<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1995.
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
HOLLY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 75-1056913
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
100 CRESCENT COURT, SUITE 1600 CHRISTOPHER L. CELLA
DALLAS, TEXAS 75201 100 CRESCENT COURT, SUITE 1600
(214) 871-3555 DALLAS, TEXAS 75201
(Address, Including Zip Code, and Telephone (214) 871-3555
Number, Including Area Code, of Registrant's (Name, Address, Including Zip Code, and
Principal Executive Offices) Telephone Number, Including Area Code,
of Agent for Service)
</TABLE>
Copies to:
LAWRENCE D. STUART, JR. KERRY C. L. NORTH
WEIL, GOTSHAL & MANGES BAKER & BOTTS, L.L.P.
100 CRESCENT COURT, SUITE 1300 2001 ROSS AVENUE
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT AGGREGATE AGGREGATE AMOUNT OF
TO BE PRICE OFFERING REGISTRATION
TITLE OF SHARES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value...... 2,875,000 shares $28.50 $81,937,500 $28,254.31
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</TABLE>
(1) Includes 375,000 shares which the Underwriters have an option to purchase to
cover over-allotments, if any.
(2) Calculated in accordance with Rule 457(c) based on the average of the high
and low sale prices of the Common Stock on May 15, 1995, as reported on the
American Stock Exchange.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 17, 1995
PROSPECTUS
2,500,000 SHARES
[LOGO]
COMMON STOCK
------------------------
Of the 2,500,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of Holly Corporation (the "Company") offered hereby (the
"Offering"), 1,500,000 shares are being sold by the Company and 1,000,000 shares
are being sold by the Selling Stockholders. See "Selling Stockholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. The Company's Common Stock is traded on the American Stock
Exchange under the symbol "HOC." On May 15, 1995, the last reported sale price
of the Common Stock on the American Stock Exchange was $28 1/2 per share. See
"Price Range of Common Stock and Dividend Policy."
SEE "INVESTMENT CONSIDERATIONS" FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(3)
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<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
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Total(3)............................... $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $350,000.
(3) The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable within 30 days after the date hereof, to purchase up to
an additional 375,000 shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Stockholders will be $ , $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to
and accepted by them, and subject to certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York on or about , 1995.
------------------------
MERRILL LYNCH & CO. CS FIRST BOSTON
------------------------
The date of this Prospectus is , 1995.
<PAGE> 3
[PHOTOGRAPH OF THE NAVAJO REFINERY OVER
GRAPHIC OF NAVAJO REFINING COMPANY'S MARKETS]
2
<PAGE> 4
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. This Prospectus does not include all the information set forth
in the Registration Statement and the exhibits thereto, to which reference is
made for further information with respect to the Company.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder, and in accordance therewith files periodic reports,
proxy and information statements, and other information with the Commission. The
Registration Statement and the exhibits thereto and all reports, proxy and
information statements, and other information filed by the Company with the
Commission may be inspected at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and may also be
inspected and copied at the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is listed on
the American Stock Exchange and all reports, proxy and information statements,
and other information filed by the Company with the Commission also may be
inspected at the American Stock Exchange, 86 Trinity Place, New York, New York
10006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated into
this Prospectus by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1994;
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1994; and
(3) The Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of the Prospectus.
The Company will provide without charge to each person, including any
beneficial owner of Common Stock, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of such person, a copy of any and
all of the documents which have been or may be incorporated by reference in this
Prospectus, except that exhibits to such documents will not be provided unless
they are specifically incorporated by reference into such documents. Requests
for copies of any such document should be directed to Holly Corporation, 100
Crescent Court, Suite 1600, Dallas, Texas 75201, Attention: Controller,
telephone: (214) 871-3555.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus assumes
that the Underwriters' over-allotment option is not exercised. Unless the
context otherwise requires, the following terms are used herein with the
following meanings: (i) the "Company" refers to Holly Corporation and its
consolidated subsidiaries, taken as a whole, (ii) "MRC" refers to Montana
Refining Company, a Partnership, the general partners of which are wholly-owned
subsidiaries of Holly Corporation, (iii) the "Montana Refinery" refers to MRC's
refinery near Great Falls, Montana, (iv) "Navajo" refers to Navajo Refining
Company, a wholly-owned subsidiary of Holly Corporation and (v) the "Navajo
Refinery" refers to Navajo's Artesia and Lovington, New Mexico refining
facilities, collectively.
THE COMPANY
The Company is an independent refiner of petroleum and petroleum
derivatives and produces high value light products such as gasoline, diesel fuel
and jet fuel for sale primarily in the southwestern United States and northern
Mexico. The Company owns a high-conversion petroleum refinery in Artesia, New
Mexico, which it operates in conjunction with crude, vacuum distillation and
other facilities situated 65 miles away in Lovington, New Mexico. The Navajo
Refinery has a crude capacity of 60,000 barrels per day ("BPD") and can process
a variety of high sulfur ("sour") crude oils. For the last three fiscal years,
sour crude oils have represented approximately 85% of the crude oils processed
by the Navajo Refinery. The Navajo Refinery's processing capabilities enable
management to vary its crude supply mix to take advantage of changes in raw
materials prices and to respond to fluctuations in the availability of crude oil
supplies. The Navajo Refinery converts approximately 86% of its raw materials
throughput into high value light products. For fiscal 1994, including barrels
purchased for resale, gasoline, diesel fuel and jet fuel represented 56.5%,
19.7% and 11.1%, respectively, of Navajo's sales volume. For the last three
fiscal years, excluding downtime for scheduled maintenance and turnarounds, the
Navajo Refinery has operated at an average annual crude capacity utilization
rate of approximately 93%.
