreement and the merger; or
79
87
-- modifying or qualifying, in any manner adverse to UDS, its
recommendation to Valero stockholders to approve the merger agreement
and the merger;
- UDS terminates the merger agreement because Valero has breached its
obligation to call the Valero special meeting;
- either party terminates the merger agreement because Valero stockholders
have failed to approve the merger agreement at the Valero special
meeting, or because the merger has not been completed on or before May 3,
2002 and the Valero special meeting has not occurred, and
-- at any time after May 6, 2001, and before the termination of the merger
agreement, an acquisition proposal for 50% or more of the consolidated
assets or 50% or more of the total voting power of Valero has been
publicly announced or otherwise communicated to the senior management,
Valero Board of Directors or Valero stockholders; and
-- within 12 months of the termination of the merger agreement, Valero or
any of its subsidiaries enters into a definitive agreement with respect
to or completes an acquisition proposal or Valero's Board of Directors
recommends that its stockholders approve such an acquisition proposal;
or
- UDS terminates the merger agreement after Valero has breached its
representations, warranties or covenants contained in the merger
agreement so that the condition described above relating to the absence
of a breach of representation, warranty or covenant by Valero is not
capable of being satisfied on or before May 3, 2002, and
-- at any time after May 6, 2001, and before the termination of the merger
agreement, an acquisition proposal of a type described in the
immediately preceding paragraph with respect to Valero has been
publicly announced or otherwise communicated to the senior management,
Valero Board of Directors or Valero stockholders, and
-- within 12 months of the termination of the merger agreement, Valero or
any of its subsidiaries enters into a definitive agreement with respect
to or completes an acquisition proposal or Valero's Board of Directors
recommends that its stockholders approve such an acquisition proposal.
AMENDMENTS, EXTENSIONS AND WAIVERS
Amendments
The Valero Board of Directors and the UDS Board of Directors may amend the
merger agreement at any time to the extent legally permissible. However, after
the Valero or UDS stockholders approve the merger agreement, no amendment may be
made that requires further approval by stockholders under applicable law or the
rules of any relevant stock exchange. All amendments to the merger agreement
must be in writing signed by each party.
Extensions and Waivers
At any time prior to completion of the merger, any party to the merger
agreement may, if legally permitted:
- extend the time for the performance of any of the obligations or other
acts of the other party to the merger agreement;
- waive any inaccuracies in the representations and warranties of the other
party contained in the merger agreement; and
- waive compliance by the other party with any of the agreements or
conditions contained in the merger agreement.
All extensions and waivers must be in writing and signed by the party
against whom the waiver is to be effective.
80
88
PROPOSED AMENDMENT TO VALERO'S
CERTIFICATE OF INCORPORATION
Valero presently is authorized to issue 170 million shares of capital
stock, divided into 150 million shares of Valero common stock and 20 million
shares of preferred stock. As of August 13, 2001, 62,311,166 shares of Valero
common stock were issued, including 1,619,835 treasury shares, and 60,691,331
shares of Valero common stock were outstanding. As of August 13, 2001, a total
of 3,530,325 shares of Valero common stock were available for delivery in the
future in respect of awards that have been or are authorized to be made under
Valero's stock-based compensation plans, and an estimated 6.9 million shares
would become issuable upon conversion of existing UDS stock options under the
merger agreement. Approximately 45.2 million shares of Valero common stock are
estimated to be issued in the merger upon the conversion of UDS common stock. As
of August 22, 2001, no shares of preferred stock of Valero were issued and no
other class of capital stock of Valero was authorized.
The Valero Board of Directors has approved an amendment to Valero's
certificate of incorporation to increase the number of authorized shares of
Valero common stock from 150 million to 300 million. Valero has a sufficient
number of authorized shares under Valero's certificate of incorporation to
complete the merger. Therefore, approval of the amendment to increase the number
of authorized shares of common stock is not a condition to the merger.
The Valero Board of Directors believes that an increase is advisable and in
the best interests of Valero and Valero stockholders. Following the merger,
Valero will have only approximately 33.7 million authorized and unissued shares
of Valero common stock not otherwise reserved for issuance. The Valero Board of
Directors believes that an increase in authorized shares of Valero common stock
to 300 million will give Valero greater flexibility in the future by allowing
Valero the latitude to declare stock dividends or stock splits, to use its
common stock to acquire other assets (for example, the merger) or to issue its
common stock for other corporate purposes, including stock dividends, raising
additional capital, issuance pursuant to employee and director stock plans and
possible future acquisitions. There are no current plans, understandings or
arrangements for issuing a material number of additional shares of Valero common
stock from the additional shares proposed to be authorized pursuant to the
amendment.
The issuance of shares of Valero common stock, including the additional
shares that would be authorized if the proposed amendment is adopted, may dilute
the present equity ownership position of current holders of Valero common stock
and may be made without stockholder approval, unless otherwise required by
applicable laws or stock exchange regulations. The amendment might also have the
effect of discouraging an attempt by another person or entity through the
acquisition of a substantial number of shares of Valero common stock, to acquire
control of Valero with a view to consummating a merger, sale of all or any part
of Valero's assets, or a similar transaction, because the issuance of new shares
could be used to dilute the stock ownership of such person or entity.
All shares of Valero common stock, including those now authorized and those
that would be authorized by the proposed amendment to Valero's certificate of
incorporation, are equal in rank and have the same voting, dividend and
liquidation rights. Holders of Valero common stock do not have preemptive
rights.
Pursuant to Valero's rights plan, one series I junior participating
preferred stock purchase right will be issued with each share of Valero common
stock. See "Description of Valero Capital Stock -- Valero Rights Plan" below.
THE VALERO BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT VALERO
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE AMENDMENT TO VALERO'S CERTIFICATE OF
INCORPORATION.
81
89
To effect the increase in authorized shares of Valero common stock, it is
proposed that the first sentence of Article Four of Valero's Restated
Certificate of Incorporation be amended to read in its entirety as follows:
"The total number of shares of all classes of stock that the
corporation shall have authority to issue is 320 million shares, divided
into classes as follows: 300 million shares shall be Common Stock, par
value $0.01 per share ("Common Stock"); and 20 million shares shall be
Preferred Stock, par value of $0.01 per share ("Preferred Stock").
The affirmative vote of the holders of a majority of the outstanding shares
of Valero common stock is required to approve the amendment to Valero's
certificate of incorporation. Unless a contrary choice is specified, proxies
solicited by the Valero Board of Directors will be voted for the amendment.
82
90
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
VALERO
Valero common stock is listed on the New York Stock Exchange and traded
under the symbol "VLO." The following table sets forth, for the calendar
quarters indicated, the high and low reported trading prices per share of Valero
common stock on The New York Stock Exchange Composite Transactions reporting
system, and cash dividends declared per share of Valero common stock.
STOCK PRICE
-------------------
CALENDAR YEAR HIGH LOW DIVIDENDS
------------- -------- -------- ---------
2001
Third Quarter (through August 22, 2001)..................... $39.03 $32.40 .08
Second Quarter.............................................. 51.85 35.06 .08
First Quarter............................................... 39.97 31.50 .08
2000
Fourth Quarter.............................................. 38.625 30.0625 .08
Third Quarter............................................... 35.50 24.9375 .08
Second Quarter.............................................. 32.75 26.4375 .08
First Quarter............................................... 32.00 18.50 .08
1999
Fourth Quarter.............................................. 23.3125 17.25 .08
Third Quarter............................................... 24.1875 18.875 .08
Second Quarter.............................................. 25.3125 18.75 .08
First Quarter............................................... 25.25 16.6875 .08
Number of Stockholders of Record at August 13, 2001: 4,835
On May 4, 2001, the last full trading day before the public announcement of
the proposed merger, the high and low sale prices per share for Valero common
stock as reported on The New York Stock Exchange Composite Transactions
reporting system were $45.60 and $43.50, respectively. On August 22, 2001, the
most recent practicable full trading day before the date of this document, the
high and low sale prices per share for Valero common stock as reported on The
New York Stock Exchange Composite Transactions reporting system were $39.03 and
$36.70, respectively.
83
91
UDS
UDS common stock is listed on the New York Stock Exchange and traded under
the symbol "UDS". The following table sets forth, for the calendar quarters
indicated, the high and low reported trading prices per share of UDS common
stock on The New York Stock Exchange Composite Transactions reporting system,
and cash dividends declared per share of UDS common stock.
STOCK PRICE
-------------------
CALENDAR YEAR HIGH LOW DIVIDENDS
------------- -------- -------- ---------
2001
Third Quarter (through August 22, 2001)..................... $50.25 $45.33 .125
Second Quarter.............................................. 56.00 36.54 .125
First Quarter............................................... 38.86 28.00 .275
2000
Fourth Quarter.............................................. 31.9375 25.1875 .275
Third Quarter............................................... 28.0625 21.8125 .275
Second Quarter.............................................. 28.625 23.1875 .275
First Quarter............................................... 26.00 20.5625 .275
1999
Fourth Quarter.............................................. 27.625 21.375 .275
Third Quarter............................................... 28.00 21.75 .275
Second Quarter.............................................. 25.375 19.6875 .275
First Quarter............................................... 25.50 17.875 .275
Number of Stockholders of Record at August 13, 2001: 8,270
On May 4, 2001, the last full trading day before the public announcement of
the proposed merger, the high and low sale prices per share for UDS common stock
as reported on The New York Stock Exchange Composite Transactions reporting
system were $42.75 and $40.70, respectively. On August 22, 2001, the most recent
practicable full trading day before the date of this document, the high and low
sale prices per share for UDS common stock as reported on The New York Stock
Exchange Composite Transactions reporting system were $50.25 and $48.95,
respectively.
84
92
INFORMATION ABOUT VALERO
GENERAL
Valero was incorporated in Delaware in 1981 under the name Valero Refining
and Marketing Company as a wholly owned subsidiary of Valero Energy Corporation,
referred to as Old Valero. Old Valero was engaged in both the refining and
marketing business and the natural gas related services business. On July 31,
1997, Old Valero spun off Valero to Old Valero's stockholders by distributing
all of the common stock of Valero. Immediately after this distribution, Old
Valero, with its remaining natural gas related services business, merged with a
wholly owned subsidiary of PG&E Corporation. The distribution of Valero to Old
Valero's stockholders and the merger of Old Valero with the subsidiary of PG&E
Corporation are collectively referred to as the restructuring. Upon completion
of the restructuring, Valero's name was changed from Valero Refining and
Marketing Company to Valero Energy Corporation and its common stock was listed
for trading on the New York Stock Exchange. Valero is headquartered in San
Antonio, Texas, where it was founded.
Valero is a large and geographically diverse independent petroleum refining
and marketing company. Valero owns and operates six refineries in Texas,
California, Louisiana and New Jersey with a combined throughput capacity of over
1,000,000 barrels per day, or BPD (840,000 BPD of crude capacity). Valero
produces premium, environmentally clean products such as reformulated gasoline,
low-sulfur diesel and oxygenates, and is able to produce gasoline meeting
specifications of the California Air Resources Board, or CARB gasoline. Valero
also produces a substantial slate of middle distillates, jet fuel and
petrochemicals. Valero markets its products in 34 states through an extensive
wholesale bulk and rack marketing network, and in California through
approximately 350 retail locations. As of January 31, 2001, Valero had 3,180
employees.
Valero common stock is listed on the NYSE under the symbol "VLO". Valero's
principal executive offices are located at One Valero Place, San Antonio, Texas,
78212 and its telephone number is (210) 370-2000.
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to executive compensation, various Valero
compensation plans (including the Valero stock option plans), voting securities,
including information regarding the principal holders of those securities,
certain relationships and related transactions and other matters regarding
Valero is incorporated by reference or set forth in Valero's Annual Report on
Form 10-K for the year ended December 31, 2000, which is incorporated in this
joint proxy statement/prospectus by reference. Stockholders desiring copies of
this joint proxy statement/prospectus and the other documents may contact Valero
at its address or telephone number indicated under "Where You Can Find More
Information."
85
93
INFORMATION ABOUT UDS
GENERAL
UDS is an independent refiner and retailer of refined products and
convenience store merchandise in the central, southwest and northeast regions of
the United States and eastern Canada. UDS's operations consist of refineries,
convenience stores, pipelines and terminals, a home heating oil business, and
petrochemical and natural gas liquids operations. As of June 30, 2001, UDS had
approximately 20,000 employees and over $6.0 billion in assets and had
approximately $17.0 billion in revenues in 2000.
UDS owns and operates seven refineries strategically located near its key
retail and wholesale assets:
- 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;
- Golden Eagle Refinery located near San Francisco in northern 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 northern Quebec, Canada.
In the United States, UDS markets refined products and a broad range of
convenience store merchandise through a network of approximately 4,300
convenience stores under the Diamond Shamrock(R), Beacon(R), Ultramar(R), and
Total(R) brand names across 17 central and southwest states including over 2,500
company-owned sites operating under those brand names. In the Northeast, UDS
markets refined products through approximately 1,200 convenience stores and 85
cardlocks. UDS's Northeast operations include a retail home heating oil business
that sells heating oil to approximately 250,000 households.
UDS's operations are divided into three reportable business segments:
- refining, which includes refinery, wholesale marketing, product supply,
distribution and transportation operations, was responsible for
approximately 60% and 62% of UDS's total sales and other revenues from
external customers for the twelve-month period ended December 31, 2000
and the six-month period ended June 30, 2001, respectively;
- retail, which includes sales of refined products and convenience store
merchandise to company-operated convenience stores, sales of refined
products to branded dealers, independent jobbers, truckstop facilities
and key-activated self-service stations, as well as home heating oil
operations, was responsible for approximately 39% and 37% of UDS's total
sales and other revenues from external customers for the twelve-month
period ended December 31, 2000 and the six-month period ended June 30,
2001, respectively; and
- petrochemical and natural gas liquids operations, which were responsible
for approximately 1% of UDS's total sales and other revenues from
external customers for each of the twelve-month period ended December 31,
2000 and the six-month period ended June 30, 2001.
UDS common stock is listed on the NYSE under the symbol "UDS". UDS's
principal executive offices are located at 6000 North Loop 1604 West, San
Antonio, Texas 78249-1112, and the telephone number is (210) 592-2000.
86
94
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to executive compensation, various UDS benefit
plans (including UDS's stock option plans), voting securities, including
information regarding the principal holders of those securities, certain
relationships and related transactions and other matters regarding UDS is
incorporated by reference or set forth in UDS's Annual Report on Form 10-K for
the year ended December 31, 2000, which is incorporated in this joint proxy
statement/prospectus by reference. Stockholders desiring copies of this joint
proxy statement/prospectus and the other documents may contact UDS at its
address or telephone number indicated under "Where You Can Find More
Information."
87
95
DESCRIPTION OF VALERO CAPITAL STOCK
As a result of the merger, UDS stockholders will become Valero
stockholders. Your rights as a Valero stockholder will be governed by Delaware
law, Valero's certificate of incorporation and Valero's bylaws. The following
description of Valero's capital stock, including the Valero common stock to be
issued in the merger, reflects the anticipated state of affairs at the
completion of the merger.
The description summarizes the material terms of Valero's capital stock. It
is qualified in its entirety by reference to the applicable provisions of
Delaware law, Valero's certificate of incorporation, bylaws and the Valero
Rights Agreement, dated as of July 17, 1997, between Valero and Computershare
Investor Services, LLC, as successor rights agent to Harris Trust and Savings
Bank, relating to rights to purchase shares of Valero series I junior
participating preferred stock.
VALERO COMMON STOCK
Valero is authorized to issue 150 million shares of common stock and, if
the amendment to Valero's certificate of incorporation is approved by Valero
stockholders and thereafter becomes effective under Delaware law, Valero will be
authorized to issue 300 million shares of Valero common stock. As of August 13,
2001, there were 60,692,331 shares of Valero common stock outstanding. All of
the issued and outstanding shares of Valero common stock are, and upon the
issuance of shares of Valero common stock in connection with the merger will be,
validly issued, fully paid and nonassessable. Holders of Valero common stock are
not entitled to any preemptive rights.
Dividend Rights
Holders of Valero common stock may receive dividends when declared by the
Valero Board of Directors as permitted by Delaware law. Subject to the terms of
any outstanding preferred stock, holders of Valero common stock may not receive
dividends until Valero has satisfied its obligations to any holders of its
preferred stock.
Voting Rights
The holders of Valero common stock are entitled to one vote per share of
Valero common stock.
Liquidation Rights
In the event of liquidation, holders of Valero common stock would be
entitled to receive proportionately any assets legally available for
distribution to Valero stockholders with respect to shares held by them, subject
to any prior rights of the holders of any Valero preferred stock then
outstanding.
Preemptive or Other Subscription Rights
Holders of Valero common stock do not have any preemptive rights to
subscribe for any securities of Valero.
Conversion and Other Rights
No conversion, redemption or sinking fund provisions apply to the Valero
common stock, and the holders of Valero common stock are not liable to further
calls or assessments by Valero.
VALERO RIGHTS PLAN
A dividend of one series I junior participating preferred stock purchase
right for each share of Valero common stock was issued on July 31, 1997 in the
distribution of common shares of Valero stock that took place on that date. Each
right entitles the registered holder to purchase from Valero one one-hundredth
of a share of Valero series I junior participating preferred stock, at a price
of $100 per one-hundredth of a share of series I junior participating preferred
stock. The description and terms of the rights are set forth
88
96
in Valero's rights plan attached as Exhibit 4.1 to Valero's Registration
Statement on Form S-8, filed on July 21, 1997, and incorporated by reference in
this joint proxy statement/prospectus. See "Where You Can Find More
Information."
COMPARISON OF STOCKHOLDER RIGHTS
The rights of Valero stockholders are currently governed by Delaware law,
Valero's certificate of incorporation, Valero's bylaws and Valero's rights plan,
as amended. The rights of UDS stockholders are currently governed by Delaware
law, UDS's certificate of incorporation, as amended, UDS's bylaws, as amended,
and UDS's rights plan, dated as of June 25, 1992, as amended, between UDS and
Chase Bank Texas, N.A., as successor rights agent to Texas Commerce Bank, N.A.,
as successor rights agent to First City, Texas-Houston, National Association,
relating to rights to purchase shares of UDS common stock. Upon completion of
the merger, UDS stockholders will automatically become Valero stockholders, and
their rights as Valero stockholders will be governed by Delaware law, Valero's
certificate of incorporation, Valero's bylaws and Valero's rights plan.
The following is a summary of material differences between the rights of
UDS stockholders and the rights of Valero stockholders. It is not a complete
statement of the provisions affecting, and the differences between, the rights
of UDS stockholders and Valero stockholders. The summary is qualified in its
entirety by reference to Delaware law, Valero's certificate of incorporation,
Valero's bylaws, Valero's rights plan, UDS's certificate of incorporation, as
amended, UDS's bylaws, as amended, and UDS's rights plan, as amended.
AUTHORIZED CAPITAL STOCK
UDS VALERO
- 250 million shares of UDS common stock - 150 million shares of Valero common stock
(to be increased to 300 million if the
- 25 million shares of UDS preferred stock amendment to Valero's certificate of
incorporation is approved and the
amendment thereafter becomes effective
under Delaware law)
- 20 million shares of Valero preferred
stock
SIZE OF BOARD OF DIRECTORS
UDS VALERO
Delaware law provides that the board of Valero's bylaws provide for a board of
directors of a Delaware corporation shall directors consisting of not fewer than five
consist of one or more directors as fixed by nor more than 13 persons. The number of
the corporation's certificate of directors of Valero currently is fixed at
incorporation or bylaws. UDS's certificate nine. There are no vacancies. In connection
of incorporation, as amended, provides for a with the merger, Valero's Board of Directors
Board of Directors consisting of not more will be increased to 13 persons and will
than 12 persons. The number of directors of include four UDS directors.
UDS currently is fixed at ten.
89
97
CUMULATIVE VOTING
UDS VALERO
Under Delaware law, stockholders of a Valero's certificate of incorporation does
Delaware corporation do not have the right not provide for cumulative voting by Valero
to cumulate their votes in the election of stockholders.
directors, unless such right is granted in
the certificate of incorporation of the
corporation. UDS's certificate of
incorporation does not provide for
cumulative voting by UDS stockholders.
CLASSES OF DIRECTORS
UDS VALERO
Delaware law permits, but does not require, Valero's certificate of incorporation
a Delaware corporation to provide in its provides for its board of directors to be
certificate of incorporation for a divided into three classes, of as equal size
classified board of directors, dividing the as practicable, with three-year terms.
board of directors into up to three classes
of directors with staggered terms of office,
with only one class of directors to be
elected each year for a maximum term of
three years. UDS's certificate of
incorporation provides for its board of
directors to be divided into three classes,
of as equal size as practicable, with
three-year terms.
QUALIFICATIONS OF DIRECTORS
UDS VALERO
Under Delaware law, a director of a Delaware Valero's bylaws provide that a director need
corporation need not be a stockholder of the not be a Valero stockholder nor a resident
corporation, unless the certificate of of Delaware and that any individual is
incorporation or bylaws of the corporation eligible for election as a Valero director,
so requires. Neither the certificate nor the provided that the individual is less than 70
bylaws of UDS contain such a requirement. years of age when elected.
90
98
FILLING VACANCIES ON THE BOARD
UDS VALERO
Delaware law provides that, unless the Valero's bylaws provide that any vacancies
governing documents of a Delaware on Valero's Board of Directors may be filled
corporation provide otherwise, vacancies and by majority vote of the remaining directors,
newly-created directorships resulting from a even though less than a quorum.
resignation or an increase in the authorized
number of directors elected by all of the
stockholders having the right to vote as a
single class may be filled by a majority of
the directors then in office.
UDS's certificate of incorporation and
bylaws provide that vacancies due to an
increase in the number of directors may be
filled by a majority of the directors then
in office, provided that there is a quorum,
and that vacancies for any other reason may
be filled by a majority of the directors
then in office, even though less than a
quorum.
REMOVAL OF DIRECTORS
UDS VALERO
UDS's certificate of incorporation provides Valero's certificate of incorporation
that directors may be removed only for cause provides that any director, or the entire
and only by the affirmative vote of a board of directors, may be removed from
majority of the outstanding shares of voting office at any time, but only for cause and
stock; it defines "cause" as the willful and only by the affirmative vote of at least 60%
continuous failure of a director to perform of the outstanding voting shares.
his or her duties or the willful engaging by
a director in gross misconduct materially
and demonstrably injurious to the
corporation.
91
99
NOMINATION OF DIRECTORS FOR ELECTION
UDS VALERO
Under UDS's bylaws, nominations for the UDS Board of Under Valero's bylaws, nominations for the Valero
Directors may be made by the UDS Board of Directors or Board of Directors may be made by the Valero Board of
by any stockholder of record on the date of the giving Directors or by any stockholder of record on the date
of the notice described in this section of the bylaws of the giving of the notice described in this section
who is entitled to vote at the meeting where election of the bylaws who is entitled to vote at the meeting
of directors will be held. Stockholder nominations where election of directors will be held. Stockholder
must comply with the notice procedures described in nominations must comply with the notice procedures
UDS's bylaws. These procedures require the written described in Valero's bylaws. These procedures require
notice to be received by UDS the written notice to be received by Valero
- for an annual meeting, not less than 60 days prior - for an annual meeting, not less than 60 days prior
to nor more than 90 days prior to the anniversary to nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting of date of the immediately preceding annual meeting of
stockholders; stockholders;
- if the date of the annual meeting is more than 30 - if the date of the annual meeting is more than 30
days before or 60 days after that anniversary date, days before or 60 days after that anniversary date,
then notice must be received not later than the then notice must be received not earlier than 90
close of business on the tenth day following the day days prior to such annual meeting nor later than 60
on which notice of the date of the annual meeting days prior to such annual meeting or the tenth day
was mailed or public disclosure of the date of the following the day on which notice of the date on
annual meeting was made, whichever is first; and which public disclosure of the date of the annual
meeting was made by the corporation; and
- for a special meeting called for the purpose of
electing directors, not later than the close of - for a special meeting at which directors are to be
business on the tenth day following the day on which elected, not earlier than 90 days prior to such
the proxy materials for such meeting were mailed or special meeting nor later than 60 days prior to such
public disclosure of the date of the special meeting special meeting or the tenth day following the day
was made, whichever is first. on which notice of the date on which public
disclosure of the date of the special meeting was
The notice must include information on the nominee made by the corporation.
required by the proxy rules of the SEC.
The notice must include information on the nominee
required by the proxy rules of the SEC.
92
100
TRANSACTIONS WITH INTERESTED STOCKHOLDERS
UDS VALERO
UDS has not elected not to be governed by Valero has not elected not to be governed by
Section 203 of the Delaware General Section 203 of the Delaware General
Corporation Law. Corporation Law.
UDS's certificate of incorporation requires Valero's certificate of incorporation
the affirmative vote of 80% of the requires the affirmative vote of 66 2/3% of
outstanding voting shares, including a the outstanding voting shares, including
majority of the shares not owned by the 66 2/3% of the shares not owned by the
interested stockholder or its affiliates, interested stockholder or its affiliates,
for for
- merger or consolidation with an - merger or consolidation with an interested
interested stockholder or an affiliate stockholder or an affiliate of an
of an interested stockholder; interested stockholder;
- sale, lease, exchange, mortgage, pledge, - sale, lease, exchange, mortgage, pledge,
transfer or other disposition of all or transfer or other disposition of any
substantially all of the assets of the assets with a fair market value of $10
corporation or assets representing more million or more to or with any
than 75% of the total value of the interested stockholder or affiliate of
assets of the corporation to or with any an interested stockholder;
interested stockholder or affiliate of
an interested stockholder; - issuance or transfer by the corporation or
any subsidiary of any securities of the
- sale, lease, exchange, mortgage, pledge, corporation or any subsidiary to any
transfer or other disposition of any interested stockholder, including
assets with a fair market value of $10 affiliates of the interested stockholder,
million or more to or with any in exchange for assets having a fair
interested stockholder or affiliate of market value of $10 million or more; or
an interested stockholder;
- adoption of any plan or proposal for
- issuance or transfer by the corporation liquidation or dissolution proposed by or
or any subsidiary of any securities of on behalf of an interested stockholder.
the corporation or any subsidiary to any
interested stockholder, including
affiliates of the interested
stockholder, in exchange for assets
having a fair market value of $10
million or more; or
- any reclassification of securities, or
recapitalization of the corporation, or
any merger or consolidation of the
corporation with any of its subsidiaries
or any other transaction, whether or not
an interested stockholder is a party
thereto, that has the effect of
increasing the proportionate share of
the outstanding shares of any class of
securities of the corporation or a
subsidiary which are owned by an
interested stockholder or its
affiliates.
93
101
The provision does not apply in certain cases, The provision does not apply if:
including if:
- a majority of the directors who are
- a majority of the directors who are unaffiliated with the interested stockholder
unaffiliated with the interested stockholder and were members of the board prior to the
and were members of the board prior to the time the interested stockholder became an
time the interested stockholder became an interested stockholder, including any directors
interested stockholder, including any directors appointed thereafter who are unaffiliated with
appointed thereafter who are unaffiliated with the interested stockholder and are
the interested stockholder and are recommended for election by the other
recommended for election by the other unaffiliated directors, approve the
unaffiliated directors, approve the transaction, transaction; or
and the interested stockholder acquired its
status in a manner approved by the board of - a number of other conditions are met,
directors prior to the time such interested including a condition requiring the payment
stockholder acquired its status; or received by the stockholders to be at least
equal to the highest price paid by the
- a number of other conditions are met, interested stockholder for shares prior to the
including a condition requiring the payment transaction.
received by the stockholders to be at least
equal to the highest price paid by the
interested stockholder for shares prior to the
transaction.
As used in this provision, "interested As used in this provision, "interested
stockholder" means any person who: stockholder" means any person who:
- along with its affiliates, is the beneficial - along with its affiliates, is the beneficial
owner of more than 10% of the outstanding owner of more than 15% of the outstanding
voting stock; or voting stock; or
- is an affiliate of the corporation and at - is an affiliate of the corporation and at any
any time within the two years immediately time within the two years immediately prior
prior to the date in question was, along with to the date in question was, along with its
its affiliates, the owner of 10% or more of affiliates, the owner of 15% or more of the
the outstanding voting stock; or outstanding voting stock; or
- is an assignee of or has otherwise succeeded - is an assignee of or has otherwise succeeded
to any voting stock which was at any time to any voting stock which was at any time
within the two years immediately prior to the within the two years immediately prior to the
date in question owned by an interested date in question owned by an interested
stockholder, if the assignment or succession stockholder, if the assignment or succession
occurred other than through a public offering. occurred other than through a public
offering.
94
102
STOCKHOLDER RIGHTS PLAN
UDS VALERO
UDS has implemented the UDS rights plan, Valero has implemented the Valero rights
under which a group of persons becomes an plan, under which a group of persons becomes
acquiring person upon a public announcement an acquiring person upon a public
that they have acquired or intend to acquire announcement that they have acquired or
20% or more of UDS's voting stock. intend to acquire 15% or more of Valero's
voting stock. This threshold can be reduced
In connection with the proposed merger, UDS by amendment of the Valero rights plan. Each
amended the UDS rights plan to exempt the share of Valero common stock issued in the
merger with Valero from triggering the UDS merger will be issued with an attached
rights plan. right.
In connection with the proposed merger,
Valero amended the Valero rights plan to
exempt the merger with UDS from triggering
the Valero rights plan.
STOCKHOLDER ACTION WITHOUT A MEETING
UDS VALERO
As permitted under Delaware law, UDS's As permitted under Delaware law, Valero's
certificate of incorporation prohibits certificate of incorporation and bylaws
stockholder action by written consent and prohibit stockholder action by written
mandates that any action required or consent and mandate that any action required
permitted to be taken by UDS stockholders or permitted to be taken by Valero
must be effected at a duly called annual or stockholders must be effected at a duly
special meeting. called annual or special meeting. The vote
of 80% of the outstanding shares are
required to amend this provision.
CALLING SPECIAL MEETINGS OF STOCKHOLDERS
UDS VALERO
Under Delaware law, a special meeting of Valero's bylaws provide that a special
stockholders of a Delaware corporation may meeting of stockholders may be called only
be called by the board of directors of the by the CEO or by the Board of Directors
corporation or by any other person pursuant to a resolution adopted by a
authorized to do so in the certificate of majority of the total number of authorized
incorporation or the bylaws of the directors (whether or not there are any
corporation. UDS's bylaws provide that a vacancies). Valero stockholders do not have
special meeting of stockholders may be the ability to call a special meeting of
called only by the Chairman of the Board of stockholders.
Directors, the President or the Board of
Directors pursuant to a resolution adopted
by a majority of the total number of
authorized directors (whether or not there
are any vacancies). UDS stockholders do not
have the ability to call a special meeting
of stockholders.
