10-Q 1 0001.txt SECOND QUARTER 10-Q 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 June 30, 2000 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 XXXX No ---- ---- UDS CAPITAL I AND UDS FUNDING I, L.P. FORM 10-Q June 30, 2000 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page ---- Item 1. Financial Statements (Unaudited) UDS CAPITAL I Balance Sheets as of June 30, 2000 and December 31, 1999............. 3 Statements of Income for the Three and Six Months Ended June 30, 2000 and 1999...................................... 4 Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999...................................... 5 Notes to Financial Statements........................................ 6 UDS FUNDING I, L.P. Balance Sheets as of June 30, 2000 and December 31, 1999............. 8 Statements of Income for the Three and Six Months Ended June 30, 2000 and 1999...................................... 9 Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999............................................ 10 Notes to Financial Statements........................................ 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 14 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................. 14 SIGNATURES................................................................ 15 PART I - FINANCIAL INFORMATION Item 1. Financial Statements UDS CAPITAL I BALANCE SHEETS (in thousands, except securities data) June 30, December 31, 2000 1999 ---- ---- (unaudited) Assets Investment in UDS Funding I, L.P. Preferred Securities $206,186 $206,186 -------- -------- Total Assets $206,186 $206,186 ======== ======== Stockholders' Equity 8.32 % Trust Originated Preferred Securities, $25.00 liquidation amount per security; 8,000,000 securities authorized, issued and outstanding $200,000 $200,000 8.32% Trust Common Securities, $25.00 liquidation amount per security; 247,440 securities authorized, issued and outstanding 6,186 6,186 -------- -------- Total Stockholders' Equity $206,186 $206,186 ======== ======== See accompanying notes to financial statements. UDS CAPITAL I STATEMENTS OF INCOME (unaudited, in thousands) Three Months Six Months Ended June 30, Ended June 30, -------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net income on UDS Funding I, L.P. Preferred Securities $4,288 $4,288 $8,577 $8,577 ====== ====== ====== ====== See accompanying notes to financial UDS CAPITAL I STATEMENTS OF CASH FLOWS (unaudited, in thousands) Six Months Ended June 30, 2000 1999 ---- ---- Cash Flows Provided By Operating Activities - Net income from UDS Funding I, L.P. Preferred Securities $ 8,577 $ 8,577 ------- ------- Cash Flows From Financing Activities: Distributions on 8.32% Trust Originated Preferred Securities (8,320) (8,320) Distributions on 8.32% Trust Common Securities (257) (257) ------- ------ Net cash used in financing activities (8,577) (8,577) ------- ------- Net Change in Cash - - Cash at Beginning of Period - - ------- ------- Cash at End of Period $ - $ - ======= ======= See accompanying notes to financial statements. UDS CAPITAL I NOTES TO FINANCIAL STATEMENTS June 30, 2000 (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 (the Company). All expenses related to the operations of the Trust are paid for by the Company. Two Trustees, who manage the Trust, are employees of the Company. The accompanying unaudited financial statements have been prepared by the Trust 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. In the opinion of the Trust's management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Trust's annual report on Form 10-K for the year ended December 31, 1999. Cash: The Trust maintains minimal cash balances, 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. NOTE 2: Investment in UDS Funding I, L.P. Preferred Securities The Trust owns 8,247,440 8.32% Preferred Securities with a $25.00 liquidation preference per security of the Partnership. The Company 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 UDS CAPITAL I NOTES TO FINANCIAL STATEMENTS - continued correspond to the distribution payment dates of the TOPrS. The Company 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. The Company 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 the Company and rank pari passu with the most senior preferred stock of the Company. Trust Common Securities The Trust has also issued 247,440 of 8.32% Common Securities with a $25.00 liquidation amount per security to the Company 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. UDS FUNDING I, L.P. BALANCE SHEETS (in thousands, except securities data) June 30, December 31, 2000 1999 ---- ---- (unaudited) Assets Cash and cash equivalents $ 156 $ 90 -------- -------- Investments: Bank certificate of deposit 100 100 Investment in U.S. government securities, at amortized cost 2,564 2,564 Subordinated debentures of Ultramar Diamond Shamrock Corporation, at cost 206,186 206,186 Subordinated debentures of Ultramar Inc. and Diamond Shamrock Refining Company, L.P., both wholly-owned subsidiaries of Ultramar Diamond Shamrock Corporation, at cost 33,960 33,960 -------- -------- Total investments 242,810 242,810 Accrued interest receivable 29 15 -------- -------- Total Assets $242,995 $242,915 ======== ======== Partners' Capital Limited partnership interest held by UDS Capital I, a Delaware business trust, 8,247,440 preferred securities with $25.00 per security liquidation preference $206,186 $206,186 General partnership interest held by Ultramar Diamond Shamrock Corporation 36,809 36,729 -------- -------- Total Partners' Capital $242,995 $242,915 ======== ======== See accompanying notes to financial statements.
