10-Q 1 f10q033101.txt FIRST QUARTER 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2001 Commission File Number 333-28737 UDS CAPITAL I Formed under the laws of the State of Delaware I.R.S. Employer Identification No. 74-6454974 6000 North Loop 1604 West San Antonio, Texas 78249-1112 Telephone number: (210) 592-2000 Securities registered pursuant to Section 12(b) of the Act: 8.32% Trust Originated Preferred Securities (TOPrS) (and the related guarantee) registered on the New York Stock Exchange. Securities registered pursuant to Section 12(g) of the Act: None UDS FUNDING I, L.P. Formed under the laws of the State of Delaware I.R.S. Employer Identification No. 74-2835441 6000 North Loop 1604 West San Antonio, Texas 78249-1112 Telephone number: (210) 592-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ================================================================================ UDS CAPITAL I AND UDS FUNDING I, L.P. FORM 10-Q March 31, 2001 TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements UDS CAPITAL I Balance Sheets as of March 31, 2001 and December 31, 2000.......... 3 Statements of Income for the Three Months Ended March 31, 2001 and 2000................................... 4 Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000................................... 5 Notes to Financial Statements...................................... 6 UDS FUNDING I, L.P. Balance Sheets as of March 31, 2001 and December 31, 2000.......... 9 Statements of Income for the Three Months 10 Ended March 31, 2001 and 2000................................... Statements of Cash Flows for the Three Months 11 Ended March 31, 2001 and 2000................................... Notes to Financial Statements...................................... 12 Item 2. Management's Discussion and Analysis of Financial Condition and 13 Results of Operations............................................ Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................... 16 SIGNATURES................................................................. 17 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements

See accompanying notes to financial statements. 3

See accompanying notes to financial statements. 4

See accompanying notes to financial statements. 5 UDS CAPITAL I NOTES TO FINANCIAL STATEMENTS March 31, 2001 (unaudited) NOTE 1: Summary of Significant Accounting Policies Basis of Presentation: UDS Capital I (the Trust) is a statutory business trust formed for the exclusive purposes of: o issuing the Trust Originated Preferred Securities (TOPrS) and the Trust Common Securities (the Common Securities and together with the TOPrS, the Trust Securities) representing undivided beneficial ownership interests in the assets of the Trust, o purchasing Partnership Preferred Securities (the Preferred Securities) representing the limited partnership interests of UDS Funding I, L.P. (the Partnership) with the proceeds from the sale of the Trust Securities, and o engaging in only those other activities necessary or incidental thereto. The Trust has a perpetual existence, subject to certain termination events. The Trust is a wholly-owned subsidiary of Ultramar Diamond Shamrock Corporation (UDS). All expenses related to the operations of the Trust are paid for by UDS. Two Trustees, who manage the Trust, are employees of UDS. These unaudited financial statements of the Trust were prepared in accordance with United States' generally accepted accounting principles for interim financial reporting and with Securities and Exchange Commission rules and regulations for Form 10-Q. All normal and recurring adjustments considered necessary for a fair presentation have been included. You should read these unaudited financial statements with the audited financial statements included in the Trust's annual report on Form 10-K for the year ended December 31, 2000. Cash: Minimal cash balances are maintained, as all income received on the Preferred Securities is distributed immediately. Investments: The investment in Preferred Securities represents the limited partnership interest in the Partnership and is recorded at cost. The carrying value of the investment approximates its fair value. Income on the investment is accrued when earned. Income Taxes: The Trust is classified as a grantor trust for U.S. Federal income tax purposes. Accordingly, the Trust does not incur any income tax liabilities. Such liabilities are incurred directly by the security holders. Derivative Instruments: Effective January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement established accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivative instruments be recognized as either assets or liabilities in the balance sheet and be measured at their fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. There was no impact in adopting Statement No. 133, as amended, as the Trust does not hold or trade derivative instruments. 6 UDS CAPITAL I NOTES TO FINANCIAL STATEMENTS - continued NOTE 2: Investment in UDS Funding I, L.P. Preferred Securities The Trust owns 8,247,440 of 8.32% Preferred Securities with a $25.00 liquidation preference per security of the Partnership. UDS is the General Partner of the Partnership. The Preferred Securities are redeemable on or after June 30, 2002 at the option of the Partnership, in whole or in part, at a redemption price equal to $25.00 per security. Upon any redemption of the Preferred Securities, the TOPrS will be redeemed. Distributions on the Preferred Securities are payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year. Distributions not paid on the scheduled payment date accumulate and compound quarterly at the rate of 8.32% per annum. The distribution payment dates of the Preferred Securities correspond to the distribution payment dates of the TOPrS. UDS has guaranteed, on a subordinated basis, the distributions due on the Preferred Securities if and when declared by the Partnership and the payments upon liquidation of the Partnership or the redemption of the Preferred Securities to the extent funds are legally available. NOTE 3: Stockholders' Equity Trust Originated Preferred Securities The Trust has issued 8,000,000 of 8.32% TOPrS, with a $25.00 liquidation amount per security, for total proceeds of $200,000,000. Holders of the TOPrS have limited voting rights and are not entitled to vote to appoint, remove or replace, or to increase or decrease the number of trustees, which voting rights are vested exclusively in the holder of the Common Securities. Under certain circumstances, the TOPrS have preferential rights to payments relative to the Common Securities. The TOPrS are redeemable on or after June 30, 2002 at the option of the Trust, in whole or in part, at a redemption price equal to $25.00 per security. Distributions on the TOPrS are cumulative and are payable quarterly on March 31, June 30, September 30, and December 31 of each year, if and when the Trust has funds available for distribution. UDS has guaranteed, on a subordinated basis, the payment of all distributions and other payments on the TOPrS to the extent funds are legally available. This guarantee and the Partnership distribution guarantee are subordinated to all other liabilities of UDS and rank equally with the most senior preferred stock of UDS. Trust Common Securities The Trust has also issued 247,440 of 8.32% Common Securities with a $25.00 liquidation amount per security to UDS for $6,186,000. The Common Securities are redeemable on or after June 30, 2002 at the option of the Trust, in whole or in part, at a redemption price equal to $25.00 per security. Distributions on the Common Securities are cumulative and payable quarterly on March 31, June 30, September 30, and December 31 of each year, in arrears, at the annual rate of 8.32% of the liquidation amount, if and when the Trust has funds available for distribution, subject to the Preferred Securities preferential rights. NOTE 4: Subsequent Event On May 7, 2001, UDS, the parent of the Trust, announced that it had agreed to be acquired by Valero Energy Corporation for total consideration of approximately $4.0 billion plus the assumption of all outstanding debt of approximately $2.0 billion. Under the terms of the agreement and plan of merger, UDS shareholders will receive 1.228 shares of Valero common stock for approximately 50% of the outstanding shares of UDS common stock, and $55 per share in cash for the remaining 50%. The merger has been approved by the board of directors of both companies, however closing of the transaction is subject to regulatory reviews and the approval of the stockholders of both companies. The merger is expected to close in the fourth quarter of 2001. Upon the closing of the merger, the Trust will become a wholly owned subsidiary of Valero Energy Corporation. 7 Valero Energy Corporation owns and operates six refineries in Texas, Louisiana, New Jersey and California with a combined throughput capacity of more than 1.0 million barrels per day. Valero markets its gasoline, diesel and other refined products in 34 states through a bulk and rack marketing network and in California through approximately 350 retail locations. 8