95
103
SUBMISSION OF STOCKHOLDER PROPOSALS
UDS VALERO
UDS's bylaws specify advance notice Valero's bylaws specify advance notice
requirements that conform to the requirements that conform to the
requirements of Delaware law. Notice for an requirements of Delaware law. Notice for an
annual meeting would have to be received by annual meeting would have to be received by
UDS Valero
- not earlier than 90 days prior to the - not earlier than 90 days prior to the
anniversary date on which UDS first mailed anniversary of last year's annual meeting,
its proxy materials for the immediately and
preceding annual meeting of stockholders,
and - not later than 60 days prior to such
anniversary date.
- not later than 60 days prior to such
anniversary date.
If the date of the annual meeting is not If the date of the annual meeting is more
within 30 days before or after the than 30 days before or 60 days after such
anniversary date of the immediately anniversary date, then notice must be
preceding annual meeting of stockholders, received by Valero
then notice must be received by UDS not
later than 10 days after the day on which - not earlier than 90 days prior to the date
the proxy materials for such annual meeting of the annual meeting, and
were mailed or public announcement of the
date of the annual meeting, whichever is - not later than 60 days prior to the date
earlier. of the annual meeting or 10 days after
public announcement of such date, if
The notice must include a description of the later.
stockholder proposal, the reasons for
conducting the business desired to be The notice must include a description of the
brought before the meeting and other stockholder proposal, the reasons for
information. conducting the business desired to be
brought before the meeting and other
information.
NOTICE OF STOCKHOLDER MEETINGS
UDS VALERO
In accordance with Delaware law, UDS's Valero's bylaws contain a substantially
bylaws provide for written notice to identical provision.
stockholders of record not less than 10 nor
more than 60 days prior to an annual or
special meeting.
96
104
DIVIDENDS
UDS VALERO
Under Delaware law, a Delaware corporation Valero's certificate of incorporation
may pay dividends out of surplus or, if provides that the Valero Board of Directors
there is no surplus, out of net profits for has full discretion to declare dividends.
the fiscal year in which declared and for
the preceding fiscal year. Delaware law also
provides that dividends may not be paid out
of net profits if, after the payment of the
dividend, capital is less than the capital
represented by the outstanding stock of all
classes having a preference upon the
distribution of assets.
UDS's bylaws provide that the UDS Board of
Directors has full discretion to declare
dividends.
STOCKHOLDER PREEMPTIVE RIGHTS
UDS VALERO
Delaware law provides that no stockholder Valero's certificate of incorporation
shall have any preemptive rights to purchase provides that no Valero stockholder shall
additional securities of the corporation have preemptive rights.
unless the certificate of incorporation
expressly grants these rights.
UDS's certificate of incorporation does not
provide for preemptive rights for UDS
stockholders.
INDEMNIFICATION
UDS VALERO
UDS's bylaws provide for indemnification, to Valero's certificate of incorporation
the fullest extent authorized by Delaware provides for indemnification, to the fullest
law, for each individual who was or is made extent authorized by Delaware law, to each
a party to, is threatened to be made a party director or officer who was or is made a
to or is involved in any action, suit or party to, is threatened to be made a party
proceeding because he or she is or was a to or is involved in any action, suit or
director, officer or employee of UDS (or was proceeding because he or she is or was a
serving at the request of UDS as a director, director, officer or employee of Valero (or
trustee, officer, employee, or agent of was serving at the request of Valero as a
another entity) while serving in that director, trustee, officer, employee, or
capacity against all expenses, liabilities, agent of another entity) while serving in
or loss incurred by that individual in that capacity against all expenses,
connection therewith, provided that judgments, fines, and amounts paid in
indemnification will be permitted only if settlement actually and reasonably incurred
the individual has met the applicable in connection therewith by that individual,
standard of conduct, as determined by a provided that, if required by Delaware law,
majority of disinterested directors or by payment of expenses incurred by a director
the stockholders. or officer in his capacity as a director or
officer (but not in any other capacity) in
The right to indemnification is not advance of the final disposition of a
exclusive of any other right that any proceeding shall be made only upon delivery
individual may have or acquire under any to Valero of an undertaking to repay all
bylaw, agreement, contract, vote of amounts so advanced if it is ultimately
stockholders or disinterested directors or determined that such individual is not
otherwise. entitled to be indemnified under Delaware
law.
The right to indemnification is not
exclusive of any other right that any
individual may have or acquire under any
agreement, vote of stockholders, vote of
disinterested directors, insurance
arrangement or otherwise.
97
105
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
UDS VALERO
UDS's certificate of incorporation provides Valero's certificate of incorporation
that, to the fullest extent permitted by contains a substantially identical
Delaware law, a director or officer of UDS provision.
shall not be personally liable to UDS or any
of UDS's stockholders for damages for breach
of fiduciary duty as a director or officer,
except for liability arising out of:
- breach of the director's duty of loyalty
to UDS or its stockholders;
- acts or omissions that involve
intentional misconduct, fraud or a
knowing violation of law;
- payment of a dividend in violation of
Delaware law; or
- any transaction from which the director
derived an improper personal benefit.
CHARTER AMENDMENTS
UDS VALERO
Under Delaware law, amendments to a Valero's certificate of incorporation
certificate of incorporation of the requires the affirmative vote of 80% of the
corporation require the approval of the outstanding voting shares to amend certain
board of directors of the corporation and provisions relating to the Board of
stockholders holding a majority of the Directors and requires the affirmative vote
outstanding stock of the class entitled to of 66 2/3% of the outstanding voting shares
vote on the amendment as a class, unless a that are unaffiliated with an interested
different proportion is specified in the stockholder to amend the "interested
certificate of incorporation or by other stockholder" provisions.
provisions of Delaware law.
UDS's certificate of incorporation requires
the affirmative vote of 80% of the
outstanding voting shares to amend
provisions relating to directors, action by
written consent, preferred stock, amendment,
and interested stockholders. In addition,
the certificate of incorporation requires
the affirmative vote of a majority of the
outstanding voting shares not affiliated
with an interested stockholder to amend the
"interested stockholder" provisions.
98
106
AMENDMENT OF BYLAWS
UDS VALERO
Under Delaware law, holders of a majority Valero's bylaws provide that the bylaws may
of the voting power of a corporation, and, be altered, amended or repealed by majority
when provided in the certificate of vote of the directors then in office or by
incorporation, the directors of the the affirmative vote of 80% of the
corporation, have the power to adopt, amend outstanding voting shares of Valero.
and repeal the bylaws of a corporation.
UDS's bylaws provide that the bylaws may be
altered, amended or repealed by majority
vote of the whole Board of Directors or by
the affirmative vote of 80% of the
outstanding voting shares of UDS.
99
107
VALERO ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements combine the
historical consolidated balance sheets and statements of income of Valero and
UDS, giving effect to the merger using the purchase method of accounting.
Certain historical balance sheet and income statement amounts of UDS have been
reclassified to conform the financial statement presentation of the two
companies. Valero's historical income statement for the year ended December 31,
2000 has been adjusted to reflect the pro forma impact of the Benicia
acquisition and related financings, which were completed during the second
quarter of 2000, as if they had occurred on January 1, 2000.
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. The balance sheet information at June 30,
2001 and the income statement information for the six months ended June 30, 2001
were derived from the unaudited financial statements of Valero and UDS. The
income statement information for the year ended December 31, 2000 was derived
from the audited financial statements of Valero and UDS. The information should
be read together with our historical financial statements and related notes
contained in the annual reports and other information that we have filed with
the SEC and incorporated herein by reference. See "Where You Can Find More
Information."
The unaudited pro forma combined balance sheet gives effect to the merger
as if it had occurred on June 30, 2001. The unaudited pro forma combined
statements of income assume the merger was effected on January 1, 2000. The
accounting policies of Valero and UDS are substantially comparable.
The unaudited pro forma combined financial information is for illustrative
purposes only. The financial results may have been different had the companies
always been combined. Further, the unaudited pro forma combined statements of
income do not reflect anticipated synergies or costs and charges that may result
from the merger as discussed under "The Merger -- Management and Operations
Following the Merger." The pro forma financial information does not reflect any
actions the companies may be required to take in connection with obtaining the
necessary regulatory approvals for the merger. You should not rely on the pro
forma combined financial information as being indicative of the historical
results that would have been achieved had the companies always been combined or
the future results that Valero will experience.
100
108
VALERO ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 2001
(MILLIONS OF DOLLARS)
VALERO
VALERO UDS PRO FORMA AND UDS
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments....................... $ 42.5 $ 299.6 $ 2,028.6 (b) $ 144.3
(20.3)(b)
(2,028.6)(a)
(22.0)(a)
(155.5)(c)
Receivables, net.......................................... 676.9 496.1 -- 1,173.0
Inventories............................................... 773.3 807.8 234.3 (a) 1,815.4
Current deferred income tax assets........................ 66.8 116.9 -- 183.7
Prepaid expenses and other................................ 44.5 79.7 -- 124.2
-------- -------- --------- ---------
1,604.0 1,800.1 36.5 3,440.6
-------- -------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT............................... 4,043.1 5,257.7 1,000.0 (a) 8,692.3
(1,608.5)(d)
Less: Accumulated depreciation............................ 869.7 1,608.5 (1,608.5)(d) 869.7
-------- -------- --------- ---------
3,173.4 3,649.2 1,000.0 7,822.6
-------- -------- --------- ---------
GOODWILL.................................................... -- 346.9 (346.9)(a) 2,357.6
1,988.3 (a)
158.2 (c)
211.1 (e)
-------- -------- --------- ---------
DEFERRED CHARGES AND OTHER ASSETS........................... 436.8 276.9 20.3 (b) 734.0
-------- -------- --------- ---------
$5,214.2 $6,073.1 $ 3,067.5 $14,354.8
======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt.... $ -- $ 1.3 $ -- $ 1.3
Accounts payable.......................................... 793.7 822.0 -- 1,615.7
Accrued expenses.......................................... 227.5 697.2 2.7 (c) 927.4
Income taxes payable...................................... 106.9 51.6 -- 158.5
-------- -------- --------- ---------
1,128.1 1,572.1 2.7 2,702.9
-------- -------- --------- ---------
LONG-TERM DEBT, less current maturities..................... 1,041.8 1,686.1 (13.9)(a) 4,742.6
2,028.6 (b)
-------- -------- --------- ---------
CAPITAL LEASE OBLIGATIONS................................... 285.8 -- -- 285.8
-------- -------- --------- ---------
DEFERRED INCOME TAXES....................................... 492.9 523.2 480.6 (a) 1,496.7
-------- -------- --------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES...................... 142.7 362.3 -- 505.0
-------- -------- --------- ---------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY................ -- 114.3 -- 114.3
-------- -------- --------- ---------
COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS.................................................... 172.5 200.0 -- 372.5
-------- -------- --------- ---------
COMMON STOCKHOLDERS' EQUITY:
Common stock............................................ .6 .8 (.8)(a) 1.1
.5 (a)
Additional paid-in capital.............................. 1,249.9 938.4 (938.4)(a) 3,493.6
2,032.6 (a)
211.1 (e)
Retained earnings....................................... 722.7 883.7 (883.7)(a) 722.7
Accumulated other comprehensive income (loss)........... 29.8 (92.7) 92.7 (a) 29.8
Treasury stock.......................................... (52.6) (86.2) 86.2 (a) (52.6)
Grantor trust stock ownership program................... -- (28.9) 28.9 (a) (59.6)
(59.6)(a)
-------- -------- --------- ---------
1,950.4 1,615.1 569.5 4,135.0
-------- -------- --------- ---------
$5,214.2 $6,073.1 $ 3,067.5 $14,354.8
======== ======== ========= =========
See Notes to Unaudited Pro Forma Combined Financial Statements.
101
109
VALERO ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
VALERO
VALERO UDS PRO FORMA AND UDS
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
OPERATING REVENUES................................ $8,268.4 $9,319.7 $(1,387.9)(f) $16,200.2
-------- -------- --------- ---------
COSTS AND EXPENSES:
Cost of sales and operating expenses............ 7,411.6 8,317.6 (1,387.9)(f) 14,341.3
Selling and administrative expenses............. 90.2 173.6 -- 263.8
Goodwill amortization........................... -- 7.0 (7.0)(g) --
Depreciation expense............................ 65.3 111.3 19.6 (h) 196.2
Restructuring and other expenses, net........... -- (8.9) -- (8.9)
-------- -------- --------- ---------
Total................................... 7,567.1 8,600.6 (1,375.3) 14,792.4
-------- -------- --------- ---------
OPERATING INCOME (LOSS)........................... 701.3 719.1 (12.6) 1,407.8
OTHER INCOME (EXPENSE), NET....................... (1.1) (1.0) -- (2.1)
INTEREST AND DEBT EXPENSE:
Incurred........................................ (43.8) (63.1) (74.8)(i) (183.2)
(1.5)(i)
Capitalized..................................... 4.6 2.2 -- 6.8
DISTRIBUTIONS ON PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS............................... (6.7) (8.6) -- (15.3)
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED
SUBSIDIARY...................................... -- (2.4) -- (2.4)
-------- -------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES................. 654.3 646.2 (88.9) 1,211.6
INCOME TAX EXPENSE (BENEFIT)...................... 243.4 243.1 (20.0)(j) 466.5
-------- -------- --------- ---------
NET INCOME (LOSS)................................. $ 410.9 $ 403.1 $ (68.9) $ 745.1
======== ======== ========= =========
EARNINGS PER SHARE OF COMMON STOCK................ $ 6.73 $ 5.41 $ 7.10
Weighted average common shares outstanding (in
millions).................................... 61.1 74.5 105.0
EARNINGS PER SHARE OF COMMON STOCK--ASSUMING
DILUTION........................................ $ 6.35 $ 5.31 $ 6.77
Weighted average common shares outstanding (in
millions).................................... 64.7 75.9 110.0
See Notes to Unaudited Pro Forma Combined Financial Statements.
102
110
VALERO ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
VALERO VALERO
HISTORICAL UDS PRO FORMA AND UDS
AS ADJUSTED(K) HISTORICAL ADJUSTMENTS COMBINED
-------------- ---------- ----------- ---------
OPERATING REVENUES............................ $15,393.4 $17,061.1 $(2,664.5)(f) $29,790.0
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales and operating expenses........ 14,472.1 15,677.6 (2,664.5)(f) 27,485.2
Selling and administrative expenses......... 146.8 345.8 -- 492.6
Goodwill amortization....................... -- 15.4 (15.4)(g) --
Depreciation expense........................ 121.4 209.0 39.1 (h) 369.5
Restructuring and other expenses, net....... -- 1.2 -- 1.2
--------- --------- --------- ---------
Total............................... 14,740.3 16,249.0 (2,640.8) 28,348.5
--------- --------- --------- ---------
OPERATING INCOME (LOSS)....................... 653.1 812.1 (23.7) 1,441.5
OTHER INCOME, NET............................. .3 28.5 -- 28.8
INTEREST AND DEBT EXPENSE:
Incurred.................................... (98.3) (126.1) (149.6)(i) (377.0)
(3.0)(i)
Capitalized................................. 7.4 2.9 -- 10.3
DISTRIBUTIONS ON PREFERRED SECURITIES OF
SUBSIDIARY TRUST............................ (13.4) (17.1) -- (30.5)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES............. 549.1 700.3 (176.3) 1,073.1
INCOME TAX EXPENSE (BENEFIT).................. 197.0 256.0 (39.6)(j) 413.4
--------- --------- --------- ---------
NET INCOME (LOSS)............................. $ 352.1 $ 444.3 $ (136.7) $ 659.7
========= ========= ========= =========
EARNINGS PER SHARE OF COMMON STOCK............ $ 5.73 $ 5.12 $ 6.26
Weighted average common shares outstanding
(in millions)............................ 61.5 86.8 105.4
EARNINGS PER SHARE OF COMMON STOCK -- ASSUMING
DILUTION.................................... $ 5.54 $ 5.11 $ 6.13
Weighted average common shares outstanding
(in millions)............................ 63.5 87.0 107.6
See Notes to Unaudited Pro Forma Combined Financial Statements.
103
111
VALERO ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) The following is a preliminary estimate of the purchase price for UDS
(dollars and shares in millions):
Number of shares of Valero common stock expected to be
issued in the exchange (including 1.3 million shares
issued to UDS's Grantor Trust Stock Ownership Program).... 45.19
Multiplied by Valero's average stock price from 2 days
before to 2 days after the announcement date............ X $ 44.99
---------
Estimated stock portion of purchase price (par value of $.5
million and additional paid-in capital of $2,032.6
million).................................................. $ 2,033.1
Estimated cash portion of purchase price (based on $27.50
per share applied to a number of UDS shares equal to the
sum of (a) 72,685,649 issued and outstanding shares as of
June 30, 2001 and (b) 1,081,905 shares held in the Grantor
Trust Stock Ownership Program as of June 30, 2001)........ 2,028.6
Estimated transaction-related costs......................... 22.0
---------
Estimated purchase price.................................... 4,083.7
Less: UDS's common stockholders' equity representing the
carrying value of assets acquired and liabilities assumed
and consisting of $.8 million of common stock, $938.4
million of additional paid-in capital, $883.7 million of
retained earnings, $(92.7) million of accumulated other
comprehensive loss, $(86.2) million of treasury stock, and
$(28.9) million related to UDS's Grantor Trust Stock
Ownership Program......................................... (1,615.1)
---------
Excess of estimated purchase price over carrying value of
net assets acquired....................................... $ 2,468.6
=========
Under the terms of the merger agreement, the aggregate number of Valero
shares to be issued, and the aggregate amount of cash to be paid, to holders
of UDS common stock in the merger generally does not vary with the market
price of Valero common stock at completion of the merger. However, the value
of the number of Valero shares that is to be issued will, individually and
in the aggregate, vary depending on the market price of Valero common stock
at completion of the merger. See "Summary -- What You Will Receive in the
Merger" and "The Merger Agreement -- Consideration to be Received in the
Merger". Also, if necessary, the number of shares of UDS common stock to be
converted into the right to receive Valero common stock will be increased,
and the number of shares of UDS common stock to be converted into the right
to receive cash will be decreased by an equal amount, to the extent required
to permit Valero and UDS to receive the tax opinions described under "The
Merger Agreement -- Conditions." An illustration of the number of additional
shares of Valero common stock that could be required to be issued under
these circumstances is provided at page 63 of this document, which indicates
that approximately 3.2 million additional shares of Valero common stock
would be required to be issued if the price of Valero common stock at
completion of the merger were $30. Based on this example and assuming
73,767,554 shares of UDS common stock, the total purchase price would be
$3,406 million, including transaction-related costs of $22 million, and pro
forma net income, earnings per common share and earnings per common share
assuming dilution would be $747.3 million, $6.91 and $6.60, respectively,
for the six months ended June 30, 2001, and $664.0 million, $6.11 and $5.99,
respectively, for the year ended December 31, 2000.
104
112
VALERO ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of this pro forma analysis, the above estimated purchase price
has been allocated based on a preliminary assessment of the fair value of
the assets to be acquired and liabilities to be assumed resulting in the
following pro forma adjustments (in millions):
Increase in inventories (reflects the excess of inventory
replacement cost over LIFO carrying values at June 30,
2001)..................................................... $ 234.3
Increase in property, plant and equipment................... 1,000.0
Elimination of UDS's historical goodwill.................... (346.9)
Decrease in long-term debt.................................. 13.9
Increase in deferred income taxes........................... (480.6)
Value of Valero stock issued to UDS's Grantor Trust Stock
Ownership Program......................................... 59.6
Goodwill resulting from the merger.......................... 1,988.3
---------
Excess of estimated purchase price over carrying value of
net assets acquired....................................... $ 2,468.6
=========
Due to the non-taxable nature of this transaction, UDS's tax basis in its
assets would carry over to Valero. The adjustment to deferred income taxes
in the above table represents the tax effect of the incremental difference
between the financial and tax bases resulting from these pro forma
adjustments.
(b) To reflect the issuance of $2,028.6 million aggregate principal amount of
debt (including the incurrence of $20.3 million of debt issuance costs), the
proceeds from which are used to fund the acquisition of approximately
one-half of the common stock of UDS.
(c) To reflect the payment of $155.5 million and accrual of $2.7 million of
estimated payments under termination and change of control provisions in
executive compensation and employment agreements.
(d) To reflect the elimination of UDS's historical accumulated depreciation of
$1,608.5 million.
(e) To reflect the estimated fair value of $211.1 million of vested stock
options issued by Valero in exchange for the outstanding stock options of
UDS.
(f) To exclude excise taxes collected on behalf of governmental agencies
associated with UDS's operations of $1,387.9 million for the six months
ended June 30, 2001 and $2,664.5 million for the year ended December 31,
2000 from Operating Revenues and Cost of Sales to conform to Valero's
accounting policies.
(g) To reverse UDS's historical goodwill amortization ($7.0 million for the six
months ended June 30, 2001 and $15.4 million for the year ended December 31,
2000) resulting from eliminating UDS's historical goodwill pursuant to the
allocation of the estimated purchase price among the assets acquired and
liabilities assumed under the purchase method of accounting. (Note: In June
2001, the Financial Accounting Standards Board issued its Statement 142,
Goodwill and Other Intangible Assets. The statement provides that goodwill
resulting from business combinations completed after June 30, 2001, should
not be amortized but instead should be tested at least annually for
impairment. As a result, goodwill arising from the merger with UDS is not
amortized in the Unaudited Pro Forma Combined Statements of Income. In
addition, the pro forma amounts do not reflect the effect of anticipated
synergies expected to result from the merger as discussed under "The
Merger -- Management and Operations Following the Merger.")
(h) To record depreciation expense on the $1,000.0 million of the excess
purchase price allocated to property, plant and equipment of $19.6 million
for the six months ended June 30, 2001 and $39.1 million for the year ended
December 31, 2000 based on an estimated useful life of 23 years and
estimated salvage value of 10%.
105
113
VALERO ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(i) To reflect interest expense at a weighted average annual interest rate of
7.375% on borrowings required to fund the estimated cash portion of the
purchase price ($74.8 million for the six months ended June 30, 2001 and
$149.6 million for the year ended December 31, 2000), as well as the
amortization of deferred debt issuance costs ($1.5 million for the six
months ended June 30, 2001 and $3.0 million for the year ended December 31,
2000). A 1/8% change in the interest rate associated with these borrowings
would have a $1.3 million and $2.5 million effect on interest expense for
the six months ended June 30, 2001 and the year ended December 31, 2000,
respectively.
(j) To reflect the tax effect of the pro forma pre-tax income adjustments
related to the merger and adjust the effective tax rate to the rate that
would have been incurred by Valero as a result of the merger.
(k) Valero's historical statement of income for the year ended December 31,
2000 has been adjusted on a pro forma basis to reflect the Benicia
acquisition and related financings, which were completed during the second
quarter of 2000, as if they had occurred on January 1, 2000. For additional
information on these transactions, see Valero's Current Report on Form
8-K/A filed August 17, 2001 and Valero's annual report on Form 10-K for the
year ended December 31, 2000.
106
114
LEGAL MATTERS
The validity of the Valero common stock to be issued in the merger will be
passed upon by Jay D. Browning, Esq., Corporate Secretary and Managing Attorney,
Corporate Law, of Valero. As of the date of this joint proxy
statement/prospectus, Mr. Browning beneficially owns 27,946 shares of Valero
common stock and currently unexercisable options to purchase 9,633 additional
shares of Valero common stock.
RIGHTS OF DISSENTING STOCKHOLDERS
The following summary of the provisions of Section 262 of the Delaware
General Corporation Law is not intended to be a complete statement of the
provisions and is qualified in its entirety by reference to the full text of
Section 262 of the Delaware General Corporation Law, a copy of which is attached
to this proxy statement/prospectus as Appendix E and is incorporated into this
summary by reference.
Under Section 262 of Delaware General Corporation Law, appraisal rights
will generally be available for the shares of any class or series of stock of a
constituent corporation to a merger if the holders thereof are required by the
terms of the agreement of merger to accept for such stock anything except (a)
shares of stock of the corporation surviving or resulting from the merger; (b)
shares of stock of certain other corporations; (c) cash in lieu of fractional
shares; or (d) any combination of shares of stock, depository receipts and cash
in lieu of fractional shares.
UDS stockholders wishing to exercise appraisal rights must strictly comply
with the rules governing the exercise of appraisal rights or may lose these
rights of appraisal.
If the merger is consummated, each UDS stockholder who (a) files with UDS a
written demand for appraisal of his or her shares prior to the taking of the
vote on the merger, and (b) follows the procedures set forth in Section 262 of
the Delaware General Corporation Law, will be entitled to be paid by Valero for
his or her shares of UDS common stock the fair value in cash of the shares of
UDS common stock. All written demands for appraisal rights should be mailed or
delivered to Ultramar Diamond Shamrock Corporation, 6000 North Loop 1604 West,
San Antonio, Texas 78212, Attention: Corporate Secretary. The fair value of
shares of UDS common stock will be determined by the Delaware Court of Chancery,
exclusive of any element of value arising from the merger. The shares of UDS
common stock with respect to which holders have perfected their appraisal rights
in accordance with Section 262 of the Delaware General Corporation Law and have
not effectively withdrawn or lost their appraisal rights are referred to in this
section as the DISSENTING SHARES.
Within ten days after the effective date of the merger, Valero, as the
surviving corporation in the merger, must mail a notice to all stockholders who
have complied with (a) in the preceding paragraph notifying such stockholders of
the effective date of the merger. Within 120 days after the effective date of
the merger, holders of shares of UDS common stock may file a petition in the
Delaware Court of Chancery for the appraisal of their shares, although they may,
within 60 days of the effective date of the merger, withdraw their demand for
appraisal. Within 120 days of the effective date of the merger, the holders of
dissenting shares may also, upon written request, receive from Valero a
statement setting forth the aggregate number of shares not voted in favor of the
merger and with respect to which demands for appraisals have been received and
the aggregate number of holders of such shares.
Appraisal rights are available only to the holder of record of shares. If a
UDS stockholder wishes to exercise appraisal rights but has a beneficial
interest in shares which are held of record by or in the name of another person,
such as a broker or nominee, the UDS stockholder should act promptly to cause
the holder of record to follow the procedures set forth in Section 262 of the
Delaware General Corporation Law to perfect the UDS stockholder's appraisal
rights.
A demand for appraisal should be signed by or on behalf of the UDS
stockholder exactly as the stockholder's name appears on the stockholder's stock
certificates. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the demand should be executed in that
capacity, and if the shares are owned of record by more than one person, as in a
joint tenancy or tenancy
107
115
in common, the demand should be executed by or on behalf of all joint owners. An
authorized agent, including one or more joint owners, may execute a demand for
appraisal on behalf of a record holder; however, in the demand the agent must
identify the record owner or owners and expressly disclose that the agent is
executing the demand as an agent for the record owner or owners. A record holder
such as a broker who holds shares as nominee for several beneficial owners may
exercise appraisal rights for the shares held for one or more beneficial owners
and not exercise rights for the shares held for other beneficial owners. In this
case, the written demand should state the number of shares for which appraisal
rights are being demanded. When no number of shares is stated, the demand will
be presumed to cover all shares held of record by the broker or nominee.
If any holder of shares of UDS common stock who demands appraisal of his or
her shares under Section 262 of the Delaware General Corporation Law fails to
perfect, or effectively withdraws or loses the right to appraisal, his or her
shares will be converted into a right to receive the consideration with respect
to the holder's dissenting shares in accordance with the merger agreement.
Dissenting shares lose their status as dissenting shares if:
- the merger is abandoned;
- the dissenting stockholder fails to make a timely written demand for
appraisal;
- the dissenting shares are voted in favor of the merger;
- neither Valero nor the stockholder files a complaint or intervenes in a
pending action within 120 days after the effective date of the merger; or
- the stockholder delivers to Valero, as the surviving corporation, within
60 days of the effective date of the merger, or thereafter, with Valero's
approval, a written withdrawal of the stockholder's demand for appraisal
of the dissenting shares, although no appraisal proceeding in the
Delaware Court of Chancery may be dismissed as to any stockholder without
the approval of the court.
Failure to follow the steps required by Section 262 of the Delaware General
Corporation Law for perfecting appraisal rights may result in the loss of
appraisal rights, in which event the UDS stockholder will be entitled to receive
the consideration with respect to the holder's dissenting shares in accordance
with the merger agreement. In view of the complexity of the provisions of
Section 262 of the Delaware General Corporation Law, holders of UDS common stock
who are considering dissenting from the merger should consult their own legal
advisors.
Any form of election submitted by a dissenting stockholder will be invalid
and will be rejected. If any dissenting stockholder ceases to be a dissenting
stockholder but does not submit a valid form of election prior to the election
deadline, each share of UDS common stock held by that dissenting stockholder
will be treated as a share for which the stockholder has indicated no preference
as to the receipt of cash or Valero common stock.
EXPERTS
The financial statements of Valero and UDS as of December 31, 2000 and
1999, and for each of the three years in the period ended December 31, 2000
incorporated by reference into this joint proxy statement/prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
108
116
OTHER MATTERS
As of the date of this joint proxy statement/prospectus, the Valero Board
of Directors and the UDS Board of Directors know of no matters that will be
presented for consideration at the Valero special meeting or the UDS special
meeting, respectively, other than as described in this joint proxy statement/
prospectus. If any other matters do properly come before either special meeting
or any adjournments or postponements of those special meetings and are voted
upon, the enclosed proxies will be deemed to confer discretionary authority on
the individuals named as proxies to vote the shares represented by those proxies
as to any of those other matters.
STOCKHOLDER PROPOSALS
For a stockholder proposal to be considered for stockholder action at the
2002 Annual Meeting of stockholders of Valero, it must be received by the
Corporate Secretary of Valero at One Valero Place, San Antonio, Texas 78212 no
later than November 28, 2001 in order to be considered for inclusion in Valero's
2002 proxy materials. Stockholder proposals submitted outside the process of
Rule 14a-8 under the Securities Exchange Act must be received by Valero as
provided in Valero's bylaws no earlier than February 9, 2002 and no later than
March 11, 2002 for such proposals to be eligible for consideration at the 2002
annual meeting.
UDS plans to hold an annual meeting in 2002 only if the merger is not
completed. If an annual meeting of UDS stockholders is held in 2002, proposals
of UDS stockholders intended to be presented at the 2002 annual meeting must be
received by the Corporate Secretary of UDS at 6000 North Loop 1604 West, San
Antonio, Texas 79249 no later than November 27, 2001, in order to be considered
for inclusion in UDS's 2002 proxy materials, and stockholder proposals submitted
outside the process of Rule 14a-8 under the Securities Exchange Act must be
received by UDS as provided in UDS's bylaws no earlier than December 27, 2001
and no later than January 26, 2002, to be eligible for consideration at the 2002
annual meeting.
