<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT 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 (S)240.14a-11(c) or (S)240.14a-12
ULTRAMAR DIAMOND SHAMROCK CORPORATION
---------------------------------------------------------------------------
Name of Registrant as Specified In Its Charter)
ULTRAMAR DIAMOND SHAMROCK CORPORATION
---------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] 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
0-1 1(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:
Notes:
<PAGE>
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Ultramar Diamond Shamrock
C o r p o r a t i o n
NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
For Annual Meeting to be held May 4, 1999
<PAGE>
NOTICE OF ANNUAL MEETING
May 4, 1999
To the Stockholders of Ultramar Diamond Shamrock Corporation:
The Annual Meeting of Stockholders (the "Annual Meeting") of Ultramar
Diamond Shamrock Corporation (the "Company") will be held at the Omni Hotel,
9821 Colonnade Boulevard, San Antonio, Texas 78230 on Tuesday, May 4, 1999 at
10:00 a.m. San Antonio time, for the following purposes:
1. To elect four directors to serve for a three-year term expiring in 2002
(Proxy Item 1);
2. To ratify the appointment of independent accountants for 1999 (Proxy
Item 2 ); and
3. To transact any other business which may be properly brought before the
Annual Meeting.
Holders of record of the Company's Common Stock at the close of business on
March 11, 1999 are entitled to notice of and to vote at the Annual Meeting.
April 2, 1999
BY ORDER OF THE BOARD OF DIRECTORS
CURTIS V. ANASTASIO
Vice President, General Counsel, and
Secretary
Ultramar Diamond Shamrock Corporation
6000 N Loop 1604 W
P.O. Box 696000
San Antonio, Texas 78269-6000
Telephone: (210) 592-2000
Whether or not you plan to attend the Annual Meeting, please date and sign the
enclosed proxy, and return it in the envelope provided. Any person giving a
proxy has the power to revoke it at any time prior to its exercise and, if
present at the Annual Meeting, may withdraw it and vote in person. Attendance
at the Annual Meeting is limited to stockholders, their proxies, and invited
guests of the Company.
<PAGE>
PROXY STATEMENT
GENERAL INFORMATION
Introduction
The Board of Directors (the "Board") of the Company is soliciting proxies to
be voted at the 1999 Annual Meeting to be held in San Antonio, Texas on May 4,
1999, and at any adjournment thereof. This Proxy Statement and the enclosed
proxy are first being mailed to stockholders on or about April 2, 1999.
Shares Voting
Holders of shares of the Common Stock of the Company ("Common Stock") at the
close of business on March 11, 1999 (the "Record Date") are entitled to notice
of the Annual Meeting and to vote shares held on that date at the Annual
Meeting. As of the close of business on the Record Date, there were 86,553,294
shares of Common Stock outstanding and entitled to vote at the Annual Meeting.
Each share of Common Stock is entitled to one vote at the Annual Meeting. A
majority of such outstanding shares of Common Stock, represented in person or
by proxy, is necessary to provide a quorum at the Annual Meeting.
Voting of Proxies
This proxy solicitation is intended to afford stockholders the opportunity to
vote regarding the election of directors, the appointment of the Company's
independent accountants for 1999, and in respect of such other matters, if any,
as may be properly brought before the Annual Meeting.
It is the Company's policy for the Annual Meeting that all returned proxies,
ballots, and other voting materials used in connection with the Annual Meeting
that identify the votes of specific stockholders will be kept confidential and
made available only to certain persons involved in the receipt, counting,
tabulation, or solicitation of proxies who have agreed to maintain stockholder
confidentiality. Access to voted proxies, ballots, and other voting materials
will not be restricted where stockholders seek to communicate with management
by writing comments on their proxy cards or otherwise disclose their vote to
management or where disclosure may be required by applicable law. In limited
circumstances, such as proxy solicitation based on an opposition proxy
statement or a proxy solicitation on a matter requiring a vote of more than a
majority of the shares represented at the Annual Meeting, this policy could be
suspended by the Board.
A proxy may be revoked either by a written notice duly signed and delivered
to the Secretary of the Company prior to the Annual Meeting, by execution of a
subsequent proxy, or by voting in person at the Annual Meeting. Abstentions and
broker non-votes will be counted for purposes of determining the presence of a
quorum for the transaction of business at the Annual Meeting, but not
otherwise. Where a stockholder's proxy specifies a choice with respect to a
matter, the shares will be voted accordingly. If no such specification is made,
the shares will be voted FOR the nominees for director identified below, FOR
the ratification of the appointment of Arthur Andersen LLP as the Company's
Independent accountants, and in the manner that the appointed proxies determine
with respect to other matters properly brought before the Annual Meeting.
Annual Report
The Company's Annual Report on Form 10-K for the year ended December 31, 1998
is being furnished with this Proxy Statement to stockholders of record as of
the Record Date. The Company's Annual Report on Form 10-K for the year ended
December 31, 1998 that is being furnished to stockholders along with this proxy
statement contains a list of exhibits filed therewith, but does not include
copies of the exhibits. Copies of those exhibits may be obtained without charge
through the office of the corporate secretary at the address shown above.
<PAGE>
ELECTION OF DIRECTORS PROPOSAL
(Item 1 on the Proxy)
The Company's bylaws provide that the directors will be classified into three
classes. The directors of each class serve for a term of three years and until
their successors are elected and qualified.
Information regarding the nominees proposed by the Company's Board for
election at the Annual Meeting and the other directors of the Company whose
terms expire after the Annual Meeting is set forth below. Messrs. Christie,
Clark, Gaulin and Marbut have been nominated for election to the class of
directors whose terms expire at the 2002 Annual Meeting. Each nominee is
presently serving as a director of the Company.
A majority of the Company's Common Shares cast at the Annual Meeting is
required to elect directors. Each nominee has consented to being named in this
Proxy Statement and to serve if elected. If a nominee should for any reason
become unavailable for election, proxies may be voted with discretionary
authority by the persons named therein for a substitute designated by the
Company's Board.
The persons named in the proxy will vote for the nominees listed below except
where authority has been withheld.
Nominees for Election at the Annual Meeting
H. Frederick Christie, age 65, is a consultant specializing in strategic and
financial planning. He retired, effective January 1, 1991, as Chairman and
Chief Executive Officer of The Mission Group, the non-utility subsidiary of SCE
Corp. Prior to that he served as President of Southern California Edison
Company. Mr. Christie is a director or trustee of 19 mutual funds under the
Capital Research and Management Company and a director of AECOM Technology
Corporation, International House of Pancakes, Inc., Ducommon, Incorporated and
Southwest Water Company. Mr. Christie is Vice Chairman of the Compensation
Committee and serves on the Finance and Planning Committee. He has been a
director of the Company since 1992.
W.H. Clark, age 66, is the retired Chief Executive Officer and Chairman of
the Board of Directors of Nalco Chemical Company. He was the President and
Chief Executive Officer of Nalco Chemical Company from 1982 until 1990, and
Chairman of the Board of Directors and Chief Executive Officer of that company
from 1984 until 1994. Mr. Clark is President of W. "H" Clark Associates, Ltd.,
and is a member of the Board of Directors of Merrill Lynch Corporation, USG
Corporation and its subsidiary, United States Gypsum Company, Fort James
Corporation, Bethlehem Steel Corporation, and Millennium Chemicals Corp. Mr.
Clark is Vice Chairman of the Finance and Planning Committee and serves on the
Compensation Committee. He served as a director of Diamond Shamrock, Inc.
("Diamond") from 1994 until he became a director of the Company in December
1996 effective with the merger between Ultramar Corporation and Diamond in
December 1996 ("U-DS Merger.")
Jean Gaulin, age 56, is Vice-Chairman, President, and Chief Executive Officer
of the Company. Prior to the U-DS Merger, he had been the Chairman of the Board
and Chief Executive Officer of the Company since its formation in 1992. From
July 1989 through January 1992, Mr. Gaulin was Chief Executive Officer of
Ultramar PLC, a leading international integrated oil and gas company, engaged
in exploration, production, development and refining and marketing, which was
the Company's predecessor. Prior to that, Mr. Gaulin was President of Ultramar
Canada, Inc. Mr. Gaulin serves on the board of directors of Quebec Telephone,
Inc. He has been a director of the Company since 1992.