The Artesia facility is located on a 300-acre site and has fully integrated
crude, fluid catalytic cracking ("FCC"), vacuum distillation, alkylation,
hydrodesulfurization and reforming units, and approximately 1.5 million barrels
of feedstock and product tank storage. The Lovington facility is operated as an
integrated component of the Navajo Refinery and refines crude oil into
intermediate products, which are transported, primarily via a Company-owned
pipeline, to the Artesia facility for further processing. Navajo's assets also
include a 500-mile crude oil gathering pipeline system, 30 crude oil and product
tank trucks, three refined products pipelines and product storage at terminals
in Tucson, Albuquerque, Artesia and El Paso in which the Company has 50% or
greater interests.
The Company also owns a 7,000 BPD petroleum refinery near Great Falls,
Montana, which can process a range of crude oils and which serves primarily the
State of Montana. For fiscal 1994, including barrels purchased for resale,
gasoline, diesel fuel, asphalt and jet fuel represented 38.6%, 24.3%, 18.6% and
15.7% of MRC's sales volume. For the last three fiscal years, excluding downtime
for scheduled maintenance and turnarounds, the Montana Refinery has operated at
an average annual crude capacity utilization rate of approximately 94%.
In addition to its refining operations, the Company also conducts a
small-scale oil and gas exploration and production program.
4
<PAGE> 6
Despite fluctuating industry conditions, the Company, which was
incorporated in 1947 and acquired the Navajo Refinery in 1969, has generated
positive net income for each of the past 24 years. The Company had net income
and cash from operating activities of $24.0 million and $33.6 million,
respectively, for fiscal 1990, $11.7 million and $27.9 million for fiscal 1991,
$2.8 million and $1.0 million for fiscal 1992, $19.0 million and $38.7 million
for fiscal 1993, and $20.7 million and $27.7 million for fiscal 1994. The
Company believes that it has certain business strengths that have contributed to
its history of profitable operations. Among those strengths are the following:
- Geographic location/attractive markets. The Navajo Refinery serves
primarily the growing southwestern United States market, including El
Paso, Albuquerque, Phoenix and Tucson, which generally has favorable
supply and demand characteristics compared to Gulf Coast markets, and the
northern Mexico market, which is expected to experience demand growth over
the next several years. According to data compiled by the United States
Bureau of the Census, from April 1, 1990 to July 1, 1993, the population
of the Navajo Refinery's principal market area in the U.S. (Arizona, New
Mexico and El Paso) grew at a compound annual rate of 2.2%, compared to a
nationwide compound annual growth rate of 1.1% during that period. From
April 1, 1980 to July 1, 1993, this area grew at a compound annual rate of
2.5%, compared to a nationwide rate of 1.0%. The Montana Refinery serves
primarily the State of Montana, which also historically has had relatively
favorable supply and demand characteristics.
- High conversion refinery. The Navajo Refinery converts approximately 86%
of its raw materials throughput into high value light products from a
variety of sour crude oils and can vary the refined products it produces
to respond to fluctuations in demand. The Navajo Refinery's processing
capabilities also enable management to vary its crude supply mix to take
advantage of changes in raw materials prices and to respond to
fluctuations in the availability of crude oil supplies. For the last three
fiscal years, sour crude oils have represented approximately 85% of the
crude oils processed by the Navajo Refinery.
- Raw material supply. Located on the northwestern shelf of the Permian
Basin, the Navajo Refinery has direct access to a historically reliable
crude oil supply, which is transported to the refinery primarily through a
500-mile, Company-owned crude oil pipeline gathering system and by crude
oil tank trucks. The Company's crude oil pipelines connect to tankage
facilities in New Mexico and Texas and are connected to, or are located in
proximity to, a number of common carrier crude oil pipelines. The Montana
Refinery obtains most of its crude oil via a 93-mile, Company-owned
pipeline which runs from near the Canadian border.
- Distribution logistics. The Company distributes refined products from the
Navajo Refinery to its principal markets primarily through (i) a
Company-owned pipeline extending from Artesia to El Paso and (ii) a
Company-owned pipeline extending from Artesia to Orla, Texas, and from
there west to El Paso. Products can be shipped by pipeline from El Paso to
Albuquerque via a products pipeline system owned by Chevron Pipeline
Company, and to Tucson and Phoenix via a products pipeline system owned by
Santa Fe Pacific Pipeline. The Company also owns a segment of a products
pipeline running from Orla to Odessa, Texas, which is currently inactive.
The Company believes that the proximity of the Navajo Refinery to its
principal markets and the refinery's products distribution network provide
a transportation cost advantage over Gulf Coast and West Coast refineries
in supplying its markets.
5
<PAGE> 7
BUSINESS STRATEGY
The Company's strategy has been, and continues to be, to optimize its
refinery operations to increase the proportion of high value products it
produces and to lower operating costs. As part of this strategy, the Company
completed a $63 million expansion of the Navajo Refinery in December 1991,
which, among other things, increased its refining capacity from 40,000 to 60,000
BPD. That expansion consisted principally of the addition of a new continuous
catalytic regeneration unit, the modification of the FCC unit, the expansion of
the naphtha desulfurizer and the installation of new sulphur and alkylation
units. The installation of new equipment and the modification and upgrading of
existing equipment as part of that expansion program increased the proportion of
sour crude oils that the Navajo Refinery can process and increased the
proportion of its throughput that can be converted into higher value products.
The Company continues to evaluate improvements to its operating cost
structure, refineries and crude oil gathering and product distribution systems.