INDEPENDENT AUDITORS
Representatives of Arthur Andersen LLP will be present at the Valero
special meeting and at the UDS special meeting. In each case, those
representatives will have the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
WHERE YOU CAN FIND MORE INFORMATION
Valero and UDS file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any such reports,
statements or other information filed by either Valero or UDS at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. The SEC filings of Valero and UDS are also available to the public from
commercial document retrieval services and at the Web site maintained by the SEC
at http://www.sec.gov. You can also inspect reports, proxy statements and other
information about Valero and UDS at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
Valero has filed a Registration Statement on Form S-4 to register with the
SEC the Valero common stock to be issued to UDS stockholders in the merger. This
joint proxy statement/prospectus is a part of that Registration Statement and
constitutes a proxy statement and a prospectus of Valero, in addition to being a
proxy statement of UDS for the UDS special meeting. The Registration Statement,
including the attached exhibits and schedules, contains additional relevant
information about Valero and UDS and Valero common stock. As allowed by SEC
rules, this joint proxy statement/prospectus does not contain all the
information you can find in the registration statement or the exhibits to the
registration statement. Summaries contained in this joint proxy
statement/prospectus of the contents of any agreement or other document referred
to in this joint proxy statement/prospectus are not necessarily complete and we
refer you to the complete copy of that agreement or other document for its
precise legal terms and other information that may be important to you.
109
117
The SEC allows Valero and UDS to "incorporate by reference" information
into this joint proxy statement/prospectus. This means that Valero and UDS can
disclose important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
to be a part of this joint proxy statement/prospectus, except for any
information that is superseded by information that is included directly in this
joint proxy statement/prospectus or incorporated by reference subsequent to the
date of this joint proxy statement/prospectus.
This joint proxy statement/prospectus incorporates by reference the
documents listed below that Valero and UDS have previously filed with the SEC.
They contain important information about Valero and UDS and their financial
condition.
VALERO SEC FILINGS PERIOD/FILING DATE
Annual Report on Form 10-K Year ended December 31, 2000
File No. 1-13175
Quarterly Reports on Form 10-Q Quarters ended March 31 and June 30, 2001
File No. 1-13175
Current Report on Form 8-K Filed May 10, 2001
File No. 1-13175
Current Report on Form 8-K Filed June 4, 2001
File No. 1-13175
Current Report on Form 8-K/A Filed June 1, 2000, amended August 17, 2001
File No. 1-13175
The description of Valero common stock contained in
Valero's Registration Statement on Form S-1,
File No. 333-27013, and any amendments thereto filed
for the purpose of updating such description.
The description of Valero's preferred share purchase
rights contained in Exhibit C to Valero's
Registration Statement on Form S-8,
File No. 333-31709, filed on July 21, 1997, and any
amendments thereto filed for the purpose of updating
such description.
UDS SEC FILINGS PERIOD/FILING DATE
Annual Report on Form 10-K Year ended December 31, 2000
File No. 1-11154
Quarterly Reports on Form 10-Q Quarter ended March 31, 2001
File No. 1-11154 Quarter ended June 30, 2001, amended August
23, 2001
Current Report on Form 8-K Filed May 10, 2001
File No. 1-11154
Current Report on Form 8-K Filed May 18, 2001
File No. 1-11154
The description of UDS common stock contained in
UDS's Registration Statement on Form S-1,
File No. 33-47586, and any amendments thereto filed
for the purpose of updating such description.
The description of UDS's rights to acquire shares of
UDS common stock contained in Exhibit 4.2 to UDS's
Registration Statement on Form S-1, and any
amendments thereto filed for the purpose of updating
such description.
110
118
In addition, Valero and UDS incorporate by reference additional documents
that either may file with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act between the date of this joint proxy statement/prospectus
and the date the merger is completed. These documents include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
Valero has supplied all information contained or incorporated by reference
in this joint proxy statement/prospectus relating to Valero, and UDS has
supplied all the information relating to UDS.
You can obtain any of the documents incorporated by reference in this joint
proxy statement/ prospectus through Valero or UDS, as the case may be, or from
the SEC through the SEC's Internet Web site at the address described above.
Documents incorporated by reference are available from Valero and UDS without
charge, excluding any exhibits to those documents, unless the exhibit is
specifically incorporated by reference as an exhibit in this joint proxy
statement/prospectus. You can obtain these documents by requesting them in
writing or by telephone from the appropriate company at the following addresses:
VALERO UDS
Investor Relations Investor Relations
Valero Energy Corporation Ultramar Diamond Shamrock Corporation
One Valero Place 6000 North Loop 1604 West
San Antonio, Texas 78212 San Antonio, Texas 78249
(210) 370-2000 (210) 592-2000
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY SEPTEMBER 20, 2001,
TO RECEIVE THEM BEFORE THE SPECIAL MEETINGS. If you request any incorporated
documents from us, we will mail them to you by first class mail, or another
equally prompt means, promptly after we receive your request.
We have not authorized anyone to give any information or make any
representation about the merger of our companies that is different from, or in
addition to, that contained in this joint proxy statement/ prospectus or in any
of the materials that we have incorporated into this joint proxy
statement/prospectus. Therefore, if anyone does give you information of this
sort, you should not rely on it. If you are in a jurisdiction where offers to
exchange or sell, or solicitations of offers to exchange or purchase, the
securities offered by this joint proxy statement/prospectus or the solicitation
of proxies is unlawful, or if you are a person to whom it is unlawful to direct
these types of activities, then the offer presented in this joint proxy
statement/prospectus does not extend to you. The information contained in this
joint proxy statement/prospectus speaks only as of the date of this document
unless the information specifically indicates that another date applies.
111
119
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 6, 2001
BY AND BETWEEN
VALERO ENERGY CORPORATION
AND
ULTRAMAR DIAMOND SHAMROCK CORPORATION
120
TABLE OF CONTENTS
ARTICLE I CERTAIN DEFINITIONS...................................... A-1
ARTICLE II THE MERGER.............................................. A-6
2.1 The Merger.................................................. A-6
2.2 Effective Time of the Merger................................ A-6
2.3 Effects of the Merger....................................... A-7
2.4 Closing..................................................... A-7
2.5 Certificate of Incorporation................................ A-7
2.6 By-Laws..................................................... A-7
2.7 Directors and Officers...................................... A-7
ARTICLE III CONVERSION OF SECURITIES............................... A-7
3.1 Effect of the Merger on Capital Stock....................... A-7
3.2 Stock Options............................................... A-10
3.3 Exchange Fund............................................... A-10
3.4 Exchange Procedures......................................... A-10
3.5 Distributions with Respect to Unexchanged Shares............ A-11
3.6 No Further Ownership Rights in UDS Common Stock............. A-11
3.7 No Fractional Shares of Valero Common Stock................. A-12
3.8 Termination of Exchange Fund................................ A-12
3.9 No Liability................................................ A-12
3.10 Investment of the Exchange Fund............................. A-12
3.11 Lost Certificates........................................... A-12
3.12 Withholding Rights.......................................... A-12
3.13 Further Assurances.......................................... A-12
3.14 Stock Transfer Books........................................ A-13
ARTICLE IV REPRESENTATIONS AND WARRANTIES.......................... A-13
4.1 Representations and Warranties of UDS....................... A-13
4.2 Representations and Warranties of Valero.................... A-20
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS................ A-27
5.1 Covenants of UDS............................................ A-27
5.2 Covenants of Valero......................................... A-29
5.3 Governmental Filings........................................ A-29
5.4 Control of Other Party's Business........................... A-30
ARTICLE VI ADDITIONAL AGREEMENTS................................... A-30
6.1 Preparation of Proxy Statement; Stockholders Meetings....... A-30
6.2 Valero Board of Directors................................... A-31
6.3 Access to Information....................................... A-31
6.4 Reasonable Best Efforts..................................... A-31
6.5 Acquisition Proposals....................................... A-33
6.6 Fees and Expenses........................................... A-34
6.7 Directors' and Officers' Indemnification and Insurance...... A-34
6.8 Employee Benefits........................................... A-34
6.9 Public Announcements........................................ A-35
6.10 Listing of Shares of Valero Common Stock.................... A-36
6.11 Rights Agreements........................................... A-36
6.12 Affiliates.................................................. A-36
6.13 Section 16 Matters.......................................... A-36
6.14 UDS Indebtedness............................................ A-36
6.15 Accountants' Letter......................................... A-37
A-i
121
ARTICLE VII CONDITIONS PRECEDENT................................... A-37
7.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-37
7.2 Additional Conditions to Obligations of Valero.............. A-37
7.3 Additional Conditions to Obligations of UDS................. A-38
ARTICLE VIII TERMINATION AND AMENDMENT............................. A-38
8.1 Termination................................................. A-38
8.2 Effect of Termination....................................... A-39
8.3 Amendment................................................... A-41
8.4 Extension; Waiver........................................... A-41
ARTICLE IX GENERAL PROVISIONS...................................... A-41
9.1 Non-Survival of Representations, Warranties and
Agreements.................................................. A-41
9.2 Notices..................................................... A-41
9.3 Interpretation.............................................. A-42
9.4 Counterparts................................................ A-42
9.5 Entire Agreement; No Third Party Beneficiaries.............. A-42
9.6 Governing Law............................................... A-42
9.7 Severability................................................ A-42
9.8 Assignment.................................................. A-43
9.9 Submission to Jurisdiction; Waivers......................... A-43
9.10 Enforcement................................................. A-43
A-ii
122
AGREEMENT AND PLAN OF MERGER, dated as of May 6, 2001 (this "Agreement"),
by and between VALERO ENERGY CORPORATION, a Delaware corporation ("Valero") and
ULTRAMAR DIAMOND SHAMROCK CORPORATION, a Delaware corporation ("UDS").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Valero and UDS have approved the
transactions contemplated by this Agreement and have recommended the adoption of
this Agreement by their respective shareholders; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Acquisition Proposal" shall have the meaning set forth in Section
6.5(a)(i).
"Affiliate" shall have the meaning given such term in Rule 12b-2 under the
Exchange Act.
"Affiliate Agreement" shall have the meaning set forth in Section 6.12.
"Agreement" shall have the meaning set forth in the preamble.
"Assumed Indentures" shall have the meaning set forth in Section 6.14.
"beneficial ownership" or "beneficially own" shall have the meaning
ascribed to such terms under Section 13(d) of the Exchange Act and the rules and
regulations thereunder.
"Benefit Plan" means, with respect to any entity, any employee
compensation, benefit plan, program, policy, practice, agreement, contract or
other arrangement providing benefits to any current or former employee, officer
or director of such entity or any of its Subsidiaries or any beneficiary or
dependent thereof that is sponsored or maintained by such entity or any of its
Subsidiaries or to which such entity or any of its Subsidiaries contributes or
is obligated to contribute, whether or not written, including without
limitation, any employee welfare benefit plan within the meaning of Section 3(1)
of ERISA, any employee pension benefit plan within the meaning of Section 3(2)
of ERISA (whether or not such plan is subject to ERISA) and any bonus,
incentive, deferred compensation, vacation, stock purchase, stock option,
severance, employment, change of control or fringe benefit plan, program, policy
or agreement and any related trusts or other funding vehicles.
"Benefit Protection Period" shall have the meaning set forth in Section
6.8(a).
"Business Day" means any day on which banks are not required or authorized
to close in the City of New York.
"Cash Consideration" shall have the meaning set forth in Section 3.1(b).
"Cash Consideration Formula" shall have the meaning set forth in Section
3.1(b).
"Cash Election" shall have the meaning set forth in Section 3.1(f)(i).
"Cash Election Shares" shall have the meaning set forth in Section 3.l(g).
A-1
123
"Cash Election Number" shall mean, subject to Section 3.1(k), the quotient,
rounded to the nearest whole share, obtained by dividing (x) the product of 27.5
and the UDS Closing Share Number by (y) the Cash Consideration; provided,
however, that, if the Cash Election Number as so determined exceeds 50% of the
UDS Closing Share Number, Valero may in its discretion set a maximum Cash
Election Number at any lesser number so long as such maximum Cash Election
Number equals or exceeds 50% of the UDS Closing Share Number.
"Cash Fraction" shall have the meaning set forth in Section 3.1(g).
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"Certificate of Merger" shall have the meaning set forth in Section 2.2.
"Change in the UDS Recommendation" shall have the meaning set forth in
Section 6.1(b).
"Change in the Valero Recommendation" shall have the meaning set forth in
Section 6.1(c).
"Closing" shall have the meaning set forth in Section 2.4.
"Closing Date" shall have the meaning set forth in Section 2.4.
"Code" shall have the meaning set forth in the recitals.
"Confidentiality Agreement" shall have the meaning set forth in Section
6.3.
"DGCL" means the Delaware General Corporation Law.
"Dissenting Shares" shall have the meaning set forth in Section 3.1(e).
"DOJ" means the Antitrust Division of the U.S. Department of Justice.
"Effective Time" shall have the meaning set forth in Section 2.2.
"Election Deadline" shall have the meaning set forth in Section 3.1(j).
"Employee Grantor Trust" shall mean the UDS Employee Benefits Trust created
by the Trust Agreement, effective as of November 9, 1999, between UDS and
Sterling National Bank, a national banking association, as Trustee.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means, with respect to any entity, trade or business, any
other entity, trade or business that is a member of a group described in Section
414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes
the first entity, trade or business, or that is a member of the same "controlled
group" as the first entity, trade or business pursuant to Section 4001(a)(14) of
ERISA.
"ESOP" has the meaning set forth in Section 4.1(l)(xi).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall have the meaning set forth in Section 3.3.
"Exchange Fund" shall have the meaning set forth in Section 3.3.
"Exchange Ratio" shall mean the quotient, rounded to the nearest
ten-thousandth, obtained by dividing (i) the sum of (a) $27.50 and (b) the
product of (I) 0.614 and (II) the Valero Average Closing Price) by (ii) the
Valero Average Closing Price.
"Expenses" means all out-of-pocket expenses (including all fees and
expenses of counsel, accountants, investment bankers, experts and consultants to
a party and its affiliates) incurred by a party or on its behalf in connection
with or related to the authorization, preparation, negotiation, execution and
performance of this Agreement and the transactions contemplated hereby,
including the preparation,
A-2
124
printing, filing and mailing of the Joint Proxy Statement/Prospectus and the
Form S-4 and the solicitation of stockholder approvals and all other matters
related to the transactions contemplated hereby and thereby.
"Form S-4" shall have the meaning set forth in Section 4.1(d)(iii).
"Form of Election" shall have the meaning set forth in Section 3.1(f).
"FTC" means the U.S. Federal Trade Commission.
"GAAP" means U.S. generally accepted accounting principles.
"Governmental Entity" shall have the meaning set forth in Section
4.1(d)(vii).
"GSOP" shall have the meaning set forth in Section 3.1(d).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Intellectual Property" means all patents, trademarks, trade names, service
marks, copyrights, and any applications therefor, technology, know-how, computer
software programs or applications, and tangible or intangible proprietary
information or materials.
"Joint Proxy Statement/Prospectus" shall have the meaning set forth in
Section 4.1(d)(iii).
"knowledge" or "known" means, with respect to any entity, the knowledge of
such entity's executive officers after reasonable inquiry.
"Letter of Transmittal" shall have the meaning set forth in Section 3.4(a).
"Liens" shall have the meaning set forth in Section 4.1(b)(ii).
"Loan" shall have the meaning set forth in Section 4.1(l)(xi).
"Material Adverse Effect" means, with respect to any entity, a material
adverse effect on (i) the business, operations, results of operations or
financial condition of such entity and its Subsidiaries taken as a whole or (ii)
the ability of such entity to timely consummate the transactions contemplated by
this Agreement, except, in each case, to the extent such effect is reasonably
attributable to (x) general economic conditions in the United States (including
prevailing interest rate and stock market levels), (y) the general state of the
industries in which such entity operates or (z) the negotiation, announcement,
execution, delivery or consummation of the transactions contemplated by, or in
compliance with, this Agreement.
"Merger" shall have the meaning set forth in Section 2.1.
"Merger Consideration" shall have the meaning set forth in Section 3.1(b).
"Multiemployer Plan" means any "multiemployer plan" within the meaning of
Section 4001(a)(3) of ERISA.
"Multiple Employer Plan" shall have the meaning set forth in Section
4.1(l)(vi).
"Necessary Consents" shall have the meaning set forth in Section
4.1(d)(vi).
"New Plans" shall have the meaning set forth in Section 6.8(b).
"Non-Election" shall have the meaning set forth in Section 3.1(f).
"Non-Election Cash Fraction" shall have the meaning set forth in Section
3.1(i).
"Non-Election Shares" shall have the meaning set forth in Section 3.1(g).
"Non-Subsidiary Affiliate" shall have the meaning set forth in Section
4.1(b)(ii).
"NYSE" means the New York Stock Exchange, Inc.
"Old Plans" shall have the meaning set forth in Section 6.8(b).
A-3
125
"Other Approvals" shall have the meaning set forth in Section 4.1(d)(ii).
"other party" means, with respect to Valero, UDS, and with respect to UDS,
Valero.
"Partial Cash Election" shall have the meaning set forth in Section
3.1(f)(ii).
"Person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization, other entity or
group (as defined in the Exchange Act).
"PBGC" shall have the meaning set forth in Section 4.1(l)(v).
"Regulatory Law" means the HSR Act, and all other federal, state and
foreign, if any, statutes, rules, regulations, orders, decrees, administrative
and judicial doctrines and other laws that are designed or intended to prohibit,
restrict or regulate (i) mergers, acquisitions or other business combinations,
(ii) foreign investment, or (iii) actions having the purpose or effect of
monopolization or restraint of trade or lessening of competition.
"Required Approvals" shall have the meaning set forth in Section 6.4(a)(i).
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" shall have the meaning ascribed to such term in
Rule 1-02 of Regulation S-X of the SEC.
"Stock Consideration" shall have the meaning set forth in Section
3.1(b)(i).
"Stock Election" shall have the meaning set forth in Section 3.1(f)(iii).
"Stock Election Number" shall mean the UDS Closing Share Number minus the
Cash Election Number.
"Stock Election Shares" shall have the meaning set forth in Section 3.1(g).
"Stock Fraction" shall have the meaning set forth in Section 3.1(h).
"Subsidiary" shall have the meaning ascribed to such term in Rule 1-02 of
Regulation S-X of the SEC.
"Superior Proposal" means, with respect to UDS, a bona fide written
proposal made by a Person other than a party to this Agreement which is (i) an
Acquisition Proposal involving UDS and (ii) is on terms which UDS's Board of
Directors in good faith concludes (following receipt of the advice of its
financial advisors and outside counsel), taking into account, among other
things, all legal, financial, regulatory and other aspects of the proposal and
the Person making the proposal, (x) would, if consummated, result in a
transaction that is more favorable to its stockholders (in their capacities as
stockholders), from a financial point of view, than the transactions
contemplated by this Agreement and (y) is reasonably capable of being completed.
"Surviving Corporation" shall have the meaning set forth in Section 2.1.
"Taxes" means any and all federal, state, local, foreign or other taxes or
charges of any kind (together with any and all interest, penalties, additions to
tax and additional amounts imposed with respect thereto) imposed by any taxing
authority, including taxes or other charges on or with respect to income,
franchises, windfall or other profits, gross receipts, property, sales, use,
capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation, or net worth, and taxes or other charges in the
nature of excise, withholding, ad valorem or value added.
"Tax Return" means any return, report or similar statement (including any
attached schedules) required to be filed with respect to any Tax, including any
information return, claim for refund, amended return or declaration of estimated
Tax.
"Termination Date" shall have the meaning set forth in Section 8.1(b).
A-4
126
"UDS" shall have the meaning set forth in the preamble.
"UDS 2000 10-K" means UDS's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, as filed with the SEC.
"UDS Benefit Plan" means each UDS Stock Plan and any other Benefit Plan
maintained or contributed to by UDS or a Subsidiary of UDS, or to which UDS or
any Subsidiary of UDS is required to contribute.
"UDS Plan" means any UDS Benefit Plan other than a Multiemployer Plan.
"UDS Board Designees" shall have the meaning set forth in Section 6.2.
"UDS Capital Stock" shall have the meaning set forth in Section
4.1(b)(i)(B).
"UDS Certificate" shall have the meaning set forth in Section 3.1(b).
"UDS Closing Share Number" shall mean the number of shares of UDS Common
Stock issued and outstanding immediately prior to the Effective Time, other than
such shares that are to be cancelled in the Merger pursuant to Section 3.1(a)
hereof.
"UDS Common Stock" means common stock, par value $0.01 per share, of UDS.
"UDS Contract" shall have the meaning set forth in Section 4.1(j)(i).
"UDS Converted Option" shall have the meaning set forth in Section 3.2(a).
"UDS Disclosure Schedule" shall have the meaning set forth in Section 4.1.
"UDS Employees" shall have the meaning set forth in Section 6.8(a).
"UDS Indebtedness" shall have the meaning set forth in Section 5.1(g)(ii).
"UDS Preferred Stock" shall have the meaning set forth in Section
4.1(b)(i)(B).
"UDS Qualified Plans" shall have the meaning set forth in Section
4.1(l)(iii).
"UDS Recommendation" shall have the meaning set forth in Section 6.1(b).
"UDS Restricted Stock" shall mean all shares of restricted stock
outstanding under the terms of any UDS Benefit Plan immediately prior to the
Effective Time that continue to be subject to restrictions on transfer or
otherwise remain unvested pursuant to the terms thereof immediately following
the merger.
"UDS Right" means any of the Rights, as such term is defined in the UDS
Rights Agreement.
"UDS Rights Agreement" means the Rights Agreement, dated as of June 25,
1992, as amended on October 26, 1992, May 10, 1994, and September 22, 1996,
between UDS and First City, Texas-Houston, National Association, as rights
agent.
"UDS SEC Documents" shall have the meaning set forth in Section 4.1(e).
"UDS Stock Option" shall have the meaning set forth in Section 3.2(a).
"UDS Stock Plans" shall have the meaning set forth in Section 4.1(b)(i).
"UDS Stockholder Approval" shall have the meaning set forth in Section
4.1(c)(i).
"UDS Stockholders Meeting" shall have the meaning set forth in Section
4.1(c)(i).
"UDS Toprs" means the 8.32% Trust Originated Preferred Securities of UDS
Capital I, a wholly owned subsidiary of UDS.
"UDS Termination Fee" means $125,000,000.
"Valero" shall have the meaning set forth in the preamble.
A-5
127
"Valero 2000 10-K" means Valero's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, as filed with the SEC.
"Valero Average Closing Price" means the average of the daily last sale
prices of Valero Common Stock as reported on the NYSE (as reported in the Wall
Street Journal or, if not reported therein, in another mutually agreed upon
authoritative source) for the ten consecutive full trading days in which such
shares are traded on the NYSE ending at the close of trading on the third
business day prior to the Closing Date.
"Valero Benefit Plan" means each Valero Stock Plan and any other Benefit
Plan maintained or contributed to by Valero or a Subsidiary of Valero, or to
which Valero or any Subsidiary of Valero is required to contribute.
"Valero Plan" means any Valero Benefit Plan other than a Multiemployer
Plan.
"Valero Capital Stock" shall have the meaning set forth in Section
4.2(b)(i)(B).
"Valero Common Stock" means common stock, par value $0.01 per share, of
Valero.
"Valero Contract" shall have the meaning set forth in Section 4.2(j).
"Valero Disclosure Schedule" shall have the meaning set forth in Section
4.2.
"Valero Preferred Stock" shall have the meaning set forth in Section
4.2(b)(i)(B).
"Valero Qualified Plans" shall have the meaning set forth in Section
4.2(l)(i).
"Valero Recommendation" shall have the meaning set forth in Section 6.1(c).
"Valero Rights" shall have the meaning set forth in Section 3.1(b).
"Valero Rights Agreement" shall have the meaning set forth in Section
3.1(b).
"Valero SEC Documents" shall have the meaning set forth in Section 4.2(e).
"Valero Stock Option" shall have the meaning set forth in Section 3.2(a).
"Valero Stock Plans" shall have the meaning set forth in Section 4.2(b)(i).
"Valero Stockholder Approval" shall have the meaning set forth in Section
4.2(c)(i).
"Valero Stockholders Meeting" shall have the meaning set forth in Section
4.2(c)(i).
"Valero Termination Fee" means $125,000,000.
"Voting Debt" means any bonds, debentures, notes or other indebtedness
having the right to vote on any matters on which holders of capital stock of the
same issuer may vote.
"Withdrawal Liability" means liability to a Multiemployer Plan as a result
of a complete or partial withdrawal from such Multiemployer Plan, as those terms
are defined in Part I of Subtitle E of Title IV of ERISA.
ARTICLE II
THE MERGER
2.1 The Merger. Upon the terms and subject to the conditions hereof, at
the Effective Time, UDS shall be merged (the "Merger") with and into Valero,
with Valero as the surviving corporation in the Merger (the "Surviving
Corporation"), and the separate existence of UDS shall thereupon cease.
2.2 Effective Time of the Merger. The Merger shall become effective as
set forth in a properly executed certificate of merger duly filed with the
Secretary of State of the State of Delaware (the "Certificate of Merger"), which
filing shall be made on the Closing Date. As used in this Agreement, the
A-6
128
term "Effective Time" shall mean the date and time when the Merger becomes
effective, as set forth in the Certificate of Merger.
2.3 Effects of the Merger. The Merger shall have the effects set forth in
the applicable provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, except as otherwise
provided herein, all of the property, rights, privileges, powers and franchises
of UDS shall vest in the Surviving Corporation, and all debts, liabilities and
duties of UDS shall become the debts, liabilities and duties of the Surviving
Corporation.
2.4 Closing. Upon the terms and subject to the conditions set forth in
Article VII and the termination rights set forth in Article VIII, the closing of
the transactions contemplated by this Agreement (the "Closing") will take place
at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York,
New York, 10019 at 10:00 A.M. on the second Business Day following the
satisfaction or waiver (subject to applicable law) of the conditions (excluding
conditions that, by their nature, cannot be satisfied until the Closing Date)
set forth in Article VII, unless this Agreement has been theretofore terminated
pursuant to its terms or unless another place, time or date is agreed to in
writing by the parties hereto (the date of the Closing being referred to herein
as the "Closing Date").
2.5 Certificate of Incorporation. At the Effective Time, the Certificate
of Incorporation of the Surviving Corporation shall be the Certificate of
Incorporation of Valero, as in effect immediately prior to the Effective Time,
until thereafter changed or amended as provided therein or by applicable law.
2.6 By-Laws. The by-laws of Valero as in effect immediately prior to the
Effective Time shall be the by-laws of the Surviving Corporation.
2.7 Directors and Officers. The directors and officers of Valero
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation, except as provided in Section 6.2.
ARTICLE III
CONVERSION OF SECURITIES
3.1 Effect of the Merger on Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder of any
capital stock of UDS:
(a) All shares of capital stock of UDS that are held by UDS as treasury
stock or that are owned by Valero or any wholly-owned subsidiaries of UDS or
Valero immediately prior to the Effective Time shall cease to be outstanding and
shall be cancelled and retired and shall cease to exist.
(b) Subject to Sections 3.1(a), 3.1(c), 3.1(d), 3.1(e) and 3.7, each
outstanding share of UDS Common Stock (together with any associated UDS Rights)
issued and outstanding immediately prior to the Effective Time shall be
converted into the right to receive, at the option of the holder as contemplated
by Sections 3.1(f) through 3.1(j), either (i) a number of shares of Valero
Common Stock equal to the Exchange Ratio (the "Stock Consideration") or (ii) an
amount in cash equal to the sum of (said formula being referred to herein as the
"Cash Consideration Formula") (x) $27.50 and (y) the product of (I) 0.614 and
(II) the Valero Average Closing Price (the "Cash Consideration" and together
with the Stock Consideration and the shares of Valero Common Stock issued
pursuant to Section 3.1(d), the "Merger Consideration"). All of the shares of
Valero Common Stock to be issued as Merger Consideration shall be duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights, with no personal liability attaching to the ownership thereof. One
preferred share purchase right issuable pursuant to the Rights Agreement, dated
as of July 17, 1997, between Valero and Computershare Investor Services, LLC, as
successor rights agent to Harris Trust and Savings Bank (the "Valero Rights
Agreement"), or any other purchase right issued in substitution thereof (the
"Valero Rights"), shall be issued together with and shall attach to each share
of Valero Common Stock issued pursuant to this Section 3.1(b) and Section
3.1(d), subject and pursuant to the terms of the Valero Rights Agreement. All
shares of UDS Common Stock converted into the right to receive the Merger
Consideration pursuant to this Section 3.1(b) and Section 3.1(d) shall cease to
be outstanding and shall be canceled and retired and
A-7
129
shall cease to exist, and each holder of a certificate that immediately prior to
the Effective Time represented any such shares of UDS Common Stock (a "UDS
Certificate") shall thereafter cease to have any rights with respect to such
shares of UDS Common Stock, except the right to receive the Merger Consideration
to be issued in consideration therefor and any dividends or other distributions
to which holders of UDS Common Stock become entitled all in accordance with this
Article III upon the surrender of such UDS Certificate.
(c) If, between the date of this Agreement and the Effective Time, there is
a reclassification, recapitalization, stock split, split-up, stock dividend,
combination or exchange of shares with respect to, or rights issued in respect
of, UDS Common Stock or Valero Common Stock, each of the Exchange Ratio and the
Cash Consideration Formula shall be adjusted accordingly, without duplication,
to provide to the holders of UDS Common Stock the same economic effect as
contemplated by this Agreement prior to such event.
(d) Subject to Section 3.7, each share held as of the Effective Time in the
Employee Grantor Trust pursuant to the UDS Grantor Trust Stock Ownership Program
("GSOP"), each share of UDS Restricted Stock and each share of UDS Common Stock
that is owned by any UDS Benefit Plan shall be converted into the right to
receive a number of fully paid and nonassessable shares of Valero Common Stock
equal to the Exchange Ratio.
(e) Notwithstanding any other provision contained in this Agreement, no
shares of UDS Common Stock that are issued and outstanding as of the Effective
Time and that are held by a stockholder who has properly exercised such
stockholder's appraisal rights (any such shares being referred to herein as
"Dissenting Shares") under the DGCL shall be converted into the right to receive
the Merger Consideration as provided in Section 3.1(b) unless and until such
stockholder shall have failed to perfect, or shall have effectively withdrawn or
lost, such stockholder's right to dissent from the Merger under the DGCL and to
receive such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to and subject to the requirements of the DGCL. If
any such stockholder shall have failed to perfect or shall have effectively
withdrawn or lost such right prior to the Election Deadline, each of such
holder's shares of UDS Common Stock shall thereupon be deemed to be Non-Election
Shares for all purposes of this Article III. If any holder of Dissenting Shares
shall have so failed to perfect or has effectively withdrawn or lost such
stockholder's right to dissent from the Merger after the Election Deadline, each
of such holder's shares of UDS Common Stock shall thereupon be deemed to have
been converted into and to have become, as of the Effective Time, the right to
receive the Stock Consideration or the Cash Consideration, or a combination
thereof, as determined by Valero in its sole discretion.