Bob Marbut, age 63, has been Chairman and Chief Executive Officer of Argyle
Communications, Inc. since January 1992, and Chairman and Co-Chief Executive
Officer of Hearst-Argyle Television, Inc. since August 1997. He was Chairman
and Chief Executive Officer of Argyle Television, Inc. from August 1994 until
its merger with Hearst Broadcasting in August 1997. He was Chairman and Chief
Executive Officer of Argyle Television Holding, Inc. from its founding in March
1993 until April 1994. Prior to 1992, Mr. Marbut was President and Chief
Executive Officer of Harte-Hanks Communications, Inc. for 20 years and served
one year as Vice Chairman of that company. He is a director of Tupperware
Corporation and Hearst-Argyle Television,
2
<PAGE>
Inc. He is chairman of the Audit Review Committee and serves on the Finance and
Planning Committee. He served as a director of Diamond from 1990 until he
became a director of the Company in December 1996 effective with the U-DS
Merger.
Directors Whose Terms Expire at the 2000 Annual Meeting
Byron Allumbaugh, age 67, is the former Chairman and Chief Executive Officer
of Ralphs Grocery Company in Los Angeles, California. Mr. Allumbaugh is a
member of the board of directors of El Paso Energy Company, C.K.E. Restaurants,
and the Automobile Club of Southern California. Mr. Allumbaugh is Chairman of
the Compensation Committee and serves on the Public Responsibility Committee.
He has been a director of the Company since 1992.
E. Glenn Biggs, age 65, is President of Biggs & Co., a corporation engaged in
developmental projects and financial planning. He has been involved in
commercial banking beginning with his service as Chairman of the Board of First
National Bank of San Antonio. He later served as Vice Chairman and Chairman of
the Executive Committee of Interfirst Bank, San Antonio. He serves as Chairman
of Hester Asset Management Corp. and Southwestern Bancorp. He is a former
Chairman and Director of Bolivian Power Corporation. He has served as Chairman
and is a Director of the University of Texas Health Science Center.
Additionally, he has served as Chairman of the Board of Regents of Baylor
University. Mr. Biggs serves on the Audit Review Committee and the Finance and
Planning Committee. He was a director of Diamond from 1987 until he became a
director of the Company in December 1996 effective with the U-DS Merger.
Katherine D. Ortega, age 64, was an alternate representative of the United
States to the 45th General Assembly of the United Nations 1990-1991. She served
as the 38th Treasurer of the United States from 1983 to 1989. Prior to joining
the Treasury Department as Treasurer, Ms. Ortega served as a Commissioner on
the Copyright Royalty Tribunal, and was a member of the President's Advisory
Committee on Small and Minority Business. Ms. Ortega is a director of Ralston
Purina Company, Rayonier, Inc. and the Kroger Co. She also serves as a director
of Catalyst, and is a member of the United States Comptroller General's
Consultant Panel. Ms. Ortega is a member of the Washington Mutual Investors
Fund Advisory Board. Before entering government, Ms. Ortega practiced as a
certified public accountant. Ms. Ortega is Vice Chairman of the Public
Responsibility Committee and serves on the Audit Review Committee. She was a
director of Diamond from 1989 until she became a director of the Company in
December 1996 effective with the U-DS Merger.
Madeleine Saint-Jacques, age 63, is Chairman of the Board of Saint-Jacques
Vallee Young and Rubicam Inc. in Montreal, Canada. From 1990 through 1994, she
was President of Young & Rubicam, and from 1978 through 1990, she served as its
Executive Vice President and Managing Director. Ms. Saint-Jacques is a member
of the board of directors of Groupe TVA inc. and St. Mary's Hospital
Foundation. Ms. Saint-Jacques is also a member of the Board of Governors, Inno-
Centre Quebec, a member of the Board of Associate Governors, University of
Montreal and Vice President of Societe d'edition de la revue Forces. Ms. Saint-
Jacques is Chairman of the Public Responsibility Committee and serves on the
Compensation Committee. She has been a director of the Company since 1992.
Directors Whose Terms Expire at the 2001 Annual Meeting
W.E. "Bill" Bradford, age 64, became Chairman of Halliburton Company
effective upon its merger in 1998 with Dresser Industries, Inc. Prior to that,
Mr. Bradford was Chairman and Chief Executive Officer of Dresser Industries,
Inc. Mr. Bradford had been with Dresser Industries, Inc. since 1963 and has
held various positions in production and management. In 1988 Mr. Bradford was
appointed President and Chief Executive Officer of Dresser-Rand Company. He was
elected President and Chief Operating Officer of Dresser Industries, Inc. in
March 1992, President and Chief Executive Officer of Dresser Industries, Inc.
in November 1995, and to the position of Chairman and Chief Executive Officer
of that Company in December 1996. Mr. Bradford serves on the Board of Directors
of Halliburton Company and Oryx Energy Company. He is Vice Chairman of the
Audit Review Committee and serves on the Compensation Committee. He was a
director of Diamond from 1992 until he became a director of the Company in
December 1996 effective with the U-DS Merger.
3
<PAGE>
Roger R. Hemminghaus, age 61, is Chairman of the Board of the Company. Mr.
Hemminghaus is a director of Luby's Cafeterias, Inc. and New Century Energies
and is the Chairman of the board of directors of the Federal Reserve Bank of
Dallas. Mr. Hemminghaus was the Chairman, Chief Executive Officer and President
of Diamond prior to the U-DS Merger. He served as a director of Diamond from
1987 and became Chairman of the Board and Chief Executive Officer of the
Company in December 1996 effective with the U-DS Merger. He served as Chief
Executive Officer of the Company from that time through December 31, 1998.
Russel H. Herman, age 68, is a former owner and principal of International
Energy Consultants Ltd., a firm which provides consulting services to senior
management in the international energy industry. Prior to that, Mr. Herman was
employed by Exxon Corporation as President and Chief Executive Officer for the
Asia-Pacific area and Executive Vice President for Exxon's petroleum business
in Europe. Mr. Herman is a member of the board of the Leonhard Center for the
Enhancement of Engineering Education at Pennsylvania State University and was
named an Honor Engineering Alumnus and also an Alumni Fellow of that
university. He is on the national board of directors of Recording for the Blind
& Dyslexic, serving on its executive committee. He is also a member of the
board of Greenwich Land Trust. He has been a director of the Company since
1992, and is currently Chairman of its Finance and Planning Committee and a
member of the Public Responsibility Committee.
C. Barry Schaefer, age 60, is an Executive Director of The Beacon Group, an
investment and financial advisory firm. Prior to joining Beacon in April 1997,
he had been a Managing Director with The Bridgeford Group, a merger and
acquisition subsidiary of the Industrial Bank of Japan, since 1992. From 1989
through 1991 he was a senior advisor with Dillon Read & Co., Inc., an
investment banking group, and prior to that he served as an Executive Vice
President of Union Pacific Corporation. Mr. Schaefer serves on the Audit Review
Committee and the Public Responsibility Committee. He has been a director of
the Company since 1992.
Board Committees
The management of the Company is under the direction of the Board. The
Company's Board has established Audit Review, Compensation, Finance and
Planning, and Public Responsibility Committees. The Company's Board held a
total of 11 meetings in 1998. Attendance at the meetings of the Company's Board
was 98%. Attendance at the meetings of the Audit Review Committee was 87%.
Attendance at the meetings of the Compensation Committee was 92%. Attendance at
the meetings of the Finance and Planning Committee and the Public
Responsibility Committee was 100%.
Audit Review Committee. Bob Marbut (Chairman), W.E. Bradford (Vice Chairman),
E. Glenn Biggs, Katherine D. Ortega and C. Barry Schaefer serve on the Audit
Review Committee. The Audit Review Committee reviews the professional services
provided by the Company's independent accountants. The Committee's review
includes the scope of the audit by the Company's independent accountants, the
annual financial statements of the Company, the annual audit report of the
independent accountants, the adequacy of the Company's internal accounting
controls, year 2000 compliance, and such other matters with respect to the
accounting, auditing, and financial reporting practices and procedures of the
Company as it finds appropriate or as may be brought to its attention. The
Audit Review Committee held three meetings in 1998.
Compensation Committee. Byron Allumbaugh (Chairman), H. Frederick Christie
(Vice Chairman), W.E. Bradford, W.H. Clark, and Madeleine Saint-Jacques serve
on the Compensation Committee. The Compensation Committee establishes executive
compensation policy, administers incentive compensation, stock options and
certain benefit plans of the Company, and approves the salaries and other
benefits of the executive officers. In addition, this Committee advises and
consults with the Company's management regarding the compensation policies and
practices of the Company applicable to other employees. The Compensation
Committee held five meetings in 1998.
Finance and Planning Committee. Russel H. Herman (Chairman), W.H. Clark (Vice
Chairman), E. Glenn Biggs, H. Frederick Christie, and Bob Marbut serve on the
Finance and Planning Committee. The Finance and
4
<PAGE>
Planning Committee reviews and makes recommendations to the Board with regard
to the overall financial structure, financial condition, and financial capacity
of the Company, including consideration of such financial matters as material
corporate borrowings, investments, capital expenditures, and long-term
commitments. In addition, it reviews and makes recommendations to the Board
with respect to the Company's annual budget and five-year business plan. The
Finance and Planning Committee held three meetings in 1998.
