<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
TESORO PETROLEUM CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
TESORO PETROLEUM CORPORATION
------------------------
NOTICE OF 1996 ANNUAL MEETING OF STOCKHOLDERS
JUNE 6, 1996
------------------------
The 1996 Annual Meeting of Stockholders of Tesoro Petroleum Corporation
will be held at the Hilton Palacio del Rio Hotel, 200 South Alamo Street, San
Antonio, Texas, at 10:00 A.M. Central time on Thursday, June 6, 1996, for the
following purposes:
1. To elect eight directors of the Company;
2. To consider and act upon a proposal to increase the number of shares
which can be granted under the Executive Long-Term Incentive Plan and
limit the awards of restricted stock under such plan;
3. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for fiscal year 1996; and
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Holders of Common Stock of record at the close of business on April 25,
1996, are entitled to notice of and to vote at the annual meeting.
By Order of the Board of Directors,
JAMES C. REED, JR.
Secretary
May 3, 1996
San Antonio, Texas
------------------------
YOUR VOTE IS IMPORTANT. IF YOU DO NOT EXPECT TO ATTEND THE ANNUAL MEETING,
OR IF YOU DO PLAN TO ATTEND BUT WISH TO VOTE BY PROXY, PLEASE DATE, SIGN AND
MAIL PROMPTLY THE ENCLOSED PROXY. A RETURN ENVELOPE IS PROVIDED FOR THIS
PURPOSE.
<PAGE> 3
TESORO PETROLEUM CORPORATION
PROXY STATEMENT
------------------------
1996 ANNUAL MEETING OF STOCKHOLDERS
JUNE 6, 1996
------------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors (sometimes referred to herein as the "Board") of Tesoro
Petroleum Corporation ("Tesoro" or the "Company") of proxies to be voted at the
1996 Annual Meeting of Stockholders to be held on Thursday, June 6, 1996, and at
any adjournment thereof.
Each proxy will be voted as specified thereon by the stockholder. Any duly
executed proxy not specifying the contrary will be voted (i) for the directors
nominated for election at the meeting, (ii) in favor of the proposal to increase
the number of shares which can be granted under the Executive Long-Term
Incentive Plan and limit the awards of restricted stock under such plan, and
(iii) for the ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for fiscal year 1996. A stockholder giving a
proxy may revoke it by written notice to the Secretary of the Company at any
time before it is voted.
At the close of business on April 25, 1996, the record date for the 1996
annual meeting, there were outstanding and entitled to vote 25,927,724 shares of
Common Stock of the Company. The holders of Common Stock are entitled to one
vote for each share held by them on all matters submitted to them. The Company
has no other voting securities outstanding.
A copy of the Annual Report of the Company, including financial statements
and a description of the Company's operations for fiscal year 1995, has
previously been mailed to all stockholders as of the record date. Such Annual
Report is not incorporated herein by reference.
The principal executive offices of the Company are located at 8700 Tesoro
Drive, San Antonio, Texas 78217. This Proxy Statement and accompanying form of
proxy are being mailed to stockholders on or about May 3, 1996.
<PAGE> 4
1. ELECTION OF DIRECTORS
At the 1996 annual meeting, the stockholders are requested to elect eight
directors to hold office until the 1997 Annual Meeting of Stockholders or until
their successors are elected and qualified. Unless otherwise specified, all duly
executed proxies received on a timely basis will be voted for the nominees set
forth below. Each of such nominees has indicated his willingness to serve as a
director, if elected, and the Company has no reason to believe that any nominee
will be unable to serve. The persons designated as proxies, however, reserve
full discretion to cast votes for other persons in the event that any one or
more of the nominees are unable to serve.
The election of director nominees requires a plurality of the votes cast at
the election. Under Delaware law and the Company's Certificate of Incorporation
and By-laws, shares as to which a stockholder withholds authority to vote on the
election of directors ("Abstentions"), and shares as to which a broker indicates
that it does not have discretionary authority to vote ("Broker Non-Votes") on
the election of directors, will not be counted as voting thereon and will not
affect the election of the nominees receiving a plurality of the votes cast.
Michael D. Burke resigned as a director of the Company on January 12, 1996,
to focus his full time and attention on building his new business. Peter M.
Detwiler retired from the Company's Board of Directors on March 10, 1996, in
order to devote more time to his other business interests. In connection with
the recent formation of the Governance Committee of the Board of Directors, the
Board approved a retirement policy and term limits policy for directors. Under
the retirement policy, a person may not stand for election if he or she would
attain age 72 during the term to which he or she would be elected. Under the
term limits policy, no non-management director may serve for more than 15 years.
As a result of these policies, John J. McKetta, Jr., who joined the Board in
1980, will not be able to stand for reelection at the 1996 annual meeting.
Although Robert J. Caverly would exceed the age limit, he has been asked, for
continuity purposes, to serve an additional one-year term as Chairman Emeritus
and as Chairman of the Governance Committee if elected as a director at the
annual meeting. The Company greatly appreciates the dedicated service and
leadership that Mr. Burke, Mr. Detwiler and Dr. McKetta have provided to the
Company.
On December 26, 1995, the Stockholders' Committee for New Management of
Tesoro Petroleum Corporation (the "Committee"), comprised of five holders of the
Company's Common Stock, announced its intention to engage in a solicitation (the
"Solicitation") of written consents for the primary purpose of removing the then
current members of the Board and replacing them with a new board. In connection
therewith, the Committee filed with the Securities and Exchange Commission
("SEC") Schedule 13D and preliminary Schedule 14A statements relating thereto.
Also, on December 26, 1995, in a related action the Committee filed suit in the
U.S. District Court for the Western District of Texas against Tesoro and its
Chief Executive Officer, Bruce A. Smith. On January 8, 1996, the defendants
filed their answer to the lawsuit, and the Company asserted various
counterclaims relating to the Solicitation, including an allegation that Ardsley
Advisory Partners ("Ardsley"), the Company's largest stockholder, was part of
the Committee. On March 1, 1996, the Committee filed a definitive Schedule 14A
with the SEC and thereafter commenced the Solicitation. The Company responded
with its own materials seeking revocation of consents.
On April 4, 1996, a settlement was reached between the Committee and
certain related parties (the "Solicitation Parties"), the Company and Ardsley.
The settlement generally provides that (i) the parties shall promptly file a
stipulation of dismissal, without prejudice and costs, of all claims in the U.S.
District Court; (ii) the Solicitation Parties will terminate the Solicitation
and will withdraw its alternate slate of directors for the 1996 annual meeting;
(iii) the Solicitation Parties severally have agreed, among other things, that
for a period beginning as of April 4, 1996, and ending on the earlier of the day
after the Company's 1999 annual meeting or June 30, 1999 (the "Standstill
Period"), he or it shall not in any way, directly or indirectly, without the
approval of the Board, make, encourage, participate or assist in (a) any attempt
to take control of the Company, (b) any consent solicitation to remove any
member of the Company's Board of Directors, (c) any solicitation of proxies to
vote or become a participant in any election contest to remove any member of the
Company's Board of Directors, (d) the nomination or election of any alternate
director or slate of directors proposed from the floor at any meeting of the
Company's stockholders, or (e) any offers or indications of
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<PAGE> 5
interest with respect to the acquisition or disposition of the Company or any of
its business units; (iv) Tesoro's Board of Directors will be expanded to nine
members with the addition of Alan Kaufman, M.D., a Committee member, Sanford B.
Prater, a Partner of Ardsley, the Company's largest stockholder, and a third
individual to be selected by the Governance Committee of the Board of Directors
by July 31, 1996, who will have no prior connection to the Company, the
Solicitation Parties or Ardsley (Dr. Kaufman and Mr. Prater became members of
the Board effective April 12, 1996); each of these persons will be nominated for
election as part of the Board's recommended slate throughout the Standstill
Period, except that (a) in the case of Dr. Kaufman, he shall not be replaced if
he dies, resigns or is removed pursuant to the terms of the settlement agreement
(in the event any of the Solicitation Parties breaches the terms of the
standstill, confidentiality and non-disparagement provisions of the settlement
agreement or in the event Dr. Kaufman reduces his holdings of Company Common
Stock below 400,000 shares or votes for any nominee for director other than
those supported by a majority of the Board), or (b) in the case of Ardsley, its
designee shall not be replaced if such director resigns or is removed pursuant
to the terms of the settlement agreement (in the event of a breach by Ardsley of
the confidentiality provisions of the settlement agreement, or in the event that
Ardsley's holdings of Company Common Stock are reduced to 50 percent or less of
the number of shares held as of April 4, 1996, or Ardsley agrees or takes any
action to support a change of control of Tesoro or the election to the Board of
any person other than a Board nominee); (v) Ardsley shall vote all shares owned
by Ardsley in favor of the entire slate proposed for election at the 1996 annual
meeting; (vi) in consideration of the above and in order to eliminate future
legal fees and expenses associated with continued protracted litigation and the
Solicitation, the Company agreed, subject to its right to examine all invoices,
to reimburse the Solicitation Parties for a portion of their reasonable
out-of-pocket expenses and legal fees incurred in connection with the lawsuit
and the Solicitation (up to a maximum of $700,000) and to reimburse Ardsley for
a portion of its reasonable expenses and legal fees incurred in the lawsuit up
to a maximum of $200,000; and (vii) provided that the parties have complied with
all material obligations under the settlement agreement, at the conclusion of
the Standstill Period mutual releases will be exchanged with respect to all
claims and counterclaims asserted in the U.S. District Court, and in the interim
the parties covenant not to sue each other and to toll the running of any
applicable statutes of limitation with respect to any such claims.
The Governance Committee has not yet selected the third individual referred
to above; therefore, although the number of directors has been set at nine, the
stockholders are being asked to elect eight directors to hold office until the
1997 Annual Meeting of Stockholders or until their successors are duly elected
and qualified, and proxies cannot be voted for more than eight nominees.
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<PAGE> 6
INFORMATION CONCERNING DIRECTORS AND NOMINEES
Certain information as to each nominee for director is set forth in the
table below and in the following paragraphs. Certain of the information
appearing in the table and the notes thereto has been furnished to the Company
by the respective nominees.
<TABLE>
<CAPTION>
SERVED AS
DIRECTOR OF
AGE AT THE COMPANY
APRIL 25, OR PREDECESSOR OTHER POSITIONS AND OFFICES
NAME(1) 1996 COMPANIES FROM WITH THE COMPANY
- -------------------------------- --------- -------------- ----------------------------
<S> <C> <C> <C>
Robert J. Caverly............... 77 1992 Chairman of the
Board of Directors(1)(2)(3)
Steven H. Grapstein............. 38 1992 Vice Chairman of the
Board of Directors(3)(4)
Alan J. Kaufman................. 58 1996
Raymond K. Mason, Sr............ 69 1983
Sanford B. Prater............... 48 1996
Bruce A. Smith.................. 52 1995 President and Chief
Executive Officer(1)
Patrick J. Ward................. 65 1996
Murray L. Weidenbaum............ 69 1992 (1)(2)(3)(4)
</TABLE>
- ---------------
(1) Member of the Executive Committee (Mr. Caverly, Chairman). Mr. Smith has
been elected Chairman of the Board of Directors effective as of the 1996
Annual Meeting of Stockholders, subject to his election as a director at
the meeting.
(2) Member of the Compensation Committee (Mr. Caverly, Acting Chairman).
(3) Member of the Governance Committee (Mr. Caverly, Chairman).
(4) Member of the Audit Committee (Dr. Weidenbaum, Chairman).
------------------------
Robert J. Caverly was elected Chairman of the Company's Board of Directors,
a non-officer position, in May 1995. Mr. Caverly was Vice Chairman of the Board
of Directors from February 1995 until May 1995. Mr. Caverly is a consultant and
investor. For the last five years he has performed interim management
assignments for various real estate development projects and has been a
consultant on real estate matters to financial institutions and law firms. Mr.
Caverly was a director of Contel Corporation from 1975 to March 1991. From 1972
through 1979, Mr. Caverly served in the positions of Executive Vice President of
Operations, director, and member of the Executive Committee of Occidental
Petroleum Corporation.
Steven H. Grapstein was elected Vice Chairman of the Company's Board of
Directors, a non-officer position, in February 1996. Mr. Grapstein has been a
Vice President of Kuo Investment Company and subsidiaries, an international
investment group, since September 1985. He is a director of several of the Kuo
companies. Mr. Grapstein has been a Vice President of Oakville N.V. ("Oakville")
since 1989. Mr. Grapstein is also a director of Baldwin Plc., which is an
entertainment and leisure-related entity. See "Security Ownership of Certain
Beneficial Owners" for information regarding the securities of the Company owned
by Oakville.
Alan J. Kaufman, M.D., was elected to the Company's Board of Directors on
April 12, 1996. Dr. Kaufman has been a practicing neurosurgeon for over 25 years
and an investor in a number of companies. Since 1987, he has been a director of
Newpark Resources, Inc., a New York Stock Exchange company engaged primarily in
providing oil field services.
Raymond K. Mason, Sr., has been Chairman of the Board of Directors of
American Banks of Florida, Inc., since 1978. Mr. Mason has served as Chairman of
the Board of Directors of American Security Life
4
<PAGE> 7
Assurance Company of North Carolina ("ASLNC") and its parent, American Security
Life Assurance Company of Florida ("ASLF"). During December 1990, ASLNC and ASLF
voluntarily consented to administrative rehabilitation. Pursuant to
administrative rehabilitation, Mr. Mason's authority as Chairman of the Board of
Directors of ASLNC and ASLF was automatically suspended. Both of these companies
are presently in liquidation. In connection with the liquidation of ASLNC, Mr.
Mason was named as a co-defendant in a lawsuit alleging violations of federal
and state RICO statutes, common law fraud and unfair and deceptive trade
practices. The parties, without admitting liability, have entered into a
settlement agreement which provides for cash payments to the plaintiffs, for the
purchase of certain assets owned by the estate of ASLNC, for dismissal of the
litigation with prejudice and for the delivery of general releases.
Sanford B. Prater was elected to the Company's Board of Directors on April
12, 1996. Mr. Prater has been General Partner and Portfolio Manager of Ardsley
since May 1994. From 1974 to May 1994 he was Managing Director of Oppenheimer &
Co. and President of Oppenheimer Investment Advisors.
Bruce A. Smith was elected President and Chief Executive Officer effective
September 29, 1995. Mr. Smith was Executive Vice President, Chief Financial
Officer and Chief Operating Officer of the Company from July 1995 to September
1995; Executive Vice President responsible for Exploration and Production and
Chief Financial Officer of the Company from September 1993 to July 1995; and
Vice President and Chief Financial Officer of the Company from September 1992 to
September 1993. Mr. Smith was Vice President and Treasurer of Valero Energy
Corporation from 1986 to September 1992.
Patrick J. Ward was elected to the Company's Board of Directors on March
11, 1996. Mr. Ward has 47 years of experience in international energy operations
with Caltex Petroleum Corporation, where he worked from 1948 until his
retirement in August 1995. Prior to retirement, he was Chairman, President and
Chief Executive Officer, positions he had held since 1990.
Murray L. Weidenbaum is an economist and educator and is the Mallinckrodt
Distinguished University Professor at Washington University in St. Louis,
Missouri, where he also serves as Chairman of the University Center for the
Study of American Business. He has been a faculty member at Washington
University since 1964. Dr. Weidenbaum is a director of May Department Stores
Company and Harbour Group, Ltd.
No director of the Company has a family relationship with any other
director or executive officer of the Company.
------------------------
The Board of Directors met ten times during fiscal year 1995. Each member
of the Board of Directors attended at least 75 percent of the meetings of the
Board and committees on which such director served during fiscal year 1995. The
Board of Directors has an Executive Committee and the following standing
committees: Audit Committee, Compensation Committee and Governance Committee.