(f) Subject to the provisions of this Section 3.1, each record holder of
shares of UDS Common Stock outstanding immediately prior to the Effective Time
to be converted in the Merger pursuant to Section 3.1(b) will be entitled to
elect to receive either (i) the Cash Consideration for all of such holder's
shares ("Cash Election"), (ii) the Cash Consideration for a stated number of
such holder's shares and a number of shares of Valero Common Stock equal to the
Exchange Ratio per share of UDS Common Stock for the balance of such holder's
shares of UDS Common Stock ("Partial Cash Election") or (iii) a number of shares
of Valero Common Stock equal to the Exchange Ratio per share of UDS Common Stock
for all of such holder's shares of UDS Common Stock ("Stock Election"). All Cash
Elections, Partial Cash Elections and Stock Elections shall be unconditional and
made on a form designed for that purpose and mutually agreeable to Valero and
UDS (a "Form of Election"). Any holder of UDS Common Stock who fails to properly
make a Cash Election, Partial Cash Election or Stock Election and any holder who
fails to submit to the Exchange Agent a properly completed and signed and
properly and timely submitted Form of Election shall be deemed to have indicated
no preference as to the receipt of cash or Valero Common Stock with respect to
such holder's shares (a "Non-Election") and will receive for such UDS Common
Stock the Merger Consideration described in Section 3.1(g), 3.1(h) or 3.1(i), as
applicable. Notwithstanding any other provision set forth herein, the aggregate
number of shares of UDS Common Stock to be converted into the right to receive
cash in the Merger (which shall for this purpose be deemed to include Dissenting
Shares, if any) shall be equal to the Cash Election Number.
A-8
130
(g) If the aggregate number of shares of UDS Common Stock for which cash is
elected under a Cash Election or a Partial Cash Election and Dissenting Shares,
if any (collectively, the "Cash Election Shares"), exceeds the Cash Election
Number, then all shares of UDS Common Stock for which Valero Common Stock was
elected under a Stock Election or Partial Cash Election (collectively, the
"Stock Election Shares") and all shares of UDS Common Stock covered by
Non-Elections (the "Non-Election Shares") shall be converted into the right to
receive Valero Common Stock, and the Cash Election Shares (other than Dissenting
Shares) shall be converted into the right to receive cash and Valero Common
Stock in the following manner:
Each Cash Election Share (other than Dissenting Shares) shall be
converted into the right to receive (A) an amount of cash (rounded to the
nearest cent), without interest, equal to the product of (x) the Cash
Consideration and (y) a fraction (the "Cash Fraction"), the numerator of
which shall be the Cash Election Number and the denominator of which shall
be the total number of Cash Election Shares and (B) a number of shares of
Valero Common Stock equal to the product of (x) the Exchange Ratio and (y)
a fraction equal to one (1) minus the Cash Fraction.
(h) If the aggregate number of Stock Election Shares exceeds the Stock
Election Number, all Cash Election Shares and all Non-Election Shares shall be
converted into the right to receive cash, and all Stock Election Shares shall be
converted into the right to receive Valero Common Stock and cash in the
following manner:
Each Stock Election Share shall be converted into the right to receive
(A) a number of shares of Valero Common Stock equal to the product of (x)
the Exchange Ratio and (y) a fraction (the "Stock Fraction"), the numerator
of which shall be the Stock Election Number and the denominator of which
shall be the total number of Stock Election Shares, and (B) an amount of
cash (rounded to the nearest cent), without interest, equal to the product
of (x) the Cash Consideration and (y) a fraction equal to one (1) minus the
Stock Fraction.
(i) In the event that neither Section 3.1(g) or 3.1(h) is applicable, all
Cash Election Shares shall be converted into the right to receive the Cash
Consideration, all Stock Election Shares shall be converted into the right to
receive the Stock Consideration and all Non-Election Shares shall be converted
into the right to receive (A) an amount of cash (rounded to the nearest cent),
without interest, equal to the product of (x) the Cash Consideration and (y) a
fraction (the "Non-Election Cash Fraction"), the numerator of which shall be the
Cash Election Number less the number of Cash Election Shares and the denominator
of which shall be the number of Non-Election Shares, and (B) a number of shares
of Valero Common Stock equal to the product of (x) the Exchange Ratio and (y) 1
minus the Non-Election Cash Fraction.
(j) UDS shall use all reasonable best efforts to cause copies of the Form
of Election (which shall contain a Letter of Transmittal to be mailed with the
Joint Proxy Statement/Prospectus to the record holders of UDS Common Stock
(other than holders of Dissenting Shares) as of the record date for the UDS
Stockholders Meeting) and to make the Form of Election available to all persons
who become record holders of UDS Common Stock during the period between such
record date and the Election Deadline. A properly completed Form of Election
must be received by the Exchange Agent by 5:00 p.m., New York City time, on the
second business day preceding the Closing Date (the "Election Deadline"), which
day shall not be less than 20 days after the initial mailing of the Form of
Election, in order to be effective. An election by a holder of UDS Common Stock
shall be validly made only if the Exchange Agent shall have timely received a
Form of Election properly completed and executed (with the signature or
signatures thereon guaranteed as required by the Form of Election) by that
stockholder accompanied either by the UDS Certificate or UDS Certificates
representing all of the shares of UDS Common Stock owned by that stockholder,
duly endorsed in blank or otherwise in form acceptable for transfer on the books
of UDS, or by an appropriate guarantee of delivery in the form customarily used
in transactions of this nature from a member of a national securities exchange,
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company in the United States. All elections may be
A-9
131
revoked until the Election Deadline in writing by the record holders submitting
Forms of Election. Valero shall have the authority, in its sole discretion, to
make all determinations as to whether or not a Form of Election has been timely
received.
(k) Notwithstanding anything in this Article III to the contrary, the Cash
Election Number shall be not greater than the greatest number that would permit
the satisfaction of the conditions set forth in Sections 7.2(c) and 7.3(c).
3.2 Stock Options. (a) Each option to purchase UDS Common Stock (a "UDS
Stock Option") granted under UDS Stock Plans which is outstanding immediately
prior to the Effective Time shall cease to represent a right to acquire shares
of UDS Common Stock and shall be converted (as so converted, a "UDS Converted
Option"), at the Effective Time and subject to the immediately following
sentence, into an option to purchase Valero Common Stock (a "Valero Stock
Option"), on the same terms and conditions as were applicable under the UDS
Stock Option. The number of shares of Valero Common Stock subject to each such
Valero Stock Option shall be the number of shares of UDS Common Stock subject to
the UDS Stock Option multiplied by the Exchange Ratio, rounded, if necessary, to
the nearest whole share of Valero Common Stock, and such Valero Stock Option
shall have an exercise price per share (rounded to the nearest one-hundredth of
a cent) equal to the per share exercise price specified in such UDS Stock Option
divided by the Exchange Ratio; provided, however, that in the case of any UDS
Stock Option to which Section 421 of the Code as of the Effective Time (after
taking into account the effect of any accelerated vesting thereof) applies by
reason of its qualification under Section 422 of the Code, the exercise price,
the number of shares subject to such option and the terms and conditions of
exercise of such option shall be determined in a manner consistent with the
requirements of Section 424(a) of the Code. As of the Effective Time, Valero
shall assume the obligations of UDS under the UDS Stock Plans, and from and
after the Effective Time, except as otherwise set forth herein, the terms of
each UDS Stock Option and the UDS Stock Plan under which such UDS Stock Option
was initially granted, in each case, as in effect immediately prior to the
Effective Time, shall continue to apply to the corresponding Valero Stock
Option.
(b) Prior to the Effective Time, UDS shall take all necessary action for
the adjustment of UDS Converted Options under this Section 3.2. Valero shall
reserve for issuance a number of shares of Valero Common Stock at least equal to
the number of shares of Valero Common Stock that will be subject to UDS
Converted Options. As soon as practicable following the Effective Time, Valero
shall file a registration statement on Form S-8 (or any successor, or if Form
S-8 is not available, other appropriate, forms) with respect to the shares of
Valero Common Stock subject to UDS Converted Options and shall maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such options remain outstanding.
3.3 Exchange Fund. Prior to the Effective Time, Valero shall appoint
Computershare Investor Services, LLC, or a commercial bank or trust company, or
a subsidiary thereof, reasonably acceptable to UDS, to act as exchange agent
hereunder for the purpose of exchanging UDS Certificates for the Merger
Consideration (the "Exchange Agent"). At or prior to the Effective Time, Valero
shall deposit with the Exchange Agent, in trust for the benefit of holders of
shares of UDS Common Stock, (a) certificates representing shares of Valero
Common Stock and (b) cash, to be issued and paid pursuant to Sections 3.1(b) and
(d) and Section 3.7 in exchange for outstanding shares of UDS Common Stock upon
due surrender of UDS Certificates pursuant to this Article III. Following the
Effective Time, Valero agrees to make available to the Exchange Agent, from time
to time as needed, cash sufficient to pay any dividends and other distributions
pursuant to Section 3.5. Any cash and certificates representing Valero Common
Stock deposited with the Exchange Agent (including the amount of any dividends
or other distributions payable with respect thereto and cash in lieu of
fractional shares to be paid pursuant to Section 3.7) shall hereinafter be
referred to as the "Exchange Fund".
3.4 Exchange Procedures. Promptly after the Effective Time, Valero shall
cause the Exchange Agent to mail to each holder of a UDS Certificate (other than
UDS Certificates representing Dissenting
A-10
132
Shares) that has not timely submitted a properly completed and executed Form of
Election accompanied by an appropriately endorsed Certificate or Certificates
representing all of the shares of Company Common Stock owned by that shareholder
(or, alternatively, by an appropriate guarantee of delivery) (a) a letter of
transmittal (the "Letter of Transmittal") that shall specify that delivery shall
be effected, and risk of loss and title to the UDS Certificates shall pass, only
upon proper delivery of the UDS Certificates to the Exchange Agent, and which
Letter of Transmittal shall be in customary form and have such other provisions
as Valero or UDS may reasonably specify (such letter to be reasonably acceptable
to UDS and Valero prior to the Effective Time) and (b) instructions for
effecting the surrender of such UDS Certificates in exchange for the Merger
Consideration, together with any dividends and other distributions with respect
thereto and any cash in lieu of fractional shares. Upon surrender of a UDS
Certificate to the Exchange Agent together with such Letter of Transmittal or
the Form of Election pursuant to Section 3.1(j), duly executed and completed in
accordance with the instructions thereto, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such UDS Certificate
shall be entitled to receive in exchange therefor (i) shares of Valero Common
Stock (which shall be in uncertificated book-entry form, unless a physical
certificate is requested by such holder or is otherwise required by applicable
law or regulation) representing, in the aggregate, the whole number of shares
that such holder has the right to receive pursuant to Section 3.1(b) or 3.1(d)
(in each case, after taking into account all shares of UDS Common Stock then
held by such holder), (ii) a check in the amount equal to the cash, if any, that
such holder has the right to receive pursuant to Section 3.1, and (iii) a check
in the amount equal to the cash, if any, that such holder has the right to
receive pursuant to the provisions of this Article III other than Section 3.1,
including cash in lieu of any fractional shares of Valero Common Stock pursuant
to Section 3.7 and dividends and other distributions pursuant to Section 3.5. No
interest will be paid or will accrue on any cash payable pursuant to the
provisions of this Article III. In the event of a transfer of ownership of UDS
Common Stock that is not registered in the transfer records of UDS, one or more
shares of Valero Common Stock evidencing, in the aggregate, the proper number of
shares of Valero Common Stock pursuant to Section 3.1, a check in the proper
amount of cash representing Cash Consideration pursuant to Section 3.1, a check
in the proper amount of cash in lieu of any fractional shares of Valero Common
Stock pursuant to Section 3.7 and any dividends or other distributions to which
such holder is entitled pursuant to Section 3.5, may be issued with respect to
such UDS Common Stock to such a transferee if the UDS Certificate representing
such shares of UDS Common Stock is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer and to evidence
that any applicable stock transfer taxes have been paid.
3.5 Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with a record date after the Effective Time shall be paid to
the holder of any unsurrendered UDS Certificate with respect to the shares of
Valero Common Stock that such holder would be entitled to receive upon surrender
of such UDS Certificate, and no cash payment in lieu of fractional shares of
Valero Common Stock shall be paid to any such holder pursuant to Section 3.7
until such holder shall surrender such UDS Certificate in accordance with
Section 3.1(j) or Section 3.4. Subject to the effect of applicable laws,
following the later of the surrender of any such UDS Certificate and the
Effective Time, there shall be paid to the record holder thereof without
interest, (a) promptly after such time, the amount of any cash payable in lieu
of fractional shares of Valero Common Stock to which such holder is entitled
pursuant to Section 3.7 and the amount of dividends or other distributions with
a record date after the Effective Time theretofore paid with respect to such
whole shares of Valero Common Stock and (b) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time and a payment date subsequent thereto and to such surrender
payable with respect to such shares of Valero Common Stock.
3.6 No Further Ownership Rights in UDS Common Stock. All shares of Valero
Common Stock issued and cash paid upon conversion of shares of UDS Common Stock
in accordance with the terms of this Article III (including any cash paid
pursuant to Section 3.5 or 3.7) shall be deemed to have been issued or paid in
full satisfaction of all rights pertaining to the shares of UDS Common Stock.
A-11
133
3.7 No Fractional Shares of Valero Common Stock. No certificates or scrip
or shares of Valero Common Stock representing fractional shares of Valero Common
Stock or book-entry credit of the same shall be issued upon the surrender for
exchange of UDS Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to have any rights of a stockholder of
Valero or a holder of shares of Valero Common Stock. In lieu of any such
fractional share, each holder of shares of UDS Common Stock who would otherwise
have been entitled to a fraction of a share of Valero Common Stock upon
surrender of UDS Certificates (determined after taking into account all UDS
Certificates delivered by such holder) shall be paid upon such surrender cash
(without interest) in an amount equal to the value (determined with reference to
the closing price of a share of Valero Common Stock as reported on the NYSE
Composite Tape on the last full trading day immediately prior to the Closing
Date) of such fractional interest. Such payment with respect to fractional
shares is merely intended to provide a mechanical rounding off of, and is not a
separately bargained for, consideration.
3.8 Termination of Exchange Fund. Any portion of the Exchange Fund that
remains undistributed to the holders of UDS Certificates one year after the
Effective Time shall, at Valero's request, be delivered to Valero or otherwise
on the instruction of Valero, and any holders of UDS Certificates who have not
theretofore complied with this Article III shall after such delivery look only
to Valero for the Merger Consideration with respect to the shares of UDS Common
Stock formerly represented thereby to which such holders are entitled pursuant
to Sections 3.1 and 3.4, any cash in lieu of fractional shares of Valero Common
Stock to which such holders are entitled pursuant to Section 3.7 and any
dividends or distributions with respect to shares of Valero Common Stock to
which such holders are entitled pursuant to Section 3.5. Any such portion of the
Exchange Fund remaining unclaimed by holders of shares of UDS Common Stock
immediately prior to such time as such amounts would otherwise escheat to or
become property of any Governmental Entity shall, to the extent permitted by
law, become the property of Valero free and clear of any claims or interest of
any Person previously entitled thereto.
3.9 No Liability. None of Valero, UDS or the Exchange Agent shall be
liable to any Person in respect of any Merger Consideration from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
3.10 Investment of the Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund as directed by Valero on a daily basis;
provided that no such investment or loss thereon shall affect the amounts
payable or the timing of the amounts payable to UDS stockholders pursuant to the
other provisions of this Article III. Any interest and other income resulting
from such investments shall promptly be paid to Valero.
3.11 Lost Certificates. If any UDS Certificate (other than any UDS
Certificate representing Dissenting Shares) shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such UDS Certificate to be lost, stolen or destroyed and, if required by Valero,
the posting by such Person of a bond in such reasonable amount as Valero may
direct as indemnity against any claim that may be made against it with respect
to such UDS Certificate, following the Effective Time the Exchange Agent will
deliver in exchange for such lost, stolen or destroyed UDS Certificate the
Merger Consideration with respect to the shares of UDS Common Stock formerly
represented thereby, any cash in lieu of fractional shares of Valero Common
Stock, and unpaid dividends and distributions on shares of Valero Common Stock
deliverable in respect thereof, pursuant to this Agreement.
3.12 Withholding Rights. Valero shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement such amounts
as it is required to deduct and withhold with respect to the making of such
payment under the Code and the rules and regulations promulgated thereunder, or
any provision of state, local or foreign Tax law. To the extent that amounts are
so withheld or paid over to or deposited with the relevant Governmental Entity
by Valero, such amounts shall be treated for all purposes of this Agreement as
having been paid to the Person in respect of which such deduction and
withholding was made by Valero.
3.13 Further Assurances. At and after the Effective Time, the officers
and directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of the
A-12
134
Surviving Corporation or UDS, any deeds, bills of sale, assignments or
assurances and to take and do, in the name and on behalf of the Surviving
Corporation or UDS, any other actions and things necessary to vest, perfect or
confirm of record or otherwise in the Surviving Corporation any and all right,
title and interest in, to and under any of the rights, properties or assets
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger.
3.14 Stock Transfer Books. The stock transfer books of UDS shall be
closed immediately upon the Effective Time, and there shall be no further
registration of transfers of shares of UDS Common Stock thereafter on the
records of UDS. On or after the Effective Time, any UDS Certificates presented
to the Exchange Agent, Valero or the Surviving Corporation for any reason shall
be converted into the right to receive the Merger Consideration with respect to
the shares of UDS Common Stock formerly represented thereby (including any cash
in lieu of fractional shares of Valero Common Stock to which the holders thereof
are entitled pursuant to Section 3.7 and any dividends or other distributions to
which the holders thereof are entitled pursuant to Section 3.5).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of UDS. Except as disclosed in a
section of the UDS disclosure schedule delivered to Valero concurrently herewith
(the "UDS Disclosure Schedule") corresponding to the subsection of this Section
4.1 to which such disclosure applies, UDS hereby represents and warrants to
Valero as follows:
(a) Corporate Organization. (i) UDS is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
UDS has the corporate power and authority to own or lease all of its properties
and assets and to carry on its business as it is now being conducted, and is
duly licensed or qualified to do business in each jurisdiction in which the
nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not, either individually or in the aggregate, have a Material Adverse
Effect on UDS. True and complete copies of the Certificate of Incorporation and
the By-Laws of UDS, as in effect as of the date of this Agreement, have
previously been made available by UDS to Valero.
(ii) Each Subsidiary of UDS (A) is duly organized and validly existing
under the laws of its jurisdiction of organization, (B) is duly qualified
to do business and in good standing in all jurisdictions (whether federal,
state, local or foreign) where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and in which the
failure to be so qualified would have a Material Adverse Effect on UDS, and
(C) has all requisite corporate power and authority to own or lease its
properties and assets and to carry on its business as now conducted.
(b) Capitalization. (i) The authorized capital stock of UDS consists of
(A) 250,000,000 shares of UDS Common Stock (each of which includes one UDS
Right), of which, as of May 1, 2001, 71,524,496 shares were issued and
outstanding, 2,234,812 shares were held in the GSOP and 17,116,837 shares were
held in treasury and (B) 25,000,000 shares of preferred stock, par value $0.01
per share, of UDS ("UDS Preferred Stock," together with the UDS Common Stock,
the "UDS Capital Stock"), of which no shares are issued and outstanding. From
May 1, 2001 to the date of this Agreement, no shares of UDS Capital Stock have
been issued except pursuant to employee and director stock plans of UDS in
effect as of the date hereof (the "UDS Stock Plans"). Except pursuant to the
terms of options, stock and restricted units issued pursuant to UDS Stock Plans
and outstanding as of the date hereof or issued thereafter as expressly
permitted hereby, and pursuant to the UDS Rights, UDS does not have and is not
bound by any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the purchase or issuance of any shares
of UDS Capital Stock or any other equity securities of UDS or any securities of
UDS representing the right to purchase or otherwise receive any shares of UDS
Capital Stock. As of May 1, 2001, no shares of UDS Capital Stock were reserved
for
A-13
135
issuance, except for 12,525,465 shares of UDS Common Stock reserved for issuance
upon the exercise of stock options pursuant to the UDS Stock Plans and in
respect of the employee and director savings, compensation and deferred
compensation plans described in the UDS 2000 10-K, and no shares of UDS Common
Stock reserved for issuance in connection with the UDS Rights Agreement. UDS has
no Voting Debt issued or outstanding.
(ii) Except for immaterial amounts of directors' qualifying shares in
foreign Subsidiaries of UDS, UDS owns, directly or indirectly, all of the
issued and outstanding shares of capital stock or other equity ownership
interests of each Subsidiary of UDS, free and clear of any liens, pledges,
charges, encumbrances and security interests whatsoever ("Liens"), and all
of such shares or equity ownership interests are duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive
rights, with no personal liability attaching to the ownership thereof. No
Subsidiary of UDS has or is bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character
calling for the purchase or issuance of any shares of capital stock or any
other equity security of such Subsidiary or any securities representing the
right to purchase or otherwise receive any shares of capital stock or any
other equity security of such Subsidiary. Section 4.2(b)(ii) of the UDS
Disclosure Schedule sets forth a list of each material investment of UDS in
any corporation, joint venture, partnership, limited liability company or
other entity other than its Subsidiaries, which, individually or taken
together in the aggregate, would be considered a Significant Subsidiary if
such investment constituted control of such entity (each a "Non-Subsidiary
Affiliate").
(c) Authority; No Violation. (i) UDS has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of UDS. The Board of Directors of UDS
has directed that this Agreement be submitted to UDS stockholders for approval
at a meeting of UDS stockholders for the purpose of approving the Merger and
this Agreement (the "UDS Stockholders Meeting"), and, except for the approval of
the Merger and of this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of UDS Common Stock (the "UDS Stockholder
Approval"), no other corporate proceedings on the part of UDS are necessary to
approve this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by UDS and
(assuming due authorization, execution and delivery by Valero) constitutes a
valid and binding obligation of UDS, enforceable against UDS in accordance with
its terms.
(ii) Neither the execution and delivery of this Agreement by UDS, nor
the consummation by UDS of the transactions contemplated hereby, nor
compliance by UDS with any of the terms or provisions hereof, will (A)
violate any provision of the Certificate of Incorporation or By-Laws of
UDS, each as amended, or (B) assuming that the consents and approvals
referred to in Section 4.1(d) are duly obtained, (x) violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to UDS, any of its Subsidiaries or Non-Subsidiary
Affiliates or any of their respective properties or assets or (y) violate,
conflict with, result in a breach of any provision of or the loss of any
benefit under, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of or a right of termination or cancellation under, accelerate
the performance required by, accelerate any right or benefit provided by,
or result in the creation of any Lien upon any of the respective properties
or assets of UDS, any of its Subsidiaries or its Non-Subsidiary Affiliates
under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which UDS, any of its Subsidiaries or
Non-Subsidiary Affiliates is a party, or by which they or any of their
respective properties or assets may be bound or affected, except (in the
case of clause (B)(y) above) for such violations, conflicts, breaches or
defaults which either individually or in the aggregate will not have a
Material Adverse Effect on UDS or the Surviving Corporation.
A-14
136
(d) Consents and Approvals. Except for (i) the filing of a notification
and report form under the HSR Act and the termination or expiration of the
waiting period under the HSR Act, (ii) the filing of any other required
applications or notices with any state or foreign agencies and approval of such
applications and notices (the "Other Approvals"), (iii) the filing with the SEC
of a joint proxy statement/prospectus relating to the matters to be submitted to
Valero's stockholders at the Valero Stockholders Meeting and the matters to be
submitted to UDS's stockholders at the UDS Stockholders Meeting (such joint
proxy statement/prospectus, and any amendments or supplements thereto, the
"Joint Proxy Statement/ Prospectus") and a registration statement on Form S-4
with respect to the issuance of Valero Common Stock in the Merger (such Form
S-4, and any amendments or supplements thereto, the "Form S-4"), (iv) the filing
of the Certificate of Merger, (v) any consents, authorizations, approvals,
filings or exemptions in connection with compliance with the rules of the NYSE,
(vi) such filings and approvals as are required to be made or obtained under the
securities or "Blue Sky" laws of various states in connection with the issuance
of Valero Common Stock pursuant to this Agreement (the consents, approvals,
filings and registration required under or in relation to the foregoing clauses
(ii) though (vi) being referred to as "Necessary Consents") and (vii) such other
consents, approvals, filings and registrations the failure of which to obtain or
make would not reasonably be expected to have a Material Adverse Effect on UDS
or the Surviving Corporation, no consents or approvals of or filings or
registrations with any supranational, national, state, municipal, local or
foreign government, any instrumentality, subdivision, court, administrative
agency or commission or other authority thereof, or any quasi-governmental or
private body exercising any regulatory, taxing, importing or other governmental
or quasi-governmental authority (each, a "Governmental Entity") are necessary in
connection with (A) the execution and delivery by UDS of this Agreement and (B)
the consummation by UDS of the transactions contemplated by this Agreement.
(e) Financial Reports and SEC Documents. The UDS 2000 10-K and all other
reports, registration statements, definitive proxy statements or information
statements filed or to be filed by UDS or any of its Subsidiaries subsequent to
December 31, 1998 under the Securities Act or under Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act in the form filed, or to be filed (collectively,
the "UDS SEC Documents"), with the SEC, (i) complied or will comply in all
material respects as to form with the applicable requirements under the
Securities Act or the Exchange Act, as the case may be, and (ii) as of its
filing date, did not or will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any such UDS SEC Document (including the related
notes and schedules thereto) fairly presents or will fairly present the
financial position of the entity or entities to which it relates as of its date,
and each of the statements of operations and changes in stockholders' equity and
cash flows or equivalent statements in such UDS SEC Documents (including any
related notes and schedules thereto) fairly presents or will fairly present the
results of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of the entity or entities to which it relates for the
periods to which it relates, in each case in accordance with GAAP consistently
applied during the periods involved, except, in each case, as may be noted
therein, subject to normal year-end audit adjustments in the case of unaudited
statements.
(f) Absence of Undisclosed Liabilities. Except as disclosed in the audited
financial statements (or notes thereto) included in the UDS 2000 10-K, neither
UDS nor any of its Subsidiaries had at December 31, 2000, or has incurred since
that date through the date hereof, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except (a)
liabilities, obligations or contingencies which (i) are accrued or reserved
against in the financial statements in the UDS 2000 10-K or reflected in the
notes thereto or (ii) were incurred in the ordinary course of business and
consistent with past practices, (b) liabilities, obligations or contingencies
which (i) would not reasonably be expected, individually or in the aggregate, to
have a Material Adverse Effect on UDS, or (ii) have been discharged or paid in
full prior to the date hereof, and (c) liabilities, obligations and
contingencies which are of a nature not required to be reflected in the
consolidated financial statements of UDS and its Subsidiaries prepared in
accordance with GAAP consistently applied.
A-15
137
(g) Absence of Certain Changes or Events. (i) Since December 31, 2000,
except as set forth in UDS SEC Documents filed since December 31, 2000 and prior
to the date hereof, no event or events have occurred that has had or would
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect on UDS.
(ii) Since December 31, 2000, UDS and its Subsidiaries have carried on
their respective businesses in all material respects in the ordinary
course.
(iii) Since December 31, 2000, neither UDS nor any of its Subsidiaries
has (A) except for such actions as were in the ordinary course of business
consistent with past practice or except as required by applicable law, (I)
increased the wages, salaries, compensation, pension, or other fringe
benefits or perquisites payable to any executive officer or director from
the amount thereof in effect as of December 31, 2000, or (II) granted any
severance or termination pay, entered into any contract to make or grant
any severance or termination pay, or paid any bonuses, to any executive
officer or director or (B) suffered any strike, work stoppage, slowdown, or
other labor disturbance which would be reasonably be expected to have, (in
the case of clause (A) or (B) above) either individually or in the
aggregate, a Material Adverse Effect on UDS.
(iv) Since December 31, 2000, UDS has not declared any dividends on
UDS Common Stock other than its regular quarterly dividends.
(h) Legal Proceedings. There is no suit, action or proceeding or
investigation pending or, to the knowledge of UDS, threatened, against or
affecting UDS or any of its Subsidiaries that would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on UDS, nor
is there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against UDS or its Subsidiaries having, or
which would reasonably be expected to have, individually or in the aggregate,
any such effect.
(i) Compliance with Applicable Law. UDS and each of its Subsidiaries hold
all licenses, franchises, permits and authorizations necessary for the lawful
conduct of their respective businesses under and pursuant to each, and have
complied in all respects with and are not in default under any, applicable law,
statute, order, rule or regulation of any Governmental Entity relating to UDS or
any of its Subsidiaries, except where the failure to hold such license,
franchise, permit or authorization or such noncompliance or default would not,
either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on UDS.
(j) Contracts. (i) Neither UDS nor any of its Subsidiaries is a party to
or bound by any contract, arrangement, commitment or understanding (whether
written or oral) (A) with respect to the employment of any directors, officers
or employees other than in the ordinary course of business consistent with past
practice, (B) which, upon the consummation or stockholder approval of the
transactions contemplated by this Agreement, will (either alone or upon the
occurrence of any additional acts or events) result in any payment (whether of
severance pay or otherwise) becoming due from Valero, UDS, the Surviving
Corporation or any of their respective Subsidiaries to any director officer or
employee thereof, (C) which is a "material contract" (as such term is defined in
Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the date of
this Agreement that has not been filed or incorporated by reference in the UDS
SEC Documents filed prior to the date hereof, or (D) which materially restricts
the conduct of any line of business by UDS or upon consummation of the Merger
will materially restrict the ability of Valero or the Surviving Corporation to
engage in any line of business. Each contract, arrangement, commitment or
understanding of the type described in this Section 4.1(j), whether or not set
forth in the UDS Disclosure Schedule or in such UDS SEC Documents, is referred
to herein as a "UDS Contract".
(ii) (A) Each UDS Contract is valid and binding on UDS and any of its
Subsidiaries that is a party thereto, as applicable, and in full force and
effect, (B) UDS and each of its Subsidiaries has in all material respects
performed all obligations required to be performed by it to date under each
UDS Contract, except where such noncompliance, either individually or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect on UDS, and (C) neither UDS nor any of
A-16
138
its Subsidiaries knows of, or has received notice of, the existence of any
event or condition which constitutes, or, after notice or lapse of time or
both, will constitute, a material default on the part of UDS or any of its
Subsidiaries under any such UDS Contract, except where such default, either
individually or in the aggregate, would not reasonably be expected to have
a Material Adverse Effect on UDS.
(k) Environmental Liability. There are no legal, administrative, arbitral
or other proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature seeking to impose, or that could reasonably result in the imposition of,
on UDS, any liability or obligation arising under common law or under any local,
state or federal environmental statute, regulation or ordinance including
CERCLA, pending or threatened in writing against UDS, which liability or
obligation, either individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on UDS. UDS is not subject to any
agreement, order, judgment, decree, letter or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any liability
or obligation with respect to the foregoing that, either individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
UDS.
(l) Employee Benefit Plans; Labor Matters. (i) Section 4.1(l)(i) of the
UDS Disclosure Schedule includes a complete list of all UDS Benefit Plans.