Public Responsibility Committee. Madeleine Saint-Jacques (Chairman),
Katherine D. Ortega (Vice Chairman), Byron Allumbaugh, Russel H. Herman, and C.
Barry Schaefer serve on the Public Responsibility Committee. The Public
Responsibility Committee reviews and monitors the Company's policies, programs,
and practices which significantly affect such responsibilities as environmental
protection, safety and health, equal employment opportunity, and business
conduct. The Committee, after consultation with management, recommends
policies, practices and programs to the Company Board regarding the Company's
relationships with its various constituencies. In addition, this Committee has
responsibility for considering the composition, structure and functioning of
the Company Board, and for selecting nominees for election as directors of the
Company. The Public Responsibility Committee held three meetings in 1998.
Nominations for Director
The Public Responsibility Committee is responsible for considering the
composition, structure, and functioning of the Company Board and for selecting
nominees for election as directors of the Company. Stockholders may make
nominations to the Company Board by following the procedures set out in the
Company's bylaws, and not otherwise. The Company bylaws provide generally that
stockholders wishing to nominate director candidates for consideration by the
Public Responsibility Committee may do so by writing the Secretary of the
Company and giving the candidate's name, biographical information,
qualifications, and class or series and number of shares of capital stock of
the Company owned by the nominee. Such notice must also set out the name and
address of the stockholder giving the notice, the class or series and number of
shares of capital stock of the Company beneficially owned by such stockholder,
a description of any arrangements relating to the nomination between the
stockholder and the nominee or any other person, and a representation that the
stockholder intends to appear in person to make the nomination. Such notice
must be accompanied by the consent of the nominee to serve if elected. The
Company bylaws require that notice of nominations by the stockholders of
persons for election as directors at annual meetings of the Company be
delivered not less than 60 nor more than 90 days prior to the anniversary date
of the mailing of the proxy for the immediately preceding annual meeting;
provided, that if the annual meeting is called for a date that is not within 30
days of the anniversary date of the prior year's annual meeting, notice by the
stockholder in order to be timely must be so received not later than the close
of business on the tenth day following the first to occur of the day on which
the notice of such annual meeting was mailed or the date of the public
disclosure of the date of the annual meeting. A copy of the Company bylaws has
been filed with the SEC or may be obtained upon request from the Company. See
"Where You Can Find More Information."
5
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Summary Compensation Table
The following table presents the compensation of the Company's Chief
Executive Officer and each of the Company's four most highly compensated
executive officers in each of 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
------------------------------------------ ------------------------------------------------
Number of
Securities
Restricted Underlying
Name and Other Annual Stock Options LTIP All Other
Principal Position Year Salary(1) Bonus(1)(2) Compensation(3) Awards(4) Granted(5) Payouts(6) Compensation(7)
------------------ ---- --------- ----------- --------------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roger R. Hemminghaus.... 1998 $725,000 $363,300 $ 2,785 $ 0 53,070 $ 0 $160,091
Chairman and Chief 1997 725,000 507,600 13,378 0 23,743 0 176,686
Executive Officer 1996 616,667 500,000 6,395 0 647,717 822,000 132,432
Jean R. Gaulin.......... 1998 725,000 363,300 2,785 0 175,000 0 58,850
Vice Chairman, 1997 725,000 507,600 6,461 0 35,425 0 58,850
President and Chief 1996 669,767 443,333 0 0 480,000 0 29,100
Operating Officer
Timothy J. Fretthold.... 1998 335,000 140,300 4,283 0 76,318 0 36,182
Executive Vice 1997 335,000 214,400 4,251 0 1,419 0 50,059
President and Chief 1996 264,583 175,000 1,131 0 185,873 225,000 35,049
Administrative and
Legal Officer
William R. Klesse....... 1998 335,000 140,300 3,580 0 100,000 0 40,386
Executive Vice 1997 335,000 217,400 5,082 0 1,957 0 54,104
President 1996 292,083 175,000 1,302 0 178,484 281,000 39,798
H. Pete Smith........... 1998 335,000 140,300 2,646 0 75,000 0 18,151
Executive Vice 1997 335,000 214,400 5,267 0 0 0 167,490
President and Chief 1996 302,781 134,000 0 0 134,000 0 14,111
Financial Officer
</TABLE>
- --------
(1) Includes amounts which have been deferred under the Company's 401(k)
Retirement Savings Plans and Nonqualified 401(k) Plan. Under the
Nonqualified 401(k) Plan, participants are permitted to defer receipt of
compensation in addition to deferrals under the 401(k) Plans. In 1998 the
base salaries of the named executive officers were increased. However, the
payment of such increase in 1998 was conditioned upon the Company's
achieving basic net income of at least $2.50 per common share. The Company
did not achieve that objective and the increases to base salary were not
paid in 1998. Such increases to base salary were in the following amounts:
Mr. Hemminghaus, $75,000; Mr. Gaulin, $75,000; Mr. Fretthold, $35,000; Mr.
Klesse, $35,000; and Mr. Smith $35,000.
(2) Reflects incentive-based cash bonuses awarded under the Company's annual
incentive plan. Awards under that plan are reported as compensation in the
year with respect to which the award was earned, even if actually paid in
the following year. The figures shown include amounts deferred under the
Company's 401(k) Plans and Nonqualified 401(k) Plan. See Note (1) above.
(3) Reimbursement of executive officers for federal income tax and medicare tax
relating to various benefit plans and premiums paid for group life
insurance in excess of $50,000. Perquisites and other personal benefits
received by the executive officers are not included because the aggregate
amount of such compensation, if any, does not exceed the lesser of $50,000
or 10% of the total amount of annual salary and bonus for any named
individual.
(4) Unvested shares of restricted stock may not be sold or transferred. The
shares otherwise carry full voting rights and dividends are paid on
restricted stock awards from the time of grant at the same rate as paid to
all stockholders. The total amount of restricted stock held by each of the
named executive officers and the fair market value of such shares as of
December 31, 1998, without reducing such market value for restrictions on
transfer was as follows: Mr. Hemminghaus, 4,665 shares, $113,126; Mr.
Fretthold, 1,050 shares, $25,463 and Mr. Klesse, 1,060 shares, $25,705.
(5) Options granted in 1998 to Messrs. Hemminghaus and Fretthold include reload
options granted upon exercise of the associated option. Options granted in
1997 to Messrs. Hemminghaus, Gaulin, Fretthold and Klesse consist of reload
options granted upon exercise of the associated option. Options granted in
1996 to Messrs. Hemminghaus, Fretthold and Klesse include reload options
granted upon exercise of the associated option. See Note (2) to table
entitled "Option Grants in 1998."
(6) Long-Term Incentive Plan payouts included in this column for Messrs.
Hemminghaus, Fretthold and Klesse include the payout of performance units
that were granted by Diamond in 1996.
(7) Includes the following compensation paid or accrued under benefit plans
maintained by the Company:
(a) Above-market interest accrued on amounts deferred by Messrs.
Hemminghaus, Fretthold and Klesse under the Diamond Deferred
Compensation Plan: Mr. Hemminghaus $58,457, Mr. Fretthold $6,031, and
Mr. Klesse $9,003.
(b) Annual allocations or accruals in the last fiscal year under the
Company's Employee Stock Ownership Plans and related Excess Benefits
Plan: Mr. Hemminghaus $22,867, Mr. Fretthold $9,414, and Mr. Klesse
$9,595. The Company's Employee Stock Ownership Plans were terminated in
November 1997.
(c) The supplemental disability income program for executive officers of the
Company employed prior to the U-DS Merger provides those executive
officers an amount equal to 60% of base compensation less any amount
received by such officer under any other
6
<PAGE>
long-term disability plan sponsored by the Company for employees
generally. The supplemental disability income program for former Diamond
executives provides participants with an amount equal to 66 2/3% of base
compensation less an amount received by such executive under any other
long-term disability plan sponsored by the Company for employees
generally. Annual premiums paid or accrued in the last fiscal year by the
Company to fulfill its obligations under the supplemental disability
income program relating to the named executive officers were: Mr.
Hemminghaus $5,272, Mr. Gaulin $9,784, Mr. Fretthold $1,137, Mr. Klesse
$1,278, and Mr. Smith $1,669.
(d) Premiums paid or accrued in the last fiscal year under the executive
life insurance program for executive officers relating to the named
executive officers were: Mr. Hemminghaus $36,517, Mr. Gaulin $12,088,
Mr. Fretthold $3,118, and Mr. Klesse $3,938.