The Executive Committee, between meetings of the Board and while the Board
is not in session, has and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Company as provided
in Article III of the By-laws of the Company and has and may exercise such other
powers and authority as may be lawfully delegated to such committee by the
Board, including the power and authority (i) to declare a dividend on the
Company's capital stock, (ii) to authorize the issuance of the Company's capital
stock, (iii) to adopt a certificate of ownership and merger pursuant to Section
253 of the Delaware General Corporation Law, and (iv) to the extent authorized
in any resolution or resolutions providing for the issuance of shares of stock
adopted by the Board or the Executive Committee as provided in subsection (a) of
Section 151 of the Delaware General Corporation Law, to fix the designations and
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Company or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Company or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series. The Executive
Committee met three times during fiscal year 1995.
The Audit Committee's primary purposes are (i) to aid the individual
directors of the Board of Directors as a whole in performing and fulfilling
their oversight responsibilities for financial reporting to the public;
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<PAGE> 8
(ii) to aid in maintaining the corporate image and credibility as it relates to
financial reporting; (iii) to recommend and support, with management and/or the
Board of Directors, as appropriate, efforts to improve and maintain standards
and procedures for financial control and quality financial reporting; (iv) to
provide communication, as necessary, between the Board of Directors and control
and accounting, legal, internal auditing and the external auditors; and (v) to
recommend and support, with management and/or the Board of Directors, as
appropriate, efforts to assure the Company's compliance with the requirements of
the Foreign Corrupt Practices Act of 1977, as amended. The Audit Committee met
seven times during fiscal year 1995.
The Compensation Committee's primary purposes are (i) to review and approve
all areas of senior executive compensation including but not limited to salary
adjustments, cash incentive awards and stock incentives, and to review and
approve the aggregate amount of all merit increases, cash incentive awards and
stock incentives for the Company's other executives; (ii) to administer and
interpret the Company's Amended Incentive Stock Plan of 1982 (the "1982 Plan"),
the Company's Executive Long-Term Incentive Plan (the "1993 Plan") and any
future incentive plans, to the extent set forth in such plans; (iii) to review
Company retirement matters, consider amendments to the Company's retirement
plans based on cost and benefit considerations, make recommendations to the
Board of Directors in respect to such amendments and proposals, and review and
approve any overall changes in retirement benefit formulas; (iv) to review new
employment agreements, amendments and extensions of existing employment
agreements, and to make recommendations to the Board of Directors with respect
to such agreements; (v) to administer and interpret employment agreements and
make recommendations to the Board of Directors with respect thereto; and (vi) to
consult with the Board of Directors and review with the Board the actions of the
Compensation Committee as appropriate. The Compensation Committee met seven
times during fiscal year 1995.
The Governance Committee was formed on February 6, 1996, and replaces the
Nominating Committee which met one time during fiscal year 1995. The Governance
Committee considers and recommends to the Board from time to time suitable
candidates for membership on the Board and will consider nominees recommended by
stockholders. Stockholders wishing to submit a recommendation should write to
the Governance Committee. Stockholders may also make nominations for director at
annual or certain special stockholder meetings if they comply with the
procedures described below. The Governance Committee also reviews and makes
recommendations to the Board annually regarding (i) the organization and
structure of the Board and the committees of the Board and director compensation
and (ii) the role and effectiveness of the Chief Executive Officer, the Board
and each committee of the Board.
Under the Company's By-laws, a stockholder of the Company entitled to vote
for the election of directors, may, if he or she complies with the following
procedures, make a nomination for director at a stockholder meeting. Nominations
for director may be made by stockholders only after compliance with the
procedures set forth in the Company's By-laws. The following summary is
qualified in its entirety by reference to the full text of the By-laws. Written
notice of such stockholder's intent to make such nomination must be delivered to
the Company (Attention: Corporate Secretary) on a timely basis as set forth
below and must contain (i) the name and address of the stockholder as it appears
on the Company's books and of the beneficial owner, if any, on behalf of whom
such nomination is made, and (ii) as to each person whom the stockholder
proposes to nominate for election as a director, all information relating to
such person that is required to be disclosed in solicitation of proxies for
election of directors, or is otherwise required, by Regulation 14A under the
Securities Exchange Act of 1934, as amended ("Exchange Act") (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected).
In the case of an annual meeting of stockholders, the required notice must
be delivered not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided that, in the event
that the date of the annual meeting is advanced by more than 30 days or delayed
by more than 60 days from such anniversary date, the notice must be delivered no
earlier than the ninetieth day prior to such annual meeting and not later than
the close of business on the later of the sixtieth day prior to such annual
meeting or the tenth day following the day on which public announcement of the
date of such meeting is first made. If the number of directors to be elected to
the Board is increased and there is no public announcement specifying the size
of the increased Board made by the Company at least 70 days prior to the
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<PAGE> 9
first anniversary of the preceding year's annual meeting, a notice will be
considered timely, but only with respect to nominees for any new positions
created by such increase, if delivered not later than the close of business on
the tenth day following the day on which the public announcement is first made
by the Company. In the case of a special meeting of stockholders at which
directors are proposed to be elected in the notice of meeting, the stockholder
wishing to make a nomination for director must deliver the required written
notice to the Company (Attention: Corporate Secretary) not earlier than the
ninetieth day prior to the special meeting and not later than the close of
business on the later of the sixtieth day prior to such meeting or the tenth day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board to be elected at such
meeting.
------------------------
COMPENSATION OF DIRECTORS
Each member of the Board of Directors who is not an officer of the Company
receives a base retainer of $18,000 per year, and an additional $2,000 for each
meeting of the Board of Directors or any committee thereof attended in person,
and $1,000 for each telephone meeting, including committee meetings held on the
same day as a meeting of the Board of Directors. The non-executive Chairman of
the Board of Directors receives $100,000 per year for his services, and Mr.
Caverly, as Chairman of the Board, was granted a $50,000 cash bonus for his
services in 1995. In addition, the Chairman of the Audit Committee and the
Chairman of the Compensation Committee each receive $5,000 per year for their
service in such positions. The Company provides group life insurance benefits in
the amount of $100,000 and accidental death and dismemberment insurance up to a
maximum of $250,000 for each of the members of the Board of Directors who are
not employees of the Company. The premium for such insurance ranged from $132 to
$3,420 for each of these directors during fiscal year 1995. The Company
currently provides health insurance to non-employee members of the Board of
Directors who are not otherwise eligible for employer-provided health insurance,
on the same basis as for active employees, with the director paying his pro rata
share of health insurance premiums.
Mr. Burke, who had been a director of the Company, resigned as a director
on January 12, 1996. Effective September 29, 1995, Mr. Burke terminated his
employment as President and Chief Executive Officer of the Company. Pursuant to
the terms of his employment agreement entered into in 1992, as amended, Mr.
Burke will receive, for a period of two years following his termination as
President and Chief Executive Officer, continuing coverage and benefits
comparable to all life, health and disability insurance plans which the Company
from time to time makes available to its management executives and their
families. Effective September 26, 1995, the Company entered into an agreement
with M.D. Burke & Company, formerly M.D. Burke Enterprises, Inc., a Texas
corporation solely owned by Mr. Burke ("Burke & Company"), pursuant to which
Burke & Company agreed to provide consulting services to the Company from
October 1, 1995, to December 31, 1996. The Company paid Burke & Company $75,000
in October 1995 and $250,000 in January 1996, in full payment for services to be
rendered under this agreement. See "Executive Compensation -- Employment
Contracts, Management Stability Agreement and Change-in-Control Arrangements."
The Company has a Non-Employee Director Retirement Plan (the "Director
Retirement Plan") which provides that any eligible non-employee director who
elects to participate in the Director Retirement Plan and who has served on the
Board of Directors for at least three full years (excluding service while a
full-time employee of the Company) shall be entitled to a retirement payment
beginning the later of the director's sixty-fifth birthday or such later date
that the individual's service as a director ends. The Director Retirement Plan
provides that the Company shall pay to such director annually a sum (the
"Retirement Amount") equal to the base annual retainer fee paid to the director
at the time such director ends service as a director to the Company. Such
payments are to be made for a period of time equal to the aggregate length of
time (the "Benefit Period") such director served on the Board of Directors
(excluding any period during which the director was a full-time employee of the
Company). The Company's obligation to pay the Retirement Amount terminates upon
the death of the director; however, in the event of death of a director after
age 65, the Company will pay an amount equal to 50 percent of the Retirement
Amount to the director's spouse for the shorter of the remaining term of the
Benefit Period or until the date of death of such spouse. In the event
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<PAGE> 10
of death of a director during a year, the amount paid the surviving spouse is
prorated based upon the director's date of death. If a director does not have a
spouse at the time of his death, no further benefits will be paid.
In addition to the retirement benefit provided above, if a non-employee
director was the Chairman of the Board of Directors or the Chairman of any
committee of the Company's Board of Directors at the time the director's service
ends, the Company will pay such director a one-time payment equal to the fee
paid during the prior calendar year by the Company for the director's service as
Chairman of the Board of Directors and/or Chairman of any committee of the Board
of Directors. In the event of death of a director while serving as Chairman of
the Board of Directors or Chairman of any committee of the Board of Directors,
this payment will be made to such director's spouse, if living, otherwise such
payment will be made to his estate.
Effective April 1, 1995, the Board of Directors adopted the Tesoro
Petroleum Corporation Board of Directors Deferred Compensation Plan (the
"Deferred Compensation Plan") pursuant to which a director electing to
participate may defer between 20 percent and 100 percent of his director fees
for the ensuing year, which deferred fees are credited to an interest-bearing
account maintained by the Company. All payments under the Deferred Compensation
Plan are the sole obligation of the Company. Upon the death of a participating
director, the balance in his account under the Deferred Compensation Plan is
paid to his beneficiary or beneficiaries in one lump sum. In the event of the
disability, retirement or the removal or resignation prior to the death,
disability or retirement of a participating director, the balance in his account
will be paid to such director in ten equal annual installments. In the event of
a change of control (as "change of control" is defined in the Deferred
Compensation Plan), the balance in each participating director's account will be
distributed to him as a lump sum within 30 days after the date of the change of
control. Effective April 1, 1995, the Company also entered into an agreement
with Frost National Bank of San Antonio, Texas, which established the Tesoro
Petroleum Corporation Board of Directors Deferred Compensation Trust for the
sole purpose of creating a fund to provide for the payment of deferred
compensation to participating directors under the Deferred Compensation Plan. As
of December 31, 1995, no members of the Board were participating in the Deferred
Compensation Plan.
At the 1995 annual meeting, the Company's stockholders approved the
Non-Employee Director Stock Option Plan (the "1995 Plan") which provides for
automatic, non-discretionary annual stock options, exercisable at fair market
value as of the date of grant, to be awarded to non-employee directors. Under
the 1995 Plan, a stock option with respect to 5,000 shares of the Company's
Common Stock with an exercise price of $10.125 per share was awarded to each
non-employee director on February 23, 1995, for an aggregate of 30,000 shares.
After February 23, 1995, any newly elected director will be granted, pursuant to
the terms of the Plan, an option to purchase 5,000 shares of Common Stock at an
option price equal to the fair market value of the Common Stock as of the date
of grant. Pursuant to this provision, Mr. Ward, Mr. Prater and Dr. Kaufman each
received an option for 5,000 shares at an exercise price per share of $8.250,
$9.375 and $9.375, respectively. In addition, a stock option for 1,000 shares
with an exercise price of $11.375 per share was granted to each non-employee
director of the Company on the day following the annual meeting of stockholders
in 1995, and a stock option for 1,000 shares at an option price equal to the
fair market value of the Common Stock as of the date of grant will be granted to
each non-employee director the day following the annual meeting of stockholders
in each succeeding year until February 2005 when the 1995 Plan will terminate as
to the issuance of stock options. A maximum of 150,000 shares of Common Stock is
reserved for issuance upon exercise of stock options granted under the 1995
Plan.
8
<PAGE> 11
STOCK OWNERSHIP
The following table shows the beneficial ownership of the Company's Common
Stock reported to the Company as of April 25, 1996, including shares as to which
a right to acquire ownership exists (for example, through the exercise of stock
options or stock awards) within the meaning of Rule 13d-3(d)(1) under the
Exchange Act for each director and nominee, the Chief Executive Officer, the
other four most highly compensated officers of the Company during 1995 and, as a
group, such persons and other executive officers. Unless otherwise indicated,
each person or member of the group listed has sole voting and investment power
with respect to the shares of Common Stock listed.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK
ON APRIL 25, 1996
----------------------------------
SHARES PERCENT OF CLASS
--------- ----------------
<S> <C> <C>
Michael D. Burke...................................... 196,220(1) 0.757
Robert J. Caverly..................................... 9,000(2) 0.035
Steven H. Grapstein................................... 1,528,900(2)(3) 5.895
Alan J. Kaufman....................................... 629,500(4) 2.428
Raymond K. Mason, Sr.................................. 23,428(2) 0.090
John J. McKetta, Jr................................... 7,565(2) 0.029
Sanford B. Prater..................................... 2,170,000(5) 8.369
Bruce A. Smith........................................ 94,526(6) 0.363
Patrick J. Ward....................................... 10,000(7) 0.039
Murray L. Weidenbaum.................................. 7,000(2) 0.027
Gaylon H. Simmons..................................... 282,340(8) 1.078
James C. Reed, Jr..................................... 30,980(9) 0.119
William T. Van Kleef.................................. 22,868(10) 0.088
Thomas E. Reardon..................................... 14,163(11) 0.055
All directors, nominees for election as a director and
executive officers as a group (16 individuals)...... 5,058,030(12) 19.183
</TABLE>
- ---------------
(1) Mr. Burke terminated his employment as President and Chief Executive
Officer of the Company effective September 29, 1995, and resigned as a
director on January 12, 1996.
(2) The shares shown for Mr. Caverly, Mr. Grapstein, Mr. Mason, Dr. McKetta and
Dr. Weidenbaum include 6,000 shares each which such directors had the right
to acquire through the exercise of stock options on April 25, 1996, or
within 60 days thereafter.
(3) The shares shown include 1,522,900 shares of the Company's Common Stock
owned by Oakville. Mr. Grapstein is an officer of Oakville. As an officer,
Mr. Grapstein shares voting and investment power with respect to such
shares. See "Security Ownership of Certain Beneficial Owners."
(4) The shares shown include 9,000 shares held in the name of Dr. Kaufman's
spouse for which he disclaims beneficial ownership.
(5) The shares shown represent 2,170,000 shares owned by the clients of
Ardsley. Mr. Prater as General Partner and Portfolio Manager of Ardsley may
be deemed to exercise investment power over such shares as to which he
disclaims beneficial ownership. See "Security Ownership of Certain
Beneficial Owners."
(6) The shares shown include 1,812 shares credited to Mr. Smith's account under
the Company's Thrift Plan and 80,866 shares which Mr. Smith had the right
to acquire through the exercise of stock options on April 25, 1996, or
within 60 days thereafter.
(7) The shares shown represent 6,000 shares owned by the P&L Family Partnership
Ltd. which Mr. Ward and his spouse control through 90 percent ownership and
4,000 shares which Mr. Ward has the right to exercise through call options.
(Footnotes continue on following page)
9
<PAGE> 12
(8) The shares shown include 268,000 shares which Mr. Simmons had the right to
acquire through the exercise of stock options on April 25, 1996, or within
60 days thereafter. Mr. Simmons resigned from the Company on April 3, 1996.
(9) The shares shown include 733 and 88 shares credited to Mr. Reed's account
under the Company's Thrift Plan and Employee Stock Ownership Plan,
respectively, and 23,200 shares which Mr. Reed had the right to acquire
through the exercise of stock options or stock awards on April 25, 1996, or
within 60 days thereafter.
(10) The shares shown include 951 shares credited to Mr. Van Kleef's account
under the Company's Thrift Plan and 14,660 shares which Mr. Van Kleef had
the right to acquire through the exercise of stock options or stock awards
on April 25, 1996, or within 60 days thereafter.