Management believes that certain enhancements and additions to the Navajo
Refinery should better position the Company to respond to competitive pressures
and to meet possible increases in demand for refined products. As part of its
strategy, management intends to spend approximately $15 million over an 18-month
period on identified capital enhancement projects at the Navajo Refinery. Those
projects involve upgrades to the FCC and alkylation units, the construction of
an isomerization unit and the installation of a new selective hydrogenation
process ("SHP") unit. Management expects these projects to increase the Navajo
Refinery's total gasoline production and to improve its ability to produce a
greater proportion of "premium" (high octane) gasoline. In addition, these
enhancements and plant additions are expected to improve management's
flexibility to operate using different types of crude oils and other raw
materials and to provide a platform for further refinery expansion, if
appropriate, in the future. In addition, the Company is evaluating a number of
other possible capital improvement projects, including (i) the redistribution of
process activities between the Lovington and Artesia facilities in order to
realize potential operating and transportation cost savings, (ii) other upgrades
to improve the efficiency of the Navajo Refinery, (iii) modifications to
increase product pipeline distribution capacity and (iv) product pipeline
reconditioning and construction to facilitate entry into new markets. See
"Capital Improvement Projects."
The Company's executive offices are located at 100 Crescent Court, Suite
1600, Dallas, Texas 75201, and its telephone number at that address is (214)
871-3555.
THE OFFERING
<TABLE>
<S> <C> <C>
Common Stock Offered By:
The Company....................... 1,500,000 shares
The Selling Stockholders.......... 1,000,000 shares
---------
Total..................... 2,500,000 shares
=========
Common Stock to be Outstanding after 9,753,514 shares
the Offering....................
Use of Proceeds..................... The Company will use approximately $15 million of the
net proceeds from its sale of Common Stock to pay for
certain identified enhancement projects for the Navajo
Refinery. The Company will use its remaining proceeds,
together with internally generated funds, for other
capital improvement projects currently being evaluated
by it and/or for general corporate purposes. The
Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders. See "Use of
Proceeds" and "Capital Improvement Projects."
American Stock Exchange Symbol...... HOC
Dividend Policy..................... The Company currently pays a quarterly dividend of $.10
per share of Common Stock outstanding. See "Price Range
of Common Stock and Dividend Policy."
</TABLE>
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data presented below for the five years
ended July 31, 1994 have been derived from the Company's audited consolidated
financial statements. The financial data for the six months ended January 31,
1994 and at and for the six months ended January 31, 1995 have been derived from
the unaudited consolidated financial statements of the Company which, in the
opinion of management, contain all adjustments, consisting only of normal,
recurring adjustments, necessary to present fairly the Company's results of
operations and financial position for such periods and at such dates. The
consolidated results of operations for the six months ended January 31, 1995 are
not necessarily indicative of results to be expected for the full year or for
future periods. The following summary consolidated financial and operating data
should be read in conjunction with the more detailed financial and other
information contained elsewhere herein. See "Selected Financial Data,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31, YEARS ENDED JULY 31,
-------------------- ------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................. $307,686 $256,207 $552,320 $630,621 $506,668 $489,333 $438,882
Income from operations............... 17,614 25,366 43,540 38,671 11,016 20,830 41,772
Interest expense, net................ 3,799 4,397 8,538 9,354 9,654 3,889 4,880
Income before cumulative effect of
accounting change.................. 8,235 12,539 20,717 19,933 2,759 11,734 23,955
Cumulative effect of accounting
change............................. 5,703 -- -- (958) -- -- --
Net income........................... 13,938 12,539 20,717 18,975 2,759 11,734 23,955
Income per common share:
Before cumulative effect of
accounting change................ $ 1.00 $ 1.52 $ 2.51 $ 2.42 $ .33 $ 1.42 $ 2.90
Cumulative effect of accounting
change........................... .69 -- -- (.12) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income......................... $ 1.69 $ 1.52 $ 2.51 $ 2.30 $ .33 $ 1.42 $ 2.90
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1)............................ $ 25,014 $ 30,733 $ 54,411 $ 54,015 $ 20,401 $ 29,289 $ 48,797
Net cash provided by operating
activities......................... 18,012 13,141 27,684 38,737 961 27,907 33,643
Capital expenditures................. 6,644 12,986 22,521 20,120 22,317 53,899 13,889
Cash dividends per common share...... $ .20 $ .15 $ .35 $ .30 $ .45 $ .48 $ .40
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1995
------------------------
AS
ACTUAL ADJUSTED(2)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................... $ 28,394 $ 68,764
Total assets.............................................................................. 280,298 320,668
Long-term debt (less current maturities).................................................. 68,832 68,832
Stockholders' equity...................................................................... 77,490 117,860
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31 YEARS ENDED JULY 31,
------------------ -------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Refinery production (BPD)(3)............... 67,600 60,000(4) 64,300(4) 65,300 55,200 44,800(4) 46,400
Crude charge (BPD)(5)...................... 64,648 56,017 60,911 62,115 51,723 43,838 46,071
Refinery utilization (BPD)(6).............. 96.5% 83.6%(4) 90.9%(4) 92.7% 88.2% 93.3%(4) 98.0%
Average per barrel:
Net sales................................ $ 23.92 $ 22.97 $ 22.88 $ 25.43 $ 24.84 $ 29.79 $ 25.41
Raw materials costs(7)................... 18.76 16.33 16.99 20.10 20.41 24.61 19.76
------- ------- ------- ------- ------- ------- -------
Gross margin............................. $ 5.16 $ 6.64 $ 5.89 $ 5.33 $ 4.43 $ 5.18 $ 5.65
======= ======= ======= ======= ======= ======= =======
Product sales (percent of total sales
volume)(8):
Gasolines................................ 58.0% 53.8% 54.5% 52.0% 49.4% 46.6% 46.6%
Diesel fuels............................. 19.5 21.4 20.1 23.6 21.1 20.1 18.7
Jet fuels................................ 10.9 11.1 11.7 10.4 13.2 18.2 20.5
Asphalt.................................. 7.1 10.2 9.4 9.8 10.8 8.9 8.1
LPG and other............................ 4.5 3.5 4.3 4.2 5.5 6.2 6.1
------- ------- ------- ------- ------- ------- -------
Total.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and is presented herein because it is commonly used to
evaluate a company's ability to service and/or to incur debt or to fund
capital expenditures. EBITDA should not be considered in isolation or as a
substitute for operating income, cash flows from operating activities and
other consolidated income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of the Company's
profitability or liquidity.
