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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-3876
HOLLY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-1056913
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 871-3555
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
8,253,514 shares of Common Stock, par value $.01 per share, were outstanding on
March 9, 1994.
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HOLLY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet -
January 31, 1994 (Unaudited) and July 31, 1993 2
Consolidated Statement of Income (Unaudited) -
Three Months and Six Months Ended January 31, 1994 and 1993 3
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended January 31, 1994 and 1993 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
</TABLE>
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Unaudited
January 31, July 31,
1994 1993
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<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 5,540 $ 6,631
Accounts receivable: Trade 29,699 40,412
Crude oil 40,131 36,455
-------- --------
69,830 76,867
Inventories: Crude oil and refined products 33,835 32,625
Materials and supplies 5,539 5,347
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39,374 37,972
Prepayments and other 8,142 7,082
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Total current assets 122,886 128,552
Properties, plants and equipment, at cost 227,372 215,603
Less accumulated depreciation, depletion and amortization 101,888 96,782
-------- --------
125,484 118,821
Other assets 2,288 2,434
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$250,658 $249,807
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable $ 86,502 $ 86,787
Accrued liabilities 11,757 16,648
Current maturities of long-term debt 5,608 5,608
Income taxes payable 963 7,364
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Total current liabilities 104,830 116,407
Deferred income taxes 13,175 12,474
Long-term debt, less current maturities 74,440 74,448
Contingencies
Stockholders' equity
Preferred stock, $1.00 par value -
1,000,000 shares authorized; none issued - -
Common stock, $.01 par value - 20,000,000 shares
authorized; 8,650,282 shares issued 87 87
Additional capital 6,132 6,132
Retained earnings 53,383 42,058
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59,602 48,277
Common stock held in treasury, at cost - 396,768 shares (569) (569)
Deferred charge - amount due from ESOP (820) (1,230)
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Total stockholders' equity 58,213 46,478
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$250,658 $249,807
======== ========
</TABLE>
See accompanying notes.
2
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Six Months Ended
January 31, January 31,
------------------------- --------------------------
1994 1993 1994 1993
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues
Net sales $ 120,583 $ 149,759 $ 255,910 $ 301,430
Miscellaneous 106 112 297 351
--------- --------- --------- ---------
120,689 149,871 256,207 301,781
Costs and expenses
Cost of sales 104,793 138,076 217,550 277,451
General and administrative 2,945 2,854 5,879 5,734
Depreciation, depletion and amortization 2,623 3,001 5,367 5,721
Exploration expenses, including dry holes 884 729 1,910 1,140
Miscellaneous 105 48 135 73
--------- --------- --------- ---------
111,350 144,708 230,841 290,119
-------- -------- -------- --------
Income from operations 9,339 5,163 25,366 11,662
Other
Interest income 55 35 153 95
Interest expense (2,260) (2,368) (4,550) (4,718)
--------- --------- --------- ---------
(2,205) (2,333) (4,397) (4,623)
--------- --------- --------- ---------
Income before income taxes and cumulative effect
of change in accounting for income taxes 7,134 2,830 20,969 7,039
Income tax provision
Current 2,292 463 7,098 1,639
Deferred 576 315 1,332 792
--------- --------- --------- ---------
2,868 778 8,430 2,431
--------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle 4,266 2,052 12,539 4,608
Cumulative effect to August 1, 1992
of change in accounting for income taxes - - - (958)
---------- ---------- ---------- ---------
Net income $ 4,266 $ 2,052 $ 12,539 $ 3,650
========= ========= ========= =========
Income (loss) per common share
Income before cumulative effect of
of change in accounting principle $ .52 $ .25 $ 1.52 $ .56
Cumulative effect to August 1, 1992
of change in accounting for income taxes - - - (.12)
--------- --------- --------- ---------
Net income $ .52 $ .25 $ 1.52 $ .44
========= ========= ========= =========
Cash dividends paid per share $ .075 $ .075 $ .15 $ .15
Average number of shares of common
stock outstanding (in thousands) 8,254 8,254 8,254 8,254
</TABLE>
See accompanying notes.
3
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HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unaudited
Six Months Ended
January 31,
----------------------------
1994 1993
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<S> <C> <C>
Cash flows from operating activities
Net income $ 12,539 $ 3,650
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation, depletion and amortization 5,367 5,721
Deferred income taxes 1,332 792
Dry hole costs and leasehold impairment 956 408
Cumulative effect to August 1, 1992 of
change in accounting for income taxes - 958
Changes in other assets and liabilities
Decrease in accounts receivable 7,037 5,693
Increase in inventories (1,402) (4,469)
Increase in income taxes receivable - (2,206)
(Increase) decrease in prepayments and other (1,691) 1,005
Decrease in accounts payable (285) (6,009)
Decrease in accrued liabilities (4,891) (111)
Decrease in income taxes payable (6,377) -
Other, net 556 630
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Net cash provided by operating activities 13,141 6,062
Cash flows from financing activities
Increase in notes payable - 6,100
Reduction in long-term debt (8) (8)
Cash dividends (1,238) (1,238)
--------- -------
Net cash provided by (used for) financing activities (1,246) 4,854
Cash flows from investing activities
Additions to properties, plants and equipment (12,986) (8,660)
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Net cash used for investment activities (12,986) (8,660)
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Cash and cash equivalents
Increase (decrease) for the period (1,091) 2,256
Beginning of year 6,631 1,389
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End of period $ 5,540 $ 3,645
======= =======
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 4,416 $ 4,560
Income taxes $13,407 $ 2,241
</TABLE>
See accompanying notes.