(11) The shares shown include 88 shares credited to Mr. Reardon's account under
the Company's Employee Stock Ownership Plan and 12,741 shares which Mr.
Reardon had the right to acquire through the exercise of stock options on
April 25, 1996, or within 60 days thereafter.
(12) The shares shown include 3,607 shares and 264 shares credited to the
accounts of executive officers and directors under the Company's Thrift
Plan and Employee Stock Ownership Plan, respectively, and 439,878 shares
which directors and executive officers had the right to acquire through the
exercise of stock options or stock awards on April 25, 1996, or within 60
days thereafter. The shares shown also include 3,000 shares acquired in the
name of an executive officer's mother with respect to which such executive
officer has voting and investment power.
------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information based on filings made with the
SEC as to each person or group who on April 25, 1996, beneficially owned more
than 5 percent of the outstanding shares of Common Stock of the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
----------------------
NAME AND ADDRESS NUMBER PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER OF SHARES OF CLASS
-------------------------------- --------------------------- ---------- --------
<S> <C> <C> <C>
Common Stock.................... Ardsley Advisory 2,170,000 8.369
Partners(1)
646 Steamboat Road
Greenwich, CT 06830
Common Stock.................... Oakville N.V.(2) 1,522,900 5.874
c/o Kuo Investment Company
33rd Floor
767 Third Avenue
New York, NY 10017
</TABLE>
- ---------------
(1) According to a Schedule 13D filed with the SEC, Ardsley states that it is a
general partnership organized under the laws of the state of Connecticut
and an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940, as amended (the "Act"). In its Schedule 13D, Ardsley
states that, with respect to the shares of Common Stock of the Company held
by Ardsley, it acts as investment adviser for the discretionary accounts of
certain clients, including investment partnerships for which Ardsley serves
as investment adviser. By reason of the provisions of Rule 13d-3 under the
Act, Ardsley may be deemed to own beneficially the shares owned by the
managed accounts. Each client for whose account Ardsley had purchased
Common Stock has the right to receive or the power to direct the receipt of
dividends from, or the proceeds from the sale of, such shares purchased for
his account. Philip J. Hempleman, a managing partner of Ardsley, is a
citizen of the United States. By virtue of Mr. Hempleman's position as
managing partner of Ardsley and general partner of the investment
(Footnotes continue on following page)
10
<PAGE> 13
partnerships, he may be deemed to have the shared power to vote, or direct
the voting of, and the shared power to dispose, or direct the disposition
of, the shares of the Company's Common Stock held by the discretionary
accounts managed by Ardsley, and therefore, Mr. Hempleman may be deemed to
be a beneficial owner of such shares. The investment partnerships and
Ardsley Offshore Fund, Ltd., entered into an option agreement with Whelan
Management Corp., one of the Solicitation Parties, which granted Whelan
options to acquire up to 400,000 shares of the Company's Common Stock for
an option price of $8.25 which expires on May 16, 1996. Ardsley is a party
to a settlement agreement with the Company pursuant to which Sanford B.
Prater, General Partner of Ardsley, is being nominated for election as a
director, see "1. Election of Directors" on page 2 hereof.
(2) According to Schedule 13Ds on file with the SEC, Oakville, a Netherlands
Antilles corporation, is a wholly owned subsidiary of Kuo Investment
Limited, a Cayman Islands corporation ("Kuo"). According to information
provided to the Company by Oakville, the following persons are Oakville's
directors and executive officers: (a) Peter Yun Siak Fu, President and
Director of Oakville; Director and officer of Kuo; (b) Peter Chong Cheng
Fu, Director and Secretary of Oakville; Director and officer of Kuo; (c)
Ong Beng Seng, Vice President and Director of Oakville; Director and
officer of Kuo; (d) David Song Long Ban, Treasurer and Director of
Oakville; Director and officer of Kuo; (e) Steven H. Grapstein, Vice
President and Director of Oakville; and (f) Holland Intertrust (Curacao)
N.V., a Netherlands Antilles corporation, a Director of Oakville. Oakville
reports that it has sole voting and dispositive power over its voting
securities.
------------------------
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10 percent of the Company's voting
stock to file with the SEC initial reports of ownership and reports of changes
in ownership of Common Stock or other equity securities of the Company. The
Company believes that during the fiscal year ended December 31, 1995, its
directors, executive officers and holders of more than 10 percent of the
Company's voting stock complied with all Section 16(a) filing requirements with
the following exception: Bruce A. Smith was late in filing a Form 4 covering two
transactions.
11
<PAGE> 14
EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following table contains information concerning the annual and
long-term compensation for services in all capacities to the Company for fiscal
years ended December 31, 1995, 1994 and 1993, of Mr. Burke, who terminated his
employment as President and Chief Executive Officer of the Company effective
September 29, 1995, and resigned as a director of the Company on January 12,
1996, and those persons who were on December 31, 1995, (i) the Chief Executive
Officer and (ii) the other four most highly compensated officers of the Company
(the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------------------
OTHER ANNUAL RESTRICTED STOCK ALL OTHER
NAME AND SALARY BONUS COMPENSATION STOCK OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) AWARD(S)($) (SHARES) ($)(2)
- --------------------------- ---- ------- ------- ------------ -------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael D. Burke........... 1995 347,885 184,438 -- -- -- 1,821,795
1994 450,000 450,000 34,121 -- 209,000 238,942
1993 450,002 157,500 21,911 -- -- 195,190
Bruce A. Smith............. 1995 347,692 350,000 -- -- 100,000 320,612
President and Chief 1994 288,462 300,000 -- -- 71,000 145,946
Executive Officer 1993 200,504 70,000 50,248 -- -- 3,719
Gaylon H. Simmons(3)....... 1995 300,000 118,125 -- -- 47,000 307,588
Executive Vice President 1994 294,231 300,000 1,045 -- 71,000 160,373
1993 244,231 87,500 8,438 -- 150,000 32,308
James C. Reed, Jr.......... 1995 192,539 161,000 -- -- 20,000 568,312
Executive Vice President, 1994 173,077 175,000 -- -- 26,000 185,643
General Counsel and 1993 124,078 44,667 -- -- 25,000 78,938
Secretary
William T. Van Kleef....... 1995 169,635 129,000 -- -- 20,000 60,962
Senior Vice President 1994 149,039 91,931 -- -- 11,300 38,445
and Chief Financial 1993 100,962 33,500 -- -- 16,000 8,600
Officer
Thomas E. Reardon.......... 1995 156,750 86,625 -- -- 10,000 114,381
Vice President, Human 1994 130,385 69,713 -- -- 11,300 181,356
Resources and 1993 119,037 20,910 -- -- 16,000 74,840
Environmental
</TABLE>
- ---------------
(1) No payments were made to the named executive officers in 1995 which are
reportable in Other Annual Compensation. Other Annual Compensation for 1994
reflects income tax reimbursements for Mr. Burke and Mr. Simmons. Other
Annual Compensation for 1993 includes income tax reimbursements of $21,911,
$8,438 and $17,800 for Mr. Burke, Mr. Simmons and Mr. Smith, respectively,
and $32,448 of perquisites and other personal benefits for Mr. Smith. The
aggregate amount of perquisites and other personal benefits was less than
either $50,000 or 10 percent of the total annual salary and bonus reported
for the other named executive officers for all periods shown.
(2) All Other Compensation for 1995 includes $1,120,000 in lump-sum termination
benefits for Mr. Burke; $55,261 paid to Mr. Burke for accrued and unused
vacation to the date of his termination; amounts contributed by the Company
and earnings on the respective executive officer's account in the Funded
Executive Security Plan (see "Retirement Benefits" on page 18) of $642,034,
$316,112, $303,088,
(Footnotes continue on following page)
12
<PAGE> 15
$563,812, $56,462 and $109,881 for Mr. Burke, Mr. Smith, Mr. Simmons, Mr.
Reed, Mr. Van Kleef and Mr. Reardon, respectively; and amounts contributed
to the Company's Thrift Plan of $4,500 for each of the executive officers.
All Other Compensation for 1994 includes relocation expenses of $50,383 and
$1,500 for Mr. Burke and Mr. Simmons, respectively, related to their
employment with the Company; amounts contributed by the Company and
earnings on the respective executive officer's account in the Funded
Executive Security Plan of $180,944, $153,046, $139,254, $180,417, $36,022
and $177,445 for Mr. Burke, Mr. Simmons, Mr. Smith, Mr. Reed, Mr. Van Kleef
and Mr. Reardon, respectively; and amounts contributed to the Company's
Thrift Plan of $7,615, $5,827, $6,692, $5,226, $2,423 and $3,911 for Mr.
Burke, Mr. Simmons, Mr. Smith, Mr. Reed, Mr. Van Kleef and Mr. Reardon,
respectively. All Other Compensation for 1993 includes relocation expenses
of $36,421 and $16,500 for Mr. Burke and Mr. Simmons, respectively; amounts
contributed by the Company and earnings on the respective executive
officer's account in the Funded Executive Security Plan of $153,057,
$15,808, $2,104, $75,217, $8,600 and $71,269 for Mr. Burke, Mr. Simmons,
Mr. Smith, Mr. Reed, Mr. Van Kleef and Mr. Reardon, respectively; and
amounts contributed to the Company's Thrift Plan of $5,712, $1,615, $3,721
and $3,571 for Mr. Burke, Mr. Smith, Mr. Reed and Mr. Reardon,
respectively.
(3) Mr. Simmons elected to terminate his employment agreement effective April
3, 1996.
------------------------
OPTION GRANTS AND EXERCISES
The following table sets forth information concerning individual grants of
stock options pursuant to the Company's 1993 Plan during the year ended December
31, 1995, to the named executive officers. No Stock Appreciation Rights ("SARs")
were granted under the 1993 Plan during 1995.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------- ANNUAL RATES OF STOCK
% OF TOTAL PRICE APPRECIATION
OPTIONS OPTIONS GRANTED EXERCISE OR FOR OPTION TERM
GRANTED TO EMPLOYEES BASE PRICE EXPIRATION ---------------------
NAME (#)(1) IN 1995 ($/SHARE) DATE 5%($) 10%($)
- ------------------------ ------- --------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Burke........ -- -- -- -- -- --
Bruce A. Smith.......... 100,000 24.5 8.00 10/31/05 503,116 1,274,994
Gaylon H. Simmons....... 47,000 11.5 8.00 10/31/05 236,464 599,247
James C. Reed, Jr....... 20,000 4.9 8.00 10/31/05 100,623 254,999
William T. Van Kleef.... 20,000 4.9 8.00 10/31/05 100,623 254,999
Thomas E. Reardon....... 10,000 2.5 8.00 10/31/05 50,312 127,499
</TABLE>
- ---------------
(1) The options granted to the named executive officers during 1995 are
exercisable in five equal annual installments beginning one year from the
dates of grant. The exercise price per share of these options is the average
of the high and low prices of the Company's Common Stock on the New York
Stock Exchange on the dates of the grants.
------------------------
13
<PAGE> 16
AGGREGATED OPTION/SAR EXERCISES IN 1995 AND OPTION/SAR VALUES AT DECEMBER 31,
1995
The following table reflects unexercised options to purchase shares of
Common Stock and unexercised SARs granted to the named executive officers during
fiscal year 1995 and prior years under the 1982 Plan and the 1993 Plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1995(#) DECEMBER 31, 1995($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Burke............ 211,045 1,767,500 -- -- -- --
Bruce A. Smith.............. -- -- 80,866 190,134 313,330 219,170
Gaylon H. Simmons........... -- -- 114,200 153,800 570,000 314,375
James C. Reed, Jr........... -- -- 15,200 55,800 33,750 63,125
William T. Van Kleef........ -- -- 8,660 38,640 21,600 44,900
Thomas E. Reardon........... -- -- 16,823 28,640 21,600 38,650
</TABLE>
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors of the Company has
prepared the following report regarding 1995 executive compensation. The
Compensation Committee, which is composed entirely of non-employee directors, is
responsible for all components of the Company's officer compensation programs
and the aggregate cost-related aspects of non-officer compensation. The members
of the Compensation Committee for 1995 were Peter M. Detwiler (Chairman), Robert
J. Caverly, John J. McKetta, Jr., and Murray L. Weidenbaum. Mr. Detwiler
resigned from the Company's Board of Directors on March 10, 1996, to devote more
time to other business interests. The Compensation Committee works closely with
the entire Board of Directors in the execution of its duties. This report is
required by rules established by the SEC and provides specific information
regarding compensation for the Company's President and Chief Executive Officer
and the other officers named in the Summary Compensation Table, as well as
compensation information of all executive officers of the Company.
Executive Compensation Policy and Philosophy
The Company's executive compensation programs have been founded on the
following guiding principles:
- Pay-for-Performance -- To this end, the Company has placed considerable
emphasis on incentive compensation programs which reward executives for
operating and financial performance. These incentive programs focus on
both annual and long-term performance.
- Pay Competitiveness -- The Company believes it must offer competitive
total compensation opportunities in order to attract, motivate and retain
executive talent. The Company's philosophy is to target the market median
(50th percentile) for all elements of executive compensation over time for
market median performance, but to provide upper quartile pay opportunities
(through incentive pay) for outstanding performance and below market pay
through reduced or lack of incentive pay for performance below
expectations. The elements of compensation considered include base salary,
annual incentives, long-term incentives and certain executive benefits.
The Company determines competitive levels of compensation using published
compensation surveys (for energy and general industry companies of
comparable size to the Company as measured by revenues), information
obtained from compensation consultants and an analysis of compensation
data contained in the proxy statements for the 12 industry peer companies
included in the Company's Total Shareholder Return Graph ("Performance
Graph").
- Alignment with Shareholders -- The Company believes that a significant
portion of each executive's compensation and wealth accumulation
opportunities should be tied to the Company's stock price performance. As
a result, a significant portion of executive compensation is provided in
the form of
14
<PAGE> 17
stock options granted at not less than 100 percent of fair market value as
defined in the Company's Executive Long-Term Incentive Plan, which only
provide income to executives if the Company's Common Stock price increases
after the date of grant.
Description of the Current Executive Compensation Program
This section of the Compensation Committee's report describes each of the
principal elements of the Company's executive compensation program with specific
reference to the objectives discussed above.
Base Salary Program
The Company's base salary levels are determined based on market
compensation rates, each employee's performance over time and each employee's
role in the Company. Consequently, employees with higher levels of sustained
performance over time and/or employees assuming greater responsibilities are
paid correspondingly higher salaries. Salaries for executive officers as a group
are reviewed annually considering a variety of factors, including individual
performance, general levels of market salary increases and the Company's overall
financial results. All salary increases are granted within a pay-for-performance
framework, but performance criteria vary significantly by individual executive.
Also, performance is assessed qualitatively and no specific weighting is
attached to performance factors considered for each of the named executive
officers.
During 1995, certain of the named executive officers were promoted into
new, expanded roles. As a result, the base salaries for these executives were
increased significantly to reflect their greater duties and responsibilities,
based on prevailing market pay levels for comparable positions. After taking
these increases into consideration, the Company's actual base salaries for its
executive officers are generally consistent with the Company's philosophy of
targeting the market median.
Annual Incentives
In 1995, the Company established a formal executive annual incentive plan
covering senior and mid-level executives. Target awards under the plan were set
at the market median. The plan was structured so that 50 percent of annual
incentive award opportunities are tied to corporate performance for corporate
positions (and for business unit positions, a combination of corporate and
business unit performance) and 50 percent of the award opportunities are tied to
a qualitative assessment of individual performance.
The corporate financial objectives for the year were return on total
capital compared to the industry peers shown in the Performance Graph and
earnings before extraordinary item, interest expense, income taxes, and
depreciation, depletion and amortization ("EBITDA") relative to the Company's
business plan. These measures were weighted equally. For the Exploration and
Production group, the quantitative performance measures were discretionary cash
flow and reserve additions. For Refining and Marketing, the business unit
objectives were return on capital employed, EBITDA relative to the business
plan, safety performance, and environmental performance.