(e) Matching contributions to participants' 401(k) accounts, and amounts
awarded by the Company under its Nonqualified 401(k) Plans under which
amounts are awarded which may not be awarded under the Company's
qualified 401(k) plans due to limitations imposed by the Internal
Revenue Code of 1986, as amended (the "Code"). Contributions made to the
accounts of the named executive officers in 1998 were: Mr. Hemminghaus
$36,978, Mr. Gaulin $36,978, Mr. Fretthold $16,482, Mr. Klesse $16,572,
and Mr. Smith $16,482.
(f) Mr. Smith received a relocation incentive payment of $150,000 in 1997 in
connection with his relocation to the Company's new headquarters after
the U-DS Merger was completed.
Stock Options
The tables below set forth information regarding stock options, including
options granted upon exercise of reload rights (i.e., the grant of new options
upon the payment of an option exercise price with previously owned shares),
granted to and exercised by the named executive officers in 1998, and the
value of unexercised options and related rights held by such executive
officers at the end of 1998.
Option Grants in 1998
Individual Grants
<TABLE>
<CAPTION>
Percent of Grant Date Value
Number of Total Options -----------------------------
Securities Granted to Exercise or Grant Date
Underlying Employees in Base Price Present
Name Grant Date(1) Options Granted Fiscal Year ($/Sh)(2) Expiration Date Value(3)
---- ------------- --------------- ------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roger R. Hemminghaus.... 02/11/98 17,761 1.31 35.9375 12/31/00 $ 79,275.11
02/11/98 4,608 0.34 35.9375 12/31/00 20,567.52
02/11/98 3,370 0.25 35.9375 12/31/00 15,041.78
02/11/98 9,587 0.70 35.9375 12/31/00 42,790.98
02/11/98 13,665 1.00 35.9375 12/19/04 90,949.12
10/21/98 4,079 0.30 29.6875 12/31/00 16,408.41
Jean R. Gaulin.......... 12/01/98 175,000 12.87 26.0625 12/01/08 1,083,678.75
Timothy J. Fretthold.... 03/20/98 1,318 0.07 36.0625 02/06/05 9,087.81
12/01/98 75,000 5.51 26.0625 12/01/08 464,433.75
William R. Klesse....... 12/01/98 100,000 7.35 26.0625 12/01/08 619,245.00
H. Pete Smith........... 12/01/98 75,000 5.51 26.0625 12/01/08 464,433.75
</TABLE>
- --------
(1)Grants of options to purchase the Company's Common Shares were made
throughout the year under the Company's various long-term incentive plans
upon the exercise of reload rights relating to already existing options.
Options were also granted under the 1996 Long-Term Incentive Plan to Messrs.
Gaulin, Fretthold, Klesse and Smith on December 1, 1998 with an exercise
price of $26.0625 and a term of ten years which become exercisable in three
annual installments on the anniversary of the grant of 30%, 30% and 40%
respectively.
(2)Exercise price based on the closing sales price on the NYSE on the date of
grant. The exercise price for options to purchase the Company's Common
Shares upon the exercise of reload rights was determined by reference to the
closing price of the Company's Common Shares on the date preceding the date
of grant.
(3)Value is based on the Black-Scholes option pricing model, in which data
relating to the volatility and dividend yield of the Company's Common Shares
is used, based upon actual experience. For options with ten year terms, the
assumptions are 0.2433 and 3.70% for the annualized volatility and annual
dividend yield, respectively. For reload options with terms of less than ten
years, the assumptions range from 0.1874 to 0.2432 for the annualized
volatility and 3.74% to 3.90% for the annual dividend yield. The risk-free
rate of interest assumed for options with ten year terms was 4.94%. The
risk-free rates of interest assumed for reload options with terms of less
than ten years range from 4.16% to 5.66%.
7
<PAGE>
Aggregated Option Exercises in 1998
and December 31, 1998 Option Values(1)
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Shares Options at Fiscal Year
Acquired 12/31/98 End
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---- -------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Roger R. Hemminghaus............ 68,158 $537,977 250,186/537,024 $ 62,369/$0
Jean R. Gaulin.................. 0 0 436,500/560,425 656,250/ 0
Timothy R. Fretthold............ 2,019 25,304 90,970/208,488 14,147/ 0
William R. Klesse............... 0 0 94,025/230,210 8,312/ 0
H. Pete Smith .................. 0 0 134,900/176,600 495,000/ 0
</TABLE>
- --------
(1)Year-end value for options was calculated based on the market value of the
underlying shares at December 31, 1998.
The Company's Benefit Plans
Qualified Benefit Plan. The Company maintains a tax-qualified defined benefit
pension plan (the "Qualified Plan") for participating Company employees working
in the United States. Benefits are based upon formulae that take into account
(i) the participant's years of service with the Company (and its prior
controlled group for some participants), (ii) the average of a participant's
compensation (consisting of salary and bonus) during such participant's three
highest-paid consecutive years of service out of the participant's most recent
five years of service with the Company (or the prior controlled group, if
higher), and (iii) for certain participants, the benefit formula in effect
under pension plans maintained by businesses acquired by the Company. In
general, a participant accrues a benefit of 1.6% of plan compensation for each
year of service. Retirement benefits payable under the Qualified Plan are
offset by pensions paid by other employers if the participant's years of
service with that employer are taken into account in determining such
participant's benefits under the Qualified Plan.
UDS Supplemental Non-Qualified Retirement Plans. The Company maintains a
supplemental nonqualified defined benefit pension plan (the "Nonqualified
Plan") to provide supplemental retirement benefits to certain executives
designated by the Company Compensation Committee, including Mr. Gaulin and Mr.
Smith out of the named executives. The Nonqualified Plan provides participants
with benefits not payable from the Qualified Plan because of limits imposed by
the Code. A participant who retires at or after age 62 receives a benefit of no
less than 60% of average annual compensation for the three highest-paid
consecutive years of service out of the most recent five, less the amount of
any other retirement benefits payable from any other source.
8
<PAGE>
The following table illustrates the yearly pension commencing at age 62
(which is not offset for social security), assuming a two-thirds joint annuity
with ten years certain, that may become payable to an employee in the higher
salary classifications out of the Qualified Plan and the Nonqualified Plan.
Pension Plan Table
<TABLE>
<CAPTION>
Years of Service
------------------------------------------------
Average Annual Compensation
(1) 15 20 25 30 35
--------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 300,000................... $ 81,000 $108,000 $135,000 $162,000 $189,000
400,000................... 108,000 144,000 180,000 216,000 252,000
500,000................... 135,000 180,000 225,000 270,000 315,000
600,000................... 162,000 216,000 270,000 324,000 378,500
700,000................... 189,000 252,000 315,000 378,000 441,000
800,000................... 216,000 288,000 360,000 432,000 504,000
900,000................... 243,000 324,000 405,000 486,000 567,000
1,000,000................... 270,000 360,000 450,000 540,000 630,000
1,100,000................... 297,000 396,000 495,000 594,000 693,000
1,200,000................... 324,000 432,000 540,000 648,000 756,000
1,300,000................... 351,000 459,000 567,000 675,000 783,000
1,400,000................... 378,000 486,000 594,000 702,000 810,000
1,500,000................... 405,000 513,000 621,000 729,000 837,000
</TABLE>
- --------
(1) As of December 31, 1998, the average highest compensation received for any
three consecutive years of service of the most recent five, and credited
years of service for the executives named in the Summary Compensation Table
entitled to receive benefits under both the Qualified Plan and the
Nonqualified Plan, were Mr. Gaulin $1,217,767, 25 years; and Mr. Smith,
$523,527, 18 years.
Diamond Retirement Plans. Former Diamond executives, including Messrs.
Hemminghaus, Fretthold and Klesse, continue to accrue benefits under certain
executive retirement programs of Diamond which were in place prior to the U-DS
Merger. The plans under which such executives continue to accrue benefits are
the Diamond Supplemental Executive Retirement Plan and the Company's
Restoration Plan.
The Supplemental Executive Retirement Plan provides additional benefits to
eligible former Diamond executives and Diamond employees. The Supplemental
Executive Retirement Plan benefit is calculated on the basis of 60% of the
average of the highest compensation the executive officer received over any
three years during the last ten years of employment with the Company and
Diamond. A reduction is made to eliminate benefits payable under the Qualified
Plan and under any defined benefit plan of previous employers. Benefits under
the Supplemental Executive Retirement Plan are secured under a trust
arrangement subject to claims of general creditors of the Company.
9
<PAGE>
The table below estimates the combined annual benefits payable by operation
of such plans to a participant upon retirement based on the specified
compensation and years of service combinations indicated without reduction for
benefits payable by previous employers.
