<PAGE> 1
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 October 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
---------------- ----------------
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
December 9, 1994.
<PAGE> 2
HOLLY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet -
October 31, 1994 (Unaudited) and July 31, 1994 3
Consolidated Statement of Income (Unaudited) -
Three Months Ended October 31, 1994 and 1993 4
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended October 31, 1994 and 1993 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Securities Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Unaudited
October 31, July 31,
1994 1994
----------- ----------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 16,403 $ 3,297
Accounts receivable: Trade 35,218 45,259
Crude oil 40,906 49,021
-------- --------
76,124 94,280
Inventories: Crude oil and refined products 31,416 37,949
Materials and supplies 6,028 6,046
-------- --------
37,444 43,995
Income taxes receivable - 697
Prepayments and other 10,601 9,340
-------- --------
Total current assets 140,572 151,609
Properties, plants and equipment, at cost 239,917 236,185
Less accumulated depreciation, depletion and amortization 109,999 107,223
-------- --------
129,918 128,962
Other assets 6,059 1,243
-------- --------
$276,549 $281,814
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable $ 90,137 $112,084
Accrued liabilities 13,865 14,945
Income taxes payable 4,382 736
Current maturities of long-term debt 5,608 5,608
-------- --------
Total current liabilities 113,992 133,373
Deferred income taxes 16,395 14,829
Long-term debt, less current maturities 68,840 68,840
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 72,082 59,942
-------- --------
78,301 66,161
Common stock held in treasury, at cost - 396,768 shares (569) (569)
Deferred charge - amount due from ESOP (410) (820)
-------- --------
Total stockholders' equity 77,322 64,772
-------- --------
$276,549 $281,814
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
October 31,
--------------------------------
1994 1993
---------- ----------
<S> <C> <C>
Revenues
Net sales $ 160,600 $ 135,327
Miscellaneous 124 191
--------- ---------
160,724 135,518
Costs and expenses
Cost of sales 139,247 112,757
General and administrative 3,355 2,934
Depreciation, depletion and amortization 3,523 2,744
Exploration expenses, including dry holes 466 1,026
Miscellaneous 28 30
--------- ---------
146,619 119,491
--------- ---------
Income from operations 14,105 16,027
Other
Interest income 181 98
Interest expense (2,120) (2,290)
--------- ---------
(1,939) (2,192)
--------- ---------
Income before income taxes and cumulative effect
of change in accounting for turnarounds 12,166 13,835
Income tax provision
Current 4,501 4,806
Deferred 413 756
--------- ---------
4,914 5,562
--------- ---------
Income before cumulative effect of
change in accounting method 7,252 8,273
Cumulative effect to August 1, 1994 of change
in accounting for turnarounds, net of taxes 5,703 -
--------- ---------
Net income $ 12,955 $ 8,273
========= =========
Income per common share
Income before cumulative effect of
change in accounting method $ .88 $ 1.00
Cumulative effect to August 1, 1994 of change
in accounting for turnarounds, net of taxes .69 -
--------- ---------
Net income $ 1.57 $ 1.00
========= =========
Cash dividends paid per share $ .10 $ .075
Average number of shares of common
stock outstanding (in thousands) 8,254 8,254
</TABLE>
See accompanying notes.
4
<PAGE> 5
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
October 31,
----------------------------
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 12,955 $ 8,273
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation, depletion and amortization 3,523 2,744
Deferred income taxes 413 756
Dry hole costs and leasehold impairment 2 628
Cumulative effect to August 1, 1994 of
change in accounting for turnarounds (5,703) -
Changes in other assets and liabilities
Decrease in accounts receivable 18,156 2,228
(Increase) decrease in inventories 6,551 (954)
Decrease in income taxes receivable 697 -
(Increase) decrease in prepayments and other 253 (258)
Decrease in accounts payable (21,947) (3,797)
Increase (decrease) in accrued liabilities 1,625 (2,642)
Increase (decrease) in income taxes payable 3,656 (1,801)
Other, net (2,514) 483
------- ------
Net cash provided by operating activities 17,667 5,660
Cash flows from financing activities
Cash dividends (825) (619)
------- ------
Net cash used for financing activities (825) (619)
Cash flows from investing activities
Additions to properties, plants and equipment (3,736) (6,755)
------- -------
Net cash used for investment activities (3,736) (6,755)
------- -------
Cash and cash equivalents
Increase (decrease) for the period 13,106 (1,714)
Beginning of year 3,297 6,631
------- -------
End of period $16,403 $ 4,917
======= =======
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 290 $ 350
Income taxes $ 100 $ 6,560
</TABLE>
See accompanying notes.