The individual, subjective performance measures varied by executive but
included such items as effectiveness in developing and implementing a strategic
plan, increasing market share, establishing effective administrative support
systems, and managing costs. These objectives were not weighted. Annual
incentive awards earned under the plan in 1995 were, on average, above targeted
award levels since company, business unit, and individual performance for most
plan participants exceeded target levels.
Long-Term Incentives
The Company believes that its executive officers should have an ongoing
stake in the success of the Company. The Company also believes these key
employees should have a considerable portion of their total compensation tied to
the Company's stock price performance, since stock-related compensation is
directly tied to stockholder value.
15
<PAGE> 18
The Compensation Committee provided stock option grants to key executives
and selected other employees in 1995. Stock options provide a strong tie between
pay and performance, since recipients only realize value from stock options if
the Company's share price rises after the date of grant. All stock options in
1995 were granted at 100 percent of fair market value at the date of grant and
vest at a rate of 20 percent per year over five years.
In determining the size of stock option grants to executive officers in
1995, the Compensation Committee considered market data on typical stock option
grants at the market 25th, 50th and 75th percentiles. Because the Compensation
Committee had provided strongly competitive stock option awards in 1994, the
1995 stock option grants made to most executives were made at or below the
market median.
Other Executive Benefits and Perquisites
The Company also provides certain benefits and perquisites to its key
executive officers. These benefits and perquisites are not tied to any formal
performance criteria and are intended to serve as part of a competitive total
compensation package. These benefits and perquisites include, but are not
limited to, supplemental retirement plans, change-in-control arrangements, and,
for senior executive officers, a flexible perquisites program (with a dollar
limit placed on perquisite expenses) and employment agreements. Levels of
Company benefits and perquisites for executives were in line with the market
median.
Discussion of 1995 Compensation for President and Chief Executive Officer
During 1995, Mr. Burke resigned as CEO and Mr. Smith was promoted to the
position. Since Mr. Burke's compensation was not adjusted during 1995, the
discussion below applies to Mr. Smith.
- Base Salary -- Mr. Smith's base salary was increased to $500,000 annually
upon his being promoted to CEO. This base salary adjustment placed Mr.
Smith's base salary slightly below the 50th percentile for the Company's
industry peer group. The base salary adjustment was intended to move Mr.
Smith's base pay to a competitive level and reflected the Compensation
Committee's subjective assessment that Mr. Smith's performance and
abilities to serve as CEO are outstanding.
- Annual Incentive Award -- Based on the Company's strong performance on
the measures described under the Annual Incentives section above (as well
as strong individual performance in the areas of progress in establishing
the Company's strategy and organizing a key leadership team), the
Compensation Committee provided Mr. Smith with an annual incentive of
$350,000 for 1995. This award was above targeted levels and below maximum
levels.
- Stock Options -- Mr. Smith received a grant of 100,000 stock options in
1995. These stock options were granted at 100 percent of the fair market
value of the Company's Common Stock on the grant date and vest at a rate
of 20 percent per year over five years. The size of the stock option grant
was established below the market 50th percentile of the published
compensation survey data in recognition of the sizeable option grant made
to Mr. Smith in 1994. The performance sensitivity of stock options is a
result of options only producing income for the recipient if the Company's
stock price rises after the grant date.
16
<PAGE> 19
Policy with Respect to the $1 Million Deduction Limit
Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), publicly traded companies may not receive a tax deduction on
non-performance based compensation to executive officers in excess of $1
million. The Company's stock option grants qualify as performance-based
compensation under the law, based on the amendment to the Company's Executive
Long-Term Incentive Plan approved at the 1995 annual meeting. The Company's cash
compensation levels for the named executive officers do not transcend the $1
million pay limit and will most likely not be affected by the regulations in the
near future. As such, no specific actions have been taken with regard to cash
compensation to comply with Section 162(m) at this time.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Robert J. Caverly
John J. McKetta, Jr.
Murray L. Weidenbaum
17
<PAGE> 20
PERFORMANCE GRAPH
The Stock Price Performance Graph below compares the cumulative total
return of the Company's Common Stock to the cumulative total return of the S&P
500 Composite Index and to a composite peer group of companies (the "Peer
Group"). Companies in the Peer Group are as follows: Diamond Shamrock
Corporation; Getty Petroleum Corporation; Holly Corporation; Louisiana Land &
Exploration Company; Maxus Energy Corporation (through 1994); Murphy Oil
Corporation; Oryx Energy; Quaker State Corporation; Tosco Corporation; Total
Petroleum (North America) Ltd.; Union Texas Petroleum Holdings, Inc.; and Valero
Energy Corporation. This line graph is for the period of five fiscal years
commencing September 30, 1990, and ended December 31, 1995, and includes the
transitional period from October 1, 1991, through December 31, 1991.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG THE COMPANY, S&P 500 INDEX AND A COMPOSITE PEER GROUP
[GRAPH]
<TABLE>
<CAPTION>
9/30/90 9/30/91 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
<S> <C> <C> <C> <C> <C> <C> <C>
Tesoro Petroleum Corp. $100 87 57 38 70 117 110
S&P 500 Index $100 131 142 153 168 171 235
Peer Group $100 88 82 74 81 76 83
</TABLE>
- ---------------
* Assumes that the value of the investment in Common Stock and each index was
$100 on September 30, 1990, and that all dividends were reinvested. Investment
is weighted on the basis of market capitalization.
NOTE: The stock price performance shown on the graph is not necessarily
indicative of future price performance.
------------------------
RETIREMENT BENEFITS
The Company maintains a noncontributory qualified Retirement Plan which
covers officers and other eligible employees. Benefits under the plan are
payable on a straight life annuity basis and are based on the average monthly
earnings and years of service of participating employees. Average monthly
earnings used in calculating retirement benefits are primarily salary and bonus
received by the participating employee during the 36 consecutive months of the
last 120 months of service which produces the highest average monthly rate of
earnings.
In addition, the Company maintains an unfunded executive security plan, the
Amended Executive Security Plan ("Amended Plan"), for executive officers and
other key personnel selected by the Chief
18
<PAGE> 21
Executive Officer. The Amended Plan provides for a monthly retirement income
payment during retirement equal to a percentage of a participant's Earnings.
"Earnings" is defined under the Amended Plan to mean a participant's average
monthly rate of total compensation, primarily salary and bonus earned, including
performance bonuses and incentive compensation paid after December 1, 1993, in
the form of stock awards of the Company's Common Stock, for the 36 consecutive
calendar months which produce the highest average monthly rate of compensation
for the participant. The monthly retirement benefit percentage is defined as the
sum of 4 percent of Earnings for each of the first ten years of employment, plus
2 percent of Earnings for each of the next ten years of employment, plus 1
percent of Earnings for each of the next ten years of employment. The maximum
percentage is 70 percent. The Amended Plan provides for the payment of the
difference, if any, between (a) the total retirement income payment calculated
above and (b) the sum of retirement income payments from the Company's
Retirement Plan and Social Security benefits.
The Company also maintains the Funded Executive Security Plan ("Funded
Plan") which covers only selected persons approved by the Chief Executive
Officer who are also participants in the Amended Plan and provides participants
with substantially the same after-tax benefits as the Amended Plan. Advance
payments are made to the extent a participant is expected to incur a
pre-retirement tax liability as a result of his participation in the Funded
Plan. The Funded Plan is funded separately for each participant on an
actuarially determined basis through a bank trust whose primary asset is an
insurance contract providing for a guaranteed rate of return for certain
periods. Amounts payable to participants from the Funded Plan reduce amounts
otherwise payable under the Amended Plan.
The following table shows the estimated annual benefits payable upon
retirement under the Company's Retirement Plan, Amended Plan and the Funded Plan
for employees in specified compensation and years of benefit service
classifications without reference to any amount payable upon retirement under
the Social Security law or any amount advanced before retirement. The estimated
annual benefits shown are based upon the assumption that the plans continue in
effect and that the participant receives payment for life. As of January 1,
1996, the federal tax law generally limits maximum annual retirement benefits
payable by the Retirement Plan to any employee to $120,000, adjusted annually to
reflect increases in the cost of living and adjusted actuarially for retirement.
However, since the Amended Plan and the Funded Plan are not qualified under
Section 401 of the Code, it is possible for certain retirees to receive annual
benefits in excess of this tax limitation.
<TABLE>
<CAPTION>
HIGHEST AVERAGE NUMBER OF YEARS OF BENEFIT SERVICE
ANNUAL RATE --------------------------------------------------------
OF COMPENSATION 10 15 20 25 30
----------------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 100,000.............................. $ 40,000 50,000 60,000 65,000 70,000
$ 200,000.............................. $ 80,000 100,000 120,000 130,000 140,000
$ 300,000.............................. $120,000 150,000 180,000 195,000 210,000
$ 400,000.............................. $160,000 200,000 240,000 260,000 280,000
$ 500,000.............................. $200,000 250,000 300,000 325,000 350,000
$ 600,000.............................. $240,000 300,000 360,000 390,000 420,000
$ 700,000.............................. $280,000 350,000 420,000 455,000 490,000
$ 800,000.............................. $320,000 400,000 480,000 520,000 560,000
$ 900,000.............................. $360,000 450,000 540,000 585,000 630,000
$1,000,000............................. $400,000 500,000 600,000 650,000 700,000
$1,100,000............................. $440,000 550,000 660,000 715,000 770,000
</TABLE>
The years of benefit service as of December 31, 1995 for the named
executive officers were as follows: Mr. Smith, 3 years; Mr. Simmons, 2 years;
Mr. Reed, 21 years; Mr. Van Kleef, 2 years; and Mr. Reardon, 15 years.
In addition to the retirement benefits described above, the Amended Plan
provides for a pre-retirement death benefit payable over eight years of four
times a participant's annual base pay as of December 1 preceding a participant's
date of death, less the amount payable from the Funded Plan at the date of
death. The amount payable from the Funded Plan at death is based on the
actuarial value of the participant's vested
19
<PAGE> 22
accrued benefit, payable in 96 monthly installments or as a life annuity if a
surviving spouse is the designated beneficiary.
EMPLOYMENT CONTRACTS, MANAGEMENT STABILITY AGREEMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Pursuant to the terms of Mr. Burke's amended employment agreement, upon his
termination on September 29, 1995, as President and Chief Executive Officer of
the Company, Mr. Burke (i) received a payment of $1,175,261, before withholding
taxes of $346,114, as a lump-sum payment for severance and unused vacation; (ii)
received two years additional service credit under the Company's Amended Plan
and Funded Plan and received a lump-sum payment of $986,480, before withholding
taxes of $404,950, in exchange for his interests in such plans; and (iii) was
immediately vested in 409,000 of unvested stock options, and the restrictions
terminated on 20,000 shares of restricted stock held by Mr. Burke. Mr. Burke
will receive, for a period of two years following his termination, continuing
coverage and benefits comparable to all life, health and disability insurance
plans which the Company from time to time makes available to its management
executives and their families. In addition, the Company paid Burke & Company, a
corporation solely owned by Mr. Burke, $75,000 and $250,000 in October 1995 and
January 1996, respectively, for consulting services to be performed by Burke &
Company through December 31, 1996.
Under an employment agreement dated February 15, 1996, Mr. Smith is
employed until December 14, 1997, at an annual base salary of not less than
$500,000. Under an employment agreement dated January 4, 1993, as amended, Mr.
Simmons was employed until April 4, 1996, at an annual base salary of not less
than $300,000. As described below, Mr. Simmons elected to terminate his
employment agreement effective April 3, 1996. Under separate employment
agreements, Mr. Reed and Mr. Van Kleef are employed until December 31, 1996, at
annual base salaries of $230,000 and $215,000, respectively. In addition to
their base salaries, each of the employment agreements for the above executives
provide that the Company shall establish an annual incentive compensation plan
for executive officers in which each executive shall be entitled to participate
in a manner consistent with his position with the Company and the evaluations of
his performance by the Board of Directors or any appropriate committee thereof.
The target incentive bonus under the 1996 annual incentive compensation plan is
a percentage of the respective executive officer's annual base salary and is 55
percent for Mr. Smith, 45 percent for Mr. Simmons, 40 percent for Mr. Reed and
40 percent for Mr. Van Kleef. Each of the employment agreements also provide
that the executive will receive an annual amount (the "flexible perquisite
amount") to cover various business-related expenses such as dues for country,
luncheon or social clubs; automobile expenses; and financial and tax planning
expenses. The executive may elect at any time by written notice to the Company
to receive in cash any of such flexible perquisite amount which has not been
paid to or on behalf of the executive. The annual flexible perquisite amount is
$20,000 each for Mr. Smith, Mr. Simmons, Mr. Reed and Mr. Van Kleef. In
addition, each employment agreement, other than Mr. Smith's, provides that the
Company will pay on behalf of the executive up to $15,000 for an initiation fee
or fees for a country, luncheon or social club or clubs and will pay directly to
the executive an amount equal to 65 percent of the amount so paid on the
executive's behalf to offset the applicable income tax expense to the executive.
Each employment agreement also provides that the Company will pay additional
initiation fees and reimburse the executive for related tax expenses to the
extent the Board of Directors or a duly authorized committee thereof determines
such fees are reasonable and in the best interest of the Company.
Each of the employment agreements with Mr. Smith, Mr. Reed and Mr. Van
Kleef provides that in the event the Company should terminate such executive
officer's employment without cause, if he should resign his employment for "good
reason" (as "good reason" is defined in the employment agreements), or if the
Company shall not have offered to such executive officer prior to the
termination date of his employment agreement the opportunity to enter into a new
employment agreement, with terms, in all respects, no less favorable to the
executive than the terms of his current employment agreement, such executive
will be paid a lump-sum payment equal to (i) two times the sum of (a) his base
salary at the then current rate and (b) the sum of the target bonuses under all
of the Company's incentive bonus plans applicable to such executive for the year
in which the termination occurs and (ii) if termination occurs in the fourth
quarter of a calendar year, the sum of the target bonuses under all of the
Company's incentive bonus plans applicable to such executive
20
<PAGE> 23
for the year in which the termination occurs prorated daily based on the number
of days from the beginning of the calendar year in which the termination occurs
to and including the date of termination. Each executive shall also receive all
unpaid bonuses for the year prior to the year in which the termination occurs
and shall receive (i) for a period of two years continuing coverage and benefits
comparable to all life, health and disability insurance plans which the Company
from time to time makes available to its management executives and their
families, (ii) a lump-sum payment equal to two times the flexible perquisites
amount and (iii) two years additional service credit under the Amended Plan and
the Funded Plan or successors thereto, of the Company applicable to such
executive on the date of termination. All unvested stock options held by the
executive on the date of the termination shall become immediately vested and all
restrictions on "restricted stock" then held by the executive shall terminate.
Effective April 3, 1996, Mr. Simmons, who had an employment contract with
similar provisions, elected to terminate his employment agreement for "good
reason" and received the benefits described above.