Pension Plan Table
(Diamond Retirement Plans)
<TABLE>
<CAPTION>
Estimated Annual Combined Benefits
Credited For Years of Service Indicated (2)
-------------------------------------------------
Earnings Credited (1) 15 20 25 30 35
--------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 250,000..................... $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000
300,000..................... 180,000 180,000 180,000 180,000 180,000
400,000..................... 240,000 240,000 240,000 240,000 240,000
500,000..................... 300,000 300,000 300,000 300,000 300,000
600,000..................... 360,000 360,000 360,000 360,000 360,000
700,000..................... 420,000 420,000 420,000 420,000 420,000
800,000..................... 480,000 480,000 480,000 480,000 480,000
900,000..................... 540,000 540,000 540,000 540,000 540,000
1,000,000..................... 600,000 600,000 600,000 600,000 600,000
1,100,000..................... 660,000 660,000 660,000 660,000 660,000
1,200,000..................... 720,000 720,000 720,000 720,000 720,000
1,300,000..................... 780,000 780,000 780,000 780,000 780,000
1,400,000..................... 840,000 840,000 840,000 840,000 840,000
1,500,000..................... 900,000 900,000 900,000 900,000 900,000
</TABLE>
- --------
(1) Earnings credited include salary and bonus paid within a calendar year. At
December 31, 1998, the average of the highest compensation received by the
executive officers named in the Summary Compensation Table currently
entitled to benefits under the Diamond Plans over any three years during
the last ten years of employment with the Company and Diamond and their
credited years of service were Mr. Hemminghaus, $1,426,020, 15 years; Mr.
Fretthold, $498,735, 22 years; and Mr. Klesse, $512,294, 30 years.
(2) Amounts shown in the table represent the maximum defined benefit values
payable under the executive retirement program. Benefits are calculated
without offset for social security benefits or reduction for benefits
payable by previous employers. Whether these amounts actually become
payable in whole or in part depends on the contingencies and conditions
governing such plans, including the individual's age, date of hire, term of
service as an executive officer, career earnings, amount of certain other
pension plan payments, and related supplemental retirement payments
received from former employers.
The Company's Restoration Plan provides non-qualified benefits to executives
and employees in place of reductions of qualified ESOP benefits resulting from
various statutory limitations imposed by the Code and the deferral of
compensation through the Diamond Deferred Compensation Plan and the Company's
Nonqualified 401(k) Plan. Until November 1997 most former Diamond employees
were entitled to receive distributions under two ESOPs created by Diamond prior
to the U-DS Merger. To the extent a portion of such employees' compensation was
ineligible for consideration in the annual calculation of distributions under
the ESOPs, an allocation equivalent to that attributable to the ineligible
compensation was made under the Company's Restoration Plan. Both ESOPs were
terminated in November 1997. Benefits are secured under a trust arrangement
which is subject to claims of general creditors of the Company.
Employment Agreements and Change-in-Control Arrangements
The Company has entered into employment agreements with each of the named
executive officers for a term of three years, except for Messrs. Hemminghaus
and Gaulin, with whom the Company has entered into employment agreements
providing for five-year terms, as described below (collectively the "Executive
Employment Agreements"). Under the Executive Employment Agreements, termination
of an executive without "cause," or voluntary termination for "good reason,"
will result in a lump sum payment equal to three times his highest annual base
salary and annual incentive compensation during the three years prior to
termination.
The Executive Employment Agreements define "cause" as a finding that the
executive (i) committed an illegal act intended to and which did defraud the
Company, (ii) engaged in gross negligence or gross misconduct in carrying out
his duties, or (iii) breached certain noncompete, no solicitation or
confidentiality
10
<PAGE>
covenants. The Executive Employment Agreements define "good reason" as (a) a
breach by the Company of a material provision of the Executive Employment
Agreement, (b) certain material reductions of the executive's aggregate
benefits, and (c) following a change in control, termination of employment for
any reason during the 13 months following the change.
Under the terms of Mr. Smith's Executive Employment Agreement and the related
Relocation Agreement, Mr. Smith is permitted to voluntarily terminate his
employment effective June 1, 2000 by giving written notice to the Company on or
before March 1, 2000. Such termination will be treated as a termination for
"good reason" under Mr. Smith's Executive Employment Agreement, except that,
instead of a lump sum equal to three times his highest annual base salary and
annual incentive compensation during the three years prior to termination, Mr.
Smith will be entitled to receive a lump sum payment equal to three times his
highest annual base salary and annual incentive compensation for 1995, 1996 and
1997, less $150,000.
Under the Executive Employment Agreement of Mr. Gaulin (the "CEO Agreement"),
Mr. Gaulin became Chief Executive Officer of the Company on January 1, 1999.
The CEO Agreement will be automatically renewed, subject to any prior
termination, for successive one-year periods on December 3, 2001 and each
anniversary thereafter unless either party gives at least three months' prior
notice of non-renewal. The other terms of the CEO Agreement, including
severance benefits, are substantially the same as those in the other Executive
Employment Agreements (other than those of Messrs. Hemminghaus and Smith),
except that the CEO Agreement (i) provides for enhanced retirement benefits
under the Company's nonqualified and qualified retirement plans upon an
involuntary termination of employment without cause (including a voluntary
termination with good reason), and (ii) "good reason," in the absence of a
change in control, includes non-renewal of the CEO Agreement by the Company, a
significant reduction in Mr. Gaulin's duties, any addition of inconsistent
duties and failure to elect Mr. Gaulin as Chairman of the Board of the Company
by January 1, 2002.
With respect to the Executive Employment Agreement of Mr. Hemminghaus, the
agreement provides that he will serve as Chairman of the Board of the Company
until December 31, 2001. Upon expiration of Mr. Hemminghaus' employment with
the Company as Chief Executive Officer on December 31,1998, he became a
consultant to the Company for a three-year consulting term. Mr. Hemminghaus
will be paid an annual consulting fee of $400,000 during the consulting term.
If the consulting arrangement is terminated during the consulting term for any
reason other than a voluntary termination by Mr. Hemminghaus, he will be
entitled to a lump sum payment equal to the unpaid consulting fees for the
remainder of the consulting term. For this purpose, a voluntary termination
will not include termination on account of death, disability, removal of Mr.
Hemminghaus from his position as Chairman of the Company's Board, a change in
control or, under certain circumstances, relocation of the Company's principal
executive offices.
Directors' Fees and Related Information
Directors who are not employees of the Company receive an annual retainer of
$28,000 plus $2,000 per day for attendance at each meeting of the Company's
Board. Non-employee directors who serve on committees of the Board also receive
$1,000 per day for committee meetings attended with the chairmen receiving
$1,500 per day for chairing meetings of those committees. Directors who are
employees of the Company are not compensated for their Board and committee
service.
Under the Company's Non-Employee Director Equity Plan, all non-employee
directors receive at least one-half of their annual retainer, with an election
to receive up to 100% of such retainer, in restricted Company Common Shares.
The shares vest in 20% increments each year over five years and carry full
voting and dividend rights from the time of grant.
In addition to the grant of Company Common Shares, all non-employee directors
receive an annual grant of options to purchase 1,000 Company Common Shares.
Except in certain situations, 100% of the options become exercisable one year
from the date they are granted and expire ten years from the date granted. The
exercise price of the options is equal to the closing price of the Company's
Common Shares as reported on the NYSE on the date of grant.
11
<PAGE>
Compensation Committee Interlocks and Insider Participation
C. Barry Schaefer (Chairman), Byron Allumbaugh, W. E. Bradford, W. H. Clark
and Madeleine Saint-Jacques served on the Company's Compensation Committee in
1998. None of those individuals has ever been an officer or employee of the
Company or its subsidiaries. No executive officer of the Company has served as
a member of the board of directors or the compensation committee of any company
whose executive officers include a member of the Board or the Compensation
Committee of the Board.
12
<PAGE>
Stock Performance Graph
The Company has altered the composition of its peer group this year. Its
objective in selecting the New Peer Group, as it was in selecting the Former
Peer Group, is to select a group that reflects the Company's business, risks,
and markets. The criteria applied in making the selection include (i) whether a
company operates one or more refineries; (ii) a company's refining and
marketing sales as a percentage of its total sales; (iii) a company's gasoline
and distillate production as a percentage of its total refinery production; and
(iv) a company's refining and marketing assets as a percentage of total company
assets.