(2) Adjusted to give effect to the sale by the Company of 1,500,000 shares of
Common Stock and the investment of the estimated net proceeds therefrom
(based on the last sale price of the Common Stock as reported on the
American Stock Exchange on May 15, 1995) in short-term, interest-bearing
securities pending use as described under "Use of Proceeds."
(3) Barrels per calendar day of refined products produced from crude oil and
other raw materials.
(4) Refinery production and utilization rates were reduced as a result of a
scheduled four-week turnaround for major maintenance at the Navajo
Refinery.
(5) Barrels per day of crude oil processed.
(6) Crude charge divided by crude capacity.
(7) Includes cost of refined products purchased for resale.
(8) Includes refined products purchased for resale representing 3.0%, 3.9%,
3.9%, 3.2%, 0.7%, 0.7% and 0.3 %, respectively, of total sales volume for
the periods shown in the table above.
8
<PAGE> 10
INVESTMENT CONSIDERATIONS
Prospective purchasers of the shares of Common Stock offered hereby should
consider carefully the following investment considerations, as well as the other
information set forth or incorporated by reference in this Prospectus.
FLUCTUATIONS IN REFINING MARGINS
The Company's operating results depend largely on the spread, or margin,
between prices paid by the market for refined petroleum products and prices paid
by the Company for crude oils and feedstocks. The Company's refining margins and
operating results have fluctuated, and will continue to fluctuate, due to
numerous factors, including changes in operating levels of other refineries in
the Company's marketing areas and in other areas of the United States, changes
in the differentials between sour and sweet crude oil prices on international
and U.S. markets, changes in the level of imported refined products and
variations in levels of demand for its principal products. Although an increase
or decrease in the price of crude oil generally results in a corresponding
increase or decrease in the price of refined products, changes in the prices of
refined products generally lag behind upward and downward changes in crude oil
prices. As a result, a rapid and significant increase in the market price for
crude oil could have an adverse impact on refining margins. The Company's future
results of operations will continue to be affected by these factors. Future
margins, results of operations and earnings per share could also be affected by
other factors beyond the Company's control, such as changes in, or the enactment
of, environmental or other regulations, which could require substantial
expenditures without necessarily increasing capacity or operating efficiency.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business."
DEPENDENCE ON NAVAJO REFINERY
The Company's performance depends primarily upon Navajo's results of
operations. Prolonged downtime of the Navajo Refinery for scheduled maintenance
turnarounds, unanticipated repairs or other reasons could materially and
adversely affect the Company's operating results. The Company's operations are
subject to the normal hazards and risks of refinery operations. The Company
maintains insurance, but there is no assurance that the Company will not incur
losses beyond the limits, or outside the coverage, of its insurance. See
"Business -- Insurance."
UNCERTAINTIES RELATED TO CAPITAL IMPROVEMENT PROJECTS
The Company's ability to implement the capital improvement projects it has
identified for enhancing the Navajo Refinery will depend on several factors,
some of which will be beyond the Company's control. Among those factors will be
the absence of unanticipated technical difficulties, fabrication delays or other
occurrences, all of which could increase the cost, and delay the completion, of
these projects. In addition, the identified refinery enhancement projects will
require the Company to obtain certain governmental approvals, and there can be
no assurance whether or when the Company will obtain those permits. Because of
these uncertainties, the Company is unable to predict when these projects will
be fully implemented or to provide any assurance that the anticipated benefits
of these projects will be realized or, if realized, will not be offset by other
factors affecting the Company's operations. In addition to the foregoing,
management will have broad discretion in deciding whether to implement any of
the other capital improvement projects it is currently evaluating.
COMPETITION; PIPELINE CONSTRAINTS
The petroleum refining business is highly competitive. Among the Company's
competitors are some of the world's largest integrated petroleum companies,
which have their own crude oil supplies, distribution and marketing systems. In
addition, Diamond Shamrock, Inc., an independent refiner and marketer, is
building a 420-mile, ten-inch refined products pipeline from its McKee refinery
near Dumas, Texas to El Paso, the Company's largest market. Diamond Shamrock has
announced that it expects to complete that pipeline, which will have an initial
capacity of 25,000 BPD, in October 1995, and that it intends to use its pipeline
to supply fuel to the El Paso, Arizona and northern Mexico markets. The Diamond
Shamrock pipeline could substantially increase the supply of products in certain
of the Company's principal markets. In addition, there is currently excess
pipeline capacity from the West Coast into the Company's Arizona markets. There
can be no assurance that West Coast refiners will not seek to increase shipments
of refined products into the Company's markets or that other industry
participants will not seek to deliver their products to the Company's
9
<PAGE> 11
markets through existing pipelines, new pipelines or otherwise. An increased
supply of products in the Company's markets could adversely affect its sales
volume and the prices it can obtain for its products.