Each employment agreement further provides that, in the event such
executive officer's employment is involuntarily terminated within two years of a
change of control or if the executive officer's employment is voluntarily
terminated within two years of a change of control "for good reason," as defined
in each of the employment agreements, he shall be paid within ten days of such
termination (i) a lump-sum payment equal to three times his base salary at the
then current rate; (ii) a lump-sum payment equal to the sum of (a) three times
the sum of the target bonuses under all of the Company's incentive bonus plans
applicable to such executive for the year in which the termination occurs or the
year in which the change of control occurred, whichever is greater, and (b) if
termination occurs in the fourth quarter of a calendar year, the sum of the
target bonuses under all of the Company's incentive bonus plans applicable to
such executive for the year in which the termination occurs prorated daily based
on the number of days from the beginning of the calendar year in which the
termination occurs to and including the date of termination; and (iii) a
lump-sum payment equal to the amount of any accrued but unpaid bonuses. The
Company (or its successor) shall also provide (i) for a period of three years
continuing coverage and benefits comparable to all life, health and disability
plans of the Company in effect at the time a change of control is deemed to have
occurred; (ii) a lump-sum payment equal to three times the flexible perquisites
amount; and (iii) three years additional service credit under the Amended Plan
and the Funded Plan, or successors thereto, of the Company applicable to such
executive on the date of termination. A change of control shall be deemed to
have occurred if (i) there shall be consummated (a) any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company where a majority of the Board of Directors of the surviving corporation
are, and for a two-year period after the merger continue to be, persons who were
directors of the Company immediately prior to the merger or were elected as
directors, or nominated for election as director, by a vote of at least
two-thirds of the directors then still in office who were directors of the
Company immediately prior to the merger, or (b) any sale, lease, exchange or
transfer (in one transaction or a series of related transactions) of all or
substantially all of the assets of the Company, or (ii) the shareholders of the
Company shall approve any plan or proposal for the liquidation or dissolution of
the Company, or (iii) (A) any "person" (as such term is used in Sections 13(d)
and 14(d)(2) of the Exchange Act) other than the Company or a subsidiary thereof
or any employee benefit plan sponsored by the Company or a subsidiary thereof,
shall become the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of securities of the Company representing 20 percent or more of
the combined voting power of the Company's then outstanding securities
ordinarily (and apart from rights accruing in special circumstances) having the
right to vote in the election of directors, as a result of a tender or exchange
offer, open market purchases, privately negotiated purchases or otherwise, and
(B) at any time during a period of two years thereafter, individuals who
immediately prior to the beginning of such period constituted the Board of
Directors of the Company shall cease for any reason to constitute at least a
majority thereof, unless the election or the nomination by the Board of
Directors for election by the Company's shareholders of each new director during
such period was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such period.
The Company has a Management Stability Agreement ("Stability Agreement")
with Mr. Reardon which is only operative in the event of a change of control of
the Company. The Stability Agreement provides
21
<PAGE> 24
that, if Mr. Reardon's employment is involuntarily terminated within two years
of a change of control or if Mr. Reardon's employment is voluntarily terminated
within two years of a change of control "for good reason," as defined in the
Stability Agreement, he shall be paid within ten days of such termination (i) a
lump-sum payment equal to two times his base salary at the then current rate and
(ii) a lump-sum payment equal to the sum of (a) two times the sum of the target
bonuses under all of the Company's incentive bonus plans applicable to Mr.
Reardon for the year in which the termination occurs or the year in which the
change of control occurred, whichever is greater, and (b) if termination occurs
in the fourth quarter of a calendar year, the sum of the target bonuses under
all of the Company's incentive bonus plans applicable to Mr. Reardon for the
year in which the termination occurs prorated daily based on the number of days
from the beginning of the calendar year in which the termination occurs to and
including the date of termination. The Company (or its successor) shall also
provide (i) for a period of two years continuing coverage and benefits
comparable to all life, health and disability plans of the Company in effect at
the time a change of control is deemed to have occurred, and (ii) two years
additional service credit under the Amended Plan and the Funded Plan, or
successors thereto, of the Company applicable to such executive on the date of
termination. A change of control shall be deemed to have occurred if (i) there
shall be consummated (a) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's Common Stock would be converted into cash, securities or
other property, other than a merger of the Company where a majority of the Board
of Directors of the surviving corporation are, and for a two-year period after
the merger continue to be, persons who were directors of the Company immediately
prior to the merger or were elected as directors, or nominated for election as
director, by a vote of at least two-thirds of the directors then still in office
who were directors of the Company immediately prior to the merger, or (b) any
sale, lease, exchange or transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the Company, or (ii)
the shareholders of the Company shall approve any plan or proposal for the
liquidation or dissolution of the Company, or (iii) (A) any "person" (as such
term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) other than the
Company or a subsidiary thereof or any employee benefit plan sponsored by the
Company or a subsidiary thereof, shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of securities of the Company
representing 20 percent or more of the combined voting power of the Company's
then outstanding securities ordinarily (and apart from rights accruing in
special circumstances) having the right to vote in the election of directors, as
a result of a tender or exchange offer, open market purchases, privately
negotiated purchases or otherwise, and (B) at any time during a period of two
years thereafter, individuals who immediately prior to the beginning of such
period constituted the Board of Directors of the Company shall cease for any
reason to constitute at least a majority thereof, unless the election or the
nomination by the Board of Directors for election by the Company's shareholders
of each new director during such period was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of such period.
2. INCREASE IN THE NUMBER OF SHARES WHICH CAN BE GRANTED UNDER THE
TESORO PETROLEUM CORPORATION EXECUTIVE LONG-TERM INCENTIVE PLAN
("1993 PLAN") AND LIMIT THE AWARDS OF RESTRICTED STOCK UNDER SUCH PLAN
The Board of Directors is unanimously recommending that the Company's
stockholders approve an amendment to the 1993 Plan which would increase the
total number of shares of Common Stock available for grant under the 1993 Plan
from 1,250,000 to 2,650,000 and which would limit the total amount of restricted
stock which can be awarded under the 1993 Plan to no more than 500,000 shares of
Common Stock. Such an increase is necessary because, as of April 25, 1996, only
418,907 shares of Common Stock were available for grant under the 1993 Plan. The
Board of Directors believes that, based upon advice from its independent
compensation consultant, this number is insufficient to provide for the future
participation of employees who are eligible for grants under the 1993 Plan and
is below the market median of shares reserved for stock-based pay. As of April
25, 1996, no restricted stock has been granted under the 1993 Plan. The Board of
Directors has approved this amendment, subject to stockholder approval.
If stock incentives covering the additional 1,400,000 shares of Common
Stock are granted by the Company, participants, upon exercise of such grants and
outstanding grants under the 1993 Plan, would hold
22
<PAGE> 25
approximately 10 percent of the outstanding Common Stock (excluding their Common
Stock ownership outside of the Plan). Persons eligible to participate in the
1993 Plan include all full-time active employees of the Company and its
subsidiaries as determined by the Compensation Committee of the Board of
Directors of the Company. It is presently estimated that approximately 25
persons, including approximately six present officers of the Company, would be
considered eligible to receive stock incentives.
The affirmative vote of the holders of a majority of the outstanding shares
present, or represented, and entitled to vote at the annual meeting is required
to approve the amendment to increase the number of shares which can be granted
under the 1993 Plan and limit the awards of restricted stock under such plan.
Under Delaware law and the Certificate of Incorporation and By-laws, Abstentions
as to proposal two will have the same affect as votes against such proposal.
Broker Non-Votes, however, will be deemed shares not entitled to vote on such
matters, and therefore will not count as votes for or against the proposal, and
will not be included in calculating the number of votes necessary for approval
of the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENT TO THE TESORO PETROLEUM CORPORATION EXECUTIVE LONG-TERM INCENTIVE
PLAN.
Summary of the 1993 Plan
The 1993 Plan was approved by the Company's stockholders at the annual
meeting of stockholders held on February 9, 1994, and replaced the 1982 Plan,
although grants under the 1982 Plan that have not been fully exercised remain
outstanding pursuant to their terms. The following summarizes the material
provisions of the 1993 Plan but is qualified in its entirety by reference to the
full text of the 1993 Plan. Persons eligible to participate in the 1993 Plan
include all full-time, active employees of the Company, including directors who
are also employees of the Company. The 1993 Plan is administered by the
Compensation Committee of the Board of Directors consisting of directors who are
not employees of the Company (the "Compensation Committee"). Subject to the
provisions of the 1993 Plan, the Compensation Committee may, from time to time,
select from all eligible employees, those to whom awards will be granted.
The 1993 Plan is a flexible plan that gives the Compensation Committee
broad discretion to fashion the terms of awards in order to provide eligible
participants with stock-based incentives as the Compensation Committee deems
appropriate. It permits the issuance of awards in a variety of forms, including
(i) restricted stock, (ii) incentive stock options, (iii) nonqualified stock
options (incentive and nonqualified stock options are referred to collectively
as "options"), (iv) SARs, and (v) performance share and performance unit awards.
The 1993 Plan provides for the grant of up to 1,250,000 shares of the
Common Stock of the Company which, subject to stockholder approval at this
meeting, will be increased to 2,650,000 shares. The closing price per share of
the Company's Common Stock as traded on the New York Stock Exchange on April 25,
1996, was $11.125. If any award granted under the 1993 Plan is canceled,
terminates, expires or lapses for any reason, subject to certain limited
exceptions, any shares subject to such award will become available for
additional awards under the 1993 Plan. However, in the event that prior to the
award's cancellation, termination, expiration or lapse, the holder of the award
at any time received one or more "benefits of ownership" pursuant to such award
(as defined by the SEC, pursuant to any rule or interpretation promulgated under
Section 16 of the Exchange Act), the shares subject to such award will not be
made available for regrant under the 1993 Plan. In the event of a stock
dividend, stock split, recapitalization or similar event, the Compensation
Committee will equitably adjust the aggregate number of shares subject to the
1993 Plan, the number of shares subject to each outstanding award and the
exercise prices of outstanding options.
The 1993 Plan may be amended, modified or terminated by the Board of
Directors. However, without stockholder approval, no such amendment,
modification or termination may: (a) with limited exceptions, materially
increase the total number of shares which may be issued, (b) materially modify
the eligibility requirements for participation or (c) materially increase the
benefits accruing to participants. Unless earlier
23
<PAGE> 26
terminated by the Board of Directors or stockholders, the issuance of awards
under the 1993 Plan will cease as of September 15, 2003.
Stock options granted under the 1993 Plan provide for purchase of shares of
Common Stock at prices determined by the Compensation Committee; provided that
the option price shall not be less than the fair market value thereof on the
date the option is granted unless such option is granted in connection with a
deferral election under the 1993 Plan. On May 4, 1995, the stockholders adopted
an amendment to the 1993 Plan which limits the number of stock option shares
that an individual participant may be granted to 500,000 shares during any
fiscal year of the Company.
Options granted under the 1993 Plan are exercisable at such times and
subject to such restrictions and conditions as the Compensation Committee shall
approve, but in no event may any option be exercisable prior to six months
following its grant. Options may only be transferred under the laws of descent
and distribution and shall be exercisable only by the participant during the
participant's lifetime. The option exercise price is payable in cash or in
shares of Common Stock having a fair market value equal to the exercise price or
in a combination of cash and such shares. The Compensation Committee may also
allow, along with other means of exercise, cashless exercise as permitted under
the Federal Reserve Board's Regulation T, subject to applicable securities laws.
Upon the death, disability or retirement of a participant, all outstanding
options shall immediately vest and shall be exercisable for the shorter of their
remaining term or one year after termination of employment in the case of death
or disability, and three years after termination of employment in the case of
retirement. Upon termination of employment of a participant for any reason other
than set forth in the preceding sentence, all options held by the participant
which are not vested as of the effective date of termination shall be forfeited
and options which are vested as of the effective date of termination may be
exercised for three months following the effective date of termination of
employment; provided, however, the Compensation Committee, in its sole
discretion, may immediately vest all or any portion of the options of a
participant not vested as of such date. If employment of a participant is
terminated by the Company for cause, all outstanding options held by the
participant are forfeited immediately to the Company and no additional exercise
period is allowed, regardless of whether any of the options are vested.
There are generally no federal tax consequences either to the optionee or
to the Company upon the grant of a stock option. On exercise of an incentive
stock option, the optionee will not recognize any income and the Company will
not be entitled to a deduction for tax purposes, although such exercise may give
rise to liability for the optionee under the alternative minimum tax provisions
of the Code. Generally, if the optionee disposes of shares acquired upon
exercise of an incentive stock option within two years of the date of grant or
one year of the date of exercise, the optionee will recognize compensation
income and the Company will be entitled to a deduction for tax purposes in the
amount of the excess of the fair market value of the shares of Common Stock on
the date of exercise over the stock option exercise price (or the gain on sale,
if less). Otherwise, the Company will not be entitled to any deduction for tax
purposes upon disposition of such shares, and the entire gain for the optionee
will be treated as a capital gain. On exercise of a nonqualified stock option,
the amount by which the fair market value of the Common Stock on the date of
exercise exceeds the stock option exercise price will generally be taxable to
the optionee as compensation income and will generally be deductible for tax
purposes by the Company. The disposition of shares of Common Stock acquired upon
exercise of a nonqualified stock option will generally result in a capital gain
or loss for the optionee but will have no tax consequences for the Company.
SARs granted under the 1993 Plan may take the form of affiliated SARs,
freestanding SARs, tandem SARs, or any combination of these forms of SARs.
Affiliated SARs may be granted in connection with related stock options and may
be automatically exercised upon exercise of the related stock option, with the
grant price being equal to the option price of the related stock option.
Freestanding SARs may be granted independent of the grant of any stock option
with a grant price at least equal to the fair market value of a share of Common
Stock on the date of grant. Tandem SARs are granted in conjunction with a
related stock option at a grant price equal to the option price of the related
stock option. Either the stock option or the tandem SAR will be adjusted for
exercise of the other since the exercise of a stock option or the tandem SAR
requires the surrender of the right to exercise the equivalent portion of the
stock option or the tandem SAR, as applicable. The term of any SAR granted under
the 1993 Plan may not exceed ten years.
24
<PAGE> 27
Upon exercise of an SAR, the participant will receive the difference
between the fair market value of one share of Common Stock on the date of
exercise and the grant price, multiplied by the number of shares with respect to
which the SAR is exercised. Payment due upon exercise of an SAR may be in cash,
in shares of Common Stock having a fair market value equal to the value of the
SAR being exercised, or partly in cash and partly in shares of Common Stock, as
determined by the Compensation Committee in its discretion. The Compensation
Committee may impose restrictions on the exercise of SARs, including the
imposition of window periods for exercise of an SAR for persons required to file
reports pursuant to the provisions of Section 16 of the Exchange Act. Upon the
death, disability or retirement of a participant, all outstanding SARs which are
exercisable on the termination date shall remain exercisable for the shorter of
their remaining term or one year after termination of employment in the case of
death or disability and three years after termination of employment in the case
of retirement. Upon the death, disability or retirement of a participant, all
outstanding SARs which are not exercisable on the termination date shall be
forfeited regardless of whether termination is due to death, disability or
retirement. Upon termination of employment of a participant for any reason other
than set forth in the preceding sentence, all SARs held by the participant which
are not vested as of the effective date of termination shall be forfeited and
SARs which are vested as of the effective date of termination may be exercised
for three months following the effective date of termination of employment;
provided, however, that the Compensation Committee, in its sole discretion, may
immediately vest all or any portion of the SARs of a participant not vested as
of such date. If employment of a participant is terminated by the Company for
cause, all outstanding SARs held by the participant are forfeited immediately to
the Company and no additional exercise period is allowed, regardless of whether
any of the SARs are vested. SARs may only be transferred under the laws of
descent and distribution and shall be exercisable during his or her lifetime
only by the participant.
The Compensation Committee may grant restricted shares of Common Stock to
eligible employees, in such amounts, and subject to such terms and conditions
(which may depend upon or be related to performance goals and other conditions)
as the Compensation Committee shall determine in its discretion. Subject to
stockholder approval at this meeting, the total amount of restricted stock which
could be awarded would be limited to 500,000 shares of Common Stock.