See accompanying notes to financial statements. 9

See accompanying notes to financial statements. 10

See accompanying notes to financial statements. 11 UDS FUNDING I, L.P. NOTES TO FINANCIAL STATEMENTS March 31, 2001 (unaudited) NOTE 1: Summary of Significant Accounting Policies Basis of Presentation: UDS Funding I, L.P. (the Partnership) is a limited partnership formed for the exclusive purposes of: o issuing its partnership interests, o investing in certain eligible securities of UDS and eligible debt securities of non-affiliated entities, and o engaging in only those other activities necessary or incidental thereto. The Partnership is a wholly-owned subsidiary of Ultramar Diamond Shamrock Corporation (UDS). UDS, as General Partner, has agreed to pay all expenses and fees related to the organization and operation of the Partnership and for all other obligations of the Partnership. Additionally, UDS has agreed to indemnify certain officers and agents of the Partnership. Except as provided in certain partnership agreements and as provided by law, the holders of the Preferred Securities have no voting rights. These unaudited financial statements were prepared in accordance with United States' generally accepted accounting principles for interim financial reporting and with Securities and Exchange Commission rules and regulations for Form 10-Q. All normal and recurring adjustments considered necessary for a fair presentation have been included. You should read these unaudited financial statements with the audited financial statements included in UDS Capital I's (the Trust) annual report on Form 10-K for the year ended December 31, 2000. Cash and Cash Equivalents: All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. As of March 31, 2001 and December 31, 2000, cash equivalents consisted of money market funds, whose cost approximates fair value. Investments: Investments in subordinated debentures of UDS and Ultramar Inc. and Diamond Shamrock Refining Company, L.P. (the Subsidiaries) and in U.S. government securities are classified as held-to-maturity and are recorded at amortized cost. The carrying value of the subordinated debentures approximates their fair value as of March 31, 2001 and December 31, 2000. Income Taxes: The Partnership is classified as a partnership for U.S. Federal income tax purposes. Accordingly, the Partnership does not incur any income tax liabilities. Those liabilities are incurred directly by the partners. Derivative Instruments: Effective January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement established accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivative instruments be recognized as either assets or liabilities in the balance sheet and be measured at their fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. There was no impact in adopting Statement No. 133, as amended, as the Partnership does not hold or trade derivative instruments. 12 UDS FUNDING I, L.P. NOTES TO FINANCIAL STATEMENTS - continued NOTE 2: Investments U.S. government securities Investments in U.S. government securities consisted of the following (in thousands):