At times in the past, the common carrier pipelines used by the Company to
serve the Arizona markets have been operated at or near their capacity. In
addition, the common carrier pipeline used by the Company to serve the
Albuquerque market currently is operating at or near capacity. As a result, the
volume of refined products that the Company and other shippers have been able to
deliver to these markets at times has been limited. In general, no assurances
can be given that the Company will not experience future constraints on its
ability to deliver its products through common carrier pipelines or that any
existing constraints will not worsen. In particular, the flow of additional
products into El Paso for shipment to Arizona, either as a result of the new
Diamond Shamrock pipeline or otherwise, could result in the reoccurrence of such
constraints. See "Business -- Navajo Refining Company -- Markets and
Competition."
SALES TO PRINCIPAL CUSTOMERS
For the 1994 fiscal year, approximately 12% of the Company's revenues
resulted from sales of jet fuel to the United States government and 11% were
attributable to sales of gasoline to an affiliate of PEMEX, the government-owned
energy company of Mexico. Sales to the United States government have been made
pursuant to a series of one-year contracts and sales to PEMEX have been made
under a contract that expires in mid-1997. The loss of either or both of these
customers could have a material and adverse effect on the Company's results of
operations. See "Business -- Navajo Refining Company -- Principal Products and
Customers."
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, emissions to air, discharges to
water, and transportation, treatment and disposal of waste and other materials.
The Company is and has been the subject of various state, federal and private
proceedings relating to environmental regulations and conditions, including a
currently pending proceeding brought by the United States Department of Justice
(the "DOJ") on behalf of the Environmental Protection Agency (the "EPA")
alleging ongoing violations of the Resource Conservation and Recovery Act
("RCRA") at the Navajo Refinery. The Company believes that it is in the final
stages of negotiating a settlement of this litigation with the DOJ and the EPA,
which, if consummated, could involve expenditures by the Company of
approximately $3 million to $4 million to construct a new wastewater management
system and to close existing wastewater evaporation ponds. Any settlement with
the DOJ also is expected to involve the payment of a civil penalty; however,
based on the negotiations between the Company and the DOJ, the Company does not
expect the amount of the civil penalty to have a material adverse effect on its
results of operations or financial condition. There can be no assurance,
however, that the Company and the government will settle the outstanding
litigation or that, if not settled, the final resolution of that suit would not
have a material adverse effect on the Company and its results of operations or
financial condition.
While the specifics cannot be presently determined, new laws or regulations
or changes in existing laws or regulations could require the Company to make
significant site or operational modifications, which could involve substantial
expenditures or the reduction or suspension of certain operations. See
"Business -- Regulation."
LIMITED LIQUIDITY OF COMMON STOCK
Although the Common Stock is listed on the American Stock Exchange, trading
volume has frequently been low over the past several years. Approximately 45% of
the outstanding shares of Common Stock is held by or for the benefit of two
families, which have been significant stockholders of the Company for over 30
years. Approximately 15% of the outstanding shares of Common Stock is held by
the Company's Employee Stock Ownership Plan (the "ESOP"). Immediately after
giving effect to the Offering, the two principal stockholder families, which are
the Selling Stockholders in the Offering, will beneficially own, in the
aggregate, approximately 28% of the outstanding Common Stock and the ESOP will
own approximately 12% of the outstanding Common Stock. There can be no assurance
that the consummation of the Offering will result in greater trading volume in
the Common Stock. See "Price Range of Common Stock and Dividend Policy" and
"Selling Stockholders."
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,500,000 shares of Common
Stock in the Offering are estimated to be $40.4 million (assuming a sale price
to the public of $28.50 per share of Common Stock). The Company will use
approximately $15 million of the net proceeds to pay for certain identified
projects to enhance the Navajo Refinery. The Company will use its remaining net
proceeds, together with internally generated funds, for other capital
improvement projects currently being evaluated by it and/or for general
corporate purposes. Pending use, the net proceeds to the Company from the
Offering will be invested in short-term, interest-bearing securities. See
"Capital Improvement Projects."
The Company will not receive any portion of the net proceeds from the sale
of the shares of Common Stock by the Selling Stockholders.
CAPITAL IMPROVEMENT PROJECTS
IDENTIFIED REFINERY ENHANCEMENT PROJECTS
As part of its efforts to improve production efficiencies, management
intends to enhance the Navajo Refinery by upgrading the FCC and alkylation
units, constructing an isomerization unit and installing a new SHP unit. These
projects are intended to improve the Navajo Refinery's ability to produce a
greater proportion of higher yielding products, principally "premium" (high
octane) gasolines, and to enhance management's flexibility to choose among
different types of crude oils and other raw materials in response to changing
prices of supplies. The Company currently estimates that the cost of these
projects will be approximately $15 million and expects to implement them over an
18-month period.
The modified FCC unit is expected to permit the refining of heavier
feedstocks than are currently processed, which would enhance the Company's
ability to take advantage of price differentials between sweet and sour crude
oils. Similarly, the isomerization unit is expected to provide the Company with
the ability to upgrade additional quantities of lower priced natural gasoline
into finished gasoline. It is anticipated that the SHP unit and the upgraded
alkylation unit will increase the refinery's production capacity for alkylate, a
high octane gasoline blendstock, which also would contribute to the refinery's
improved ability to produce premium unleaded gasolines and to upgrade natural
gasoline into a refined product. Consequently, the Company expects that the
enhancements to the Navajo Refinery will provide management with additional
flexibility in managing the refinery's crude oil and other raw materials
supplies. Further, based on industry studies concerning new environmental
regulations promulgated by the California Air Resources Board and scheduled to
go into effect in California in 1996, it appears that California refiners may
require increased supplies of alkylates to produce the cleaner burning gasolines
called for by the new regulations. In that event, the Navajo Refinery's
increased production of alkylate could be made available for sale to California
refineries.