Consistent with that criteria, the Company has removed Ashland, Inc. and
Coastal Corp. from the New Peer Group, because a significantly lower percentage
of their total sales are refining and marketing sales, and a significantly
lower percentage of their total assets are refining and marketing assets, as
compared to when those companies were initially included in the Company's
Former Peer Group for comparison of cumulative total return. Tesoro Petroleum
Corporation has been added to the Company's new peer group (the "New Peer
Group"), which, other than the addition of Tesoro Petroleum Corporation and the
removal of Ashland, Inc. and Coastal Corp., is identical to the former peer
group (the "Former Peer Group") shown in the following graph. In addition to
Tesoro Petroleum Corporation, the New Peer Group includes Crown Central
Petroleum Corporation, Giant Industries, Inc., Holly Corporation, Sun Company,
Inc., Tosco Corporation, USX-Marathon Group, and Valero Energy Corporation. The
following graph compares the cumulative total return on the Common Stock of the
Company with the Standard & Poor's 500 Stock Index, the Former Peer Group, and
the New Peer Group, assuming an initial investment of $100 on December 31, 1993
and the reinvestment of all dividends. The returns for each company in the
Former Peer Group and the New Peer Group have been weighted according to that
company's stock market capitalization.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG ULTRAMAR DIAMOND SHAMROCK CORPORATION,
THE S & P 500 INDEX, A NEW PEER GROUP AND A FORMER PEER GROUP
13
<PAGE>
Compensation Committee Report on Executive Compensation
The Company's executive compensation and benefit program is administered by
the Board's Compensation Committee. The Compensation Committee is composed of
five independent "non-employee directors" as that term is defined in Section
16(b) of the Exchange Act and related rules, who are also "outside directors"
as that term is defined in Section 162(m) ("Section 162(m)") of the Code.
Compensation Policy and Objectives
The executive compensation program is designed to (i) provide competitive
compensation to attract, motivate and retain executives with superior skills
and abilities, (ii) align the immediate financial goals of executives with
those of stockholders by linking a significant portion of all executives'
annual compensation directly to stockholders' return and corporate performance
for the year, and (iii) align the long-term economic interests of executives
with those of the Company's stockholders by encouraging executives to become
long-term stockholders by providing a significant portion of their compensation
in stock options.
These goals are achieved through the structuring and integrated
administration of the Company's base salary, annual incentives, and long-term
incentives based on pre-established guidelines and targets.
Elements of Compensation
Base Salary. The Compensation Committee annually reviews competitive base
salary data of an industry group composed of companies comparable in size to
the Company prepared by nationally recognized independent compensation
consultants. In determining the Chief Executive Officer's base salary for 1998,
the Compensation Committee targeted the median base salary for chief executive
officers among the companies used in the competitive base salary data. In
determining the President and Chief Operating Officer's base salary for 1998,
the Compensation Committee considered the provisions contained in the
employment contracts of the Chief Executive Officer and the Chief Operating
Officer which provided that the Chief Executive Officer would be succeeded in
that position by the Chief Operating Officer at the end of 1998, and provided a
base salary which was identical to that of the Chief Executive Officer in 1998.
In determining the 1998 base salaries for the remainder of the executive
officers, the Compensation Committee reviewed data reflecting the compensation
of executives who hold positions of similar overall scope and level of
responsibility, targeting the median of the competitive market base salaries
reflected in the data.
Although the base salaries of all of the named executive officers, including
those of the Chief Executive Officer and the Chief Operating Officer, were
increased in 1998, payment of the increase in 1998 was conditioned upon the
basic net income of the Company equaling or exceeding $2.50 per Common Share in
1998. This goal was not achieved, and no increase in the base salary of the
executive officers was paid in 1998 (although the increase was given effect for
purposes of pension, insurance, and certain non-qualified retirement benefit
calculations, and, in the case of the Chief Executive Officer, for purposes of
calculating the consulting fee payable under the Chief Executive Officer's
employment agreement).
The salary increases were made to take into account increases in base salary
paid to officers occupying similar positions in companies of similar size and
complexity during the same period, and to take into account the increased size
and complexity of the Company resulting from the acquisition of Total Petroleum
(North America), Ltd. in 1997.
Annual Incentive Plan. The 1998 Annual Incentive Plan ("AIP") was used by the
Company for 1998 annual incentive compensation in the form of an AIP bonus. For
the Chief Executive Officer and the President and Chief Operating Officer,
incentive compensation under the 1998 AIP was based 60% on the Company's Total
Shareholder Return ("TSR") versus the TSR of the Former Peer Group, and 40% on
the Company's return on capital employed ("ROCE"). In calculating the ROCE
component of the award, 50% of the component was adjusted to remove market-
related margin volatility in order to recognize improvements in the Company's
productivity. For other senior executives, incentive compensation was based 40%
on the Company's TSR versus that of the Former Peer Group, 40% on ROCE targets
for the Company, and 20% on
14
<PAGE>
individual performance based on pre-agreed objectives. The form in which annual
incentive awards are paid will be subject to the Company's minimum share
ownership guidelines after a three-year transition period ending January 1,
2000. Under the guidelines, the Chief Executive Officer is expected to own
Company Common Shares equal in value to three times his annual base salary,
other executive committee members are expected to own Company Common Shares
with value equal to two times their annual base salary, and other annual
incentive plan participants are expected to own Company Common Shares with
value equal to their annual salary. Annual incentive plan participants are
permitted to count Company Common Shares which they own outright, Company
Common Shares they own indirectly (e.g. through trusts or similar arrangements,
including employee stock ownership plans), and Company Common Shares they own
subject to restriction. Senior managers below the level of vice president are
also permitted to include the value of vested options to purchase Company
Common Shares. After January 1, 2000, annual incentive awards will be paid 75%
in cash and 25% in restricted stock unless minimum share ownership policy
requirements are met.
Long-Term Incentive Plan. The Company's Long-Term Incentive Plan (the "1996
LTIP") was adopted by the Company's Board and approved by the Company's
stockholders at the time of the U-DS Merger. Award levels under the 1996 LTIP
are developed to be competitive with market median long-term incentive values
(on an annualized basis) and to provide opportunity to meet stock ownership
requirements.
Awards to the executive officers under the 1996 LTIP have consisted of
"front-loaded" options, the vesting of which is accelerated by significant
increases in the price of Company Common Shares, and traditional options
vesting over three years in increments of 30%, 30%, and 40%, respectively.
Compensation of Mr. Hemminghaus as Chairman of the Board and Chief Executive
Officer. Mr. Hemminghaus' compensation package was designed to encourage short
and long-term performance in line with the interests of the Company's
stockholders. The majority of his compensation was at risk, in the form of
Company-earnings-based conditions to payment of a portion of base salary,
annual bonus, and stock options. Mr. Hemminghaus' annual base salary for 1998
was $800,000 ($75,000 of which was not paid in 1998 due to the failure of the
Company to achieve certain earnings targets, as discussed above), which was at
the median level for chief executives of companies included in the industry
group base salary data reviewed by the Compensation Committee, and was
consistent with base salaries paid to the Chairmen and Chief Executive Officers
of other corporations comparable in size and complexity to the Company. He
received an AIP Bonus of $363,300, based on the Company's TSR and ROCE for
1998. No awards were made to Mr. Hemminghaus under the 1996 LTIP in 1998.
Internal Revenue Service Rules
The Internal Revenue Service has issued regulations under Section 162(m)
which generally disallow a federal income tax deduction to any publicly-held
corporation for compensation paid in excess of $1 million in any taxable year
to the Chief Executive Officer or any of the four other most highly compensated
executive officers, unless such compensation is paid pursuant to a qualified
"performance-based compensation" plan, the material terms of which are
disclosed to and approved by stockholders.
The Company's Board has considered these requirements and the regulations.
While the tax impact of any compensation arrangement is one factor to be
considered, such impact is evaluated by the Board in light of the Company's
overall compensation philosophy and objectives. The Company has established
incentive plans which permit stock awards that meet the requirements of Section
162(m) and hence will maximize the Company's federal income tax deductions for
compensation expense. However, the Company's Board believes there are
circumstances in which the Company's and stockholders' interests are best
served by providing compensation which may not always be fully deductible, and
that its ability to exercise discretion outweighs the advantages of qualifying
all compensation under Section 162(m).