Certificates for the shares of Common Stock covered by the award shall have
appropriate restrictive legends placed on them with respect to such
restrictions. Subject to the applicable restrictions, the grantee shall have the
rights of a stockholder with respect to such shares. The shares of restricted
stock may not be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated until the end of the applicable restriction period established by
the Compensation Committee or upon earlier satisfaction of any other conditions
specified by the Compensation Committee in its sole discretion. In addition, no
restricted stock granted under the 1993 Plan may become vested in a participant
sooner than six months following the date of its grant. In the event employment
of a participant is terminated by reason of death, disability or retirement, all
unvested shares of restricted stock shall immediately be forfeited; provided,
however, that the Compensation Committee, in its sole discretion, shall have the
right to provide for accelerated vesting of some or all unvested shares of
restricted stock. In the event employment of a participant shall terminate for
any other reason, all shares of restricted stock held by the participant which
are not vested as of the effective date of the termination of employment shall
be immediately forfeited and returned to the Company; provided, however, that
the Compensation Committee, in its sole discretion, shall have the right, except
in the case of termination of employment for cause, to provide for the lapse of
restrictions on the restricted stock following employment termination, upon such
terms and provisions as it deems proper.
The Compensation Committee may grant performance shares and performance
units awards to eligible employees, in such amounts, and subject to such terms
and conditions as the Compensation Committee shall in its discretion determine.
The grantee of such awards shall receive payment of the value of performance
shares and performance units earned in cash or shares of Common Stock, or in a
combination of cash and shares of Common Stock, which have an aggregate fair
market value equal to the value of the earned performance shares at the close of
the applicable performance period, in such combination as the Compensation
Committee shall, in its sole discretion, determine. In the event the employment
of a participant is terminated by reason of death, disability, retirement or
involuntary termination without cause during the performance period, the
participant shall receive a prorated payout of the performance units and
performance
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shares earned, which shall be determined by the Compensation Committee in its
sole discretion, and shall be based upon the length of time the participant held
the award during the performance period and shall be further adjusted based upon
the achievement of the preestablished performance goals. Such payment in the
event of termination shall be made at the same time as payments are made to
participants who did not terminate employment during the applicable performance
period; provided, however, that the Compensation Committee, in its sole
discretion, shall have the power to accelerate the payment of the performance
units and performance shares to participants whose employment has terminated. In
the event that a participant's employment terminates for any reason other than
the foregoing reasons, all performance units and performance shares shall be
forfeited by the participant to the Company. Performance units and performance
shares may not be sold, transferred, pledged, assigned or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
During the participant's lifetime, the participant's rights under the 1993 Plan
shall be exercisable only by the participant or the participant's legal
representative.
In the event that (i) any "person," as that term is defined under the
Exchange Act (other than a trustee or other fiduciary holding securities under
an employee benefit plan of the Company, or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company), acquires beneficial
ownership of more than 50 percent of the outstanding voting securities, (ii) a
majority of the individuals who constitute the Board of Directors at any time
shall cease to be made up of "qualified directors," and (iii) the stockholders
of the Company approve a merger or consolidation with or involving any other
corporation, other than in a transaction that would result in the voting
securities of the Company outstanding immediately prior to such transaction
continuing to represent at least 50 percent of the outstanding voting securities
of the Company immediately after such transaction, then any stock option or SAR
outstanding shall become fully vested and fully exercisable, any restriction
periods and restrictions imposed on restricted stock shall lapse, the target
value obtainable under all performance units and performance shares shall be
deemed to have been fully earned for the entire performance period and the
Compensation Committee may, in its discretion, make any other modifications to
any awards as determined by the Compensation Committee to be deemed appropriate
before the effective date of such transaction.
A "qualified director" is a director who meets any of the following
criteria: (1) was a director immediately after the effective date of the
Reclassification (as defined in the Company's Registration Statement on Form
S-4, relating to the 1993 Annual Meeting of Stockholders), including the three
new directors elected in connection therewith; (2) was a director immediately
after the Company's 1994 Annual Meeting of Stockholders; or (3) any director
nominated for election as a director or elected to the Board of Directors by the
directors to fill a vacancy by a vote of directors, and at the time of such
nomination or election at least a majority of the directors were qualified
directors.
3. APPOINTMENT OF AUDITORS
The Board of Directors considers it desirable that its appointment of the
firm of Deloitte & Touche LLP as independent auditors for the Company and its
subsidiaries for fiscal year 1996 be ratified by the stockholders.
Representatives of Deloitte & Touche LLP are expected to be present at the 1996
Annual Meeting of Stockholders and to be available to respond to appropriate
questions. Such representatives will have the opportunity to make a statement at
the annual meeting if they desire to do so. Under Delaware law, the Certificate
of Incorporation and By-laws, a majority of the votes cast are required to
approve the appointment of Deloitte & Touche LLP as auditors. Abstentions and
Broker Non-Votes are not votes "cast" on the question and therefore will not
count as votes for or against the proposal, and will not be included in
calculating the number of votes necessary for approval of the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPOINTMENT OF THE FIRM OF
DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS FOR THE COMPANY AND ITS
SUBSIDIARIES FOR FISCAL YEAR 1996.
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<PAGE> 29
4. EXPENSES OF SOLICITATION
The Company expects to solicit proxies primarily by mail, but directors,
officers and regular employees of the Company may also solicit in person, by
telephone or telegram. All expenses in connection with the solicitation of
proxies will be borne by the Company. Arrangements will be made by the Company
for the forwarding, at the Company's expense, of soliciting materials by
brokers, nominees, fiduciaries and other custodians to their principals. The
Company has retained a professional proxy soliciting organization, Georgeson &
Company Inc. of New York, New York, to aid in the solicitation of proxies from
brokers, bank nominees and other institutional owners, and possibly individual
holders of record of 1,000 shares or more, by personal interview, telephone,
telegram or mail. The Company will pay such organization its customary fees,
estimated not to exceed $8,500, and will reimburse such organization for certain
expenses.
5. STOCKHOLDERS' PROPOSALS
Proposals of stockholders to be presented at the annual meeting to be held
in 1997 must be received for inclusion in the Company's proxy statement and form
of proxy by December 4, 1996.
6. OTHER MATTERS
As of the date of this Proxy Statement, management of the Company has no
knowledge of any matters to be presented for consideration at the meeting other
than those referred to above. If any other matters properly come before the
meeting, the persons named in the accompanying form of proxy intend to vote such
proxy to the extent entitled in accordance with their best judgment.
By Order of the Board of Directors,
JAMES C. REED, JR.
Secretary
May 3, 1996
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<PAGE> 30
TESORO PETROLEUM CORPORATION
ANNUAL MEETING OF STOCKHOLDERS, JUNE 6, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
PLEASE MARK, SIGN, DATE AND RETURN IN THE ENCLOSED ENVELOPE.
The undersigned hereby appoints BRUCE A. SMITH and JAMES C. REED, JR.,
and each of them, as proxies of the undersigned, each with full power to act
without the other and with full power of substitution, to vote all the shares
of Common Stock of Tesoro Petroleum Corporation held in the name of the
undersigned at the close of business on April 25, 1996, at the Annual Meeting
of Stockholders to be held at the Hilton Palacio del Rio Hotel, 200 South Alamo
Street, San Antonio, Texas, on Thursday, June 6, 1996, at 10:00 A.M. Central
time, and at any adjournment thereof, with all the powers the undersigned would
have if personally present, upon the matters set forth in the Notice of such
meeting and as indicated in the following sentence. Said proxies are authorized
to vote in accordance with the Proxy Statement for the election of the persons
nominated pursuant thereto as directors (unless authority is withheld as
provided below), as indicated below upon the following proposals, more fully
set forth in the Proxy Statement, and in their discretion upon such other
matters as may properly come before the meeting.
(Continued and to be signed on the reverse side)
<PAGE> 31
PLEASE MARK YOUR CHOICE LIKE THIS X IN BLUE OR BLACK INK [X]
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE NOMINEES LISTED IN ITEM 1,
"FOR" ITEM 2 AND "FOR" ITEM 3.
ITEM 1 - Election of 8 directors (all nominated as directors to serve for the
terms indicated in the Proxy Statement).
[ ] FOR all nominees [ ] WITHHELD for all nominees
Nominees: Robert J. Caverly; Steven H. Grapstein; Alan J. Kaufman; Raymond K.
Mason, Sr.; Sanford B. Prater; Bruce A. Smith; Patrick J. Ward; and Murray L.
Weidenbaum.
INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, DRAW A
LINE THROUGH OR STRIKE OUT THAT NOMINEE'S NAME AS SET FORTH ABOVE.
ITEM 2 - Proposal to increase the number of shares which can be granted under
the Executive Long-Term Incentive Plan and limit the awards of restricted stock
under such plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 3 - Ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for fiscal year 1996.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 4 - To transact such other business as may properly come before the
meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED AND
RETURNED WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED STOCKHOLDER.
IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR ITEMS 1, 2 AND 3.
Dated:_____________________________, 1996
Signature:_______________________________
Signature:_______________________________
PLEASE SIGN EXACTLY AS NAME APPEARS ABOVE. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
<PAGE> 32
TESORO PETROLEUM CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
THRIFT PLAN
ANNUAL MEETING OF STOCKHOLDERS, JUNE 6, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned participant in the TESORO PETROLEUM CORPORATION EMPLOYEE
STOCK OWNERSHIP PLAN and/or the TESORO PETROLEUM CORPORATION THRIFT PLAN (the
"Plan(s)") hereby acknowledges receipt of the Notice of the Annual Meeting of
Stockholders to be held at the Hilton Palacio del Rio Hotel, 200 South Alamo
Street, San Antonio, Texas, on Thursday, June 6, 1996, at 10:00 A.M. Central
time, and directs the Frost National Bank, Trustee, to vote (or cause to be
voted) all shares of Tesoro Common Stock allocated to the undersigned's account
under the Plan(s) and held in the Trustee's name on April 25, 1996, at said
meeting and at any adjournment thereof. Said Trustee is authorized to vote in
accordance with the Proxy Statement for the election of the persons nominated
pursuant thereto as directors (unless authority is withheld as provided below),
as indicated below upon the following proposals, more fully set forth in the
Proxy Statement, and in its discretion upon such other matters as may properly
come before the meeting.
(Continued and to be signed on the reverse side)
<PAGE> 33
PLEASE MARK YOUR CHOICE LIKE THIS X IN BLUE OR BLACK INK [X]
______ ______
ESOP THRIFT
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE NOMINEES LISTED IN ITEM 1,
"FOR" ITEM 2 AND "FOR" ITEM 3.
ITEM 1 - Election of 8 directors (all nominated as directors to serve for the
terms indicated in the Proxy Statement).
[ ] FOR all nominees [ ] WITHHELD for all nominees
Nominees: Robert J. Caverly; Steven H. Grapstein; Alan J. Kaufman; Raymond K.
Mason, Sr.; Sanford B. Prater; Bruce A. Smith; Patrick J. Ward; and Murray L.
Weidenbaum.
INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, DRAW A
LINE THROUGH OR STRIKE OUT THAT NOMINEE'S NAME AS SET FORTH ABOVE.
ITEM 2 - Proposal to increase the number of shares which can be granted under
the Executive Long-Term Incentive Plan and limit the awards of restricted stock
under such plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 3 - Ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for fiscal year 1996.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 4 - To transact such other business as may properly come before the meeting
or any adjournment thereof.
Dated:_____________________________, 1996
Signature:_______________________________
PLEASE SIGN EXACTLY AS NAME APPEARS ABOVE. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
<PAGE> 34
APPENDIX
TESORO PETROLEUM CORPORATION
EXECUTIVE LONG-TERM INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Tesoro Petroleum Corporation, a Delaware
corporation (hereinafter referred to as the "Company"), hereby
establishes an incentive compensation plan to be known as the "Tesoro
Petroleum Corporation Executive Long-Term Incentive Plan" (hereinafter
referred to as the "Plan"), as set forth in this document. The Plan
permits the grant of Nonqualified Stock Options, Incentive Stock
Options, SARs, Restricted Stock, Performance Units, and Performance
Shares.
Subject to ratification by an affirmative vote of a majority of
Shares, the Plan shall become effective as of September 15, 1993 (the
"Effective Date"), and shall remain in effect as provided in Section
1.3 herein.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the
success and enhance the value of the Company by linking the personal
interests of Participants to those of Company shareholders, and by
providing Participants with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract, and retain the services of
Participants upon whose judgment, interest, and special effort the
successful conduct of its operation largely is dependent.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date,
as described in Section 1.1 herein, and shall remain in effect,
subject to the right of the Board of Directors to terminate the Plan
at any time pursuant to Article 14 herein, until all Shares subject to
it shall have been purchased or acquired according to the Plan's
provisions. However, in no event may an Award be granted under the
Plan on or after September 15, 2003.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word
is capitalized:
(a) "Affiliated SAR" means a SAR that is granted in connection with a
related Option, and which will be deemed to automatically be exercised
simultaneous with the exercise of the related Option.
(b) "Award" means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options, Incentive Stock Options, SARs,
Restricted Stock, Performance Units, or Performance Shares.
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<PAGE> 35
(c) "Award Agreement" means an agreement entered into by each Participant
and the Company, setting forth the terms and provisions applicable to
Awards granted to Participants under this Plan.
(d) "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange
Act.
(e) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(f) "Cause" means: (i) willful misconduct on the part of a Participant
that is materially detrimental to the Company; or (ii) the commission
by a Participant of one or more acts which constitute an indictable
crime under United States Federal, state, or local law. "Cause" under
either (i) or (ii) shall be determined in good faith by the Committee.
(g) "Change in Control" of the Company shall be deemed to have occurred
if:
(i) Any Person other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a
corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their
ownership of stock or the Company is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the combined
voting power of the Company's then outstanding voting
securities;
(ii) A majority of the Board at any time shall cease to be made up
of Qualified Directors. For purposes hereof a Qualified
Director is a director who meets any of the following
criteria: (1) Was a director immediately after the effective
date of the Reclassification (as defined in the Company's
Registration Statement on S-4, relating to the 1993 Annual
Meeting of Stockholders), including the three new directors
elected in connection therewith; (2) Was a director
immediately after the Company's 1994 Annual Meeting of
Stockholders; (3) Any director nominated for election as a
director or elected to the Board by the directors to fill a
vacancy by a vote of directors, and at the time of such
nomination or election at least a majority of the directors
were qualified directors.
(iii) The shareholders of the Company approve a merger or
consolidation of the Company, with any other corporation,
other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) at least fifty percent (50%) of the
combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such
merger or consolidation, or the shareholders of the Company
approve a plan of complete liquidation of the Company, or an
agreement for
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<PAGE> 36
the sale or disposition by the Company of all or substantially
all of the Company's assets.
However, in no event shall a "Change in Control" be deemed to have
occurred with respect to a Participant, if the Participant is part of
a purchasing group which consummates the Change-in-Control
transaction. A Participant shall be deemed "part of a purchasing
group" for purposes of the preceding sentence if the Participant is an
equity participant in the purchasing company or group (except for (i)
passive ownership of less than three percent (3%) of the stock of the
purchasing company; or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not significant, as
determined prior to the Change in Control by a majority of the
nonemployee continuing Directors).
(h) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(i) "Committee" means the committee, as specified in Article 3, appointed
by the Board to administer the Plan with respect to grants of Awards.
(j) "Company" means Tesoro Petroleum Corporation, a Delaware corporation,
or any successor thereto as provided in Article 17 herein.
(k) "Director" means any individual who is a member of the Board of
Directors of the Company.
(l) "Disability" means a permanent and total disability, within the
meaning of Code Section 22(e)(3), as determined by the Committee in
good faith, upon receipt of sufficient competent medical advice from
one or more individuals, selected by the Committee, who are qualified
to give professional medical advice.
(m) "Employee" means any full-time, nonunion employee of the Company or of
the Company's Subsidiaries. Directors who are not otherwise employed
by the Company shall not be considered Employees under this Plan.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor Act thereto.
(o) "Fair Market Value" shall mean the average of the highest and lowest
quoted selling prices for Shares on the relevant date, or (if there
were no sales on such date) the weighted average of the means between
the highest and lowest quoted selling prices on the nearest day before
and the nearest day after the relevant date, as determined by the
Committee.