(ii) With respect to each UDS Plan, UDS has delivered or made
available to Valero a true, correct and complete copy of: (A) each UDS Plan
document or a summary of any unwritten UDS Plan, trust agreement and
insurance contract or other funding vehicle; (B) the most recent Annual
Report (Form 5500 Series) and accompanying schedule, if any; (C) the
current summary plan description and any material modifications thereto, if
any (in each case, whether or not required to be furnished under ERISA);
(D) the most recent annual financial report, if any; (E) the most recent
actuarial report, if any; and (vi) the most recent determination letter
from the Internal Revenue Service, if any. Except as specifically provided
in the foregoing documents delivered or made available to Valero, there are
no amendments to any UDS Plan that have been adopted or approved nor has
UDS or any of its Subsidiaries undertaken to make any such amendments or to
adopt or approve any new UDS Plan.
(iii) Section 4.1(l)(iii) of the UDS Disclosure Schedule identifies
each UDS Plan that is intended to be a "qualified plan" within the meaning
of Section 401(a) of the Code ("UDS Qualified Plans"). The Internal Revenue
Service has issued a favorable determination letter with respect to each
UDS Qualified Plan and the related trust, and such determination letter has
not been revoked. No circumstances exist and no events have occurred that
could adversely affect the qualified status of any UDS Qualified Plan or
the related trust, which could not be corrected under the Internal Revenue
Service's Employee Plans Compliance Resolution System (Revenue Procedure
2001-17) without material liability. No UDS Plan is intended to meet the
requirements of Code Section 501(c)(9).
(iv) All contributions required to be made to any UDS Plan by
applicable law or regulation or by any plan document or other contractual
undertaking, and all premiums due or payable with respect to insurance
policies funding any UDS Plan, for any period through the date hereof have
been timely made.
(v) With respect to each UDS Plan that is subject to Title IV or
Section 302 of ERISA or Section 412 or 4971 of the Code: (A) there does not
exist any accumulated funding deficiency within the meaning of Section 412
of the Code or Section 302 of ERISA, whether or not waived; (B) the fair
market value of the assets of such UDS Plan equals or exceeds the actuarial
present value of all accrued benefits under such UDS Plan (whether or not
vested) on an accumulated benefits obligation basis based on the most
recent actuarial report for each such plan; (C) no reportable event within
the meaning of Section 4043(c) of ERISA for which the 30-day notice
requirement has not been waived has occurred, and the consummation of the
transactions contemplated by this Agreement will not
A-17
139
result in the occurrence of any such reportable event; (D) all premiums to
the Pension Benefit Guaranty Corporation (the "PBGC") have been timely paid
in full; (E) no liability (other than for premiums to the PBGC) under Title
IV of ERISA has been or is expected to be incurred by UDS or any of its
Subsidiaries; and (F) the PBGC has not instituted proceedings to terminate
any such UDS Plan and, to UDS's knowledge, no condition exists that
presents a risk that such proceedings will be instituted or which would
constitute grounds under Section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, any such UDS Plan.
(vi) (A) No UDS Benefit Plan is a Multiemployer Plan or a plan that
has two or more contributing sponsors at least two of whom are not under
common control, within the meaning of Section 4063 of ERISA (a "Multiple
Employer Plan"); and (B) none of UDS and its Subsidiaries nor any ERISA
Affiliates has incurred any Withdrawal Liability that has not been
satisfied in full. With respect to each UDS Benefit Plan that is a
Multiemployer Plan, none of UDS and its Subsidiaries, nor any of their
respective ERISA Affiliates has received any notification, nor has any
reason to believe, that any such Multiemployer Plan is in reorganization,
has been terminated, is insolvent, or may reasonably be expected to be in
reorganization, to be insolvent, or to be terminated.
(vii) Except as would not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect on UDS, (A) each of the
UDS Plans has been operated and administered in all material respects in
accordance with applicable law and administrative rules and regulations of
any Governmental Entity, including, but not limited to, ERISA and the Code,
and (B) there are no pending or threatened claims (other than claims for
benefits in the ordinary course), lawsuits or arbitrations which have been
asserted or instituted against the UDS Plans, any fiduciaries thereof with
respect to their duties to the UDS Plans or the assets of any of the trusts
under any of the UDS Plans which could reasonably be expected to result in
any material liability of UDS or any of its Subsidiaries to the PBGC, the
U.S. Department of the Treasury, the U.S. Department of Labor, any UDS
Plan, any participant in a UDS Plan, or any other party.
(viii) UDS and its Subsidiaries have no liability for life, health,
medical or other welfare benefits to former employees or beneficiaries or
dependents thereof, except for health continuation coverage as required by
Section 4980B of the Code or Part 6 of Title I of ERISA and at no expense
to UDS and its Subsidiaries. To the knowledge of UDS, UDS and each of its
Subsidiaries has reserved the right to amend, terminate or modify at any
time all plans or arrangements providing for retiree health or life
insurance coverage.
(ix) Section 4.1(l)(ix) of the UDS Disclosure Schedule sets forth (A)
an accurate and complete list of each UDS Plan under which the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby could (either alone or in conjunction with any other
event), result in, cause the accelerated vesting, funding or delivery of,
or increase the amount or value of, any payment or benefit (including the
forgiveness of indebtedness) to any employee, officer or director of UDS or
any of its Subsidiaries, or could limit the right of UDS or any of its
Subsidiaries to amend, merge, terminate or receive a reversion of assets
from any UDS Plan or related trust or any material employment agreement or
related trust, (B) a reasonable good faith estimate of the maximum amount
of the severance benefits that could become payable to officers and senior
management of UDS if their employment were terminated at the Effective
Time, and (C) a reasonable good faith estimate of the maximum amount of the
"excess parachute payments" within the meaning of Section 280G of the Code
that could become payable by UDS and its Subsidiaries in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
(x) Except as would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect on UDS, all UDS Benefit Plans
subject to the laws of any jurisdiction outside of the United States (A)
have been maintained in accordance with all applicable requirements; (B) if
they are intended to qualify for special tax treatment meet all
requirements for
A-18
140
such treatment; and (C) if they are intended to be funded and/or
book-reserved are fully funded and/or book reserved, as appropriate, based
upon reasonable actuarial assumptions.
(xi) With respect to any UDS Benefit Plan that is an "employee stock
ownership plan" within the meaning of Section 4975(e)(7) of the Code (an
"ESOP"), (A) each loan under which the ESOP was a borrower (each, a "Loan")
has been fully repaid, and (B) all of the securities of UDS that were
acquired with such Loan have been released from the pledge made in
connection with the Loan and fully allocated to the accounts of
participants in the ESOP in accordance with the requirements of Treasury
Regulations Sections 54.4975-7 and 54.4975-11.
(m) Intellectual Property. Except as would not reasonably be expected to
have a Material Adverse Effect on UDS, (i) UDS and its Subsidiaries own, or are
licensed to use, all Intellectual Property used in and necessary for the conduct
of their business as it is currently conducted, (ii) to the knowledge of UDS,
the use of Intellectual Property by UDS and its Subsidiaries does not infringe
on or otherwise violate the rights of any third party, and, to the extent such
Intellectual Property is licensed, its use is in accordance in all material
respects with the applicable license pursuant to which UDS acquired the right to
use such Intellectual Property, (iii) to the knowledge of UDS, no third party is
challenging, infringing on or otherwise violating any right of UDS in the
Intellectual Property, (iv) neither UDS nor any of its Subsidiaries has received
any written notice of any pending claim, order or proceeding with respect to any
Intellectual Property used in and necessary for the conduct of UDS's and its
Subsidiaries' business as it is currently conducted, and (v) to the knowledge of
UDS, no Intellectual Property is being used or enforced by UDS or its
Subsidiaries in a manner that would reasonably be expected to result in the
abandonment, cancellation or unenforceability of any Intellectual Property used
in and necessary for the conduct of UDS's and its Subsidiaries' business as it
is currently conducted.
(n) State Takeover Laws; Rights Plan. (i) The Board of Directors of UDS
has approved this Agreement and the transactions contemplated by this Agreement
as required under Section 203 of the DGCL and any other applicable state
takeover laws and any applicable provision of the UDS Certificate of
Incorporation so that any such state takeover laws and such provisions will not
apply to this Agreement or any of the transactions contemplated hereby.
(ii) UDS has taken all action, if any, necessary or appropriate so
that the entering into of this Agreement, and the consummation of the
transactions contemplated hereby, do not and will not result in the ability
of any person to exercise any UDS Rights under the UDS Rights Agreement or
enable or require the UDS Rights to separate from the shares of UDS Common
Stock to which they are attached or to be triggered or become exercisable.
No "Distribution Date" or "Stock Acquisition Date" (as such terms are
defined in the UDS Rights Agreement) has occurred.
(o) Opinion of Financial Advisor. UDS has received the opinion of Banc of
America Securities LLC, dated the date hereof, to the effect that the Merger
Consideration to be received by holders of UDS Common Stock in the Merger is
fair to such stockholders from a financial point of view.
(p) Board Approval. The Board of Directors of UDS, at a meeting duly
called and held, has by unanimous vote of those directors present (i) determined
that this Agreement and the transactions contemplated hereby are advisable, fair
to and in the best interests of the stockholders of UDS, (ii) approved and
adopted this Agreement and (iii) recommended that the plan of merger contained
in this Agreement be adopted by the holders of UDS Common Stock.
(q) Broker's Fees. Neither UDS nor any of its Subsidiaries nor any of
their respective officers or directors has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement, excluding fees
to be paid to Banc of America Securities LLC.
(r) Taxes. (i) Except as would not reasonably be expected, individually or
in the aggregate, to have a Material Adverse Effect on UDS, (A) each of UDS and
its Subsidiaries has duly and timely filed all Tax Returns required to be filed
by it, and all such Tax Returns are true, complete and accurate in all
A-19
141
respects; (B) UDS and each of its Subsidiaries has paid all Taxes required to be
paid by it, and has paid all Taxes that it was required to withhold from amounts
owing to any employee, creditor or third party; (C) there are no pending or, to
the knowledge of UDS, threatened audits, examinations, investigations,
deficiencies, claims or other proceedings in respect of Taxes relating to UDS or
any Subsidiary of UDS; (D) there are no liens for Taxes upon the assets of UDS
or any Subsidiary of UDS, other than liens for current Taxes not yet due and
liens for Taxes that are being contested in good faith by appropriate
proceedings; (E) neither UDS nor any of its Subsidiaries has requested any
extension of time within which to file any Tax Returns in respect of any taxable
year which have not subsequently been filed when due (pursuant to such
extension), nor provided or been requested to provide any waivers of the time to
assess any Taxes that are pending or outstanding; (F) the consolidated federal
income Tax Returns of UDS have been examined, or the statute of limitations has
closed, with respect to all taxable years through and including 1994; (G)
neither UDS nor any of its Subsidiaries has any liability for Taxes of any
Person (other than UDS and its Subsidiaries) under Treasury Regulation Section
1.1502-6 (or any comparable provision of state, local or foreign law); and (H)
neither UDS nor any Subsidiary of UDS is a party to any agreement (with any
Person other than UDS and/or any of its Subsidiaries) relating to the allocation
or sharing of Taxes which is currently in force.
(ii) UDS has not constituted either a "distributing corporation" or a
"controlled corporation" within the meaning of Section 355(a)(1)(A) of the
Code in a distribution of stock intended to qualify under Section 355(a) of
the Code (i) in the two years prior to the date of this Agreement (or will
constitute such a corporation in the two years prior to the Closing Date)
or (ii) in a distribution which otherwise constitutes part of a "plan" or
"series of related transactions" within the meaning of Section 355(e) of
the Code in conjunction with the Merger.
(s) Reorganization under the Code. As of the date of this Agreement,
neither UDS nor any of its Subsidiaries has taken any action or knows of any
fact that is reasonably likely to prevent the Merger from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code.
(t) Form S-4; Joint Proxy Statement/Prospectus. None of the information to
be supplied by UDS or its Subsidiaries in the Form S-4 or the Joint Proxy
Statement/Prospectus will, at the time of the mailing of the Joint Proxy
Statement/Prospectus and any amendments or supplements thereto, and at the time
of each of the Valero Stockholders Meeting and the UDS Stockholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Joint Proxy Statement/Prospectus will comply, as of its mailing
date, as to form in all material respects with all applicable laws, including
the provisions of the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by UDS with respect to
information supplied by Valero for inclusion therein.
(u) Labor Relations; Collective Bargaining Agreements. Neither UDS nor any
Subsidiary of UDS is a party to any collective bargaining or other labor union
contract applicable to persons employed by UDS or any Subsidiary of UDS, and no
collective bargaining agreement or other labor union contract is being
negotiated by UDS or any Subsidiary of UDS. No labor organization or group of
employees of UDS or any of its Subsidiaries has made a pending demand for
recognition or certification, and there are no representation or certification
proceedings or petitions seeking a representation proceeding presently pending
or threatened to be brought or filed, with the National Labor Relations Board or
any other labor relations tribunal or authority. To the knowledge of UDS, except
as would not reasonably be expected to have a Material Adverse Effect on UDS,
(i) there is no labor dispute, strike, slowdown or work stoppage against UDS or
any Subsidiary of UDS pending or, to the knowledge of UDS, threatened against
UDS or any Subsidiary of UDS and (ii) no unfair labor practice or labor charge
or complaint has occurred with respect to UDS or any Subsidiary of UDS.
4.2 Representations and Warranties of Valero. Except as disclosed in a
section of the Valero disclosure schedule delivered to UDS concurrently herewith
(the "Valero Disclosure Schedule")
A-20
142
corresponding to the subsection of this Section 4.2 to which such disclosure
applies, Valero hereby represents and warrants to UDS as follows:
(a) Corporate Organization. (i) Valero is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Valero has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not, either individually or in the aggregate, have a Material Adverse
Effect on Valero. True and complete copies of the Restated Certificate of
Incorporation and By-Laws of Valero, as in effect as of the date of this
Agreement, have previously been made available by Valero to UDS.
(ii) Each Subsidiary of Valero (A) is duly organized and validly
existing under the laws of its jurisdiction of organization, (B) is duly
qualified to do business and in good standing in all jurisdictions (whether
federal, state, local or foreign) where its ownership or leasing of
property or the conduct of its business requires it to be so qualified and
in which the failure to be so qualified would have a Material Adverse
Effect on Valero and (C) has all requisite corporate power and authority to
own or lease its properties and assets and to carry on its business as now
conducted.
(b) Capitalization. (i) The authorized capital stock of Valero consists of
(A) 150,000,000 shares of Valero Common Stock (each of which includes one Valero
Right), of which, as of March 31, 2001, 61,016,165 shares were issued and
outstanding and 1,295,001 shares were held in treasury and (B) 20,000,000 shares
of preferred stock, par value $0.01 per share, of Valero (the "Valero Preferred
Stock," together with the Valero Common Stock, the "Valero Capital Stock"), of
which no shares are issued and outstanding. From January 31, 2001 to the date of
this Agreement, no shares of Valero Capital Stock have been issued except
pursuant to employee and director stock plans of Valero in effect as of the date
hereof (the "Valero Stock Plans"). All of the issued and outstanding shares of
Valero Common Stock have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. As of the date of this Agreement, except
pursuant to the terms of options and stock issued pursuant to Valero Stock Plans
and pursuant to the Valero Rights, Valero does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of Valero
Capital Stock or any other equity securities of Valero or any securities
representing the right to purchase or otherwise receive any shares of Valero
Capital Stock. As of March 31, 2001, no shares of Valero Capital Stock were
reserved for issuance, except for shares of Valero Common Stock reserved for
issuance upon the exercise of stock options pursuant to the Valero Stock Plans
and in respect of the employee and director savings, compensation and deferred
compensation plans described in the Valero 2000 10-K and 1,500,000 shares of
Junior Participating Preferred Stock, Series I, reserved for issuance in
connection with the Valero Rights Agreement. Valero has no Voting Debt issued or
outstanding. Except for immaterial amounts of directors' qualifying shares in
foreign Subsidiaries of Valero, Valero owns, directly or indirectly, all of the
issued and outstanding shares of capital stock or other equity ownership
interests of each Subsidiary of Valero, free and clear of any Liens, and all of
such shares or equity ownership interests are duly authorized and validly issued
and are fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof. No Subsidiary of Valero
has or is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of capital stock or any other equity security of such Subsidiary
or any securities representing the right to purchase or otherwise receive any
shares of capital stock or any other equity security of such Subsidiary.
(c) Authority; No Violation. (i) Valero has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of Valero. The Board of Directors of
Valero has directed that this Agreement be submitted to Valero stockholders for
approval at a meeting of Valero stockholders
A-21
143
for the purpose of approving the Merger and this Agreement (the "Valero
Stockholders Meeting"), and, except for the approval of the Merger and this
Agreement by majority vote at a meeting of Valero's stockholders at which a
quorum is present (the "Valero Stockholder Approval"), no other corporate
proceedings on the part of Valero are necessary to approve this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Valero and (assuming due authorization,
execution and delivery by UDS) constitutes a valid and binding obligation of
Valero, enforceable against Valero in accordance with its terms.
(ii) Neither the execution and delivery of this Agreement by Valero,
nor the consummation by Valero of the transactions contemplated hereby, nor
compliance by Valero with any of the terms or provisions hereof, will (A)
violate any provision of the Restated Certificate of Incorporation or
By-Laws of Valero or (B) assuming that the consents and approvals referred
to in Section 4.2(d) are duly obtained, (x) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Valero, any of its Subsidiaries or Non-Subsidiary Affiliates
or any of its properties or assets or (y) violate, conflict with, result in
a breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by,
accelerate any right or benefit provided by, or result in the creation of
any Lien upon any of the properties or assets of Valero, any of its
Subsidiaries or Non-Subsidiary Affiliates under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which
Valero, any of its Subsidiaries or Non-Subsidiary Affiliates is a party, or
by which they or any of their properties or assets may be bound or
affected, except (in the case of clause (y) above) for such violations,
conflicts, breaches or defaults which, either individually or in the
aggregate, will not have a Material Adverse Effect on Valero.
(d) Consents and Approvals. Except for (i) the filing of a notification
and report form under the HSR Act and the termination or expiration of the
waiting period under the HSR Act, (ii) the Other Approvals, (iii) the filing
with the SEC of the Joint Proxy Statement/Prospectus and the Form S-4, (iv) the
filing of the Certificate of Merger, (v) any consents, authorizations,
approvals, filings or exemptions in connection with compliance with the rules of
the NYSE, (vi) such filings and approvals as are required to be made or obtained
under the securities or "Blue Sky" laws of various states in connection with the
issuance of the shares of Valero Common Stock pursuant to this Agreement and
(vii) such other consents, approvals, filings and registrations the failure of
which to obtain or make would not reasonably be expected to have a Material
Adverse Effect on Valero, no consents or approvals of or filings or
registrations with any Governmental Entity are necessary in connection with (A)
the execution and delivery by Valero of this Agreement and (B) the consummation
by Valero of the transactions contemplated by this Agreement.
(e) Financial Reports and SEC Documents. The Valero 2000 10-K and all
other reports, registration statements, definitive proxy statements or
information statements filed or to be filed by Valero or any of its Subsidiaries
subsequent to December 31, 1998 under the Securities Act or under Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act, in the form filed, or to be
filed (collectively, the "Valero SEC Documents"), with the SEC (i) complied or
will comply in all material respects as to form with the applicable requirements
under the Securities Act or the Exchange Act, as the case may be, and (ii) as of
its filing date, did not or will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which
they were made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any such Valero SEC Document (including the
related notes and schedules thereto) fairly presents or will fairly present the
financial position of the entity or entities to which it relates as of its date,
and each of the statements of income and changes in stockholders' equity and
cash flows or equivalent statements in such Valero SEC Documents (including any
related notes and schedules thereto) fairly presents or will fairly present the
results of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of the entity or entities to
A-22
144
which it relates for the periods to which it relates, in each case in accordance
with GAAP consistently applied during the periods involved, except, in each
case, as may be noted therein, subject to normal year-end audit adjustments in
the case of unaudited statements.
(f) Absence of Undisclosed Liabilities. Except as disclosed in the audited
financial statements (or notes thereto) included in the Valero 2000 10-K,
neither Valero nor any of its Subsidiaries had at December 31, 2000, or has
incurred since that date through the date hereof, any liabilities or obligations
(whether absolute, accrued, contingent or otherwise) of any nature, except (a)
liabilities, obligations or contingencies which (i) are accrued or reserved
against in the financial statements in the Valero 2000 10-K or reflected in the
notes thereto or (ii) were incurred in the ordinary course of business and
consistent with past practices, (b) liabilities, obligations or contingencies
which (i) would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Valero, or (ii) have been discharged or
paid in full prior to the date hereof, and (c) liabilities, obligations and
contingencies which are of a nature not required to be reflected in the
consolidated financial statements of Valero and its Subsidiaries prepared in
accordance with GAAP consistently applied.
(g) Absence of Certain Changes or Events. (i) Since December 31, 2000,
except as set forth in Valero SEC Documents filed since December 31, 2000 and
prior to the date hereof, no event or events have occurred that has had or would
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect on Valero.
(ii) Since December 31, 2000, Valero and its Subsidiaries have carried
on their respective businesses in all material respects in the ordinary
course.
(iii) Since December 31, 2000, Valero has not declared any dividends
on Valero Common Stock other than its regular quarterly dividends.
(h) Legal Proceedings. There is no suit, action or proceeding or
investigation pending or, to the knowledge of Valero, threatened, against or
affecting Valero or any of its Subsidiaries that would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on Valero,
nor is there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against Valero or its Subsidiaries having, or
which would reasonably be expected to have, individually or in the aggregate,
any such effect.
(i) Compliance with Applicable Law. Valero and each of its Subsidiaries
hold all licenses, franchises, permits and authorizations necessary for the
lawful conduct of their respective businesses under and pursuant to each, and
have complied in all respects with and are not in default under any, applicable
law, statute, order, rule or regulation of any Governmental Entity relating to
Valero or any of its Subsidiaries, except where the failure to hold such
license, franchise, permit or authorization or such noncompliance or default
would not, either individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect on Valero.
(j) Contracts. (i) Neither Valero nor any of its Subsidiaries is a party
to or bound by any contract, arrangement, commitment or understanding (whether
written or oral) (A) which, upon the consummation or stockholder approval of the
transactions contemplated by this Agreement, will (either alone or upon the
occurrence of any additional acts or events) result in any payment (whether of
severance pay or otherwise) becoming due from UDS, Valero, the Surviving
Corporation or any of their respective Subsidiaries to any director officer or
employee thereof, (B) which is a "material contract" (as such term is defined in
Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the date of
this Agreement that has not been filed or incorporated by reference in the
Valero SEC Documents filed prior to the date hereof, or (C) which materially
restricts the conduct of any line of business by Valero or upon consummation of
the Merger will materially restrict the ability of UDS or the Surviving
Corporation to engage in any line of business. Each contract, arrangement,
commitment or understanding of the type described in this Section 4.2(j),
whether or not set forth in the Valero Disclosure Schedule or in such Valero SEC
Documents, is referred to herein as a "Valero Contract".
A-23
145
(ii) (A) Each Valero Contract is valid and binding on Valero and
any of its Subsidiaries that is a party thereto, as applicable, and in
full force and effect, (B) Valero and each of its Subsidiaries has in
all material respects performed all obligations required to be performed
by it to date under each Valero Contract, except where such
noncompliance, either individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on Valero, and
(C) neither Valero nor any of its Subsidiaries knows of, or has received
notice of, the existence of any event or condition which constitutes,
or, after notice or lapse of time or both, will constitute, a material
default on the part of Valero or any of its Subsidiaries under any such
Valero Contract, except where such default, either individually or in
the aggregate, would not reasonably be expected to have a Material
Adverse Effect on Valero.
(k) Environmental Liability. There are no legal, administrative, arbitral
or other proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature seeking to impose, or that could reasonably result in the imposition of,
on Valero, any liability or obligation arising under common law or under any
local, state or federal environmental statute, regulation or ordinance including
CERCLA, pending or threatened in writing against Valero, which liability or
obligation, either individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on Valero. Valero is not subject to
any agreement, order, judgment, decree, letter or memorandum by or with any
court, governmental authority, regulatory agency or third party imposing any
liability or obligation with respect to the foregoing that, either individually
or in the aggregate, would reasonably be expected to have a Material Adverse
Effect on Valero.
(l) Employee Benefit Plans; Labor Matters. (i) The Internal Revenue
Service has issued a favorable determination letter with respect to each Valero
Plan that is intended to be a "qualified plan" within the meaning of Section
401(a) of the Code ("Valero Qualified Plans") and the related trust, and such
determination letter has not been revoked. No circumstances exist and no events
have occurred that could adversely affect the qualified status of any Valero
Qualified Plan or the related trust which could not be corrected under the
Internal Revenue Service's Employee Plans Compliance Resolution System (Revenue
Procedure 2001-17) without material liability to Valero. No Valero Plan is
intended to meet the requirements of Code Section 501(c)(9).
(ii) With respect to each Valero Plan that is subject to Title IV or
Section 302 of ERISA or Section 412 or 4971 of the Code: (A) there does not
exist any accumulated funding deficiency within the meaning of Section 412
of the Code or Section 302 of ERISA, whether or not waived; (B) the fair
market value of the assets of such Valero Plan equals or exceeds the
actuarial present value of all accrued benefits under such Valero Plan
(whether or not vested) on an accumulated benefit obligation basis, based
on the most recent actuarial report for such plan; (C) no reportable event
within the meaning of Section 4043(c) of ERISA for which the 30-day notice
requirement has not been waived has occurred, and the consummation of the
transactions contemplated by this Agreement will not result in the
occurrence of any such reportable event; (D) all premiums to the PBGC have
been timely paid in full; (E) no liability (other than for premiums to the
PBGC) under Title IV of ERISA has been or is expected to be incurred by
Valero or any of its Subsidiaries; and (F) the PBGC has not instituted
proceedings to terminate any such Valero Plan and, to Valero's knowledge,
no condition exists that presents a risk that such proceedings will be
instituted or which would constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any
such Valero Plan.
(iii) Except as would not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect on Valero, (A) each of the
Valero Plans has been operated and administered in all material respects in
accordance with applicable law and administrative rules and regulations of
any Governmental Entity, including, but not limited to, ERISA and the Code,
and (B) there are no pending or threatened claims (other than claims for
benefits in the ordinary course), lawsuits or arbitrations which have been
asserted or instituted against the Valero Benefit Plans, any fiduciaries
A-24
146
thereof with respect to their duties to the Valero Benefit Plans or the
assets of any of the trusts under any of the Valero Benefit Plans which
could reasonably be expected to result in any material liability of Valero
or any of its Subsidiaries to the PBGC, the U.S. Department of the
Treasury, the U.S. Department of Labor, any Valero Benefit Plan, any
participant in a Valero Benefit Plan, or any other party.
(iv) No Valero Benefit Plan is a Multiemployer Plan or a Multiple
Employer Plan.
(m) Intellectual Property. Except as would not reasonably be expected to
have a Material Adverse Effect on Valero, (i) Valero and its Subsidiaries own,
or are licensed to use, all Intellectual Property used in and necessary for the
conduct of their business as it is currently conducted, (ii) to the knowledge of
Valero, the use of Intellectual Property by Valero and its Subsidiaries does not
infringe on or otherwise violate the rights of any third party, and, to the
extent such Intellectual Property is licensed, its use is in accordance in all
material respects with the applicable license pursuant to which Valero acquired
the right to use such Intellectual Property, (iii) to the knowledge of Valero,
no third party is challenging, infringing on or otherwise violating any right of
Valero in the Intellectual Property, (iv) neither Valero nor any of its
Subsidiaries has received any written notice of any pending claim, order or
proceeding with respect to any Intellectual Property used in and necessary for
the conduct of Valero's and its Subsidiaries' business as it is currently
conducted, and (v) to the knowledge of Valero, no Intellectual Property is being
used or enforced by Valero or its Subsidiaries in a manner that would reasonably
be expected to result in the abandonment, cancellation or unenforceability of
any Intellectual Property used in and necessary for the conduct of Valero's and
its Subsidiaries' business as it is currently conducted.
(n) State Takeover Laws; Rights Plan. (i) The Board of Directors of Valero
has approved this Agreement and the transactions contemplated by this Agreement
as required under Section 203 of the DGCL and any other applicable state
takeover laws so that any such state takeover laws will not apply to this
Agreement or any of the transactions contemplated hereby.
(ii) Valero has taken all action, if any, necessary or appropriate so
that the entering into of this Agreement, and the consummation of the
transactions contemplated hereby, do not and will not result in the ability
of any person to exercise any Valero Rights under the Valero Rights
Agreement or enable or require the Valero Rights to separate from the
shares of Valero Common Stock to which they are attached or to be triggered
or become exercisable. No "Distribution Date" or "Shares Acquisition Date"
(as such terms are defined in the Valero Rights Agreement) has occurred.
(o) Opinion of Financial Advisor. Valero has received the opinion of
Credit Suisse First Boston Corporation and Morgan Stanley & Co. Incorporated, in
each case dated the date hereof, to the effect that the Merger Consideration is
fair to Valero from a financial point of view.
(p) Board Approval. The Board of Directors of Valero, at a meeting duly
called and held, has by unanimous vote of those directors present (i) determined
that this Agreement and the transactions contemplated hereby are advisable, fair
to and in the best interests of the stockholders of Valero, (ii) approved and
adopted this Agreement, and (iii) recommended that the plan of merger contained
in this Agreement be adopted by the holders of Valero Common Stock.
(q) Broker's Fees. Neither Valero nor any of its Subsidiaries nor any of
its respective officers or directors has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement, excluding fees
to be paid to Morgan Stanley & Co. Incorporated and Credit Suisse First Boston
Corporation.
(r) Taxes. (i) Except as would not reasonably be expected, individually or
in the aggregate, to have a Material Adverse Effect on Valero, (A) each of
Valero and its Subsidiaries has duly and timely filed all Tax Returns required
to be filed by it, and all such Tax Returns are true, complete and accurate in
all respects; (B) Valero and each of its Subsidiaries has paid all Taxes
required to be paid by it, and has paid all Taxes that it was required to
withhold from amounts owing to any employee, creditor or third party; (C) there
are no pending or, to the knowledge of Valero, threatened audits, examinations,
investigations,
A-25
147
deficiencies, claims or other proceedings in respect of Taxes relating to Valero
or any Subsidiary of Valero; (D) there are no liens for Taxes upon the assets of
Valero or any Subsidiary of Valero, other than liens for current Taxes not yet
due and liens for Taxes that are being contested in good faith by appropriate
proceedings; (E) neither Valero nor any of its Subsidiaries has requested any
extension of time within which to file any Tax Returns in respect of any taxable
year which have not subsequently been filed when due (pursuant to such
extension), nor provided or been requested to provide any waivers of the time to
assess any Taxes that are pending or outstanding; (F) the consolidated federal
income Tax Returns of Valero have been examined, or the statute of limitations
has closed, with respect to all taxable years through and including July 31,
1997; (G) neither Valero nor any of its Subsidiaries has any liability for Taxes
of any Person (other than Valero and its Subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any comparable provision of state, local or foreign law);
and (H) neither Valero nor any Subsidiary of Valero is a party to any agreement
(with any Person other than Valero and/or any of its Subsidiaries) relating to
the allocation or sharing of Taxes which is currently in force.