5
<PAGE> 6
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, 1994), reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position as of October 31, 1994, the
consolidated results of operations for the three months ended October 31, 1994
and 1993, and consolidated cash flows for the three months ended October 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, 1994.
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
three months of fiscal 1995 are not necessarily indicative of the results to be
expected for the full year.
Note B - Accounting Change
Effective August 1, 1994, the Company changed its method of accounting
for turnaround costs. Turnarounds consist of preventive maintenance on major
processing units as well as the shutdown and restart of all units, and
generally are scheduled at two to three year intervals. Previously, the
Company estimated the costs of the next scheduled turnaround and ratably
accrued the related expenses prior to the actual turnaround. To provide for a
better matching of turnaround costs with revenues, the Company changed its
accounting method for turnaround costs to one that results in the amortization
of costs incurred over the period until the next scheduled turnaround. The
cumulative effect of this accounting change through the 1994 fiscal year was an
increase in net income in the current year of $5,703,000, or $.69 per common
share. Excluding the cumulative effect, the change increased net income for
the first quarter of fiscal 1995 by $920,000 or $.11 per common share. If the
accounting change for turnaround costs had been retroactively applied, pro
forma net income for the first quarter of fiscal 1994 would not have changed
from what was originally reported and net income for the full 1994 fiscal year
would have increased by $1,266,000 or $.15 per share to pro forma net income
amounts for the 1994 fiscal year of $21,983,000 or $2.66 per share.
6
<PAGE> 7
HOLLY CORPORATION
Notes to Consolidated Financial Statements (Continued)
Note C - 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, Navajo has answered the complaint, denying all
the allegations of legal liability and asserting affirmative defenses. Only
limited discovery has been conducted. The Company and Navajo have been
contesting the Government's case as necessary and appropriate, while
contemporaneously exploring the prospects for negotiated settlement.
In this regard, a tentative resolution of a substantial portion of the
litigation has been reached. Under this approach, the Company would close the
existing evaporation ponds of its wastewater management system, at an
approximate cost of $1 to $2 million, to be expended over a several year period
(a reserve of $2 million was recorded in fiscal 1993, principally to provide
for the cost of closing existing ponds). Under the tentative resolution, the
Company would implement one of several alternatives to the existing wastewater
treatment system. Depending upon which approach is utilized, the Company could
incur capitalizable costs of an additional $5 to $10 million over the next
several years.
Assuming the Company consummates the settlement discussed above, the
remaining aspect of the litigation would be the civil penalty which the
Government seeks. While the amount of any such civil penalty cannot presently
be ascertained, based upon the advice of counsel, it is not believed that any
such penalty would have a materially adverse impact on the Company's financial
position.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net income for the first quarter ended October 31, 1994 was $13.0
million (which included a $5.7 million accounting change in that quarter for
the cumulative effect of a change in accounting for turnarounds relating to
prior periods), as compared to $8.3 million for the first quarter of the prior
year.
7
<PAGE> 8
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Effective August 1, 1994, the Company changed its method of accounting
for turnaround costs. Turnarounds consist of preventive maintenance on major
processing units as well as the shutdown and restart of all units, and
generally are scheduled at two to three year intervals. Previously, the
Company estimated the costs of the next scheduled turnaround and ratably
accrued the related expenses prior to the actual turnaround. To provide for a
better matching of turnaround costs with revenues, the Company changed its
accounting method for turnaround costs to one that results in the amortization
of costs incurred over the period until the next scheduled turnaround. The
cumulative effect of this accounting change through the 1994 fiscal year was an
increase in net income in the current year of $5.7 million. Excluding the
cumulative effect, the change increased net income for the first quarter of
fiscal 1995 by $.9 million. If the accounting change for turnaround costs had
been retroactively applied, pro forma net income for the first quarter of
fiscal 1994 would not have changed from what was originally reported and net
income for the full 1994 fiscal year would have increased by $1.3 million to
pro forma net income for the 1994 fiscal year of $22.0 million.