(p) "Freestanding SAR" means a SAR that is granted independently of any
Options.
(q) "Incentive Stock Option" or "ISO" means an option to purchase Shares,
granted under Article 6 herein, which is designated as an Incentive
Stock Option and is intended to meet the requirements of Section 422
of the Code.
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<PAGE> 37
(r) "Insider" shall mean an Employee who is, on the relevant date, an
officer, director, or ten percent (10%) beneficial owner of the
Company, as defined under Section 16 of the Exchange Act.
(s) "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares, granted under Article 6 herein, which is not intended to be an
Incentive Stock Option.
(t) "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
(u) "Option Price" means the price at which a Share may be purchased by a
Participant pursuant to an Option, as determined by the Committee.
(v) "Participant" means an Employee of the Company who has outstanding an
Award granted under the Plan.
(w) "Performance Unit" means an Award granted to an Employee, as described
in Article 9 herein.
(x) "Performance Share" means an Award granted to an Employee, as
described in Article 9 herein.
(y) "Period of Restriction" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the
passage of time, the achievement of performance goals, or upon the
occurrence of other events as determined by the Committee, at its
discretion), and the Shares are subject to a substantial risk of
forfeiture, as provided in Article 8 herein.
(z) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(aa) "Restricted Stock" means an Award granted to a Participant pursuant to
Article 8 herein.
(ab) "Retirement" shall have the meaning ascribed to it in the
tax-qualified pension plan of the Company.
(ac) "Shares" means the shares of common stock of the Company.
(ad) "Subsidiary" means any corporation in which the Company owns directly,
or indirectly through subsidiaries, at least fifty percent (50%) of
the total combined voting power of all classes of stock, or any other
entity (including, but not limited to, partnerships and joint
ventures) in which the Company owns at least fifty percent (50%) of
the combined equity thereof.
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<PAGE> 38
(ae) "Stock Appreciation Right" or "SAR" means an Award, granted alone or
in connection with a related Option, designated as a SAR, pursuant to
the terms of Article 7 herein.
(af) "Tandem SAR" means a SAR that is granted in connection with a related
Option, the exercise of which shall require forfeiture of the right to
purchase a Share under the related Option (and when a Share is
purchased under the Option, the Tandem SAR shall similarly be
canceled).
(ag) "Window Period" means the period beginning on the third business day
following the date of public release of the Company's quarterly sales
and earnings information, and ending on the twelfth business day
following such date.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Executive
Long-Term Compensation Committee of the Board, or by any other
Committee appointed by the Board consisting of all Directors who are
not Employees (the "Committee"). The members of the Committee shall
be appointed from time to time by, and shall serve at the discretion
of, the Board of Directors.
The Committee shall be comprised solely of Directors who are eligible
to administer the Plan pursuant to Rule 16b-3(c)(2) under the Exchange
Act. However, if for any reason the Committee does not qualify to
administer the Plan, as contemplated by Rule 16b-3(c)(2) of the
Exchange Act, the Board of Directors may appoint a new Committee so as
to comply with Rule 16b-3(c)(2).
3.2 AUTHORITY OF THE COMMITTEE. The Committee shall have full power
except as limited by law or by the Articles of Incorporation or Bylaws
of the Company, and subject to the provisions herein, to determine the
size and types of Awards; to determine the terms and conditions of
such Awards in a manner consistent with the Plan; to construe and
interpret the Plan and any agreement or instrument entered into under
the Plan; to establish, amend, or waive rules and regulations for the
Plan's administration; and (subject to the provisions of Article 14
herein) to amend the terms and conditions of any outstanding Award to
the extent such terms and conditions are within the discretion of the
Committee as provided in the Plan. Further, the Committee shall make
all other determinations which may be necessary or advisable for the
administration of the Plan. As permitted by law, the Committee may
delegate its authorities as identified hereunder.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related
orders or resolutions of the Board of Directors shall be final,
conclusive, and binding on all persons, including the Company, its
stockholders, Employees, Participants, and their estates and
beneficiaries.
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<PAGE> 39
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3
herein, the total number of Shares available for grant under the Plan
may not exceed 1,250,000. These Shares may be either authorized but
unissued or reacquired Shares.
The following rules will apply for purposes of the determination of
the number of Shares available for grant under the Plan:
(a) While an Award is outstanding, it shall be counted against the
authorized pool of Shares, regardless of its vested status.
(b) The grant of an Option or Restricted Stock shall reduce the
Shares available for grant under the Plan by the number of
Shares subject to such Award.
(c) The grant of a Tandem SAR shall reduce the number of Shares
available for grant by the number of Shares subject to the
related Option (i.e., there is no double counting of Options
and their related Tandem SARs).
(d) The grant of an Affiliated SAR shall reduce the number of
Shares available for grant by the number of Shares subject to
the SAR, in addition to the number of Shares subject to the
related Option.
(e) The grant of a Freestanding SAR shall reduce the number of
Shares available for grant by the number of Freestanding SARs
granted.
(f) The Committee shall in each case determine the appropriate
number of Shares to deduct from the authorized pool in
connection with the grant of Performance Units and/or
Performance Shares.
4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled,
terminates, expires, or lapses for any reason (with the exception of
the termination of a Tandem SAR upon exercise of the related Option or
the termination of a related Option upon exercise of the corresponding
Tandem SAR), any Shares subject to such Award again shall be available
for the grant of an Award under the Plan. However, in the event that
prior to the Award's cancellation, termination, expiration, or lapse,
the holder of the Award at any time received one or more "benefits of
ownership" pursuant to such Award (as defined by the Securities and
Exchange Commission, pursuant to any rule or interpretation
promulgated under Section 16 of the Exchange Act), the Shares subject
to such Award shall not be made available for regrant under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger,
reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, split-up, Share combination, or other
change in the corporate structure of the Company affecting the Shares,
such adjustment shall be made in the number and class of Shares which
may be delivered under the Plan, and in the number and class of and/or
price of Shares
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<PAGE> 40
subject to outstanding Awards granted under the Plan, as may be
determined to be appropriate and equitable by the Committee, in its
sole discretion, to prevent dilution or enlargement of rights; and
provided that the number of Shares subject to any Award shall always
be a whole number.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to participate in this Plan include all
full-time, active Employees of the Company and its Subsidiaries, as
determined by the Committee, including Employees who are members of
the Board, but excluding Directors who are not Employees.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees,
those to whom Awards shall be granted and shall determine the nature
and amount of each Award.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Employees at any time and from time to time
as shall be determined by the Committee. The Committee shall have
discretion in determining the number of Shares subject to Options
granted to each Participant. The Committee may grant ISOs, NQSOs, or
a combination thereof.
6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the
Option, the number of Shares to which the Option pertains, and such
other provisions as the Committee shall determine. The Option
Agreement also shall specify whether the Option is intended to be an
ISO within the meaning of Section 422 of the Code, or a NQSO whose
grant is intended not to fall under the Code provisions of Section
422.
6.3 OPTION PRICE. The Option Price for each grant of an Option shall be
determined by the Committee; provided that the Option Price shall not
be less than the Fair Market Value of a Share on the date the Option
is granted unless such Option is granted in connection with a deferral
election pursuant to Article XI herein.
6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however,
that no Option shall be exercisable later than the tenth (10th)
anniversary date of its grant.
6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and
conditions as the Committee shall in each instance approve, which need
not be the same for each grant or for each Participant. However, in
no event may any Option granted under this Plan become exercisable
prior to six (6) months following the date of its grant.
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6.6 PAYMENT. Options shall be exercised by the delivery of a written
notice of exercise to the Company, setting forth the number of Shares
with respect to which the Option is to be exercised, accompanied by
full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by
tendering previously acquired Shares having an aggregate Fair Market
Value at the time of exercise equal to the total Option Price
(provided that the Shares which are tendered must have been held by
the Participant for at least six (6) months prior to their tender to
satisfy the Option Price), or (c) by a combination of (a) and (b).
The Committee also may allow cashless exercise as permitted under
Federal Reserve Board's Regulation T, subject to applicable securities
law restrictions, or by any other means which the Committee determines
to be consistent with the Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the
Participant, in the Participant's name, Share certificates in an
appropriate amount based upon the number of Shares purchased under the
Option(s).
6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an
Option under the Plan as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities laws,
under the requirements of any stock exchange or market upon which such
Shares are then listed and/or traded, and under any blue sky or state
securities laws applicable to such Shares.
6.8 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
(A) TERMINATION BY DEATH. In the event the employment of a
Participant is terminated by reason of death, all outstanding
Options which are exercisable as of the date of death shall
remain exercisable at any time prior to their expiration date,
or for one (1) year after the date of death, whichever period
is shorter, by such person or persons as shall have been named
as the Participant's beneficiary, or by such persons that have
acquired the Participant's rights under the Option by will or
by the laws of descent and distribution.
Options which are not exercisable as of the date of death
shall be forfeited and returned to the Company; provided,
however, that the Committee may, at its sole discretion,
provide for accelerated vesting of unvested Options upon such
terms as the Committee deems advisable.
(B) TERMINATION BY DISABILITY. In the event the employment of a
Participant is terminated by reason of Disability, all
outstanding Options which are exercisable as of the date the
Committee determines the definition of
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Disability to have been satisfied shall remain exercisable at
any time prior to their expiration date, or for one (1) year
after the date that the Committee determines the definition of
Disability to have been satisfied, whichever period is
shorter.
Options which are not exercisable as of the date the Committee
determines the definition of Disability to have been satisfied
shall be forfeited and returned to the Company; provided,
however, that the Committee may, at its sole discretion,
provide for accelerated vesting of unvested Options upon such
terms as the Committee deems advisable.
(C) TERMINATION BY RETIREMENT. In the event the employment of a
Participant is terminated by reason of Retirement, all
outstanding Options which are exercisable as of the date of
Retirement shall remain exercisable at any time prior to their
expiration date, or for three (3) years after the effective
date of Retirement, whichever period is shorter. Options
which are not exercisable as of the date of Retirement shall
be forfeited and return to the Company; provided, however,
that the Committee may, at its sole discretion, provide for
accelerated vesting of unvested Options upon such terms as the
Committee deems advisable.
(D) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that a
Participant's employment terminates by reason of Disability or
Retirement, and within the exercise period following such
termination the Participant dies, then the remaining exercise
period under outstanding vested Options shall equal the longer
of (i) one (1) year following death; or (ii) the remaining
portion of the exercise period which was triggered by the
employment termination. Such Options shall be exercisable by
such person or persons who shall have been named as the
Participant's beneficiary, or by such persons who have
acquired the Participant's rights under the Option by will or
by the laws of descent and distribution.
(E) EXERCISE LIMITATIONS ON ISOS. In the case of ISOs, the tax
treatment prescribed under Section 422 of the Internal Revenue
Code of 1986, as amended, may not be available if the Options
are not exercised within the Section 422 prescribed time
periods after each of the various types of employment
termination.
6.9 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a
Participant shall terminate for any reason other than the reasons set
forth in Section 6.8 (and other than for Cause), all Options held by
the Participant which are not vested as of the effective date of
employment termination immediately shall be forfeited to the Company
(and shall once again become available for grant under the Plan).
However, the Committee, in its sole discretion, shall have the right
to immediately vest all or any portion of such Options, subject to
such terms as the Committee, in its sole discretion, deems
appropriate.
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Options which are vested as of the effective date of employment
termination may be exercised by the Participant within the period
beginning on the effective date of employment termination, and ending
three (3) months after such date.
If the employment of a Participant shall be terminated by the Company
for Cause, all outstanding Options held by the Participant immediately
shall be forfeited to the Company and no additional exercise period
shall be allowed, regardless of the vested status of the Options.
6.10 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may
be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution. Further, all Options granted to a Participant under the
Plan shall be exercisable during his or her lifetime only by such
Participant.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 GRANT OF SARS. Subject to the terms and conditions of the Plan, a SAR
may be granted to an Employee at any time and from time to time as
shall be determined by the Committee. The Committee may grant
Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination of
these forms of SARs.
The Committee shall have complete discretion in determining the number
of SARs granted to each Participant (subject to Article 4 herein) and,
consistent with the provisions of the Plan, in determining the terms
and conditions pertaining to such SARs. However, the grant price of a
Freestanding SAR shall be at least equal to the Fair Market Value of a
Share on the date of grant of the SAR. The grant price of Tandem SARs
and Affiliated SARs shall equal the Option Price of the related
Option. In no event shall any SAR granted hereunder become
exercisable within the first six (6) months of its grant.
7.2 EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the
right to exercise the equivalent portion of the related Option. A
Tandem SAR may be exercised only with respect to the Shares for which
its related Option is then exercisable.
Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (i) the
Tandem SAR will expire no later than the expiration of the underlying
ISO; (ii) the value of the payout with respect to the Tandem SAR may
be for no more than one hundred percent (100%) of the difference
between the Option Price of the underlying ISO and the Fair Market
Value of the Shares subject to the underlying ISO at the time the
Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised
only when the Fair Market Value of the Shares subject to the ISO
exceeds the Option Price of the ISO.
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7.3 EXERCISE OF AFFILIATED SARS. Affiliated SARs shall be deemed to be
exercised upon the exercise of the related Options. The deemed
exercise of Affiliated SARs shall not necessitate a reduction in the
number of related options.
7.4 EXERCISE OF FREESTANDING SARS. Freestanding SARs may be exercised
upon whatever terms and conditions the Committee, in its sole
discretion, imposes upon them.
7.5 SAR AGREEMENT. Each SAR grant shall be evidenced by an Award
Agreement that shall specify the grant price, the term of the SAR, and
such other provisions as the Committee shall determine.
7.6 TERM OF SARS. The term of a SAR granted under the Plan shall be
determined by the Committee, in its sole discretion; provided,
however, that such term shall not exceed ten (10) years.
7.7 PAYMENT OF SAR AMOUNT. Upon exercise of a SAR, a Participant shall be
entitled to receive payment from the Company in an amount determined
by multiplying:
(a) The difference between the Fair Market Value of a Share on the
date of exercise over the grant price; by
(b) The number of Shares with respect to which the SAR is
exercised.
At the discretion of the Committee, the payment upon SAR exercise may
be in cash, in Shares of equivalent value, or in some combination
thereof.
7.8 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the
Plan, the Committee may impose such conditions on exercise of a SAR
(including, without limitation, the right of the Committee to limit
the time of exercise to specified periods) as may be required to
satisfy the requirements of Section 16 (or any successor rule) of the
Exchange Act.
For example, if the Participant is an Insider, the ability of the
Participant to exercise SARs for cash will be limited to Window
Periods. However, if the Committee determines that the Participant is
not an Insider, or if the securities laws change to permit greater
freedom of exercise of SARs, then the Committee may permit exercise at
any point in time, to the extent the SARs are otherwise exercisable
under the Plan.
7.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
(A) TERMINATION BY DEATH. In the event the employment of a
Participant is terminated by reason of death, all outstanding
SARs which are exercisable as of the date of death shall
remain exercisable at any time prior to their expiration date,
or for one (1) year after the date of death, whichever period
is shorter, by such person or persons as shall have been named
as the Participant's beneficiary, or by such persons that have
acquired the
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<PAGE> 45
Participant's rights under the SAR by will or by the laws of
descent and distribution.
SARs which are not exercisable as of the date of death shall
be forfeited and returned to the Company; provided, however,
that the Committee may, at its sole discretion, provide for
accelerated vesting of unvested SARs upon such terms as the
Committee deems advisable.
(B) TERMINATION BY DISABILITY. In the event the employment of a
Participant is terminated by reason of Disability, all
outstanding SARs which are exercisable as of the date the
Committee determines the definition of Disability to have been
satisfied shall remain exercisable at any time prior to their
expiration date, or for one (1) year after the date that the
Committee determines the definition of Disability to have been
satisfied, whichever period is shorter.