Compensation Committee of the Board of Directors
Byron Allumbaugh, Chairman
H. Frederick Christie, Vice Chairman
W.E. Bradford
W.H. Clark
Madeleine Saint-Jacques
C. Barry Schaefer
15
<PAGE>
Indebtedness of Management
Employee Stock Purchase Loan Program. This program was in effect at Diamond
prior to the U-DS Merger and was reactivated in October, 1998 to encourage
common stock purchases by key employees by providing loans to buy Company
Common Shares on the open market. The interest rate for a loan under the
original program is adjusted annually during the term of the loan to the lesser
of the Applicable Federal Rate (the "AFR") published by the U.S. Internal
Revenue Service as of the date of such adjustment, the initial AFR rate on all
loans, or the weighted average rate of the current loans outstanding. Loans
under the reactivated program bear interest at a rate equal to the AFR for
short-term loans, as effective month-to-month during the term of the loan, not
to exceed 8%. As of March 15, 1999, rates of interest on loans to executive
officers ranged from 4.67% to 5.95% with the AFR being 4.67%. Interest is
payable annually and principal is repayable in five annual installments of 20%
commencing on the February 15th following the fifth anniversary of the
borrowing. The highest amounts outstanding at any time since the beginning of
the last fiscal year under the Program and the amount outstanding on March 15,
1999 on loans to executive officers and directors of the Company which at any
time since January 1, 1998 exceeded $60,000 were: Mr. Beadle, the Company's
Senior Vice President, NGLs, Petrochemicals and Specialties Group: $214,310 and
$214,310, respectively; Mr. Eisman, Senior Vice President, Supply: $196,794 and
$196,794, respectively; Mr. Hemminghaus, Chairman of the Board: $111,012 and
$60,570, respectively; Mr. Klesse, Executive Vice President, Operations:
$330,941 and $311,003, respectively; and Mr. Smith, Executive Vice President
and Chief Financial Officer, $188,719 and $188,719, respectively.
Other Indebtedness of Management. In order to assist certain key executives
of the Company in relocating to the various areas in which the Company
maintains offices, the Company has provided ten-year, secured, non-interest
bearing loans to be used to purchase a primary residence. During 1992, in
connection with his relocation, the Company made such a loan to Mr. Smith. The
highest amount outstanding on Mr. Smith's loan since January 1, 1998 was
$206,250, and $165,000 was outstanding on Mr. Smith's loan on March 15, 1999.
In 1997, in connection with his relocation, the Company made a similar loan to
Christopher Havens, the Company's Senior Vice President-Retail Marketing. The
highest amount outstanding on Mr. Havens' loans since January 1, 1998 was
$357,750, and $318,000 was outstanding on Mr. Havens' loan on March 15, 1999.
In 1997, the Company made a loan of $397,500 to Alain Ferland, the Company's
Senior Vice President, Refining, Product Supply, and Logistics--Northeast in
connection with his relocation to the Company's headquarters. The Company made
a second loan to Mr. Ferland in 1998 of $395,279 in connection with his
relocation to Canada. He repaid the 1997 loan in full in 1998. The highest
amount outstanding on Mr. Ferland's loan since January 1, 1998 was $405,702,
and $405,702 was outstanding on March 15, 1999.
16
<PAGE>
OWNERSHIP OF THE COMPANY'S COMMON SHARES
BY MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
Directors and Executive Officers
The table below sets forth the share ownership of the Company's directors and
executive officers as of the Record Date. As of that date, no director or
executive officer beneficially owned 1% or more of the Company's Common Shares
and all directors and executive officers as a group beneficially owned 2.2% of
the Company's Common Shares. Unless otherwise indicated in the footnotes to
such table, each of the named persons and members of the group has sole voting
and investment power with respect to the shares shown:
<TABLE>
<CAPTION>
Shares
Unrestricted Subject
Shares to Total Shares
Restricted Beneficially Options Beneficially
Name Shares (1) Owned (2) Owned
---- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Byron Allumbaugh............... 2,646 6,588 (3) 2,000 11,234
E. Glenn Biggs................. 2,646 9,524 5,060 17,230
W. E. Bradford................. 2,646 4,541 5,060 12,247
H. Frederick Christie.......... 2,646 6,649 (4) 2,000 11,295
W. H. Clark.................... 2,646 2,736 5,060 10,442
Timothy J. Fretthold........... 459 38,379 94,121 132,959
Jean R. Gaulin................. -- 88,277 436,500 524,777
Roger R. Hemminghaus........... 5,053 114,869 (5) 261,997 381,919
Russel H. Herman............... 2,646 14,049 2,000 18,695
William R. Klesse.............. 469 49,938 98,278 148,685
Bob Marbut..................... 2,646 13,854 5,060 21,560
Katherine D. Ortega............ 2,646 3,608 5,060 11,314
Madeleine Saint-Jacques........ 1,323 6,101 2,000 9,424
C. Barry Schaefer.............. 1,323 4,587 (6) 2,000 7,910
H. Pete Smith.................. -- 26,576 131,900 158,476
All directors and executive
officers
as a group (19 persons)....... 30,416 449,883 1,389,723 1,870,022
</TABLE>
- --------
(1) Includes restricted Company Common Shares issued under the Company's long-
term incentive plans, the vesting of which is contingent on the passage of
time or continued service.
(2) Includes Company Common Shares which may be acquired within 60 days
through the exercise of options granted under the Company's long-term
incentive plans.
(3) Includes 2,461 Company Common Shares registered in the name of Byron E.
and Sharon K. Allumbaugh Revocable Trust.
(4) Includes 3,000 Company Common Shares registered in the name of the
Christie Family Trust.
(5) Includes 11,872 Company Common Shares with respect to which Mr.
Hemminghaus acts as trustee.
(6) Includes 500 Company Common Shares registered in the name of the Evelyn G.
Schaefer Trust.
17
<PAGE>
Certain Beneficial Owners
The following table contains certain information regarding persons or
entities whom the Company has been advised are beneficial owners of 5% or more
of the Company's Common Shares as of the dates indicated in the footnotes to
the table.
<TABLE>
<CAPTION>
Amount and Percent
Name and Address Nature of Beneficial of
of Beneficial Owner Ownership Class
------------------- -------------------- -------
<S> <C> <C>
Capital Research and Management Company............ 9,942,000(1) 11.4%
333 South Hope Street
Los Angeles, CA 90071
Total Finance/TOTAL................................ 7,049,853(2) 8.04%
Tour Total
24 cours Michelet
92069 Paris, La Defense, France
Wellington Management Company, LLP................. 6,766,183(3) 7.72%
75 State Street
Boston, MA 02109
Brinson Partners, Inc. ............................ 6,226,363(4) 7.19%
209 South La Salle St.
Chicago, IL 60604
Vanguard/Windsor Funds, Inc. -- Windsor Fund....... 5,611,200(5) 6.41%
100 Vanguard Bld.
P. O. Box 2600
Malvern, PA 19355
</TABLE>
- --------
(1) According to a Schedule 13G filed on February 11, 1999 with the SEC by
Capital Research and Management Company, it holds sole dispositive power
with respect to these shares and disclaims beneficial ownership of these
shares.
(2) According to a Schedule 13D filed jointly on September 30, 1997 with the
SEC by TOTAL and Total Finance, a wholly-owned subsidiary of TOTAL, TOTAL
holds sole voting and dispositive power with respect to 49,050 Company
Common Shares, and shares voting and dispositive power with Total Finance
with respect to 7,000,803 Company Common Shares.
(3) According to a Schedule 13G filed on February 10, 1999 with the SEC by
Wellington Management Company, LLP, it shares voting power with its
clients with respect to 615,485 Company Common Shares and shares
dispositive power with its clients with respect to all of these shares.
(4) According to a Schedule 13G filed on February 11, 1999 with the SEC by
Brinson Partners, Inc. on behalf of itself and UBS AG., both companies
share dispositive and voting power with respect to these shares.
(5) According to a Schedule 13G filed on February 10, 1999 with the SEC by
Vanguard/Windsor Funds, Inc., it holds sole voting and shares dispositive
power with respect to these shares.
18
<PAGE>
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
(Item 2 on the Proxy)
The Board has selected Arthur Andersen LLP ("Arthur Andersen") to serve as
the Company's independent accountants to audit the consolidated financial
statements of the Company for 1999. Stockholders are being asked to ratify this
appointment. The Company has been informed that neither Arthur Andersen nor any
of its partners has any direct financial interest or any material indirect
financial interest in the Company or has had any connection during the past
three years with the Company or its predecessors in the capacity of promoter,
underwriter, voting trustee, director, officer, or employee.
On March 4, 1997, upon the recommendation of the Audit Review Committee, the
Board unanimously selected Arthur Andersen to serve as the Company's
independent accountants, replacing Ernst & Young LLP ("Ernst & Young"). Ernst &
Young served as the Company's independent accountants for the two year period
ended December 31, 1996. In their report for the fiscal year ended December 31,
1996, Ernst & Young expressed reliance upon the report of Price Waterhouse LLP
("Price Waterhouse") with respect to the audit by Price Waterhouse of a
significant portion of the operations of the Company. Neither of the reports of
Ernst & Young or Price Waterhouse for the year ended December 31, 1996, were
qualified or modified as to uncertainty, audit scope, or accounting principles,
except with respect to the Company's change in its method of accounting for
refinery maintenance turnaround costs discussed in Note 5 to the Company's
consolidated financial statements for the year ended December 31, 1996. The
report of Arthur Andersen for the year ended December 31, 1997 was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the two fiscal years ended December 31,
1996, and the subsequent interim period through March 4, 1997, there were no
disagreements ("Disagreements"), as defined in Item 304(a)(1)(iv) and the
Instructions to Item 304 of Regulation S-K promulgated pursuant to the
Securities and Exchange Act of 1934, as amended ("Regulation S-K"), between the
Company and Ernst & Young or Price Waterhouse on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which, if not resolved to their satisfaction, would have caused
either Ernst & Young or Price Waterhouse to make reference in their report to
the subject matter of the Disagreement.