The Company expects to commence its indentified refinery enhancement
projects promptly. However, management intends to bring the new and upgraded
equipment on-line in a manner that will minimize disruption to the Navajo
Refinery's operations. Consequently, management does not expect to make the FCC
modifications until the scheduled fall 1996 maintenance turnaround of the
refinery.
OTHER PROJECTS UNDER CONSIDERATION
The Company is currently evaluating certain other enhancements and
additions to the Navajo Refinery and the related supply and distribution systems
to better position it to respond to competitive pressures and to meet possible
increases in demand for refined products. Future capital projects that are being
considered include (i) the redistribution of process activities between the
Lovington and Artesia facilities in order to realize potential operating and
transportation cost savings, (ii) other upgrades to improve the efficiency of
the Navajo Refinery, (iii) modifications to increase product pipeline
distribution capacity and (iv) product pipeline reconditioning and construction
to facilitate entry into new markets. Management believes that the proceeds from
the Offering not expended on the currently identified projects, together with
cash flows from operating activities, should be sufficient to fund other
projects under consideration.
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at January 31, 1995, and as adjusted to give effect to the sale of
1,500,000 shares of Common Stock by the Company (based on the last sale price of
the Common Stock on the American Stock Exchange as reported on May 15, 1995).
See "Use of Proceeds" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
<TABLE>
<CAPTION>
JANUARY 31, 1995
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt.................................. $ 5,608 $ 5,608
Long-term debt, less current maturities............................... 68,832 68,832
Stockholders' equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares
authorized;
none issued and outstanding...................................... -- --
Common stock, par value $.01 per share; 20,000,000 shares
authorized;
8,650,282 shares issued and outstanding; 10,150,282 shares issued
and
outstanding, as adjusted......................................... 87 102
Additional capital.................................................. 6,132 46,487
Retained earnings................................................... 72,250 72,250
-------- ----------
78,469 118,839
Common stock held in treasury, at cost; 396,768 shares.............. (569) (569)
Deferred charge -- amount due from ESOP............................. (410) (410)
-------- ----------
Total stockholders' equity.................................. 77,490 117,860
-------- ----------
Total capitalization........................................ $151,930 $ 192,300
======== ==========
</TABLE>
12
<PAGE> 14
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the American Stock Exchange under the symbol
"HOC". The following table sets forth the range of the daily high and low sale
prices per share of Common Stock, as reported on the American Stock Exchange,
and dividends paid per share of Common Stock for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31, HIGH LOW DIVIDENDS
---------------------------------------------------------- ---- ---- ---------
<S> <C> <C> <C>
1993
First Quarter........................................... $25 $23 $.075
Second Quarter.......................................... 30 7/8 23 7/8 .075
Third Quarter........................................... 29 3/8 25 7/8 .075
Fourth Quarter.......................................... 30 1/2 26 3/8 .075
1994
First Quarter........................................... 30 26 5/8 .075
Second Quarter.......................................... 30 25 3/8 .075
Third Quarter........................................... 30 1/2 27 1/8 .10
Fourth Quarter.......................................... 33 3/8 28 1/4 .10
1995
First Quarter........................................... 28 1/2 23 3/4 .10
Second Quarter.......................................... 26 1/2 24 .10
Third Quarter........................................... 26 3/4 23 .10
Fourth Quarter (to May 15, 1995)........................ 28 1/2 26 3/4
</TABLE>
As of April 30, 1995, the Company had approximately 2,100 stockholders of
record.
The Company, which currently pays a quarterly dividend of $.10 per share of
Common Stock outstanding, considers the declaration of dividends on a quarterly
basis. The Company's ability to pay future dividends depends on its future
earnings and capital requirements, and on its financial condition and other
factors. The Company's senior notes (the "Senior Notes") and its revolving
credit agreement (the "Credit Agreement") could limit the Company's ability to
pay dividends under certain circumstances. See Note 6 to the Consolidated
Financial Statements for the year ended July 31, 1994 included elsewhere herein.