(ii) Valero has not constituted either a "distributing corporation" or
a "controlled corporation" within the meaning of Section 355(a)(1)(A) of
the Code in a distribution of stock intended to qualify under Section
355(a) of the Code (i) in the two years prior to the date of this Agreement
(or will constitute such a corporation in the two years prior to the
Closing Date) or (ii) in a distribution which otherwise constitutes part of
a "plan" or "series of related transactions" within the meaning of Section
355(e) of the Code in conjunction with the Merger.
(s) Reorganization under the Code. As of the date of this Agreement,
neither Valero nor any of its Subsidiaries has taken any action or knows of any
fact that is reasonably likely to prevent the Merger from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code.
(t) Form S-4; Joint Proxy Statement/Prospectus. None of the information to
be supplied by Valero or its Subsidiaries in the Form S-4 or the Joint Proxy
Statement/Prospectus will, at the time of the mailing of the Joint Proxy
Statement/Prospectus and any amendments or supplements thereto, and at the time
of each of the Valero Stockholders Meeting and the UDS Stockholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Joint Proxy Statement/Prospectus will comply, as of its mailing
date, as to form in all material respects with all applicable laws, including
the provisions of the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by Valero with respect to
information supplied by UDS for inclusion therein.
(u) Neither Valero nor any Subsidiary of Valero is a party to any
collective bargaining or other labor union contract applicable to persons
employed by Valero or any Subsidiary of Valero, and no collective bargaining
agreement or other labor union contract is being negotiated by Valero or any
Subsidiary of Valero. No labor organization or group of employees of Valero or
any of its Subsidiaries has made a pending demand for recognition or
certification, and there are no representation or certification proceedings or
petitions seeking a representation proceeding presently pending or threatened to
be brought or filed, with the National Labor Relations Board or any other labor
relations tribunal or authority. To the knowledge of Valero, except as would not
reasonably be expected to have a Material Adverse Effect on Valero, (i) there is
no labor dispute, strike, slowdown or work stoppage against Valero or any
Subsidiary of Valero pending or, to the knowledge of Valero, threatened against
Valero or any Subsidiary of Valero and (ii) no unfair labor practice or labor
charge or complaint has occurred with respect to Valero or any Subsidiary of
Valero.
(v) Financing. Valero will have available on the Closing Date sufficient
funds to enable it to consummate the transactions contemplated by this
Agreement.
A-26
148
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Covenants of UDS. During the period from the date of this Agreement
and continuing until the Effective Time, UDS agrees as to itself and its
Subsidiaries that (unless Valero shall otherwise agree in writing and except as
expressly contemplated or permitted by this Agreement or a correspondingly
numbered subsection of the UDS Disclosure Schedule):
(a) Ordinary Course. (i) UDS and its Subsidiaries shall carry on their
respective businesses in the ordinary course consistent with past practices in
all material respects, in substantially the same manner as heretofore conducted,
and shall use its reasonable best efforts consistent with the other provisions
of this Agreement to keep available the services of their respective present
officers and key employees, preserve intact their present lines of business,
maintain their rights and franchises and preserve their relationships with
customers, suppliers and others having business dealings with them to the end
that their ongoing businesses shall not be impaired in any material respect at
the Effective Time.
(ii) UDS shall not, and shall not permit any of its Subsidiaries to,
(A) enter into any new material line of business or (B) without the prior
written consent of Valero, which will not be unreasonably withheld, incur
or commit to any capital expenditures or any obligations or liabilities in
connection therewith, other than capital expenditures and obligations or
liabilities in connection therewith (I) not exceeding $25 million
individually, or $100 million in the aggregate, or (II) contemplated by the
2001 capital budget approved by the UDS Board of Directors and previously
disclosed to Valero.
(b) Dividends; Changes in Share Capital. UDS shall not, and shall not
permit any of its Subsidiaries to, and shall not propose to, (i) declare or pay
any dividends on or make other distributions in respect of any of its capital
stock, except (x) the declaration and payment of regular quarterly cash
dividends not in excess of $0.125 per share of UDS Common Stock with usual
record and payment dates for such dividends in accordance with past dividend
practice, (y) the payment of accrued amounts on any UDS Toprs pursuant to the
terms of, and in connection with the redemption of, such UDS Toprs as required
by their terms as in effect as of the date hereof and (z) the declaration and
payment of regular dividends from a wholly owned Subsidiary of UDS to UDS or to
another wholly owned Subsidiary of UDS in accordance with past dividend
practice, (ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in lieu
of or in substitution for, shares of its capital stock, except for any such
transaction by a wholly owned Subsidiary of UDS which remains a wholly owned
Subsidiary after consummation of such transaction, or (iii) repurchase, redeem
or otherwise acquire any shares of its capital stock or any securities
convertible into or exercisable for any shares of its capital stock.
(c) Issuance of Securities. UDS shall not, and shall not permit any of its
Subsidiaries to, issue, deliver, sell, pledge or dispose of, or authorize or
propose the issuance, delivery, sale, pledge or disposition of, any shares of
its capital stock of any class, any Voting Debt or any securities convertible
into or exercisable for, or any rights, warrants, calls or options to acquire,
any such shares or Voting Debt, or enter into any commitment, arrangement,
undertaking or agreement with respect to any of the foregoing, other than (i)
the issuance of UDS Common Stock (and the associated UDS Rights) upon the
exercise of UDS Stock Options outstanding as of the date hereof in accordance
with their present terms, (ii) issuances, sales or deliveries by a wholly-owned
Subsidiary of UDS of capital stock to such Subsidiary's parent or another
wholly-owned Subsidiary of UDS or (iii) issuances in accordance with the UDS
Rights Agreement. UDS shall not contribute any additional shares of capital
stock to any trust associated with the GSOP.
(d) Governing Documents. Except to the extent required to comply with its
obligations hereunder or with applicable law, UDS shall not and shall cause each
of its Subsidiaries not to amend or propose to so amend its certificate of
incorporation or by-laws or similar organizational documents.
A-27
149
(e) No Acquisitions. Except for acquisitions in the ordinary course of
business consistent with past practice that do not exceed $25 million
individually or $100 million in the aggregate, without the prior written consent
of Valero, which will not be unreasonably withheld, UDS shall not, and shall not
permit any of its Subsidiaries to, acquire or agree to acquire by merger or
consolidation, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets (excluding
the acquisition of assets used in the operations of the business of UDS and its
Subsidiaries in the ordinary course, which assets do not constitute a business
unit, division or all or substantially all of the assets of the transferor and
which acquisitions are in the ordinary course of business consistent with past
practice).
(f) No Dispositions. UDS shall not, and shall not permit any of its
Subsidiaries to, sell, lease or otherwise dispose of, or agree to sell, lease or
otherwise dispose of, any of its assets (including capital stock of Subsidiaries
of UDS) other than in the ordinary course of business consistent with past
practice.
(g) Investments; Indebtedness. UDS shall not, and shall not permit any of
its Subsidiaries to, (i) make any loans, advances or capital contributions to,
or investments in, any other Person, other than (x) loans or investments by UDS
or a wholly owned Subsidiary of UDS to or in UDS or any wholly owned Subsidiary
of UDS, (y) in the ordinary course of business consistent with past practice
which are not, individually or in the aggregate, material to UDS and its
Subsidiaries taken as a whole (provided that none of such transactions referred
to in this clause (y) presents a material risk of making it more difficult to
obtain any approval or authorization required in connection with the Merger
under Regulatory Law) or (ii) except in the ordinary course consistent with past
practice under UDS's existing authorized commercial paper program, incur any
indebtedness for borrowed money or guarantee any such indebtedness of another
Person, issue or sell any debt securities or warrants or other rights to acquire
any debt securities of UDS or any of its Subsidiaries, guarantee any debt
securities of another person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another Person (other than any
wholly owned Subsidiary) or enter into any arrangement having the economic
effect of any of the foregoing (collectively, "UDS Indebtedness").
(h) Tax-Free Qualification. UDS shall use its reasonable best efforts not
to, and shall use its reasonable best efforts not to permit any of its
Subsidiaries to, take any action (including any action otherwise permitted by
this Section 5.1) that would reasonably be expected to prevent the Merger from
qualifying as a "reorganization" within the meaning of Section 368(a) of the
Code.
(i) Compensation. Except (x) as required by law or by the terms of any
collective bargaining agreement or other agreement currently in effect between
UDS or any Subsidiary of UDS and any director, officer or employee thereof or
(y) in the ordinary course of business consistent with past practice, UDS shall
not (A) increase the amount of compensation of, or pay any severance to, any
director or employee of UDS or any material Subsidiary or business unit of UDS
(and UDS shall consult with Valero before effecting or proposing any such
increase with respect to any director, officer or key employee of the
foregoing), or (B) make any increase in or commitment to increase any employee
benefits, grant any additional UDS Stock Options, adopt or amend or make any
commitment to adopt or amend any UDS Benefit Plan or fund or make any
contribution to any UDS Benefit Plan or any related trust or other funding
vehicles (provided that, in any event, any such increase, commitment, grant,
adoption, amendment, funding or contribution contemplated by this clause (B)
shall only be made after prior consultation with Valero), other than regularly
scheduled contributions to trusts funding qualified plans. No UDS Stock Options
that are issued after the date hereof and prior to the Effective Time shall
include "reload" features or "change in control" provisions that would be
triggered by the transactions contemplated by this Agreement.
(j) Accounting Methods; Tax Elections. Except as disclosed in UDS SEC
Documents filed prior to the date of this Agreement, or as required by a
Governmental Entity, UDS shall not change in any material respect its methods of
accounting in effect at December 30, 2000, except as required by changes in GAAP
as concurred in by UDS's independent public accountants. UDS shall not (i)
change its fiscal
A-28
150
year or any method of tax accounting, (ii) make any Tax election or (iii) settle
or compromise any liability for Taxes, except in each case for any such actions
that, individually or in the aggregate, would not reasonably be expected to have
a Material Adverse Effect on UDS or as required by law.
(k) Certain Actions. UDS and its Subsidiaries shall not take any action or
omit to take any action that would reasonably be expected to prevent or
materially delay or impede the consummation of the Merger or the other
transactions contemplated by this Agreement or, except in the ordinary course of
business consistent with past practice, terminate, amend or modify any material
provision of, or waive any material rights under, any UDS Contract.
(l) No Related Actions. UDS shall not, and shall not permit any of its
Subsidiaries to, agree or commit to do any of the foregoing.
5.2 Covenants of Valero. During the period from the date of this
Agreement and continuing until the Effective Time, Valero agrees as to itself
and its Subsidiaries that (unless UDS shall otherwise agree in writing and
except as expressly contemplated or permitted by this Agreement or a
correspondingly numbered subsection of the Valero Disclosure Schedule):
(a) Ordinary Course. Valero and its Subsidiaries shall carry on their
respective businesses in the ordinary course consistent with past practices in
all material respects, in substantially the same manner as heretofore conducted,
and shall use their reasonable best efforts to preserve intact their present
lines of business, maintain their rights and franchises and preserve their
relationships with customers, suppliers and others having business dealings with
them to the end that their ongoing businesses shall not be impaired in any
material respect at the Effective Time.
(b) Dividends; Changes in Share Capital. Valero shall not, and shall not
permit any of its Subsidiaries to, and shall not propose to, (i) declare or pay
any dividends on or make other distributions in respect of any of its capital
stock, except (x) the declaration and payment of regular quarterly cash
dividends with usual record and payment dates for such dividends in accordance
with past dividend practice and (y) the declaration and payment of regular
dividends from a Subsidiary of Valero to Valero or to another Subsidiary of
Valero in accordance with past dividend practice or (ii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for, shares of its capital stock, except for any such transaction by a wholly
owned Subsidiary of Valero which remains a wholly owned Subsidiary after
consummation of such transaction.
(c) Governing Documents. Except (i) to the extent required to comply with
their respective obligations hereunder or with applicable law or (ii) to
increase the number of shares of capital stock authorized by its certificate of
incorporation, Valero shall not amend or propose to so amend its certificate of
incorporation or by-laws.
(d) Tax-Free Qualification. Valero shall use its reasonable best efforts
not to, and shall use its reasonable best efforts not to permit any of its
Subsidiaries to, take any action (including any action otherwise permitted by
this Section 5.2) that would reasonably be expected to prevent the Merger from
qualifying as a "reorganization" within the meaning of Section 368(a) of the
Code.
(e) Certain Actions. Valero and its Subsidiaries shall not take any action
or omit to take any action that would reasonably be expected to prevent or
materially delay or impede the consummation of the Merger or the other
transactions contemplated by this Agreement.
(f) No Related Actions. Valero shall not, and shall not permit any of its
Subsidiaries to, agree or commit to do any of the foregoing.
5.3 Governmental Filings. UDS and Valero shall (A) confer on a reasonable
basis with each other and (B) report to each other (to the extent permitted by
law or regulation or any applicable confidentiality agreement) on operational
matters. UDS and Valero shall file all reports required to be filed by each of
them with the SEC (and all other Governmental Entities) between the date of this
Agreement and the Effective Time and shall, if requested by the other and (to
the extent permitted by law or regulation or
A-29
151
any applicable confidentiality agreement) deliver to the other party copies of
all such reports, announcements and publications promptly upon request.
5.4 Control of Other Party's Business. Nothing contained in this
Agreement shall give UDS, directly or indirectly, the right to control or direct
Valero's operations or give Valero, directly or indirectly, the right to control
or direct UDS's operations prior to the Effective Time. Prior to the Effective
Time, each of UDS and Valero shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision over its
respective operations.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Preparation of Proxy Statement; Stockholders Meetings. (a) As
promptly as reasonably practicable following the date hereof, Valero and UDS
shall cooperate in preparing and each shall cause to be filed with the SEC
mutually acceptable proxy materials which shall constitute the Joint Proxy
Statement/Prospectus and Valero shall prepare and file with the SEC the Form
S-4. The Joint Proxy Statement/Prospectus will be included as a prospectus in
and will constitute a part of the Form S-4 as Valero's prospectus. Each of
Valero and UDS shall use reasonable best efforts to have the Joint Proxy
Statement/Prospectus cleared by the SEC and the Form S-4 declared effective by
the SEC and to keep the Form S-4 effective as long as is necessary to consummate
the Merger and the transactions contemplated hereby. Valero and UDS shall, as
promptly as practicable after receipt thereof, provide each other with copies of
any written comments, and advise each other of any oral comments, with respect
to the Joint Proxy Statement/Prospectus or Form S-4 received from the SEC. The
parties shall cooperate and provide the other party with a reasonable
opportunity to review and comment on any amendment or supplement to the Joint
Proxy Statement/Prospectus and the Form S-4 prior to filing such with the SEC
and will provide each other with a copy of all such filings made with the SEC.
Notwithstanding any other provision herein to the contrary, no amendment or
supplement (including by incorporation by reference) to the Joint Proxy
Statement/Prospectus or the Form S-4 shall be made without the approval of both
Valero and UDS, which approval shall not be unreasonably withheld or delayed;
provided that, with respect to documents filed by a party which are incorporated
by reference in the Form S-4 or Joint Proxy Statement/Prospectus, this right of
approval shall apply only with respect to information relating to the other
party or its business, financial condition or results of operations. Valero will
use reasonable best efforts to cause the Joint Proxy Statement/Prospectus to be
mailed to Valero stockholders, and UDS will use reasonable best efforts to cause
the Joint Proxy Statement/Prospectus to be mailed to UDS stockholders, in each
case, as promptly as practicable after the Form S-4 is declared effective under
the Securities Act. Each party will advise the other party, promptly after it
receives notice thereof, of the time when the Form S-4 has become effective, the
issuance of any stop order, the suspension of the qualification of the Valero
Common Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Joint Proxy
Statement/Prospectus or the Form S-4. If, at any time prior to the Effective
Time, any information relating to Valero or UDS, or any of their respective
affiliates, officers or directors, is discovered by Valero or UDS and such
information should be set forth in an amendment or supplement to any of the Form
S-4 or the Joint Proxy Statement/ Prospectus so that any of such documents would
not include any misstatement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, the party discovering such
information shall promptly notify the other party hereto and, to the extent
required by law, rules or regulations, an appropriate amendment or supplement
describing such information shall be promptly filed with the SEC and
disseminated to the stockholders of Valero and UDS.
(b) UDS shall duly take all lawful action to call, give notice of, convene
and hold the UDS Stockholders Meeting as soon as practicable on a date
determined in accordance with the mutual agreement of Valero and UDS for the
purpose of obtaining the UDS Stockholder Approval and, subject to Section 6.5,
shall take all lawful action to solicit the UDS Stockholder Approval. The Board
of Directors
A-30
152
of UDS shall, subject to the proper exercise of its fiduciary duties, recommend
the adoption of the plan of merger contained in this Agreement by the
stockholders of UDS to the effect as set forth in Section 4.1(p) (the "UDS
Recommendation"), and shall not, unless Valero makes a Change in the Valero
Recommendation, (x) withdraw, modify or qualify (or propose to withdraw, modify
or qualify) in any manner adverse to Valero the UDS Recommendation or (y) take
any action or make any statement in connection with the UDS Stockholders Meeting
inconsistent with such recommendation (collectively, a "Change in the UDS
Recommendation"); provided, however, that the Board of Directors of UDS may make
a Change in the UDS Recommendation pursuant to Section 6.5 hereof.
(c) Valero shall duly take all lawful action to call, give notice of,
convene and hold the Valero Stockholders Meeting as soon as practicable on a
date determined in accordance with the mutual agreement of Valero and UDS for
the purpose of obtaining the Valero Stockholder Approval and shall take all
lawful action to solicit the Valero Stockholder Approval. The Board of Directors
of Valero shall, subject to the proper exercise of its fiduciary duties,
recommend the adoption of the plan of merger contained in this Agreement by the
stockholders of Valero to the effect set forth in Section 4.2(p) and the
approval of the issuance of Valero Common Stock in the Merger by the
stockholders of Valero (the "Valero Recommendation"), and shall not, unless UDS
makes a Change in the UDS Recommendation, (x) withdraw, modify or qualify (or
propose to withdraw, modify or qualify) in any manner adverse to UDS the Valero
Recommendation or (y) take any action or make any statement in connection with
the Valero Stockholders Meeting inconsistent with such recommendation
(collectively, a "Change in the Valero Recommendation").
6.2 Valero Board of Directors. At the Effective Time, Valero shall take
all requisite action to (i) if necessary to give effect to the succeeding clause
(ii), expand its Board of Directors by up to four members and (ii) cause four of
the current members of the UDS Board of Directors, as shall be mutually
determined by UDS and Valero, to be appointed to its Board of Directors
(collectively, the "UDS Board Designees"). At the annual meeting of the
stockholders of Valero immediately following the Effective Time, Valero will
take all action necessary to nominate and recommend each UDS Board Designee for
reelection to the Valero Board of Directors, with at least one UDS Board
Designee serving in each class of directors and no more than two UDS Board
Designees serving in the same class of directors.
6.3 Access to Information. Upon reasonable notice, each party shall (and
shall cause its Subsidiaries to) afford to the officers, employees, accountants,
counsel, financial advisors and other representatives of the other party
reasonable access during normal business hours, during the period prior to the
Effective Time, to all its properties, books, contracts, commitments, records,
officers and employees and, during such period, such party shall (and shall
cause its Subsidiaries to) furnish promptly to the other party (a) a copy of
each report, schedule, registration statement and other document filed,
published, announced or received by it during such period pursuant to the
requirements of Federal or state securities laws or the HSR Act, as applicable
(other than documents which such party is not permitted to disclose under
applicable law), and (b) all other information concerning it and its business,
properties and personnel as such other party may reasonably request; provided,
however, that either party may restrict the foregoing access to the extent that
(i) any law, treaty, rule or regulation of any Governmental Entity applicable to
such party or any contract requires such party or its Subsidiaries to restrict
or prohibit access to any such properties or information or (ii) the information
is subject to confidentiality obligations to a third party. The parties will
hold any information obtained pursuant to this Section 6.3 in confidence in
accordance with, and shall otherwise be subject to, the provisions of the
confidentiality agreement dated April 23, 2001, between UDS and Valero (the
"Confidentiality Agreement"), which Confidentiality Agreement shall continue in
full force and effect. Any investigation by either Valero or UDS shall not
affect the representations and warranties of the other.
6.4 Reasonable Best Efforts. (a) Subject to the terms and conditions of
this Agreement, each party hereto will use its reasonable best efforts to take,
or cause to be taken, all actions, and do, or cause to be done, all things
necessary, proper or advisable under this Agreement and applicable laws and
regulations to consummate the Merger and the other transactions contemplated by
this Agreement as soon as practicable after the date hereof, including (i)
preparing and filing as promptly as practicable all
A-31
153
documentation to effect all necessary applications, notices, petitions, filings,
and other documents and to obtain as promptly as practicable all Necessary
Consents and all other consents, waivers, licenses, orders, registrations,
approvals, permits, rulings, authorizations and clearances necessary or
advisable to be obtained from any third party and/or any Governmental Entity in
order to consummate the Merger or any of the other transactions contemplated by
this Agreement (collectively, the "Required Approvals") and (ii) using its
reasonable best efforts to obtain all such Necessary Consents and the Required
Approvals. In furtherance and not in limitation of the foregoing, each of Valero
and UDS agrees (i) to make (A) prior to May 31, 2001, an appropriate filing of a
Notification and Report Form pursuant to the HSR Act with respect to the
transactions contemplated hereby, (B) as promptly as practicable, appropriate
filings with the European Commission, if required, in accordance with applicable
competition, merger control, antitrust, investment or similar laws, and (C) as
promptly as practicable, all other necessary filings with other Governmental
Entities relating to the Merger, and, to supply as promptly as practicable any
additional information or documentation that may be requested pursuant to such
laws or by such authorities and to use reasonable best efforts to cause the
expiration or termination of the applicable waiting periods under the HSR Act
and the receipt of Required Approvals under such other laws or from such
authorities as soon as practicable and (ii) not to extend any waiting period
under the HSR Act or enter into any agreement with the FTC or the DOJ not to
consummate the transactions contemplated by this Agreement, except with the
prior written consent of the other parties hereto (which shall not be
unreasonably withheld or delayed).
(b) Each of UDS and Valero shall, in connection with the efforts referenced
in Section 6.4(a) to obtain all Required Approvals, use its reasonable best
efforts to (i) cooperate in all respects with each other in connection with any
filing or submission and in connection with any investigation or other inquiry,
including any proceeding initiated by a private party, (ii) subject to
applicable law, permit the other party to review in advance any proposed written
communication between it and any Governmental Entity, (iii) promptly inform each
other of (and, at the other party's reasonable request, supply to such other
party) any communication (or other correspondence or memoranda) received by such
party from, or given by such party to, the DOJ, the FTC or any other
Governmental Entity and of any material communication received or given in
connection with any proceeding by a private party, in each case regarding any of
the transactions contemplated hereby, and (iv) consult with each other in
advance to the extent practicable of any meeting or conference with the DOJ, the
FTC or any other Governmental Entity or, in connection with any proceeding by a
private party, with any other Person, and to the extent permitted by the DOJ,
the FTC or such other applicable Governmental Entity or other Person, give the
other party the opportunity to attend and participate in such meetings and
conferences.
(c) In furtherance and not in limitation of the covenants of the parties
contained in Section 6.4(a) and 6.4(b), if any administrative or judicial action
or proceeding, including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging any transaction contemplated by this
Agreement as violative of any regulatory law, or if any statute, rule,
regulation, executive order, decree, injunction or administrative order is
enacted, entered, promulgated or enforced by a Governmental Entity which would
make the Merger or the other transactions contemplated hereby illegal or would
otherwise prohibit or materially impair or delay the consummation of the Merger
or the other transactions contemplated hereby, UDS shall cooperate with Valero
in all respects in responding thereto, and each shall use its respective
reasonable best efforts in responding thereto, including (i) contesting and
resisting any such action or proceeding and to have vacated, lifted, reversed or
overturned any decree, judgment, injunction or other order, whether temporary,
preliminary or permanent, that is in effect and that prohibits, prevents or
restricts consummation of the Merger or the other transactions contemplated by
this Agreement and to have such statute, rule, regulation, executive order,
decree, injunction or administrative order repealed, rescinded or made
inapplicable so as to permit consummation of the transactions contemplated by
this Agreement and (ii) holding separate or otherwise disposing of or conducting
their business in a specified manner, or agreeing to sell, hold separate or
otherwise dispose of or conduct their business in a specified manner or
permitting the sale, holding separate or other disposition of, assets of Valero,
UDS or their respective Subsidiaries or the conducting of their business in a
specified manner. Notwithstanding the foregoing or any other provision of this
Agreement, nothing in this Section 6.4 shall
A-32
154
limit a party's right to terminate this Agreement pursuant to Section 8.1(b) or
8.1(c) so long as such party has up to then complied with its obligations under
this Section 6.4.
(d) Each of Valero and UDS and their respective Boards of Directors shall,
if any state takeover statute or similar statute (including, without limitation,
Section 203 of the DGCL) becomes applicable to this Agreement, the Merger or any
other transactions contemplated hereby, take all action reasonably necessary to
ensure that the Merger and the other transactions contemplated by this Agreement
may be consummated as promptly as practicable on the terms contemplated hereby
and otherwise to minimize the effect of such statute or regulation on this
Agreement, the Merger and the other transactions contemplated hereby.
6.5 Acquisition Proposals. (a) UDS agrees that neither it nor any of its
Subsidiaries nor any of the officers and directors of UDS or its Subsidiaries
shall, and that it shall use its reasonable best efforts to cause its and its
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, directly or indirectly, (i) initiate, solicit, encourage or knowingly
facilitate any inquiries or the making of any proposal or offer with respect to,
or a transaction to effect, a merger, reorganization, share exchange,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving UDS or any of its Significant Subsidiaries, or
any purchase or sale of 20% or more of the consolidated assets (including stock
of its Subsidiaries) of it and its Subsidiaries, taken as a whole, or any
purchase or sale of, or tender or exchange offer for, its equity securities
that, if consummated, would result in any Person (or the stockholders of such
Person) beneficially owning securities representing 20% or more of its total
voting power (or of the surviving parent entity in such transaction) or the
voting power of any of its Significant Subsidiaries (any such proposal, offer or
transaction (other than a proposal or offer made by any other party to this
Agreement or an Affiliate thereof) being hereinafter referred to as an
"Acquisition Proposal"), (ii) have any discussion with or provide any
confidential information or data to any Person relating to an Acquisition
Proposal, or engage in any negotiations concerning an Acquisition Proposal, or
knowingly facilitate any effort or attempt to make or implement an Acquisition
Proposal, (iii) approve or recommend, or propose publicly to approve or
recommend, any Acquisition Proposal or (iv) approve or recommend, or propose to
approve or recommend, or execute or enter into, any letter of intent, agreement
in principle, merger agreement, acquisition agreement, option agreement or other
similar agreement or propose publicly or agree to do any of the foregoing
related to any Acquisition Proposal.
(b) Notwithstanding anything in this Agreement to the contrary, UDS (and
its Board of Directors) shall be permitted to (A) comply with Rule 14d-9 and
Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal (to the extent applicable), (B) effect a Change in the UDS
Recommendation, or (C) engage in discussions or negotiations with, or provide
any information to, any Person in response to an unsolicited bona fide written
Acquisition Proposal by any such Person, if and only to the extent that, in any
such case referred to in clause (B) or (C), (I) the UDS Stockholders Meeting
shall not have occurred other than as a result of a breach by UDS of its
obligations pursuant to Section 6.1, (II) (x) in the case of clause (B) above,
it has received an unsolicited bona fide written Acquisition Proposal from a
third party and its Board of Directors concludes in good faith that such
Acquisition Proposal constitutes a Superior Proposal and (y) in the case of
clause (C) above, its Board of Directors concludes in good faith that there is a
reasonable likelihood that such Acquisition Proposal could constitute a Superior
Proposal, (III) in the case of clause (B) or (C) above, its Board of Directors,
after receipt of the advice of UDS's outside counsel, determines in good faith
that there is a reasonable probability that the failure to take such action
would be inconsistent with its fiduciary duties under applicable law, (IV) prior
to providing any information or data to any Person in connection with an
Acquisition Proposal by any such Person, its Board of Directors receives from
such Person an executed confidentiality agreement having provisions that are
customary in such agreements, as advised by counsel, provided that if such
confidentiality agreement contains provisions that are less restrictive than the
comparable provision, or omits restrictive provisions, contained in the
Confidentiality Agreement, then the Confidentiality Agreement will be deemed to
be amended to contain only such less restrictive provisions or to omit such
restrictive provisions, as the case may be, and (V) prior to providing any
information or data
A-33
155
to any Person or entering into discussions or negotiations with any Person, it
notifies Valero promptly of such inquiries, proposals or offers received by, any
such information requested from, or any such discussions or negotiations sought
to be initiated or continued with, any of its representatives indicating, in
connection with such notice, the name of such Person and the material terms and
conditions of any inquiries, proposals or offers. UDS agrees that it will
promptly keep Valero reasonably informed of the status and terms of any
inquiries, proposals or offers and the status and terms of any discussions or
negotiations, including the identity of the party making such inquiry, proposal
or offer. UDS agrees that it will, and will cause its officers, directors and
representatives to, immediately cease and cause to be terminated any activities,
discussions or negotiations existing as of the date of this Agreement with any
parties (other than the parties to this Agreement) conducted heretofore with
respect to any Acquisition Proposal. UDS agrees that it will use reasonable best
efforts to promptly inform its directors, officers, key employees, agents and
representatives of the obligations undertaken in this Section 6.5. Nothing in
this Section 6.5 shall (x) permit UDS to terminate this Agreement (except as
specifically provided in Article VIII hereof) or (y) affect or limit any other
obligation of Valero or UDS under this Agreement.
6.6 Fees and Expenses. Subject to Section 8.2, whether or not the Merger
is consummated, all Expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
Expenses, except Expenses incurred in connection with the filing, printing and
mailing of the Joint Proxy Statement/Prospectus and Form S-4, which shall be
shared equally by Valero and UDS.