UDS FUNDING I, L.P. STATEMENTS OF INCOME (unaudited, in thousands) Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Interest income: Interest income on subordinated debenture of Ultramar Diamond Shamrock Corporation $4,288 $4,288 $ 8,577 $ 8,577 Interest income on subordinated debentures of Ultramar Inc. and Diamond Shamrock Refining Company, L.P., both wholly- owned subsidiaries of Ultramar Diamond Shamrock Corporation 707 707 1,413 1,413 Interest income on U.S. government securities, certificate of deposit and cash equivalents 41 36 80 74 ------ ------ ------- ------- Net income $5,036 $5,031 $10,070 $10,064 ====== ====== ======= ======= See accompanying notes to financial statements.
UDS FUNDING I, L.P. STATEMENTS OF CASH FLOWS (unaudited, in thousands) Six Months Ended June 30, ------------------------- 2000 1999 ---- ---- Cash Flows From Operating Activities: Net income $10,070 $10,064 Amortization of U.S. government securities - 1 Increase in accrued interest receivable (14) (3) ------- ------- Net cash provided by operating activities 10,056 10,062 ------- ------- Cash Flows Provided by Investing Activities: Purchase of U.S. government securities (650) - Maturities of U.S. government securities 650 - ------- ------- Net cash provided by investing activities - - ------- ------- Cash Flows From Financing Activities: Distributions to Limited Partner (8,577) (8,577) Distributions to General Partner (1,413) (1,413) ------- ------- Net cash used in financing activities (9,990) (9,990) ------- ------- Net Increase in cash and cash equivalents 66 72 Cash and cash equivalents at Beginning of Period 90 25 ------- ------- Cash and cash equivalents at End of Period $ 156 $ 97 ======= ======= See accompanying notes to financial statements. UDS FUNDING I, L.P. NOTES TO FINANCIAL STATEMENTS June 30, 2000 (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 the Company 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 (the Company). The Company, 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, the Company 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. The accompanying unaudited financial statements have been prepared by the Partnership 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. In the opinion of the Partnership's management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in UDS Capital I's (the Trust) annual report on Form 10-K for the year ended December 31, 1999. Cash and Cash Equivalents: The Partnership considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of June 30, 2000 and December 31, 1999, cash equivalents consisted of money market funds, whose cost approximates fair value. Investments: Investments in subordinated debentures of the Company 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 June 30, 2000 and December 31, 1999. 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. Such liabilities are incurred directly by the partners. 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): Gross Unrealized ----------------- Amortized Fair Cost Gains Losses Value ---- ----- ------ ----- June 30, 2000 $ 2,564 $ - $ 35 $ 2,529 December 31, 1999 2,564 - 33 2,531 As of June 30, 2000, U.S. government securities mature as follows (in thousands): June 2001 $ 630 June 2002 1,284 June 2003 650 ------- $ 2,564 Subordinated debentures The subordinated debentures of the Company 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 the Company 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 the Company 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. The Company 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 the Company and ranks pari passu with the most senior preferred stock of the Company. 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 (the Company) and wholly-owned subsidiaries of the Company and eligible debt securities of non-affiliated entities, and o engaging in only those activities necessary or incidental thereto. The Company 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 TOPrS and Common Securities as summarized below:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in thousands) Net income from Preferred Securities $ 4,288 $ 4,288 $ 8,577 $ 8,577 ===== ===== ===== ===== Distributions to: TOPrS $ 4,160 $ 4,160 $ 8,320 $ 8,320 Common Securities 128 128 257 257 ------ ------ ------- ------ $ 4,288 $ 4,288 $ 8,577 $ 8,577 ===== ===== ===== =====
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 the Company and wholly-owned subsidiaries of the Company 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:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in thousands) Net income from debentures and other investments $ 5,036 $ 5,031 $ 10,070 $ 10,064 ===== ===== ====== ====== Distributions to: Limited partner $ 4,288 $ 4,288 $ 8,577 $ 8,577 General partner 707 707 1,413 1,413 ------ ------ ----- ----- $ 4,995 $ 4,995 $ 9,990 $ 9,990 ===== ===== ===== =====
Accounting Pronouncements In June 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133." FASB Statement No. 138 addresses a number of issues causing implementation difficulties for numerous entities that apply FASB Statement No. 133. FASB Statement No. 138 amends the accounting and reporting standards of FASB Statement No. 133 for certain derivative instruments and certain hedging activities. Management believes there will be no material effect to the Trust's or Partnership's financial position or results of operation as a result of implementation of this statement. 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. The Company'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 27.1 Financial Data Schedule (b) Reports on Form 8-K.... None. 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/ H. Pete Smith Name: H. Pete Smith Title: Regular Trustee August 4, 2000 UDS Funding I, L.P. By: Ultramar Diamond Shamrock Corporation, as General Partner By: /s/ H. Pete Smith Name: H. Pete Smith Title: Executive Vice President and Chief Financial Officer August 4, 2000