13
<PAGE> 15
SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended July
31, 1994 have been derived from the Company's audited consolidated financial
statements. The selected financial data at and for the six months ended January
31, 1994 and 1995 have been derived from the unaudited consolidated financial
statements of the Company which, in the opinion of management, contain all
adjustments, consisting only of normal, recurring adjustments, necessary to
present fairly the Company's results of operations and financial position for
such periods and at such dates. The consolidated results of operations for the
six months ended January 31, 1995 are not necessarily indicative of the results
to be expected for the full year or for future periods. The selected financial
data presented below should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31, YEARS ENDED JULY 31,
----------------------- -----------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues....................... $ 307,686 $ 256,207 $ 552,320 $ 630,621 $ 506,668 $ 489,333 $ 438,882
Costs and expenses:
Cost of sales................ 274,650 217,550 480,916 565,638 474,151 448,356 377,853
General and administrative... 6,670 5,879 12,369 11,951 9,263 9,200 9,699
Depreciation, depletion and
amortization............... 7,400 5,367 10,871 11,344 10,085 6,984 6,515
Exploration expenses,
including dry holes........ 1,270 1,910 4,441 2,867 2,005 3,834 2,576
Miscellaneous................ 82 135 183 150 148 129 467
--------- --------- --------- --------- --------- --------- ---------
290,072 230,841 508,780 591,950 495,652 468,503 397,110
--------- --------- --------- --------- --------- --------- ---------
Income from operations......... 17,614 25,366 43,540 38,671 11,016 20,830 41,772
Other income (expense)
Interest income.............. 443 153 447 169 432 419 517
Interest expense............. (4,242) (4,550) (8,985) (9,523) (10,086) (4,308) (5,397)
Other........................ -- -- -- 4,000 (700) 1,475 510
--------- --------- --------- --------- --------- --------- ---------
(3,799) (4,397) (8,538) (5,354) (10,354) (2,414) (4,370)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
cumulative effect of
accounting change............ 13,815 20,969 35,002 33,317 662 18,416 37,402
Income tax provision
(benefit).................... 5,580 8,430 14,285 13,384 (2,097) 6,682 13,447
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect
of accounting change......... 8,235 12,539 20,717 19,933 2,759 11,734 23,955
Cumulative effect of accounting
change....................... 5,703 -- -- (958) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income..................... $ 13,938 $ 12,539 $ 20,717 $ 18,975 $ 2,759 $ 11,734 $ 23,955
========= ========= ========= ========= ========= ========= =========
Income per common share:
Income before cumulative
effect of accounting
change..................... $ 1.00 $ 1.52 $ 2.51 $ 2.42 $ .33 $ 1.42 $ 2.90
Cumulative effect of
accounting change.......... .69 -- -- (.12) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................... $ 1.69 $ 1.52 $ 2.51 $ 2.30 $ .33 $ 1.42 $ 2.90
========= ========= ========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31, YEARS ENDED JULY 31,
----------------------- -----------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)...................... $ 25,014 $ 30,733 $ 54,411 $ 54,015 $ 20,401 $ 29,289 $ 48,797
Net cash provided by operating
activities................... 18,012 13,141 27,684 38,737 961 27,907 33,643
Capital expenditures........... 6,644 12,986 22,521 20,120 22,317 53,899 13,889
Cash dividends per common
share........................ $ .20 $ .15 $ .35 $ .30 $ .45 $ .48 $ .40
Average number of shares of
common stock outstanding..... 8,253,514 8,253,514 8,253,514 8,253,514 8,253,514 8,253,514 8,253,514
REFINERY OPERATING DATA:
Refinery production (BPD)(2)... 67,600 60,000(3) 64,300(3) 65,300 55,200 44,800(3) 46,400
Crude charge (BPD)(4).......... 64,648 56,017 60,911 62,115 51,723 43,838 46,071
Refinery utilization
(BPD)(5)..................... 96.5% 83.6%(3) 90.9%(3) 92.7% 88.2% 93.3%(3) 98.0%
Average per barrel:
Net sales.................... $ 23.92 $ 22.97 $ 22.88 $ 25.43 $ 24.84 $ 29.79 $ 25.41
Raw materials costs(6)....... 18.76 16.33 16.99 20.10 20.41 24.61 19.76
--------- --------- --------- --------- --------- --------- ---------
Gross margin................. $ 5.16 $ 6.64 $ 5.89 $ 5.33 $ 4.43 $ 5.18 $ 5.65
========= ========= ========= ========= ========= ========= =========
Product sales (percent of total
sales volume)(7):
Gasolines.................... 58.0% 53.8% 54.5% 52.0% 49.4% 46.6% 46.6%
Diesel fuels................. 19.5 21.4 20.1 23.6 21.1 20.1 18.7
Jet fuels.................... 10.9 11.1 11.7 10.4 13.2 18.2 20.5
Asphalt...................... 7.1 10.2 9.4 9.8 10.8 8.9 8.1
LPG and other................ 4.5 3.5 4.3 4.2 5.5 6.2 6.1
--------- --------- --------- --------- --------- --------- ---------
Total.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
----------------------- -----------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................ $ 28,394 $ 18,056 $ 18,236 $ 12,145 $ 5,031 $ 18,658 $ 11,608
Total assets................... 280,298 250,658 281,814 249,807 245,462 212,095 149,503
Long-term debt (less current
maturities).................. 68,832 74,440 68,840 74,448 80,056 80,164 34,136
Stockholders' equity........... 77,490 58,213 64,772 46,478 29,505 29,811 21,371
</TABLE>
- ---------------
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and is presented herein because it is commonly used to evaluate
a company's ability to service and/or to incur debt or to fund capital
expenditures. EBITDA should not be considered in isolation or as a
substitute for operating income, cash flows from operating activities and
other consolidated income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of the Company's
profitability or liquidity.
(2) Barrels per calendar day of refined products produced from crude oil and
other raw materials.
(3) Refinery production and utilization rates were reduced as a result of a
scheduled four-week turnaround for major maintenance at the Navajo Refinery.
(4) Barrels per day of crude oil processed.
(5) Crude charge divided by crude capacity.
(6) Includes cost of refined products purchased for resale.
(7) Includes refined products purchased for resale representing 3.0%, 3.9%,
3.9%, 3.2%, 0.7%, 0.7% and 0.3%, respectively, of the total sales volume for
the periods shown in the table above.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company's operating results depend largely on the spread, or margin,
between prices paid by the market for refined petroleum products and prices paid
by the Company for crude oils and feedstocks. The Company's refining margins and
operating results have fluctuated, and will continue to fluctuate, due to
numerous factors, including changes in operating levels of other refineries in
the Company's marketing areas and in other areas of the United States, changes
in the differentials between sour and sweet crude oil prices on international
and U.S. markets, changes in the level of imported refined products and
variations in levels of demand for its principal products. Although an increase
or decrease in the price of crude oil generally results in a corresponding
increase or decrease in the price of refined products, changes in the prices of
refined products generally lag behind upward and downward changes in crude oil
prices. As a result, a rapid and significant increase in the market price for
crude oil could have an adverse impact on refining margins. The Company's future
results of operations will continue to be affected by these factors. Future
margins, results of operations and earnings per share could also be affected by
other factors beyond the Company's control, such as changes in, or the enactment
of, environmental or other regulations, which could require substantial
expenditures without necessarily increasing capacity or operating efficiency.