SARs which are not exercisable as of the date the Committee
determines the definition of Disability to have been satisfied
shall be forfeited and returned to the Company; provided,
however, that the Committee may, at its sole discretion,
provide for accelerated vesting of unvested SARs upon such
terms as the Committee deems advisable.
(C) TERMINATION BY RETIREMENT. ln the event the employment of a
Participant is terminated by reason of Retirement, all
outstanding SARs which are exercisable as of the date of
Retirement shall remain exercisable at any time prior to their
expiration date, or for three (3) years after the effective
date of Retirement, whichever period is shorter.
SARs which are not exercisable as of the date of Retirement
shall be forfeited and returned to the Company; provided,
however, that the Committee may, at its sole discretion,
provide for accelerated vesting of unvested SARs upon such
terms as the Committee deems advisable.
(D) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that a
Participant's employment terminates by reason of Disability or
Retirement, and within the exercise period following such
termination the Participant dies, then the remaining exercise
period under outstanding vested SARs shall equal the longer
of: (i) one (1) year following death; or (ii) the remaining
portion of the exercise period which was triggered by the
employment termination. Such SARs shall be exercisable by
such person or persons who shall have been named as the
Participant's beneficiary, or by such persons who have
acquired the Participant's rights under the SAR by will or by
the laws of descent and distribution.
7.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a
Participant shall terminate for any reason other than the reasons set
forth in Section 7.9 (and other than for Cause), all SARs held by the
Participant which are not vested as of the effective date of
employment termination immediately shall be forfeited to the
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<PAGE> 46
Company (and shall once again become available for grant under the
Plan). However, the Committee, in its sole discretion, shall have the
right to immediately vest all or any portion of such SARs, subject to
such terms as the Committee, in its sole discretion, deems
appropriate.
SARs which are vested as of the effective date of employment
termination may be exercised by the Participant within the period
beginning on the effective date of employment termination, and ending
three (3) months after such date.
If the employment of a Participant shall be terminated by the Company
for Cause, all outstanding SARs held by the Participant immediately
shall be forfeited to the Company and no additional exercise period
shall be allowed, regardless of the vested status of the SARs.
7.11 NONTRANSFERABILITY OF SARS. No SAR granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution. Further, all SARs granted to a Participant under the
Plan shall be exercisable during his or her lifetime only by such
Participant.
ARTICLE 8. RESTRICTED STOCK
8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant
Shares of Restricted Stock to eligible Employees in such amounts as
the Committee shall determine.
8.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be
evidenced by a Restricted Stock Agreement that shall specify the
Period of Restriction, or Periods, the number of Restricted Stock
Shares granted, and such other provisions as the Committee shall
determine.
8.3 TRANSFERABILITY. Except as provided in this Article 8, the Shares of
Restricted Stock granted herein may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated until the end of the
applicable Period of Restriction established by the Committee and
specified in the Restricted Stock Agreement, or upon earlier
satisfaction of any other conditions, as specified by the Committee in
its sole discretion and set forth in the Restricted Stock Agreement.
However, in no event may any Restricted Stock granted under the Plan
become vested in a Participant prior to six (6) months following the
date of its grant. All rights with respect to the Restricted Stock
granted to a Participant under the Plan shall be available during his
or her lifetime only to such Participant.
8.4 OTHER RESTRICTIONS. The Committee shall impose such other conditions
and/or restrictions on any Shares of Restricted Stock granted pursuant
to the Plan as it may deem advisable including, without limitation, a
requirement that Participants pay a stipulated purchase price for each
Share of Restricted Stock, restrictions based upon the achievement of
specific performance goals (Companywide, divisional, and/or
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<PAGE> 47
individual), and/or restrictions under applicable Federal or state
securities laws; and may legend the certificates representing
Restricted Stock to give appropriate notice of such restrictions.
8.5 CERTIFICATE LEGEND. In addition to any legends placed on certificates
pursuant to Section 8.4 herein, each certificate representing Shares
of Restricted Stock granted pursuant to the Plan may bear the
following legend:
"The sale or other transfer of the Shares of stock represented
by this certificate, whether voluntary, involuntary, or by
operation of law, is subject to certain restrictions on
transfer as set forth in the Tesoro Petroleum Corporation
Executive Long-Term Incentive Plan, and in a Restricted Stock
Agreement. A copy of the Plan and such Restricted Stock
Agreement may be obtained from Tesoro Petroleum Corporation."
The Company shall have the right to retain the certificates
representing Shares of Restricted Stock in the Company's possession
until such time as all conditions and/or restrictions applicable to
such Shares have been satisfied.
8.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article
8, Shares of Restricted Stock covered by each Restricted Stock grant
made under the Plan shall become freely transferable by the
Participant after the last day of the Period of Restriction. Once the
Shares are released from the restrictions, the Participant shall be
entitled to have the legend required by Section 8.5 removed from his
or her share certificate.
8.7 VOTING RIGHTS. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to those Shares.
8.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder
shall be entitled to receive all dividends and other distributions
paid with respect to those Shares while they are so held. If any such
dividends or distributions are paid in Shares, the Shares shall be
subject to the same restrictions on transferability and forfeitability
as the Shares of Restricted Stock with respect to which they were
paid.
In the event that any dividend constitutes a "derivative security" or
an "equity security" pursuant to Rule 16(a) under the Exchange Act,
such dividend shall be subject to a vesting period equal to the longer
of: (i) the remaining vesting period of the Shares of Restricted Stock
with respect to which the dividend is paid; or (ii) six months. The
Committee shall establish procedures for the application of this
provision.
8.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In
the event the employment of a Participant is terminated by reason of
death, Disability, or
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<PAGE> 48
Retirement, all unvested Shares of Restricted Stock shall immediately
be forfeited by the Participant; provided, however, that the
Committee, in its sole discretion, shall have the right to provide for
accelerated vesting of some or all unvested Shares of Restricted
Stock, upon such terms as the Committee deems advisable. The holder
of the certificates of Restricted Stock shall be entitled to have any
nontransferability legends required under Sections 8.4 and 8.5 of this
Plan removed from the Share certificates.
8.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a
Participant shall terminate for any reason other than those
specifically set forth in Section 8.9 herein, all Shares of Restricted
Stock held by the Participant which are not vested as of the effective
date of employment termination immediately shall be forfeited (and,
subject to Section 4.2 herein, shall once again become available for
grant under the Plan).
With the exception of a termination of employment for Cause, the
Committee, in its sole discretion, shall have the right to provide for
lapsing of the restrictions on Restricted Stock following employment
termination, upon such terms and provisions as it deems appropriate.
ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES
9.1 GRANT OF PERFORMANCE UNITS/SHARES. Subject to the terms of the Plan,
Performance Units and Performance Shares may be granted to eligible
Employees at any time and from time to time, as shall be determined by
the Committee. The Committee shall have complete discretion in
determining the number of Performance Units and Performance Shares
granted to each Participant.
9.2 VALUE OF PERFORMANCE UNITS/SHARES. Each Performance Unit shall have
an initial value that is established by the Committee at the time of
grant. Each Performance Share shall have an initial value equal to
the Fair Market Value of a Share on the date of grant. The Committee
shall set performance goals in its discretion which, depending on the
extent to which they are met, will determine the number and/or value
of Performance Units/Shares that will be paid out to the Participants.
The time period during which the performance goals must be met shall
be called a "Performance Period." Performance Periods shall, in all
cases, exceed six (6) months in length.
9.3 EARNING OF PERFORMANCE UNITS/SHARES. After the applicable Performance
Period has ended, the holder of Performance Units/Shares shall be
entitled to receive payout on the number of Performance Units/Shares
earned by the Participant over the Performance Period, to be
determined as a function of the extent to which the corresponding
performance goals have been achieved.
9.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES. Payment of
each Performance Units/Shares shall be made in a single lump sum,
within forty-five (45) calendar days following the close of the
applicable Performance Period. The
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<PAGE> 49
Committee, in its sole discretion, may pay earned Performance
Units/Shares in the form of cash or in Shares (or in a combination
thereof), which have an aggregate Fair Market Value equal to the value
of the earned Performance Units/Shares at the close of the applicable
Performance Period.
Prior to the beginning of each Performance Period, Participants may
elect to defer the receipt of Performance Unit/Share payout upon such
terms as the Committee deems appropriate.
9.5 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, RETIREMENT, OR
INVOLUNTARY TERMINATION (WITHOUT CAUSE). In the event the employment
of a Participant is terminated by reason of death, Disability,
Retirement, or involuntary termination without Cause during a
Performance Period, the Participant shall receive a prorated payout of
the Performance Units/Shares. The prorated payout shall be determined
by the Committee, in its sole discretion, and shall be based upon the
length of time that the Participant held the Performance Units/Shares
during the Performance Period, and shall further be adjusted based on
the achievement of the preestablished performance goals.
Payment of earned Performance Units/Shares shall be made at the same
time payments are made to Participants who did not terminate
employment during the applicable Performance Period. However, the
Committee, in its sole discretion, shall have the right to accelerate
the timing of this payout, upon such terms and provisions as it deems
appropriate.
9.6 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a
Participant's employment terminates for any reason other than those
reasons set forth in Section 9.5 herein, all Performance Units/Shares
shall be forfeited by the Participant to the Company, and shall once
again be available for grant under the Plan. However, the Committee,
in its sole discretion, may provide a payout on any or all Performance
Units/Shares, upon such times and provisions as it deems appropriate.
9.7 NONTRANSFERABILITY. Performance Units/Shares may not be sold,
transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution. Further a Participant's rights under the Plan shall be
exercisable during the Participant's lifetime only by the Participant
or the Participant's legal representative.
ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke
all prior designations by the same Participant, shall be in a form prescribed
by the Company, and will be effective only when filed by the Participant in
writing with the Company during the Participant's lifetime. In the absence
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<PAGE> 50
of any such designation, benefits remaining unpaid at the Participant's death
shall be paid to the Participant's estate.
ARTICLE 11. DEFERRALS
The Committee may permit a Participant to defer such Participant's receipt of
the payment of cash or the delivery of Shares that would otherwise be due to
such Participant by virtue of the exercise of an Option or SAR, the lapse or
waiver of restrictions with respect to Restricted Stock, or the satisfaction of
any requirements or goals with respect to Performance Units/Shares. If any
such deferral election is required or permitted, the Committee shall, in its
sole discretion, establish rules and procedures for such payment deferrals.
ARTICLE 12. RIGHTS OF EMPLOYEES
12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment
at any time, nor confer upon any Participant any right to continue in
the employ of the Company.
For purposes of the Plan, transfer of employment of a Participant
between the Company and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a termination of employment.
12.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or having been so selected, to be
selected to receive a future Award.
ARTICLE 13. CHANGE IN CONTROL
Upon the occurrence of a Change in Control, unless otherwise specifically
prohibited by the terms of Section 18 herein:
(a) Any and all Options and SARs granted hereunder shall become
immediately exercisable;
(b) Any restriction periods and restrictions imposed on Restricted Shares
shall lapse, and within ten (10) business days after the occurrence of
a Change in Control, the stock certificates representing Shares of
Restricted Stock, without any restrictions or legend thereon, shall be
delivered to the applicable Participants;
(c) The target payout opportunity attainable under all outstanding
Performance Units and Performance Shares shall be deemed to have been
earned for the portion of the Performance Period(s) that passed as of
the effective date of the Change in Control. This pro rata value
shall be paid out in cash to Participants within thirty (30) days
following the effective date of the Change in Control. However,
regardless of the above, Performance Units or Performance Shares that
were granted less than six (6) months prior to the effective date of
the Change in Control shall be forfeited in their entirety, and
receive no accelerated payout.
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(d) Subject to Article 14 herein, the Committee shall have the authority
to make any modifications to the Awards as determined by the Committee
to be appropriate before the effective date of the Change in Control.
(e) In the event that following the Change in Control the Shares are no
longer traded over a national public securities exchange, Participants
holding Options shall have the right to require the Company to make a
cash payment to them in exchange for their Options. Such cash payment
shall be contingent upon the Option holder surrendering his or her
Option. The amount of the cash payment shall be determined by adding
the total "spread" on all outstanding Options. For this purpose, the
total "spread" shall equal the sum of the differences between: (i)
the Fair Market Value of a Share on the date the Option is surrendered
by the Participant; and (ii) the Option Price applicable to each Share
held under Option.
ARTICLE 14. AMENDMENT, MODIFICATION, AND TERMINATION
14.1 AMENDMENT, MODIFICATION, AND TERMINATION. At any time and from time
to time, the Board may terminate, amend, or modify the Plan. However,
without the approval of the stockholders of the Company (as may be
required by the Code, by the insider trading rules of Section 16 of
the Exchange Act, by any national securities exchange or system on
which the Shares are then listed or reported, or by a regulatory body
having jurisdiction with respect hereto), no such termination,
amendment, or modification may:
(a) Materially increase the total number of Shares which may be
issued under this Plan, except as provided in Section 4.3
herein; or
(b) Materially modify the eligibility requirements; or
(c) Materially increase the benefits accruing under the Plan.
14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification
of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award.
ARTICLE 15. WITHHOLDING
15.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company,
an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be
withheld with respect to any taxable event arising or as a result of
this Plan.
15.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on
Restricted Stock, or upon any other taxable event hereunder,
Participants may elect, subject to the approval of the Committee, to
satisfy the withholding requirement, in whole or in part, by having
the
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Company withhold Shares having a Fair Market Value on the date the tax
is to be determined equal to the minimum statutory total tax which
could be imposed on the transaction. All elections shall be
irrevocable, made in writing, signed by the Participant, and elections
by Insiders shall additionally comply with the applicable requirement
set forth in (a) or (b) of this Section 15.2.
(A) AWARDS HAVING EXERCISE TIMING WITHIN PARTICIPANTS' DISCRETION.
The Insider must either:
(i) Deliver written notice of the stock withholding
election to the Committee at least six (6) months
prior to the date specified by the Insider on which
the exercise of the Award is to occur, or
(ii) Make the stock withholding election in connection
with an exercise of an Award which occurs during a
Window Period.
(B) AWARDS HAVING A FIXED EXERCISE/PAYOUT SCHEDULE WHICH IS
OUTSIDE INSIDER'S CONTROL. The Insider must either.
(i) Deliver written notice of the stock withholding
election to the Committee at least six (6) months
prior to the date on which the taxable event (e.g.,
exercise or payout) relating to the Award is
scheduled to occur; or
(ii) Make the stock withholding election during a Window
Period which occurs prior to the scheduled taxable
event relating to the Award (for this purpose, an
election may be made prior to such a Window Period,
provided that it becomes effective during a Window
Period occurring prior to the applicable taxable
event).
ARTICLE 16. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him or her in satisfaction of any
judgment in any such action, suit, or proceeding against him or her, provided
he or she shall give the Company an opportunity, at its own expense, to handle
and defend the same before he or she undertakes to handle and defend it on his
or her own behalf.
The foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which such persons may be entitled under the
Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold
them harmless.
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ARTICLE 17. SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards granted
hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the
business and/or assets of the Company.
ARTICLE 18. LEGAL CONSTRUCTION
18.1 GENDER AND NUMBER. Except where otherwise indicated by the context
any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the
plural.
18.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining parts of the Plan, and the Plan shall be
construed and enforced as if the illegal or invalid provision had not
been included.
18.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules,
and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
Notwithstanding any other provision set forth in the Plan, if required
by the then-current Section 16 of the Exchange Act, any "derivative
security" or "equity security" offered pursuant to the Plan to any
Insider may not be sold or transferred for at least six (6) months
after the date of grant of such Award. The terms "equity security"
and "derivative security" shall have the meanings ascribed to them in
the then-current Rule 16(a) under the Exchange Act.
18.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions
of Rule 16b-3 or its successors under the 1934 Act. To the extent any
provision of the plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
18.5 GOVERNING LAW. To the extent not preempted by Federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the State of Texas.
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