6.7 Directors' and Officers' Indemnification and Insurance. Following the
Effective Time, Valero shall (i) indemnify and hold harmless, and provide
advancement of expenses to, all past and present directors, officers and
employees of UDS and its Subsidiaries (in all of their capacities) (A) to the
same extent such persons are indemnified or have the right to advancement of
expenses as of the date of this Agreement by UDS pursuant to UDS's Certificate
of Incorporation, By-laws and indemnification agreements, if any, in existence
on the date hereof with, or for the benefit of, any directors, officers and
employees of UDS and its Subsidiaries and (B) without limitation to clause (A),
to the fullest extent permitted by law, in each case for acts or omissions
occurring at or prior to the Effective Time (including for acts or omissions
occurring in connection with the approval of this Agreement and the consummation
of the transactions contemplated hereby), (ii) include and cause to be
maintained in effect in the Surviving Corporation's (or any successor to the
business of the Surviving Corporation) certificate of incorporation and by-laws
for a period of six years after the Effective Time, provisions regarding
elimination of liability of directors, indemnification of officers, directors
and employees and advancement of expenses which are, in the aggregate, no less
advantageous to the intended beneficiaries than the corresponding provisions
contained in the current Certificate of Incorporation and By-laws of UDS and
(iii) cause to be maintained by the Surviving Corporation (or any successor to
the business of the Surviving Corporation) for a period of six years after the
Effective Time the current policies of directors' and officers' liability
insurance and fiduciary liability insurance maintained by UDS (provided that
Valero (or any such successor) may substitute therefor one or more policies of
at least the same coverage and amounts containing terms and conditions which
are, in the aggregate, no less advantageous to the insured) with respect to
claims arising from facts or events that occurred on or before the Effective
Time; provided, however, that in no event shall Valero (or any such successor)
be required to expend in any one year an amount in excess of 200% of the annual
premiums currently paid by UDS for such insurance; and, provided further that if
the annual premiums of such insurance coverage exceed such amount, Valero (or
any such successor) shall obtain a policy with the greatest coverage available
for a cost not exceeding such amount. The obligations of Valero (or any such
successor) under this Section 6.7 shall not be terminated or modified in such a
manner as to adversely affect any indemnitee to whom this Section 6.7 applies
without the consent of such affected indemnitee (it being expressly agreed that
the indemnitees to whom this Section 6.7 applies and their respective heirs and
other representatives shall be third-party beneficiaries of, and entitled to
enforce, this Section 6.7).
6.8 Employee Benefits. (a) Following the Effective Time until the first
to occur of (i) the first anniversary of the Effective Time and (ii) December
31, 2002 (such shorter period referred to herein as
A-34
156
the "Benefit Protection Period"), Valero shall provide, or shall cause to be
provided, to individuals who are employees of UDS and its Subsidiaries
immediately before the Effective Time and who continue to be employed by Valero
and its Subsidiaries after the Effective Time (the "UDS Employees") Benefit
Plans (other than any equity-based UDS Benefit Plans) that are, in the
aggregate, not less favorable than those generally provided to UDS Employees as
of the date hereof, as disclosed by UDS to Valero immediately prior to the date
of this Agreement. After the expiration of the Benefit Protection Period, Valero
shall provide, or cause to be provided, to UDS Employees compensation and
employee benefit plans and programs that are, in the aggregate, not less
favorable than those generally provided to other similarly situated employees of
Valero and its Subsidiaries. After the Effective Time, the equity-based benefits
to be provided to an eligible UDS Employee shall be pursuant to the equity-based
benefit plans and programs provided to similarly situated employees of Valero.
Nothing contained herein shall be construed to prevent the termination of
employment of any UDS Employee; provided, however, that in the event of a
qualifying termination of any UDS Employee during the Benefit Protection Period,
Valero shall provide, or cause to be provided, to such terminated UDS Employee
severance benefits that are not less than the amount of severance benefits that
would have been payable under the terms of the UDS severance plan or policy
listed on Section 6.8(a) of the Company Disclosure Letter as in effect as of the
date hereof that is applicable to any such UDS Employee. Notwithstanding
anything contained herein to the contrary, UDS Employees who are covered under a
collective bargaining agreement shall be provided the benefits that are required
by such collective bargaining agreement from time to time.
(b) For all purposes under the employee benefit plans of Valero and its
Subsidiaries providing benefits to any UDS Employee after the Effective Time
(the "New Plans"), each UDS Employee shall be credited with his or her years of
service with UDS and its Subsidiaries and predecessor employers before the
Effective Time, to the same extent as such UDS Employee was entitled, before the
Effective Time, to credit for such service under any similar UDS Benefit Plans,
except to the extent such credit would result in a duplication of benefits. In
addition, and without limiting the generality of the foregoing: (i) each UDS
Employee shall be immediately eligible to participate, without any waiting time,
in any and all New Plans to the extent coverage under such New Plan replaces
coverage under a UDS Benefit Plan in which such UDS Employee participated
immediately before the Effective Time (such plans, collectively, the "Old
Plans"); (ii) for purposes of each New Plan providing medical, dental,
pharmaceutical and/or vision benefits to any UDS Employee, Valero shall cause
all pre-existing condition exclusions and actively-at-work requirements of such
New Plan to be waived for such employee and his or her covered dependents, and
Valero shall cause any eligible expenses incurred by such employee and his or
her covered dependents during the portion of the plan year of the Old Plan
ending on the date such employee's participation in the corresponding New Plan
begins to be taken into account under such New Plan for purposes of satisfying
all deductible, coinsurance and maximum out-of-pocket requirements applicable to
such employee and his or her covered dependents for the applicable plan year as
if such amounts had been paid in accordance with such New Plan; and (iii) for
purposes of each New Plan providing long-term or short-term disability, life
insurance or other welfare benefits (other than medical, dental, pharmaceutical
and/or vision benefits) to any UDS Employee, Valero shall cause all pre-existing
condition exclusions of such New Plan to be waived for such employee and his or
her covered dependents.
(c) Valero will honor, in accordance with their terms, all vested and
accrued benefit obligations to, and contractual rights of, current and former
employees of UDS and its Subsidiaries which are disclosed on UDS's Disclosure
Schedules, including, without limitation, the "change of control" provisions
contained in the UDS Benefit Plans listed on the Section 6.8(c) of the Valero
Disclosure Schedule. Nothing in this Agreement shall be interpreted as
preventing Valero from amending, modifying or terminating any UDS Benefit Plan
or other contract, arrangement, commitment or understanding, in accordance with
their terms and applicable law.
6.9 Public Announcements. Valero and UDS shall use reasonable best
efforts to develop a joint communications plan and each shall use reasonable
best efforts (i) to ensure that all press releases and other public statements
with respect to the transactions contemplated hereby shall be consistent with
such joint communications plan and (ii) unless otherwise required by applicable
law or by obligations pursuant
A-35
157
to any listing agreement with or rules of any securities exchange, to consult
with each other before issuing any press release or, to the extent practical,
otherwise making any public statement with respect to this Agreement or the
transactions contemplated hereby. In addition to the foregoing, except to the
extent disclosed in or consistent with the Joint Proxy Statement/Prospectus in
accordance with the provisions of Section 6.1, and subject to Section 6.5(b),
neither Valero nor UDS shall issue any press release or otherwise make any
public statement or disclosure concerning the other party or the other party's
business, financial condition or results of operations without the consent of
the other party, which consent shall not be unreasonably withheld or delayed.
6.10 Listing of Shares of Valero Common Stock. Valero shall use its
reasonable best efforts to cause the shares of Valero Common Stock to be issued
in the Merger and the shares of Valero Common Stock to be reserved for issuance
upon exercise of the UDS Stock Options to be approved for listing on the NYSE,
subject to official notice of issuance, prior to the Closing Date.
6.11 Rights Agreements. (a) The Board of Directors of Valero shall take
all action to the extent necessary (including amending the Valero Rights
Agreement) in order to render the Valero Rights inapplicable to the Merger and
the other transactions contemplated by this Agreement.
(b) The Board of Directors of UDS shall take all action to the extent
necessary (including amending the UDS Rights Agreement) in order to render the
UDS Rights inapplicable to the Merger and the other transactions contemplated by
this Agreement. Except in connection with the foregoing sentence, the Board of
Directors of UDS shall not, without the prior written consent of Valero, (i)
amend or waive any provision of the UDS Rights Agreement or (ii) take any action
with respect to, or make any determination under, the UDS Rights Agreement,
including a redemption of the UDS Rights, in each case in order to facilitate
any Acquisition Proposal with respect to UDS.
6.12 Affiliates. Not less than 45 days prior to the date of the UDS
Stockholders Meeting, UDS shall deliver to Valero a letter identifying all
persons who, in the judgment of UDS, may be deemed at the time this Agreement is
submitted for adoption by the stockholders of UDS, "affiliates" of UDS for
purposes of Rule 145 under the Securities Act and applicable SEC rules and
regulations, and such list shall be updated as necessary to reflect changes from
the date thereof. UDS shall use reasonable best efforts to cause each person
identified on such list to deliver to Valero not later than ten days prior to
the Effective Time, a written agreement substantially in the form attached as
Exhibit A hereto (an "Affiliate Agreement").
6.13 Section 16 Matters. Prior to the Effective Time, Valero and UDS
shall take all such steps as may be required to cause any dispositions of UDS
Common Stock (including derivative securities with respect to UDS Common Stock)
or acquisitions of Valero Common Stock (including derivative securities with
respect to Valero Common Stock) resulting from the transactions contemplated by
Article II or Article III of this Agreement by each individual who is subject to
the reporting requirements of Section 16(a) of the Exchange Act with respect to
UDS or will become subject to such reporting requirements with respect to
Valero, to be exempt under Rule 16b-3 promulgated under the Exchange Act.
6.14 UDS Indebtedness. With respect to UDS Indebtedness issued under
indentures qualified under the Trust Indenture Act of 1939, and any other UDS
Indebtedness the terms of which require Valero to assume such debt in order to
avoid default thereunder (collectively, the "Assumed Indentures"), Valero shall
execute and deliver to the trustees or other representatives in accordance with
the terms of the respective Assumed Indentures, supplemental indentures or other
instruments, in form satisfactory to the respective trustees or other
representatives, expressly assuming the obligations of UDS with respect to the
due and punctual payment of the principal of (and premium, if any) and interest,
if any, on, and conversion obligations under, all debt securities issued by UDS
under the Assumed Indentures and the due and punctual performance of all the
terms, covenants and conditions of the Assumed Indentures to be kept or
performed by UDS and shall deliver such supplemental indentures or other
instruments to the respective trustees or other representatives under the
Assumed Indentures.
A-36
158
6.15 Accountants' Letter. UDS shall use its reasonable best efforts to
cause to be delivered to Valero a letter from its independent public accountants
addressed to Valero, dated a date within two Business Days before the date on
which the Form S-4 shall become effective, in form and substance reasonably
satisfactory to Valero and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Form S-4.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of UDS and Valero to effect the Merger are subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. (i) UDS shall have obtained the UDS Stockholder
Approval and (ii) Valero shall have obtained the Valero Stockholder Approval.
(b) No Injunctions or Restraints; Illegality. No law shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other Governmental
Entity of competent jurisdiction shall be in effect, having the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger.
(c) HSR Act; Other Approvals. (i) The waiting period (and any extension
thereof) applicable to the Merger under the HSR Act shall have been terminated
or shall have expired, and (ii) all Other Approvals shall have been obtained,
except those Other Approvals the failure of which to obtain would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Valero or UDS.
(d) NYSE Listing. The shares of Valero Common Stock to be issued in the
Merger and such other shares of Valero Common Stock to be reserved for issuance
in connection with the Merger shall have been approved for listing on the NYSE,
subject to official notice of issuance.
(e) Effectiveness of the Form S-4. The Form S-4 shall have been declared
effective by the SEC under the Securities Act and no stop order suspending the
effectiveness of the Form S-4 shall have been issued by the SEC and no
proceedings for that purpose shall have been initiated or threatened by the SEC.
7.2 Additional Conditions to Obligations of Valero. The obligations of
Valero to effect the Merger are subject to the satisfaction, or waiver by
Valero, on or prior to the Closing Date, of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of UDS set forth in this Agreement that is qualified as to
materiality or Material Adverse Effect shall be true and correct, and each of
the representations and warranties of UDS set forth in this Agreement that is
not so qualified shall be true and correct in all material respects, in each
case as of the date of this Agreement and as of the Closing Date as though made
on and as of the Closing Date (except to the extent that such representations
and warranties speak as of another date, in which case such representations and
warranties shall be so true and correct as of such other date); provided,
however, that no such representations or warranties shall be deemed to have
failed to be true and correct for purposes of this Section 7.2(a) unless the
failure of such representations and warranties to be true and correct,
disregarding for this purpose all qualifications and exceptions contained
therein relating to materiality or Material Adverse Effect, would, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect on
UDS; and Valero shall have received a certificate of an executive officer of UDS
to such effect.
(b) Performance of Obligations of UDS. UDS shall have performed or
complied in all material respects with all agreements and covenants required to
be performed by it under this Agreement at or
A-37
159
prior to the Closing Date; and Valero shall have received a certificate of an
executive officer of UDS to such effect.
(c) Tax Opinion. Valero shall have received from Wachtell, Lipton, Rosen &
Katz, counsel to Valero, a written opinion dated the Closing Date to the effect
that for federal income tax purposes the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Code. In rendering
such opinion, counsel to Valero shall be entitled to rely upon customary
assumptions and representations reasonably satisfactory to such counsel,
including representations set forth in certificates of officers of Valero and
UDS.
7.3 Additional Conditions to Obligations of UDS. The obligations of UDS
to effect the Merger are subject to the satisfaction, or waiver by UDS, on or
prior to the Closing Date, of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of Valero set forth in this Agreement that is qualified as to
materiality or Material Adverse Effect shall be true and correct, and each of
the representations and warranties of Valero set forth in this Agreement that is
not so qualified shall be true and correct in all material respects, in each
case as of the date of this Agreement and as of the Closing Date as though made
on and as of the Closing Date (except to the extent that such representations
and warranties speak as of another date, in which case such representations and
warranties shall be so true and correct as of such other date); provided,
however, that no such representations or warranties shall be deemed to have
failed to be true and correct for purposes of this Section 7.3(a) unless the
failure of such representations and warranties to be true and correct,
disregarding for this purpose all qualifications and exceptions contained
therein relating to materiality or Material Adverse Effect, would, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect on
Valero; and UDS shall have received a certificate of an executive officer of
Valero to such effect.
(b) Performance of Obligations of Valero. Valero shall have performed or
complied in all material respects with all agreements and covenants required to
be performed by it under this Agreement at or prior to the Closing Date; and UDS
shall have received a certificate of an executive officer of Valero to such
effect.
(c) Tax Opinion. UDS shall have received from Jones, Day, Reavis & Pogue,
counsel to UDS, a written opinion dated the Closing Date to the effect that for
federal income tax purposes the Merger will constitute a "reorganization" within
the meaning of Section 368(a) of the Code. In rendering such opinion, counsel to
UDS shall be entitled to rely upon customary assumptions and representations
reasonably satisfactory to such counsel, including representations set forth in
certificates of officers of Valero and UDS.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, by action taken or authorized by the Board of Directors of
the terminating party or parties, and except as specifically provided below,
whether before or after the Valero Stockholders Meeting or the UDS Stockholders
Meeting:
(a) By mutual written consent of Valero and UDS;
(b) By either Valero or UDS, if the Effective Time shall not have occurred
on or before May 3, 2002 (the "Termination Date"); provided, however, that the
right to terminate this Agreement under this Section 8.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement (including such party's obligations set forth in Section 6.4) has been
the primary cause of, or resulted in, the failure of the Effective Time to occur
on or before the Termination Date;
A-38
160
(c) By either Valero or UDS, if any Governmental Entity (i) shall have
issued an order, decree or ruling or taken any other action (which the parties
shall have used their reasonable best efforts to resist, resolve or lift, as
applicable, in accordance with Section 6.4) permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this Agreement, and
such order, decree, ruling or other action shall have become final and
nonappealable or (ii) shall have failed to issue an order, decree or ruling or
to take any other action which is necessary to fulfill the conditions set forth
in Sections 7.1(c), (d) or (e), as applicable, and such denial of a request to
issue such order, decree, ruling or the failure to take such other action shall
have become final and nonappealable (which order, decree, ruling or other action
the parties shall have used their reasonable best efforts to obtain, in
accordance with Section 6.4); provided, however, that the right to terminate
this Agreement under this Section 8.1(c) shall not be available to any party
whose failure to comply with Section 6.4 has been the primary cause of such
action or inaction;
(d) By either Valero or UDS, if either the Valero Stockholder Approval or
the UDS Stockholder Approval has not been obtained by reason of the failure to
obtain the required vote at the Valero Stockholders Meeting or the UDS
Stockholders Meeting, as applicable;
(e) By Valero, if UDS shall have breached or failed to perform any of its
representations, warranties, covenants or other agreements contained in this
Agreement, such that the conditions set forth in Section 7.2(a) or (b) are not
capable of being satisfied on or before the Termination Date;
(f) By UDS, if Valero shall have breached or failed to perform any of its
representations, warranties, covenants or other agreements contained in this
Agreement, such that the conditions set forth in Section 7.3(a) or (b) are not
capable of being satisfied on or before the Termination Date;
(g) By UDS, if the Board of Directors of UDS has provided written notice to
Valero that UDS intends to enter into a binding written agreement for a Superior
Proposal (with such termination becoming effective, if Valero does not make the
offer contemplated by clause (iii) below, on the business day immediately
following the five business day period contemplated thereby, or otherwise, upon
UDS entering into such binding written agreement); provided, however, that (i)
UDS shall have complied with Section 6.5 hereof in all material respects; (ii)
UDS shall have (A) notified Valero in writing of its receipt of such Superior
Proposal, (B) further notified Valero in such writing that UDS intends to enter
into a binding agreement with respect to such Superior Proposal subject to
clause (iii) below and (C) attached the most current written version of such
Superior Proposal (or a summary containing all material terms and conditions of
such Superior Proposal) to such notice; (iii) Valero does not make, within five
business days after receipt of UDS's written notice pursuant to clause (ii)
above, an offer that the Board of Directors of UDS shall have reasonably
concluded in good faith (following consultation with its financial advisor and
outside counsel) is as favorable to the stockholders of UDS as such Superior
Proposal; and (iv) UDS pays the UDS Termination Fee in accordance with Section
8.2(d) concurrently with such termination;
(h) By UDS, if Valero shall have (i) failed to make the Valero
Recommendation or effected a Change in the Valero Recommendation (or resolved to
take any such action), whether or not permitted by the terms hereof, or (ii)
materially breached its obligations under this Agreement by reason of a failure
to call the Valero Stockholders Meeting in accordance with Section 6.1(c) or a
failure to prepare and mail to its stockholders the Joint Proxy
Statement/Prospectus in accordance with Section 6.1(a); or
(i) By Valero, if UDS shall have (i) failed to make the UDS Recommendation
or effected a Change in the UDS Recommendation (or resolved to take any such
action), whether or not permitted by the terms hereof, or (ii) materially
breached its obligations under this Agreement by reason of a failure to call the
UDS Stockholders Meeting in accordance with Section 6.1(b) or a failure to
prepare and mail to its stockholders the Joint Proxy Statement/Prospectus in
accordance with Section 6.1(a).
8.2 Effect of Termination. (a) In the event of termination of this
Agreement by either UDS or Valero as provided in Section 8.1, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of any party to this Agreement or their respective officers or directors
A-39
161
except with respect to Section 4.1(q), Section 4.2(o), the second sentence of
Section 6.3, Section 6.6, this Section 8.2 and Article IX, which provisions
shall survive such termination; provided that, notwithstanding anything to the
contrary contained in this Agreement, neither Valero nor UDS shall be relieved
or released from any liabilities or damages arising out of its willful and
material breach of this Agreement.
(b) If (A)(I)(x) either UDS or Valero terminates this Agreement pursuant to
Section 8.1(d) (provided that the basis for such termination is the failure to
obtain the UDS Stockholder Approval) or pursuant to Section 8.1(b) without the
UDS Stockholders Meeting having occurred or (y) Valero terminates this Agreement
pursuant to Section 8.1(e), (II) at any time after the date of this Agreement
and before such termination an Acquisition Proposal with respect to UDS shall
have been publicly announced or otherwise communicated to the senior management,
Board of Directors or stockholders of UDS, or UDS shall have breached in any
material respect its obligations under Section 6.5, and (III) within twelve
months of such termination UDS or any of its Subsidiaries enters into any
definitive agreement with respect to, or consummates, or the Board of Directors
of UDS or any of its Subsidiaries recommends that its respective stockholders
approve, adopt or accept, any Acquisition Proposal, or (B) Valero shall
terminate this Agreement pursuant to Section 8.1(i), then UDS shall promptly,
but in no event later than one Business Day after the date of such termination
(or, in the case of clause (A), if later, the date UDS or its Subsidiary enters
into such agreement with respect to or consummates such Acquisition Proposal),
pay Valero an amount equal to the UDS Termination Fee, by wire transfer of
immediately available funds.
(c) If (A)(I)(x) either UDS or Valero terminates this Agreement pursuant to
Section 8.1(d) (provided that the basis for such termination is the failure to
obtain the Valero Stockholder Approval) or pursuant to Section 8.1(b) without
the Valero Stockholders Meeting having occurred or (y) UDS terminates this
Agreement pursuant to Section 8.1(f), (II) at any time after the date of this
Agreement and before such termination there shall have been publicly announced
or otherwise communicated to the senior management, Board of Directors or
stockholders of Valero a proposal for the acquisition by a third party of 50% or
more of the consolidated assets (including stock of its Subsidiaries) of Valero
and its Subsidiaries, taken as a whole, or of 50% or more of its total voting
power, whether by merger, reorganization, share exchange, consolidation,
business combination, recapitalization, liquidation, dissolution, tender offer
or exchange offer or similar transaction and (III) within twelve months of such
termination Valero or any of its Subsidiaries enters into any definitive
agreement with respect to, or consummates, or the Board of Directors of Valero
or any of its Subsidiaries recommends that its respective stockholders approve,
adopt or accept, a transaction contemplated by clause (II), or (B) UDS shall
terminate this Agreement pursuant to Section 8.1(h), then Valero shall promptly,
but in no event later than one Business Day after the date of such termination
(or, in the case of clause (A), if later, the date Valero or its Subsidiary
enters into such agreement with respect to or consummates the transaction
contemplated by clause (II)), pay UDS an amount equal to the Valero Termination
Fee, by wire transfer of immediately available funds.
(d) If UDS terminates this Agreement pursuant to Section 8.1(g), UDS shall
pay Valero in an amount equal to the UDS Termination Fee, by wire transfer of
immediately available funds, concurrently with such termination.
(e) The parties hereto acknowledge that the agreements contained in this
Section 8.2 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, neither party would enter into
this Agreement; accordingly, if either party fails promptly to pay any amount
due pursuant to this Section 8.2, and, in order to obtain such payment, the
other party commences a suit which results in a judgment against such party for
the fee set forth in this Section 8.2, such party shall pay to the other party
its costs and expenses (including attorneys' fees and expenses) in connection
with such suit, together with interest on the amount of the fee at the prime
rate of Citibank, N.A. in effect on the date such payment was required to be
made, notwithstanding the provisions of Section 6.6. The parties hereto agree
that any remedy or amount payable pursuant to this Section 8.2 shall not
preclude any other remedy or amount payable hereunder, and shall not be an
exclusive remedy, for any willful and material breach of any representation,
warranty, covenant or agreement contained in this Agreement.
A-40
162
8.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after the Valero Stockholder Approval or the UDS Stockholder Approval,
but, after any such approval, no amendment shall be made which by law or in
accordance with the rules of any relevant stock exchange requires further
approval by such stockholders without such further approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party. The failure of
any party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
ARTICLE IX
GENERAL PROVISIONS
9.1 Non-Survival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and other agreements in this
Agreement or in any instrument delivered pursuant to this Agreement, including
any rights arising out of any breach of such representations, warranties,
covenants, agreements and other provisions, shall survive the Effective Time,
except for those covenants, agreements and other provisions contained herein
that by their terms apply or are to be performed in whole or in part after the
Effective Time and this Article IX.
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed duly given (a) on the date of delivery if delivered
personally, or by telecopy or facsimile, upon verbal confirmation of receipt,
(b) on the first Business Day following the date of dispatch if delivered by a
recognized next-day courier service, or (c) on the fifth Business Day following
the date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated in
writing by the party to receive such notice:
(i) if to Valero to:
Valero Energy Corporation
One Valero Place
San Antonio, Texas 78212
Attention: General Counsel
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Edward D. Herlihy, Esq.
A-41
163
(ii) if to UDS to:
Ultramar Diamond Shamrock Corporation
6000 North Loop
1604 West
San Antonio, Texas 78249-1112
Attention: Chief Administrative & Legal Officer
with a copy to:
Jones, Day, Reavis & Pogue
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114-1190
Attention: Lyle Ganske, Esq.
9.3 Interpretation. When a reference is made in this Agreement to
Articles, Sections, Exhibits or Schedules, such reference shall be to an Article
or Section of or Exhibit or Schedule to this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." In addition, each Section of this Agreement is
qualified by the matters set forth with respect to such Section on the Valero
Disclosure Schedule, the UDS Disclosure Schedule and the other Schedules to this
Agreement, and such other Sections of this Agreement to the extent that the
matter in such Section of such Schedule is disclosed in such a way as to make
its relevance called for by such other Section of this Agreement readily
apparent.
9.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that both
parties need not sign the same counterpart.
9.5 Entire Agreement; No Third Party Beneficiaries. (a) This Agreement,
the Confidentiality Agreement and the exhibits and schedules hereto and the
other agreements and instruments of the parties delivered in connection herewith
constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, except that, for purposes of the definition of "best
efforts" as used in Sections 6.4(a) and 6.4(c) and interpreting the right of UDS
to terminate this Agreement under Section 8.1(f) upon breach by Valero of
Sections 6.4(a) and 6.4(c), the parties agree that it is proper to refer to the
course of their discussions prior to entering into this Agreement.
(b) This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other Person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement, other than
Section 6.7 (which is intended to be for the benefit of the Persons covered
thereby).
9.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware (without giving effect to
choice of law principles thereof).
9.7 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
A-42
164
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
9.8 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto, in
whole or in part (whether by operation of law or otherwise), without the prior
written consent of the other party, and any attempt to make any such assignment
without such consent shall be null and void. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
9.9 Submission to Jurisdiction; Waivers. Each of Valero and UDS
irrevocably agrees that any legal action or proceeding with respect to this
Agreement or for recognition and enforcement of any judgment in respect hereof
brought by the other party hereto or its successors or assigns may be brought
and determined in the Chancery or other Courts of the State of Delaware, and
each of Valero and UDS hereby irrevocably submits with regard to any such action
or proceeding for itself and in respect to its property, generally and
unconditionally, to the nonexclusive jurisdiction of the aforesaid courts. Each
of Valero and UDS hereby irrevocably waives, and agrees not to assert, by way of
motion, as a defense, counterclaim or otherwise, in any action or proceeding
with respect to this Agreement, (a) any claim that it is not personally subject
to the jurisdiction of the above-named courts for any reason other than the
failure to lawfully serve process, (b) that it or its property is exempt or
immune from jurisdiction of any such court or from any legal process commenced
in such courts (whether through service of notice, attachment prior to judgment,
attachment in aid of execution of judgment, execution of judgment or otherwise),
(c) to the fullest extent permitted by applicable law, that (i) the suit, action
or proceeding in any such court is brought in an inconvenient forum, (ii) the
venue of such suit, action or proceeding is improper and (iii) this Agreement,
or the subject matter hereof, may not be enforced in or by such courts and (d)
any right to a trial by jury.
9.10 Enforcement. The parties hereto agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms. It is accordingly agreed that
the parties hereto shall be entitled to specific performance of the terms
hereof, this being in addition to any other remedy to which they are entitled at
law or in equity.
IN WITNESS WHEREOF, Valero and UDS have caused this Agreement to be signed
by their respective officers thereunto duly authorized, all as of the date first
written above.
VALERO ENERGY CORPORATION
By: /s/ WILLIAM E. GREEHEY
----------------------------------
Name: William E. Greehey
Title: Chief Executive Officer
and President
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
By: /s/ JEAN R. GAULIN
----------------------------------
Name: Jean R. Gaulin
Title: Chief Executive Officer
and President
A-43
165
APPENDIX B
[MORGAN STANLEY & CO. INCORPORATED LOGO]
May 4, 2001
Board of Directors
Valero Energy Corporation
One Valero Place
San Antonio, TX 78212
Members of the Board:
We understand that Valero Energy Corporation ("Valero" or the "Company")
and Ultramar Diamond Shamrock Corporation ("UDS") propose to enter into an
Agreement and Plan of Merger, substantially in the form of the draft dated May
3, 2001 (the "Merger Agreement"), which provides, among other things, for the
merger (the "Merger") of UDS with and into Valero. Pursuant to the Merger, each
outstanding share of common stock, par value $.01 per share, of UDS and any
associated UDS Rights (as defined in the Merger Agreement) (collectively, the
"UDS Common Stock"), other than shares held in treasury or held by Valero or any
wholly-owned subsidiaries of UDS or Valero or as to which dissenters' rights
have been perfected, will be converted into the right to receive, at the option
of the holder of UDS Common Stock and subject to the provisions of the Merger
Agreement, either (i) a number of shares of common stock, par value $0.01 per
share, of Valero (the "Valero Common Stock") that is the quotient obtained by
dividing the sum of (a) $27.50 and (b) the product of (I) 0.614 and (II) the
Valero Average Closing Price as defined in the Merger Agreement by the Valero
Average Closing Price, or (ii) an amount in cash equal to the sum of $27.50 and
the product of 0.614 and the Valero Average Closing Price (collectively, the
"Merger Consideration"). The terms and conditions of the Merger are more fully
set forth in the Merger Agreement.
You have asked for our opinion as to whether the Merger Consideration to be
paid by Valero pursuant to the Merger Agreement is fair from a financial point
of view to the Company.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and UDS, respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and UDS, prepared by
the managements of the Company and UDS, respectively;
(iii) reviewed certain financial projections of the Company and UDS
prepared by the managements of the Company and UDS, respectively;
(iv) discussed the past and current operations and financial condition
and the prospects of the Company and UDS, including information relating to
certain strategic, financial and operational benefits anticipated from the
Merger, with senior executives of the Company and UDS, respectively;
(v) reviewed the pro forma impact of the Merger on Valero's present
and projected financial performance and other financial ratios;
(vi) discussed potential strategic and operational benefits of the
Merger with senior executives of the Company and UDS;
(vii) reviewed the reported prices and trading activity for the Valero
Common Stock and the UDS Common Stock;
B-1
166
Valero Energy Corporation
May 4, 2001
Page 2
(viii) compared the financial performance of the Company and UDS and
the prices and trading activity of the Valero Common Stock and the UDS
Common Stock with that of certain other comparable publicly traded
companies and their securities;
(ix) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(x) participated in discussions and negotiations among representatives
of the Company and UDS and their legal and financial advisors;
(xi) reviewed the Merger Agreement and certain related documents;
(xii) considered such other factors and performed such other analysis
as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, including information
relating to certain strategic, financial and operational benefits anticipated
from the Merger, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
future financial performance and prospects of the Company and UDS. Morgan
Stanley has assumed that in connection with the receipt of all the necessary
regulatory approvals for the proposed Merger, no restrictions will be imposed
that would have a material adverse effect on the contemplated benefits expected
to be derived in the proposed Merger.