4
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HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants (except for
the consolidated balance sheet as of July 31, 1993), reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position as of January 31, 1994, the
consolidated results of operations for the three months and six months ended
January 31, 1994 and 1993, and consolidated cash flows for the six months ended
January 31, 1994 and 1993.
Certain notes and other information have been condensed or omitted.
Therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1993.
References herein to the "Company" are for convenience of presentation
and may include obligations, commitments or contingencies that pertain solely
to one or more affiliates of the Company. Results of operations for the first
six months of fiscal 1994 are not necessarily indicative of the results to be
expected for the full year.
Note B - Contingencies
In July 1993, the United States Department of Justice ("DOJ"), acting on
behalf of the Environmental Protection Agency ("EPA"), filed a complaint in the
United States District Court for the District of New Mexico alleging that the
Company's subsidiary, Navajo Refining Company, beginning in September 1990 and
continuing through the present, had violated and continues to violate the
Resource Conservation and Recovery Act ("RCRA") and implementing regulations of
the EPA by treating, storing and disposing of certain hazardous wastes without
compliance with regulatory requirements. The complaint seeks a court order
directing Navajo to comply with certain regulatory standards and civil
penalties for the alleged non-compliance.
As previously disclosed, net income for the 1993 fiscal year included a
pre-tax reserve of $2 million in connection with this matter. The Company has
been and continues to be involved in settlement discussions with the EPA and
the DOJ (collectively, the "plaintiff"). The plaintiff has been presented with
and is presently considering a settlement proposal that, if implemented, would
resolve a substantial portion of the litigation.
As has been the case since the outset of this matter, the Company is
optimistic that a negotiated resolution will be achieved. Nonetheless, it is
not presently determinable whether this matter's ultimate resolution will occur
through settlement or litigation. In either case, phased closure of all four
ponds in Navajo's wastewater treatment system may be required, with the
resulting costs of closure and of developing an alternative means of treating
and disposing of the refinery's wastewater.
5
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HOLLY CORPORATION
Notes to Consolidated Financial Statements (Continued)
In this regard, after consultation with counsel and engineering
consultants, the Company estimates closure costs for all of the ponds could be
between $3.5 and $9 million and development of additional treatment and
alternative disposal could cost an additional $2 to $7 million. These
estimates do not include the cost of any possible civil penalty, the amount of
which cannot be presently ascertained.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Cash flows from operations during the six months ended January 31, 1994
were slightly less than capital expenditures and dividends paid, resulting in a
net decrease of cash and cash equivalents of $1.1 million. Working capital
increased during the six months by $5.9 million to $18.1 million at January 31,
1994. The Company's capital structure continues to improve as long-term debt
now represents 57.9% of total capitalization as compared to 63.3% at July 31,
1993. Additionally, the Company had $25 million of borrowing capacity under
the Credit Agreement at January 31, 1994, which can be used for short term
working capital needs. The Company believes that these sources of funds,
together with future cash flows from operations, should provide sufficient
resources, financial strength and flexibility for the Company to satisfy its
liquidity needs, capital requirements, and debt service obligation and to
permit the payment of dividends for at least the next few years.
Net cash provided by operating activities amounted to $13.1 million in
the first six months of fiscal 1994, as compared to $6.1 million in the same
period of the prior year. The principal reason for the increase in cash
provided from operations was the improvement in earnings, which was partially
offset by changes in working capital accounts.
Cash flows used for investing activities were $13.0 million in the first
six months of fiscal 1994, as compared to $8.7 million in the same period of
the prior year, all of which amounts were for capital expenditures in both
periods. Fiscal 1994 capital expenditures are projected to total $24 million,
of which expenditures of $13 million are for carry-over projects from the prior
year, principally for a diesel desulfurization unit at the Montana refinery and
for asphalt tankage in Phoenix, Arizona. The Company has adopted capital
budgets totalling $11 million for fiscal 1994, of which $8 million is
principally for refinery projects at the New Mexico refinery and the balance of
which is for oil and gas exploration. In order to meet the October 1993 lower
sulphur content requirements for diesel fuel, diesel desulfurization units were
completed at both the Artesia, New Mexico facility in August 1993 and at the
Montana refinery in October 1993. While it is not possible to anticipate fully
what future regulatory requirements may require, the Company believes that
capital expenditures in the near future should be lower than expenditures
incurred in the past few years.
6
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Cash flows used for financing activities amounted to $1.2 million in the
first six months of fiscal 1994, as compared to cash flows provided by
financing activities of $4.9 million in the same period of the prior year. The
Company had $10.5 million of borrowings outstanding under its Credit Agreement
as of July 31, 1992 and borrowed $6.1 million during the six months ended
January 31, 1993, the full balance of which was paid off during the third and
fourth quarters of fiscal 1993. The first principal payment of $5.6 million on
the Senior Notes is due in June 1994.