In connection with the audits of the two fiscal years ended December 31,
1996, and the subsequent interim period through March 4, 1997, there were no
reportable events ("Reportable Events") as defined in Item 304(a)(1)(v) of
Regulation S-K.
At no time preceding March 4, 1997 has the Company consulted with Arthur
Andersen on matters regarding (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, or (ii)
any matter that was the subject of a Disagreement with Ernst & Young or Price
Waterhouse or which was a Reportable Event.
A representative of Arthur Andersen is expected to be present at the Annual
Meeting with the opportunity to make a statement, if such representative
desires to do so, and to be available to respond to appropriate questions.
The affirmative vote of the holders of a majority of the shares of Common
Stock represented at the Annual Meeting and voting on this proposal is required
to ratify the appointment of Arthur Andersen as independent accountants for
1999.
The Board recommends that stockholders vote FOR such ratification. Proxies
solicited by the Board will be so voted unless stockholders specify in their
proxies a contrary choice.
19
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly, and special reports, proxy statements,
and other information with the SEC. Company stockholders may read and copy any
reports, statements, or other information the Company files at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. The Company's SEC filings are also available to the public
from commercial document retrieval services and at the web site maintained by
the SEC at "http://www.sec.gov." In addition, the Company's filings can be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
The Company's stockholders may rely on the information contained in this
Proxy Statement and in the Annual Report on Form 10-K for the year ended
December 31, 1998 delivered along with this proxy statement to vote on the
director nominees and the approval of Arthur Andersen LLP as the Company's
independent public accountants. The Company has not authorized anyone to
provide Company stockholders with information that is different from what is
contained in this Proxy Statement. This Proxy Statement is dated April 2, 1999.
Company stockholders should not assume that the information contained in this
Proxy Statement is accurate as of any date other than that date, and the
mailing of this Proxy Statement to Company stockholders does not create any
implication to the contrary.
MISCELLANEOUS
Compliance with Section 16(a) of the Exchange Act
The rules of the Securities and Exchange Commission require that the Company
disclose late filings of reports pertaining to ownership of and transactions in
stock of the Company by the Company's directors and executive officers. To the
best of the Company's knowledge there were no such late filings in 1998.
Submission of Proposals by Stockholders; Discretionary Authority
In order to be eligible for inclusion in the Company's proxy statement for
the 2000 Annual Meeting of Stockholders any proposal of a stockholder must be
received by the Company at its principal executive offices in San Antonio,
Texas by December 1, 1999. Proxies appointed by the Shareholders may exercise
discretionary voting authority at the 1999 Annual Meeting with respect to
matters brought before the 1999 Annual Meeting, other than those described
above, as to which the Company has not received notice in writing at its
principal executive offices not less than sixty nor more than ninety days prior
to the anniversary of the date on which the Company first mailed its proxy
materials for the immediately preceding annual meeting.
Proxy Solicitation
In addition to soliciting proxies by mail, directors, executive officers, and
employees of the Company, without receiving additional compensation, may
solicit proxies by telephone, by telegram, by telecopy, or in person.
Arrangements will also be made with brokerage firms and other custodians,
nominees, and fiduciaries to forward solicitation materials to the beneficial
owners of shares of Common Stock, and the Company will reimburse such brokerage
firms and other custodians, nominees, and fiduciaries for reasonable out-of-
pocket expenses incurred by them in connection with forwarding such materials.
The Company has retained Morrow & Company, Inc. to aid in the solicitation of
proxies. The fee to be paid by the Company to such firm is estimated to be
$10,000 plus reimbursement for out-of-pocket costs and expenses.
BY ORDER OF THE BOARD OF DIRECTORS
Curtis V. Anastasio
Vice President, General Counsel, and
Secretary
San Antonio, Texas
April 2, 1999
20
<PAGE>
[X] PLEASE MARK VOTE REVOCABLE PROXY
AS IN THIS EXAMPLE ULTRAMAR DIAMOND SHAMROCK CORPORATION
Proxy Solicited on Behalf of the Board of Directors
for the Annual Meeting on May 4, 1999
The undersigned hereby appoints Timothy J. Fretthold, Curtis V. Anastasio,
and Todd Walker, and any of them, each with full power of substitution and
resubstitution, as proxies to represent and to vote all shares which the
undersigned may be entitled to vote as of March 11, 1999, the record date,
at the Annual Meeting of Stockholders of Ultramar Diamond Shamrock Corporation
to be held on May 4, 1999, and any adjournment thereof.
The following items of business to be acted upon are listed in the Notice of
Annual Meeting and described in the Proxy Statement;
WITH- FOR ALL
1. Election of 4 directors, each for a FOR HOLD EXCEPT
three-year term expiring in 2002: [__] [__] [__]
Nominees: H. Frederick Christie, W.H. Clark, Jean Gaulin,
and Bob Marbut
INSTRUCTION: To withhold authority to vote for any individual nominee, mark
"For All Except" and write that nominee's name in the space provided below.
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
[__] [__] [__]
2. Ratification of appointment of Arthur
Andersen, L.L.P. as independent
accountants.
The Board of Directors recommends a vote FOR items 1 and 2. You may specify
your choices on the items by marking the appropriate boxes. You need not mark
any boxes if you wish to vote in accordance with the Board of Directors'
recommendations.
Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
_________________________
Please be sure to sign and date Date
this Proxy in the box below.
_______________________________________________________________
___Stockholder sign above______Co-holder (if any) sign above___
Detach above card, sign, date and mail in postage paid envelope provided.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
________________________________________________________________________________
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
________________________________________________________________________________
<PAGE>
[X] PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE ULTRAMAR DIAMOND SHAMROCK CORPORATION
The Solicitation of these Confidential Voting Instructions
is made on behalf of the Board of Directors
The undersigned as a participant in one or both Ultramar Diamond Shamrock
Corporation Employee Stock Ownership Plans (the "ESOP Plans"), and/or the
Ultramar Diamond Shamrock Corporation 401(k) Plans (along with the ESOP Plans,
collectively the "Plans") hereby instructs the Trustee of the respective Plans
to appoint Timothy J. Fretthold, Curtis V. Anastasio, and Todd Walker, and each
of them, with full power of substitution, the attorney and proxy of the said
Trustee to represent the interests of the undersigned in Ultramar Diamond
Shamrock Corporation Common Stock held under the terms of said Plan(s), at the
Annual Meeting of Shareholders of Ultramar Diamond Shamrock Corporation to be
held on May 4, 1999, and any adjournment thereof, and to vote, with all powers
the Trustee would possess if present, all shares of Common Stock ("Common
Stock") credited to the undersigned's account(s) under said Plan(s) as of March
11, 1999, the record date for the Annual Meeting, upon the following matters and
upon any other business that may properly come before the meeting or any
adjournment thereof.
WITH- FOR ALL
FOR HOLD EXCEPT
4 1. Election of 4 directors, each for a [_] [_] [_]
three-year term expiring in 2002:
0
Nominees: H. Frederick Christie, W.H. Clark, Jean Gaulin,
1 and Bob Marbut
(K) INSTRUCTION: To withhold authority to vote for any individual nominee, mark
"For All Except" and write that nominee's name in the space provided below.
- --- ---------------------------------------------------------------------------
E FOR AGAINST ABSTAIN
S 2. Ratification of appointment of Arthur [_] [_] [_]
O Andersen, L.L.P. as independent
P accountants.
The Board of Directors recommends a vote FOR Items 1 and 2. You may
specify your choices on the items by marking the appropriate boxes. You
need not mark any boxes if you wish to vote in accordance with the Board of
Directors' recommendations.
By completing, signing and returning this voting instruction card, the
undersigned will be acting as a named fiduciary under the Employee
Retirement Income Security Act of 1974, as amended, for the Plan in which the
undersigned participates and will be voting all Allocated Shares.
_________________________
Please be sure to sign and date Date
this Proxy in the box below.
_______________________________________________________________
___Shareholder sign above______Co-holder (if any) sign above___
Detach above card, sign, date and mail in postage paid envelope provided.
ULTRAMAR DIAMOND SHAMROCK CORPORATION
________________________________________________________________________________
Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
________________________________________________________________________________