Excluding the effects of the change in accounting for turnarounds, net
income decreased in the current year's first quarter as compared to the same
period of fiscal 1994. Refinery margins, although significantly improved over
the poor margins experienced in the prior year's fourth quarter, were less than
in the first quarter of the prior year as crude oil costs were higher while
product prices were lower in the current year's first quarter as compared to
the prior year's first quarter. Almost offsetting the lower margins in the
fiscal 1995 first quarter was an increase of 22% in sales volumes over volumes
in the prior year's first quarter, which had been reduced by a major
maintenance turnaround of Navajo Refining Company's New Mexico facilities in
the fall of 1993. Revenues increased in the quarter ended October 31, 1994
over the prior year's comparable period as the result of the greater sales
volumes, partially offset by the decrease in product prices.
Financial Condition
Cash flows from operations during the three months ended October 31,
1994 exceeded capital expenditures and dividends paid, resulting in a net
increase of cash and cash equivalents of $13.1 million. Working capital
increased during the three months by $8.3 million to $26.6 million at October
31, 1994. The Company's long-term debt now represents 49.1% of total
capitalization as compared to 53.5% at July 31, 1994. At October 31, 1994, the
Company had $25 million of borrowing capacity under the Credit Agreement 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
obligations and to permit the payment of dividends for at least the next few
years.
8
<PAGE> 9
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Net cash provided by operating activities amounted to $17.7 million in
the first three months of fiscal 1995, as compared to $5.7 million in the same
period of the prior year. The principal reason for the increase in cash
provided from operations was changes in working capital accounts, primarily
inventory and income taxes. The change in the method of accounting for
turnaround costs did not have any effect on cash provided from operations.
Cash flows used for investing activities were $3.7 million in the first
three months of fiscal 1995, as compared to $6.8 million in the same period of
the prior year, all of which amounts were for capital expenditures. The
Company has adopted capital budgets totalling $17 million for fiscal 1995, of
which $13 million is principally for refinery projects and $4 million is for
oil and gas exploration. The majority of the oil and gas budget relates to
anticipated costs of completion and of production facilities for two offshore
properties. While it is inherently difficult to anticipate what future
regulatory requirements may necessitate, the Company believes that capital
expenditures in the near future should not substantially exceed the level of
capital expenditures that has been required in the past few years.
Cash flows used for financing activities amounted to $.8 million in the
first three months of fiscal 1995, as compared to $.6 million in the same
period of the prior year, all of which were for dividends. The next principal
payment of $5.6 million on the Company's Senior Notes is due in June 1995.
While the Company believes it is well positioned to meet present and
future competitive pressures, certain recent developments should be noted. In
December 1993, Diamond Shamrock, Inc., an independent refiner and retailer
headquartered in San Antonio, Texas, announced its intention to build a
400-mile 10-inch pipeline, with initial capacity of 32,000 BPD 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. In addition, Williams Energy Ventures, a unit of the
Williams Companies, Inc., has announced the possibility of its involvement in
the construction of a complex 50,000 BPD refinery near Phoenix, Arizona. While
Williams has made it clear that the project is only tentative, its consummation
could cause more product to be present in several of the Company's markets,
particularly Tucson and Phoenix, Arizona. Williams has stated that, if the
project were undertaken, it would take approximately 30 months to complete
construction.
9
<PAGE> 10
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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, Navajo has answered the complaint, denying all
the allegations of legal liability and asserting affirmative defenses. Since
near the outset of this matter, the Company and the Government have been
pursuing settlement discussions. It now appears that the parties have reached
a tentative resolution that would resolve some if not all of the litigation.
Under this resolution, the Company would close the existing evaporation ponds
of its wastewater management system, at an approximate cost of $1 to $2
million, to be expended over a several year period (a reserve of $2 million was
recorded in fiscal 1993, principally to provide for the cost of closing
existing ponds). Under the tentative resolution, the Company would implement
one of several alternatives to the existing wastewater treatment system.