In July 1993, the United States Department of Justice ("DOJ"), acting on
behalf of the Environmental Protection Agency ("EPA"), filed a complaint in the
United States District Court for the District of New Mexico alleging that the
Company's subsidiary, Navajo Refining Company, beginning in September 1990 and
continuing through the present, had violated and continues to violate the
Resource Conservation and Recovery Act ("RCRA") and implementing regulations of
the EPA by treating, storing and disposing of certain hazardous wastes without
compliance with regulatory requirements. The complaint seeks a court order
directing Navajo to comply with certain regulatory standards and civil
penalties for the alleged non-compliance.
As previously disclosed, net income for the 1993 fiscal year included a
pre-tax reserve of $2 million in connection with this matter. The Company has
continued previously disclosed settlement discussions with the EPA and the DOJ
(collectively, the "plaintiff"). Settlement discussions that appear to be
constructive are ongoing.
While the Company remains optimistic that a negotiated resolution will
be achieved, it is not presently determinable whether this matter's ultimate
resolution will occur through settlement or litigation. In either case, it is
possible that phased closure of all four ponds in Navajo's wastewater treatment
system may be required, with the resulting costs of closure and of developing
an alternative means of treating and disposing of the refinery's wastewater.
In this regard, after consultation with counsel and engineering
consultants, the Company estimates closure costs for all of the ponds could be
between $3.5 and $9 million and development of additional treatment and
alternative disposal could cost an additional $2 to $7 million. If these
expenses were to be incurred, the cost would likely be borne over a period of
several years and would be reflected as an expense or capitalized, as
appropriate, for the period for which the cost is properly allocable. These
estimates do not include the cost of any possible civil penalty, the amount of
which cannot be presently ascertained.
In December 1993, Diamond Shamrock, Inc., an independent refiner and
retailer, announced its intention to build a 400-mile 10-inch pipeline, with
initial capacity of 32,000 barrels per day of refined products, from its McKee
refinery near Dumas, Texas to El Paso, Texas. Such a pipeline, which Diamond
Shamrock has stated it anticipates to complete in the spring of 1995, could
substantially increase the supply of product in the Company's markets.
7
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HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Results of Operations
Net income for the second quarter ended January 31, 1994 was $4.3
million, as compared to $2.1 million for the second quarter of the prior year.
For the six months ended January 31, 1994, net income was $12.5 million, as
compared to $4.6 million for the six months in the same period of fiscal 1993
before an accounting charge. The cumulative effect through the 1992 fiscal
year of adopting Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", which amends the accounting for income taxes
from the deferral method to the liability method, was to decrease net income by
$1.0 million to $3.7 million in the six months ended January 31, 1993.
The increases in net income in the second quarter and six months ended
January 31, 1994, over the comparable periods in the prior year, are due
primarily to improved refinery margins, offset partially by the effect of
decreases in sales volumes. The increased refinery margins result from crude
oil cost decreases in both periods which exceeded declines in product prices.
Revenues for both the quarter and six months ended January 31, 1994 decreased,
as a result of a decline in product prices which occurred principally in the
second quarter, and the planned and phased major maintenance turnaround of
Navajo Refining Company's New Mexico facilities. An effect of the turnaround
was to decrease sales volumes in the current year by 6% and 7%, from the prior
year's second quarter and six month period, respectively. The turnaround,
which commenced in early September 1993 and continued in three phases through
the end of November 1993, involved repairs and replacements of equipment on
many major units, and the shutdown and restart of all units. Costs of $1.5
million for this turnaround in excess of the revised accrual at July 31, 1993,
were included as an expense for the current quarter ended January 31, 1994.
Income tax expense as a percentage of pre-tax income was lower for the
prior year's three and six month periods because of the effect of a state tax
refund.
8
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HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 1993, the United States Department of Justice, acting on behalf
of the EPA, filed a complaint in the United States District Court for the
District of New Mexico alleging that the Company's subsidiary, Navajo Refining
Company, beginning in September 1990 and continuing until the present, had
violated and continues to violate the Resource Conservation and Recovery Act
(RCRA) and implementing regulations of the EPA by treating, storing and
disposing of certain hazardous wastes without necessary authorization and
without compliance with regulatory requirements. The complaint seeks a court
order directing Navajo to comply with these regulatory standards and civil
penalties for the alleged non-compliance. Navajo has answered the complaint,
denying all the allegations of legal liability and asserting affirmative
defenses. Discovery is in an early stage. While the Company and Navajo intend
to contest the Government's case as necessary and appropriate, the Company is
presently engaged in settlement discussions. For additional discussion
concerning this matter, please see Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note B to the Consolidated
Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
9
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLY CORPORATION
-----------------------------
(Registrant)
Date: March 11, 1994 By /S/Henry A.Teichholz
--------------------------
Henry A. Teichholz
Vice President, Treasurer
and Controller
(Duly Authorized Principal
Financial and Accounting
Officer)
10