In addition, we have assumed that the Merger will be consummated in
accordance with the terms set forth in the Merger Agreement, including, among
other things, that the Merger will be treated as a tax-free reorganization
and/or exchange, each pursuant to the Internal Revenue Code of 1986. We have not
made any independent valuation or appraisal of the assets or liabilities of UDS,
nor have we been furnished with any such appraisals. Our opinion is necessarily
based on financial, economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for the Company and UDS and have
received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the transaction with the
Securities and Exchange Commission. In addition, this opinion does not in any
manner address the prices at which the Valero Common Stock will trade following
consummation of the Merger, and Morgan Stanley expresses no opinion or
recommendation as to how the shareholders of the Company should vote at the
shareholders' meetings held in connection with the Merger.
B-2
167
Valero Energy Corporation
May 4, 2001
Page 3
Based on the foregoing, we are of the opinion on the date hereof that the
Merger Consideration to be paid by Valero pursuant to the Merger Agreement is
fair from a financial point of view to the Company.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ MICHAEL DICKMAN
------------------------------------
Michael Dickman
Managing Director
B-3
168
[CREDIT SUISSE LOGO] [CREDIT SUISSE LETTERHEAD]
APPENDIX C
May 4, 2001
Board of Directors
Valero Energy Corporation
One Valero Place
San Antonio, TX 78212
Members of the Board:
You have asked us to advise you with respect to the fairness to Valero Energy
Corporation ("Valero") from a financial point of view of the Consideration (as
defined below) to be paid by Valero pursuant to the terms of an Agreement and
Plan of Merger, which you have advised us is expected to be entered into as of
May 6, 2001 (the "Merger Agreement"), by and between Ultramar Diamond Shamrock
Corporation ("Ultramar") and Valero. Pursuant to the Merger Agreement Ultramar
will merge with and into Valero (the "Merger") and each outstanding share of
common stock, par value $0.01 per share, of Ultramar will be converted into the
right to receive, at the option of the holder thereof (subject to certain
procedures and limitations set forth in the Merger Agreement as to which we
express no opinion), either (i) a number of shares (the "Stock Consideration")
of common stock, par value $0.01 per share ("Valero Common Stock"), of Valero
equal to the quotient, rounded to the nearest ten-thousandth, obtained by
dividing (a) the sum of (x) $27.50 and (y) the product of (A) 0.614 and (B) the
average daily last sale prices of Valero Common Stock as reported on the NYSE
for the ten consecutive full trading days in which such shares are traded on the
NYSE ending at the close of trading on the third business day prior to the
closing date (the "Valero Average Closing Price") by (b) the Valero Average
Closing Price or (ii) an amount in cash equal to the sum of (x) $27.50 and (y)
the product of (A) 0.614 and (B) the Valero Average Closing Price (the "Cash
Consideration" and, together with the Stock Consideration, as applicable, the
"Consideration").
In arriving at our opinion, we have reviewed certain publicly available business
and financial information relating to Valero and Ultramar, as well as a draft of
the Merger Agreement dated May 1, 2001, and certain related documents. We have
also reviewed certain other information, including financial forecasts, provided
to or discussed with us by Valero and Ultramar, and have met with Valero's and
Ultramar's managements to discuss the businesses and prospects of Valero and
Ultramar. We have also considered certain financial and stock market data of
Valero and Ultramar, and we have compared those data with similar data for other
publicly held companies in businesses similar to those of Valero and Ultramar
and we have considered the financial terms of certain other business
combinations and other transactions which have recently been effected or
announced. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which we
deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of
Valero's and Ultramar's managements as to the future financial performance of
Valero and Ultramar and as to the cost savings and other potential synergies
(including the amount, timing and achievability thereof) anticipated to result
from the Merger. You also have informed us, and we have assumed, that the Merger
will be treated as a tax-free reorganization for federal income tax purposes. We
have assumed, with your consent, that in the course of obtaining the necessary
regulatory and third party approvals and consents for the Merger, no
modification, delay, limitation, restriction or condition will be imposed that
will have a material adverse effect on the
C-1
169
contemplated benefits to Valero of the Merger. You also have advised us, and we
have assumed, that the Merger will be consummated in accordance with the terms
of the Merger Agreement, without waiver, amendment or modification of any
material term, condition or agreement set forth therein. We have also assumed
that the Merger Agreement, when executed, will conform to the draft reviewed by
us in all respects material to our analyses. In addition, we have not been
requested to make, and have not made, an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of Valero or Ultramar, nor
have been we been furnished with any such evaluations or appraisals. Our opinion
is necessarily based upon financial, economic, market and other conditions as
they exist and can be evaluated on the date hereof. Our opinion does not address
the relative merits of the Merger as compared to alternative transactions or
business strategies that may be available to Valero, nor does it address
Valero's underlying business decision to engage in the Merger. We are not
expressing any opinion as to the actual value of Valero Common Stock when issued
pursuant to the Merger or the prices at which such common stock will trade at
any time.
We have been engaged solely to render our opinion to the Board of Directors of
Valero with respect to the fairness from a financial point of view of the
Consideration to be paid by Valero pursuant to the Merger and did not
participate in the negotiation of the Merger Agreement or the determination of
the Consideration. We will receive a fee for rendering this opinion.
We and our affiliates have in the past provided, and may in the future provide,
investment banking and financial services to Valero for which we have received,
and expect to receive, compensation. We may also provide or otherwise assist
Valero in obtaining all or a portion of the financing Valero requires in
connection with the Merger, for which we would expect to receive compensation.
In the ordinary course of our business, we and our affiliates may actively trade
the debt and equity securities of both Valero and Ultramar for our and such
affiliates' own accounts and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Valero in connection with its consideration of the Merger and does
not constitute a recommendation as to how any stockholder of Valero should vote
or act on any matter relating to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Consideration to be paid by Valero pursuant to the Merger is fair to
Valero from a financial point of view.
Very truly yours,
/s/ CREDIT SUISSE FIRST BOSTON
CORPORATION
CREDIT SUISSE FIRST BOSTON
CORPORATION
C-2
170
APPENDIX D
[LETTERHEAD OF BANC OF AMERICA SECURITIES LLC]
[BANC OF AMERICA SECURITIES LLC LOGO]
May 5, 2001
Board of Directors
Ultramar Diamond Shamrock Corporation
6000 North Loop 1604 West
San Antonio, TX 78249
Members of the Board of Directors:
You have requested our opinion as to the fairness from a financial point of view
to the stockholders of Ultramar Diamond Shamrock Corporation (the "Company"), of
the Merger Consideration (as defined below) provided for in connection with the
proposed merger (the "Merger") of the Company with Valero Energy Corporation
(the "Purchaser"). Pursuant to the terms of the Agreement and Plan of Merger
(the "Agreement") to be entered into by and between the Company and the
Purchaser, the Company will be merged with and into the Purchaser and each share
of Common Stock, par value $0.01 per share, of the Company (the "Company Common
Stock"), other than shares held in treasury or held by the Purchaser or any
wholly-owned subsidiary of the Purchaser or as to which dissenters' or appraisal
rights have been perfected, will be converted into the right to receive, at the
election of the holder thereof and subject to certain election and proration
procedures specified in the Agreement (as to which we express no opinion),
either (a) a number of shares of Common Stock, par value $0.01 per share, of the
Purchaser (the "Purchaser Common Stock"), equal to the quotient obtained by
dividing (i) the sum of (A) $27.50 and (B) the product of (x) 0.614 and (y) the
average of the daily last sale prices of a share of Purchaser Common Stock on
the New York Stock Exchange for the ten consecutive full trading days ending at
the close of trading on the third business day prior to the closing date (the
"Purchaser Average Closing Price") by (ii) the Purchaser Average Closing Price
(such number of shares of Purchaser Common Stock, the "Stock Consideration"); or
(b) an amount in cash equal to the sum of (i) $27.50 and (ii) the product of (A)
0.614 and (B) the Purchaser Average Closing Price (the "Cash Consideration" and
together with the Stock Consideration, the "Merger Consideration"). The terms
and conditions of the Merger are more fully set forth in the Agreement.
You have informed us, and we have assumed, that the Merger will be treated as a
tax-free reorganization and/or exchange pursuant to the Internal Revenue Code of
1986, as amended.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
business and financial information of the Company and the Purchaser;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and the Purchaser;
(iii) analyzed certain financial forecasts prepared by the managements
of the Company and the Purchaser and certain analysts;
(iv) reviewed and discussed with the managements of the Company and
the Purchaser information relating to certain strategic, financial and
operational benefits anticipated from the Merger, prepared by the
managements of the Company and the Purchaser, respectively;
(v) discussed the past and current operations, financial condition and
prospects of the Company with senior executives of the Company and
discussed the past and current operations, financial condition and
prospects of the Purchaser with senior executives of the Purchaser;
D-1
171
Board of Directors
Ultramar Diamond Shamrock Corporation
May 5, 2001
Page 2
(vi) reviewed the pro forma impact of the Merger on the Purchaser's
earnings per share, cash flow, consolidated capitalization and financial
ratios;
(vii) reviewed the reported prices and trading activity for the
Company Common Stock and the Purchaser Common Stock;
(viii) compared the financial performance of the Company and the
Purchaser and the prices and trading activity of the Company Common Stock
and the Purchaser Common Stock with that of certain other publicly traded
companies we deemed relevant;
(ix) compared certain financial terms of the Merger to corresponding
financial terms, to the extent publicly available, of certain other
business combination transactions we deemed relevant;
(x) participated in discussions among representatives of the Company
and the Purchaser and their financial and legal advisors;
(xi) reviewed a draft dated May 3, 2001 of the Agreement and certain
related documents; and
(xii) performed such other analyses and considered such other factors
as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the financial and other information reviewed by us for the
purposes of this opinion. With respect to the financial forecasts, including
information relating to certain strategic, financial and operational benefits
anticipated from the Merger, we have been advised, and have assumed, that they
have been reasonably prepared on bases reflecting the best currently available
estimates and good faith judgments of the future financial performance of the
Company and the Purchaser. With respect to certain adjustments to the financial
forecasts relating to the Purchaser provided to or discussed with us by the
management of the Company, we assumed, at the direction of the management of the
Company, without independent verification or investigation, that such
adjustments and estimates were reasonably prepared on bases reflecting the best
available information, estimates and judgments of the management of the Company.
We have not made any independent valuation or appraisal of the assets or
liabilities of the Company, nor have we been furnished with any such appraisals.
We were not requested to and did not solicit any expressions of interest from
any other parties with respect to the sale of all or any part of the Company or
any other alternative transaction. We did not participate in negotiations with
respect to the terms of the Merger. Consequently, we have assumed that such
terms are the most beneficial terms from the Company's perspective that could
under the circumstances be negotiated among the parties to the Merger, and no
opinion is expressed as to whether any alternative transaction might produce
consideration for the Company's stockholders in an amount in excess of that
contemplated in the Merger. We have also assumed that the definitive form of the
Agreement will be substantially similar to the last draft reviewed by us.
We have acted as financial advisor to the Board of Directors of the Company in
connection with this transaction and will receive a fee for our services,
including a fee which is contingent upon the consummation of the Merger. In the
past, Banc of America Securities LLC or its affiliates have provided financial
advisory and financing services for the Company and have received fees for the
rendering of these services. Bank of America, N.A., an affiliate of ours, is
agent and a lender under the Company's senior credit facility. In the ordinary
course of our businesses, we and our affiliates may actively trade the debt and
equity securities of the Company and the Purchaser for our own account or for
the accounts of customers and, accordingly, we or our affiliates may at any time
hold long or short positions in such securities.
D-2
172
Board of Directors
Ultramar Diamond Shamrock Corporation
May 5, 2001
Page 3
It is understood that this letter is for the benefit and use of the Board of
Directors of the Company in connection with and for purposes of its evaluation
of the Merger. This opinion may not be disclosed, referred to, or communicated
(in whole or in part) to any third party for any purpose whatsoever except with
our prior written consent in each instance. However, this opinion may be
included in its entirety in any filing made by the Company in respect of the
Merger with the Securities and Exchange Commission, so long as this opinion is
reproduced in such filing in full and any description of or reference to us or
summary of this opinion and the related analysis in such filing is in a form
acceptable to us and our counsel. In furnishing this opinion, we do not admit
that we are experts within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. It should be understood that subsequent developments may affect
this opinion and we do not have any obligation to update, revise, or reaffirm
this opinion. This opinion does not in any manner address the prices at which
the Purchaser Common Stock will trade following consummation of the Merger or at
any time. In addition, we express no opinion or recommendation as to how the
stockholders of the Company should vote or act on any matter relating to the
Merger or as to the form of the Merger Consideration to be elected by such
stockholders.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, we are of the opinion on the date hereof that the
Merger Consideration is fair from a financial point of view to the Company's
stockholders.
Very truly yours,
/s/ BANC OF AMERICA SECURITIES LLC
D-3
173
APPENDIX E
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
E-1
174
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that
E-2
175
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided, that if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the notice
is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list
E-3
176
filed by the surviving or resulting corporation pursuant to subsection (f) of
this section and who has submitted such stockholder's certificates of stock to
the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
E-4
177
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Valero's Restated Certificate of Incorporation provides that the
corporation shall indemnify its directors and officers to the full extent of the
corporation's ability to indemnify them under the Delaware General Corporation
Law. Each director or officer of Valero who was or is made a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he, or a person of whom he is the
legal representative, is or was a director or officer of Valero or is or was
serving at the request of Valero as a director or officer, is indemnified by
Valero against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection therewith. The rights of directors and officers to indemnification
include the right to be paid by Valero the expenses incurred in defending any
such proceeding in advance of its final disposition, though if the DGCL
requires, the payment of such expenses incurred by a director or officer in his
capacity as a director or officer in advance of the final disposition of a
proceeding shall be made only upon delivery to Valero of an undertaking, by or
on behalf of such director or officer, to repay all amounts so advanced if it is
ultimately determined that such director or officer is not entitled to be
indemnified under the applicable provisions of the DGCL.
The Board of Directors may cause Valero to indemnify, to the same extent
allowed for directors and officers of Valero, employees or agents of Valero, or
any other person who is or was serving at the request of Valero as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, benefit plan, non-profit or charitable organization or other enterprise.
Valero has in force and effect a policy insuring the directors and officers
of Valero against losses which they or any of them shall become legally
obligated to pay for by reason of any actual or alleged error or misstatement or
misleading statement or act or omission or neglect or breach of duty by the
directors and officers in the discharge of their duties, individually or
collectively, or any matter claimed against them solely by reason of their being
directors or officers, such coverage being limited by the specific terms and
provisions of the insurance policy.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
2.1 Agreement and Plan of Merger, dated as of May 6, 2001, by
and between Valero Energy Corporation and Ultramar Diamond
Shamrock Corporation (attached as Appendix A to the Proxy
Statement/Prospectus included in this Registration
Statement).
5.1 Opinion of Jay D. Browning, Esq. as to the legality of the
securities.
8.1 Tax Opinion of Wachtell, Lipton, Rosen & Katz.
8.2 Tax Opinion of Jones, Day, Reavis & Pogue.
23.1 Consent of Arthur Andersen LLP, San Antonio, Texas.
23.2 Consent of Arthur Andersen LLP, San Antonio, Texas.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Jay D. Browning, Esq. (included in opinion filed
as Exhibit 5.1).
23.5 Consent of Wachtell, Lipton, Rosen & Katz (included in
opinion filed as Exhibit 8.1).
23.6 Consent of Jones, Day, Reavis & Pogue (included in opinion
filed as Exhibit 8.2).
24.1 Powers of Attorney (previously filed on May 25, 2001).
24.2 Certified Resolution (previously filed on August 3, 2001).
99.1 Form of Proxy for Holders of UDS Common Stock (included as
Annex A to the proxy statement/prospectus which is part of
this registration statement on Form S-4).
99.2 Form of Proxy for Participants in the UDS 401(k) Plan
(included as Annex B to the proxy statement/prospectus which
is part of this registration statement on Form S-4).
II-1
178
99.3 Form of Proxy for Holders of Valero Common Stock (included as Annex C to the proxy
statement/prospectus which is part of this registration statement on Form S-4).
99.4 Consent of Morgan Stanley & Co. Incorporated (previously filed on May 25, 2001).
99.5 Consent of Credit Suisse First Boston Corporation (previously filed on May 25, 2001).
99.6 Consent of Banc of America Securities LLC (previously filed on May 25, 2001).
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus (a) that is filed pursuant
to the immediately preceding paragraph, or (b) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
179
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Antonio,
Texas, on the 23rd day of August, 2001.
VALERO ENERGY CORPORATION
By: /s/ JOHN D. GIBBONS
----------------------------------
Name: John D. Gibbons
Title: Executive Vice President
and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM E. GREEHEY* Chairman of the Board, August 23, 2001
------------------------------------------------ President and Chief Executive Officer
William E. Greehey (Principal Executive Officer)
/s/ JOHN D. GIBBONS Executive Vice President and Chief Financial August 23, 2001
------------------------------------------------ Officer
John D. Gibbons (Principal Financial and Accounting Officer)
/s/ RONALD K. CALGAARD* Director August 23, 2001
------------------------------------------------
Ronald K. Calgaard
/s/ DONALD M. CARLTON* Director August 23, 2001
------------------------------------------------
Donald M. Carlton
/s/ JERRY D. CHOATE* Director August 23, 2001
------------------------------------------------
Jerry D. Choate
/s/ ROBERT G. DETTMER* Director August 23, 2001
------------------------------------------------
Robert G. Dettmer
/s/ RUBEN M. ESCOBEDO* Director August 23, 2001
------------------------------------------------
Ruben M. Escobedo
/s/ LOWELL H. LEBERMANN* Director August 23, 2001
------------------------------------------------
Lowell H. Lebermann
/s/ SUSAN KAUFMAN PURCELL* Director August 23, 2001
------------------------------------------------
Susan Kaufman Purcell
/s/ WILLIAM B. RICHARDSON* Director August 23, 2001
------------------------------------------------
William B. Richardson
*By: /s/ JOHN D. GIBBONS
--------------------------------------------
John D. Gibbons
As Attorney-in-Fact
II-3
180
ANNEX A
--------------------------------------------------------------------------------
REVOCABLE PROXY
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Proxy Solicited on Behalf of the Board of Directors
for the Special Meeting on September 27, 2001
The shareholder hereby appoints Timothy J. Fretthold and Todd Walker, and either
of them, with full power of substitution and resubstitution, as proxies to
represent and to vote all shares which the shareholder may be entitled to vote
as of August 13, 2001, the record date, at the Special Meeting of Stockholders
of Ultramar Diamond Shamrock Corporation to be held on September 27, 2001, and
any adjournment thereof.
The items of business to be acted upon as set forth on the reverse side are
listed in the Notice of Special Meeting and described in the Proxy Statement.
PLEASE ACT PROMPTLY
--------------------------------------------------------------------------------
C/O PROXY SERVICES
P.O. BOX 9142
FARMINGDALE, NY 11735
VOTE BY INTERNET -- www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic
delivery of information up until 11:59 P.M. Eastern Time the day before the
cut-off date or meeting date. Have your proxy card in hand when you access the
web site. You will be prompted to enter your 12-digit Control Number which is
located below to obtain your records and to create an electronic voting
instruction form.
VOTE BY MAIL --
Mark, sign, and date your proxy card and return it in the postage-paid envelope
we have provided or return it to Ultramar Diamond Shamrock Corporation, c/o ADP,
51 Mercedes Way, Edgewood, NY 11717.
181
TO VOTE, MARK BLOCKS BELOW IN UDSC09 KEEP THIS PORTION FOR YOUR
BLUE OR BLACK INK AS FOLLOWS: RECORDS
--------------------------------------------------------------------------------
THIS PROXY CARD IS VALID ONLY DETACH AND RETURN THIS PORTION
WHEN SIGNED AND DATED. ONLY
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Vote On Adoption of the Merger Agreement, pursuant to which UDS will merge and
into Valero:
As described in additional detail in the accompanying joint proxy statement/
prospectus, upon completion of the merger, each share of UDS common stock will
be converted into the right to receive, at the election of the holder and
subject to the pro-ration and allocation procedures in the Merger Agreement,
cash, a number of shares of Valero common stock or a combination of cash and
stock, in each case with a value equal to the sum of $27.50 and a measurement
period value of 0.614 shares of Valero common stock.
For Against Abstain
[__] [__] [__]
The undersigned shareholder authorizes the Proxy to vote, in its discretion, on
any other business that may properly come before the Special Meeting or any
adjournments or postponements thereof.
The Board of Directors recommends a vote FOR adoption of the Merger Agreement.
You may specify your choices on the items by marking the appropriate boxes.
You need not mark any boxes if you wish to vote in accordance with the Board of
Directors' recommendations.
Please be sure to sign and date this Proxy in the boxes below.
Please sign exactly as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
--------------------------------------------------------------------------------
Signature Date Signature (Joint Owners) Date
182
ANNEX B
--------------------------------------------------------------------------------
REVOCABLE PROXY
401(K)
ULTRAMAR DIAMOND SHAMROCK CORPORATION
The Solicitation of these Confidential Voting Instructions
is made on behalf of the Board of Directors
The shareholder, as a participant in the Ultramar Diamond Shamrock Corporation
401(k) Plan (the "Plan"), hereby instructs the Trustee of the Plan to appoint
Timothy J. Fretthold and Todd Walker, and either of them, with full power of
substitution, the attorney and proxy of the said Trustee to represent the
interests of the shareholder in Ultramar Diamond Shamrock Corporation Common
Stock held under the terms of the Plan, at the Special Meeting of Shareholders
of Ultramar Diamond Shamrock Corporation to be held on September 27, 2001, and
any adjournment thereof, and to vote, with all powers of Common Stock ("Common
Stock") credited to the shareholder's account(s) under the Plan as of August 13,
2001, the record date for the Special Meeting, upon the matter set forth on the
reverse side and upon any other business that may properly come before the
meeting or any adjournment thereof.
PLEASE ACT PROMPTLY
--------------------------------------------------------------------------------
C/O PROXY SERVICES
P.O. BOX 9142
FARMINGDALE, NY 11735
VOTE BY INTERNET -- www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic
delivery of information up until 11:59 P.M. Eastern Time the day before the
cut-off date or meeting date. Have your proxy card in hand when you access the
web site. You will be prompted to enter your 12-digit Control Number which is
located below to obtain your records and to create an electronic voting
instruction form.
VOTE BY MAIL --
Mark, sign, and date your proxy card and return it in the postage-paid envelope
we have provided or return it to Ultramar Diamond Shamrock Corporation, c/o ADP,
51 Mercedes Way, Edgewood, NY 11717.
183
TO VOTE, MARK BLOCKS BELOW IN UDSC09 KEEP THIS PORTION FOR YOUR
BLUE OR BLACK INK AS FOLLOWS: RECORDS
--------------------------------------------------------------------------------
THIS PROXY CARD IS VALID ONLY DETACH AND RETURN THIS PORTION
WHEN SIGNED AND DATED. ONLY
ULTRAMAR DIAMOND SHAMROCK CORPORATION
Vote On Adoption of the Merger Agreement, pursuant to which UDS will merge and
into Valero:
As described in additional detail in the accompanying joint proxy statement/
prospectus, upon completion of the merger, each share of UDS common stock will
be converted into the right to receive, at the election of the holder and
subject to the pro-ration and allocation procedures in the Merger Agreement,
cash, a number of shares of Valero common stock or a combination of cash and
stock, in each case with a value equal to the sum of $27.50 and a measurement
period value of 0.614 shares of Valero common stock.
For Against Abstain
[__] [__] [__]
The undersigned shareholder instructs the Trustee of the Plan to authorize the
Proxy to vote, in its discretion, on any other business that may properly come
before the Special Meeting or any adjournments or postponements thereof.
The Board of Directors recommends a vote FOR adoption of the Merger Agreement.
You may specify your choices on the items by marking the appropriate boxes.
You need not mark any boxes if you wish to vote in accordance with the Board of
Directors' recommendations.
Please be sure to sign and date this Proxy in the boxes below.
Please sign exactly as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
--------------------------------------------------------------------------------
Signature Date Signature (Joint Owners) Date
184
ANNEX C
VALERO ENERGY CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
The Board of Directors recommends a vote FOR adoption FOR AGAINST ABSTAIN
of the Merger Agreement and FOR the amendment of the
Restated Certificate of Incorporation
1. Adoption of the Merger Agreement, pursuant [_] [_] [_]
to which UDS will merge with and into Valero.
As described in additional detail in the accompanying
joint proxy statement/prospectus, upon completion of
the merger, each share of UDS common stock will be
converted into the right to receive, at the election
of the holder and subject to the pro-ration and
allocation procedures in the Merger Agreement, cash, a
number of shares of Valero common stock or a
combination of cash and stock, in each case with a
value equal to the sum of $27.50 and a measurement
period value of 0.614 shares of Valero common stock.
FOR AGAINST ABSTAIN
2. Approval of Amendment to Restated Certificate of [_] [_] [_]
Incorporation, pursuant to which the number of
authorized shares of Valero common stock will be
increased from 150 to 300 million. As described in Sign here exactly as name(s) appear on this card.
additional detail in the accompanying joint proxy
statement/prospectus, the purpose of the amendment Dated , 2001
is to provide Valero greater flexibility to ------------------
undertake transactions involving the issuance of
additional common stock, including without limitation (x)
stock dividends, stock splits, acquisitions, raising -------------------------------
additional capital and employee and director
incentive compensation and benefit arrangements. (x)
-------------------------------
I (we) hereby revoke all proxies previously given to vote at
the meeting or any adjournments thereof and acknowledge
receipt of the Joint Proxy Statement/Prospectus. If signing
for a corporation or partnership or as agent, attorney or
fiduciary, indicate full title or capacity in which you are
signing.
I (we) hereby authorize the Proxies to vote, in their
discretion, on any other business that may properly come
before the Special Meeting or any adjournments or
postponements thereof.
------------------------------------------------------------------------------------------------------------------------
o FOLD AND DETACH HERE o
YOU CAN VOTE YOUR SHARES BY TELEPHONE OR INTERNET!
QUICK o EASY o IMMEDIATE o AVAILABLE 24 HOURS A DAY o 7 DAYS A WEEK
VALERO ENERGY CORPORATION encourages you to take advantage of convenient ways to
vote your shares. If voting by proxy, you may vote by mail, or choose one of the
two methods described below. Your telephone or Internet vote authorizes the
named proxies to vote your shares in the same manner as if you marked, signed,
and returned your proxy card. To vote by telephone or Internet, read the proxy
statement and then follow these easy steps:
185
-----------------------------------------------------------------
TO VOTE BY PHONE Call toll free 1-877-482-6151 in the United States or Canada any
time on a touch tone telephone. There is NO CHARGE to you for
the call.
Enter the 6-digit Control Number located above.
Option #1: To vote as the Board of Directors recommends on the
proposals: Press 1
When asked, confirm your vote by pressing 1
Option #2: If you choose to vote on the proposals separately,
press 0 and follow the simple recorded instructions.
-----------------------------------------------------------------
TO VOTE BY INTERNET Go to the following Website:
www.computershare.com/us/proxy
Enter the information requested on your computer screen,
including your 6-digit Control Number located above.
Follow the simple instructions on the screen. There is NO CHARGE
to you to vote.
-----------------------------------------------------------------
If you vote by telephone or the Internet, DO NOT mail back the proxy card.
THANK YOU FOR VOTING!
186
VALERO ENERGY CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD SEPTEMBER 27, 2001.
The undersigned hereby appoint(s) each of William E. Greehey, Gregory C.
King and Jay D. Browning as Proxies, with full power of substitution, to
represent and to vote all the shares of common stock of Valero Energy
Corporation ("Valero") that the undersigned would be entitled to vote at the
Special Meeting of Stockholders to be held in San Antonio, Texas on September
27, 2001, including any adjournment thereof, with respect to the matters set
forth in the Joint Proxy Statement/Prospectus. When properly executed, this
proxy will be voted in accordance with the directions indicated, or if no
direction is made, will be voted FOR adoption of the Merger Agreement and FOR
the amendment of the Valero Restated Certificate of Incorporation. For shares
allocated to a participant's account pursuant to any Employee Stock Plan of
Valero, this proxy will constitute an instruction to the plan trustee as to how
such shares are to be voted. In their discretion, the Proxies are authorized to
vote upon any other matter that may properly come before the meeting.
The Board of Directors recommends a vote FOR adoption of the Merger Agreement
and FOR the amendment of the Valero Restated Certificate of Incorporation.
YOUR VOTE IS IMPORTANT. PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY FORM
PROMPTLY USING THE ENCLOSED ENVELOPE, OR VOTE BY TELEPHONE OR BY
THE INTERNET BY FOLLOWING THE DIRECTIONS ON THE REVERSE SIDE.
(Please See Reverse Side)
187
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Agreement and Plan of Merger, dated as of May 6, 2001, by
and between Valero Energy Corporation and Ultramar
Diamond Shamrock Corporation (attached as Appendix A to
the Proxy Statement/Prospectus included in this
Registration Statement).
5.1 -- Opinion of Jay D. Browning, Esq. as to the legality of
the securities.
8.1 -- Tax Opinion of Wachtell, Lipton, Rosen & Katz.
8.2 -- Tax Opinion of Jones, Day, Reavis & Pogue.
23.1 -- Consent of Arthur Andersen LLP, San Antonio, Texas.
23.2 -- Consent of Arthur Andersen LLP, San Antonio, Texas.
23.3 -- Consent of PricewaterhouseCoopers LLP.
23.4 -- Consent of Jay D. Browning, Esq. (included in opinion
filed as Exhibit 5.1).
23.5 -- Consent of Wachtell, Lipton, Rosen & Katz (included in
opinion filed as Exhibit 8.1).
23.6 -- Consent of Jones, Day, Reavis & Pogue (included in
opinion filed as Exhibit 8.2).
24.1 -- Powers of Attorney (previously filed on May 25, 2001).
24.2 -- Certified Resolution (previously filed on August 3,
2001).
99.1 -- Form of Proxy for Holders of UDS Common Stock (included
as Annex A to the proxy statement/prospectus which is
part of this registration statement on Form S-4).
99.2 -- Form of Proxy for Participants in the UDS 401(k) Plan
(included as Annex B to the proxy statement/prospectus
which is a part of this registration statement on Form
S-4).
99.3 -- Form of Proxy for Holders of Valero Common Stock
(included as Annex C to the proxy statement/prospectus
which is a part of this registration statement on Form
S-4).
99.4 -- Consent of Morgan Stanley & Co. Incorporated (previously
filed on May 25, 2001).
99.5 -- Consent of Credit Suisse First Boston Corporation
(previously filed on May 25, 2001).
99.6 -- Consent of Banc of America Securities, LLC (previously
filed on May 25, 2001).