Depending upon which approach is utilized, the Company could incur costs of an
additional $5 to $10 million over the next several years. The costs to
implement an alternative wastewater treatment system would be capitalized and
amortized over the future useful life of the resulting asset in accordance with
generally accepted accounting principles.
Assuming the Company consummates the settlement discussed above, the
remaining aspect of the litigation would be the civil penalty which the
Government seeks. While the amount of any such civil penalty cannot presently
be ascertained, based upon the advice of counsel, it is not believed that any
such penalty would have a materially adverse impact on the Company's financial
position or operations.
10
<PAGE> 11
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. Only limited discovery has been conducted. While the Company and
Navajo have been contesting the Government's case as necessary and appropriate,
the parties have been exploring the possibility of a negotiated resolution
since near the onset of this matter. For additional discussion, please see
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note C to the Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Securities Holders
At the annual meeting of stockholders of December 8, 1994, all eight of
the management's nominees for directors as listed in the proxy statement were
elected.
<TABLE>
<CAPTION>
SCHEDULE OF VOTES CAST FOR EACH DIRECTOR
----------------------------------------
Total Shares Voted Total Shares Voted
"For" "Withheld"
--------------- ----------------
<S> <C> <C>
W. John Glancy 7,180,352 61,064
Marcus R. Hickerson 7,181,120 60,296
A. J. Losee 7,181,120 60,296
Thomas K. Matthews, II 7,179,244 62,172
Robert G. McKenzie 7,181,128 60,288
Lamar Norsworthy 7,180,960 60,456
E. I. Parsons 7,181,128 60,288
Jack P. Reid 7,181,120 60,296
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits on page 13.
(b) Reports on Form 8-K: None.
11
<PAGE> 12
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: December 14, 1994 By /s/ Henry A. Teichholz
Henry A. Teichholz
Vice President, Treasurer
and Controller
(Duly Authorized Principal
Financial and Accounting
Officer)
12
<PAGE> 13
HOLLY CORPORATION
INDEX TO EXHIBITS
(Exhibits are numbered to correspond to the exhibit
table in Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
18 - Letter from Ernst & Young LLP, dated December 8, 1994
regarding change in accounting method
27 - Financial Data Schedule
</TABLE>
13
<PAGE> 1
EXHIBIT 18
December 8, 1994
Mr. Henry Teichholz
Vice President, Treasurer, and
Controller
Holly Corporation
100 Crescent Court
Suite 1600
Dallas, Texas 75201
Dear Mr. Teichholz:
Note B of Notes to Consolidated Financial Statements of Holly Corporation
included in its Form 10-Q for the three months ended October 31, 1994 describes
a change in the method of accounting for turnaround costs, from the method of
accruing expected expenses up to the date of turnaround to the method of
amortizing turnaround costs incurred over the period until the next turnaround.
You have advised us that you believe that the change is to a preferable method
in your circumstances because it provides better matching of turnaround costs
with revenues.
We concluded that the change in the method of accounting for turnaround costs
is to an acceptable alternative method which, based on your business judgment
to make this change for the reason cited above, is preferable in your
circumstances. We have not conducted an audit in accordance with generally
accepted auditing standards of any financial statements of the Company as of
any date or for any period subsequent to July 31, 1994, and therefore we do not
express any opinion on any financial statements of Holly Corporation subsequent
to that date.
/s/ ERNST & YOUNG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> OCT-31-1994
<CASH> 16,403
<SECURITIES> 0
<RECEIVABLES> 76,124
<ALLOWANCES> 0
<INVENTORY> 37,444
<CURRENT-ASSETS> 140,572
<PP&E> 239,917
<DEPRECIATION> 109,999
<TOTAL-ASSETS> 276,549
<CURRENT-LIABILITIES> 113,992
<BONDS> 68,840
<COMMON> 87
0
0
<OTHER-SE> 77,235
<TOTAL-LIABILITY-AND-EQUITY> 276,549
<SALES> 160,600
<TOTAL-REVENUES> 160,724
<CGS> 139,247
<TOTAL-COSTS> 146,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,120
<INCOME-PRETAX> 12,166
<INCOME-TAX> 4,914
<INCOME-CONTINUING> 7,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 5,703
<NET-INCOME> 12,955
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
</TABLE>