As of March 31, 2001, U.S. government securities mature as follows (in thousands):

Subordinated debentures The subordinated debentures of UDS and the Subsidiaries have a term of 20 years and bear interest at 8.32% per annum. The subordinated debentures are redeemable on or after June 30, 2002 at the option of UDS and the Subsidiaries, in whole or in part, at a redemption price equal to the entire principal amount of the subordinated debentures being so redeemed plus any accrued and unpaid interest. The interest payment dates correspond to the distribution payment dates of the Preferred Securities. Interest and redemption payments on the Subsidiaries' debentures are guaranteed by UDS on a subordinated basis. NOTE 3: Partners' Capital The Partnership has outstanding 8,247,440 of 8.32% Preferred Securities, with a $25.00 liquidation preference per security owned by the Trust. The Preferred Securities are redeemable on or after June 30, 2002 at the option of the Partnership, in whole or in part, at a redemption price equal to $25.00 per security. Distributions on the Preferred Securities are cumulative and are payable quarterly on March 31, June 30, September 30, and December 31 of each year, if and when declared by the General Partner. UDS has guaranteed, on a subordinated basis, the distributions due on the Preferred Securities if and when declared by the Partnership, and the payments upon liquidation of the Partnership or the redemption of the Preferred Securities to the extent funds are legally available. This guarantee is subordinated to all other liabilities of UDS and ranks equally with the most senior preferred stock of UDS. NOTE 4: Subsequent Event On May 7, 2001, UDS, the parent of the Partnership, announced that it had agreed to be acquired by Valero Energy Corporation for total consideration of approximately $4.0 billion plus the assumption of all outstanding debt of approximately $2.0 billion. Under the terms of the agreement and plan of merger, UDS shareholders will receive 1.228 shares of Valero common stock for approximately 50% of the outstanding shares of UDS common stock, and $55 per share in cash for the remaining 50%. The merger has been approved by the board of directors of both companies, however closing of the transaction is subject to regulatory reviews and the approval of the stockholders of both companies. The merger is expected to close in the fourth quarter of 2001. Upon the closing of the merger, the Partnership will become a wholly owned subsidiary of Valero Energy Corporation. 13 Valero Energy Corporation owns and operates six refineries in Texas, Louisiana, New Jersey and California with a combined throughput capacity of more than 1.0 million barrels per day. Valero markets its gasoline, diesel and other refined products in 34 states through a bulk and rack marketing network and in California through approximately 350 retail locations. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results Of Operations UDS Capital I (the Trust) is a statutory business trust which exists for the exclusive purposes of: o issuing the 8.32% Trust Originated Preferred Securities (TOPrS) and the Common Securities of the Trust, o investing in the 8.32% Preferred Securities issued by UDS Funding I, L.P., and o engaging in only those other activities necessary or incidental thereto. UDS Funding I, L.P. (the Partnership) is a limited partnership which exists for the exclusive purposes of: o issuing its partnership interests, o investing in certain eligible securities of Ultramar Diamond Shamrock Corporation (UDS) and its wholly-owned subsidiaries and eligible debt securities of non-affiliated entities, and o engaging in only those activities necessary or incidental thereto. UDS is the General Partner and the Trust is the Limited Partner of the Partnership. The Partnership is managed by the General Partner. In 1997, the Trust issued the TOPrS and Common Securities for total proceeds of $200,000,000 and $6,186,000, respectively, and invested those proceeds in Preferred Securities of the Partnership. The Trust received net income from Preferred Securities from the Partnership and made distributions to the holders of the TOPrS and Common Securities as summarized below:

In 1997, the Partnership issued the Preferred Securities and the general partner interest for total proceeds of $206,186,000 and $36,386,000, respectively, and invested those proceeds in the subordinated debentures of UDS and its wholly-owned subsidiaries totaling $240,146,000. In addition, the Partnership invested approximately $2,400,000 in Eligible Debt Securities and other investments. Net income from debentures and other investments and distributions to the General Partner and the Limited Partner are summarized below:

15 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Trust and the Partnership have not entered into any transactions using derivative financial instruments or derivative commodity instruments. UDS's management believes that the Trust's and Partnership's exposure to market risk associated with other investments is not material. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K.... None. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Trust and the Partnership have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. UDS Capital I By: /s/ Robert S. Shapard -------------------------- Name: Robert S. Shapard Title: Regular Trustee May 9, 2001 UDS Funding I, L.P. By: Ultramar Diamond Shamrock Corporation, as General Partner By: /s/ Robert S. Shapard -------------------------- Name: Robert S. Shapard Title: Executive Vice President and Chief Financial Officer May 9, 2001 17

UDS CAPITAL I 10-Q