The Company's results of operations experience some seasonal fluctuations,
with demand for gasoline and asphalt products historically being stronger from
March through October, which are the key "driving" and road construction months,
than during the rest of the year. In addition, the Company's refineries are
subject to preventive maintenance turnarounds scheduled at two- or three-year
intervals, during which all or a portion of the facilities are shut down. As a
result, the Company's operating results during the periods and full fiscal years
when turnarounds occur typically will be below the Company's results for the
comparable prior year periods. In addition, in part because the Navajo and
Montana Refineries serve markets with different supply and demand relationships,
the refineries' operating results do not always increase or decrease in tandem.
Consequently, there have been periods (such as fiscal 1994 and 1993) when MRC's
results of operations have contributed more to the Company's overall results of
operations than management ordinarily would expect given the relative size of
the Navajo and Montana Refineries.
RESULTS OF OPERATIONS
Six Months ended January 31, 1995 Versus Six Months ended January 31, 1994
For the six months ended January 31, 1995, net income was $13.9 million,
which included a $5.7 million contribution in the first quarter from the
cumulative effect of a change in accounting for turnarounds relating to prior
periods, compared to $12.5 million for the same period of fiscal 1994. 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 amortization of turnaround costs is recorded in
depreciation, depletion and amortization expense, whereas previously the
expenses accrued prior to the turnaround were recorded in cost of sales as an
operating expense. The increase in the current year in depreciation expense is
primarily the result of this change in accounting. The cumulative effect of this
accounting change was to increase net income in the current year by $5.7
million. Excluding the cumulative effect of the accounting change, the new
method of accounting for turnaround costs increased net income for the first
half of fiscal 1995 by $1.0 million to $8.2 million. If the accounting change
for turnaround costs had been retroactively applied, pro forma net income for
the six months ended January 31, 1994 would have increased by $1.1 million to
$13.6 million and pro forma net income for the full 1994 fiscal year would have
increased by $1.3 million to $22.0 million.
16
<PAGE> 18
Excluding the effects of the change in accounting for turnarounds, the $4.3
million decrease in net income for the first half of 1995 compared to the prior
year period is due primarily to a 22% reduction in gross margins per barrel,
offset partially by a 15% increase in volumes sold. Gross margins for the
current year were less than in the comparable prior year period because crude
oil costs per barrel increased at a 15% rate over the prior year, while product
prices per barrel increased at only a 4% rate. Gross margins per barrel at the
Montana Refinery, particularly in the latter part of the second quarter of 1995,
were 30% below the comparable prior year period because product prices per
barrel increased 1% over the prior year levels while crude oil costs per barrel
increased 23%. Revenues for the six months ended January 31, 1995 were 20%
higher than in the comparable prior year period due to a 15% increase in sales
volumes in the current year period and 4% higher product prices per barrel in
the first half of 1995 compared to the 1994 period. The prior year's sales
volumes were adversely affected by the scheduled maintenance turnaround at the
Navajo Refinery from September to November 1993.
1994 Versus 1993
Net income for the year ended July 31, 1994 was $20.7 million compared to
$19.9 million before an accounting change in the 1993 fiscal year. In the 1993
fiscal year, the Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), which amended the accounting
for income taxes from the deferral method to the liability method. The
cumulative effect of this change in accounting was to decrease net income by
$1.0 million to $19.0 million for the year ended July 31, 1993. Other than the
cumulative effect of the adjustment, the effect of the change on income for the
year ended July 31, 1993 was not material.
While gross margins per barrel for the 1994 fiscal year as a whole improved
11% over the levels of the prior year, the 1994 year's margins per barrel were
adversely affected by Navajo's refined product margins per barrel in the fourth
quarter of 1994, which decreased 43% from the same period during 1993 because
product prices per barrel fell 9% in the fourth quarter of 1994 while crude oil
cost per barrel rose 3% in the same period. MRC had a third consecutive record
earnings year in fiscal 1994 because its gross margins were positively affected
by favorable prices for crude oil and other feedstocks. Notwithstanding the
Company's higher gross margins, as a whole, for 1994 compared to 1993, net sales
for the 1994 fiscal year decreased 13% from the prior year's levels as the
result of a 10% decrease in product prices per barrel and a 3% decline in sales
volume for the year caused primarily by a scheduled major maintenance turnaround
of the Navajo Refinery. Under the prior accounting method, a charge of $2.9
million was recorded in the fourth quarter of fiscal 1993 to reflect an increase
in the estimate for the costs to be incurred in the turnaround, and an
additional $1.5 million in excess of the revised accrual at July 31, 1993 was
included as an expense with respect to the scheduled turnaround in the 1994
year's second quarter. Increases in other operating expense and in exploration
expenses, including dry holes, further reduced income in 1994.
Pre-tax income in 1993 was improved by $4 million relating to the
settlement of litigation with a common carrier pipeline and was reduced by a $2
million charge relating to an enforcement action brought by the DOJ alleging
that Navajo, beginning in September 1990 and continuing until the present,
violated and continues to violate the Resource Conservation and Recovery Act
(RCRA) and implementing regulations by treating, storing and disposing of
certain hazardous wastes without required authorization and without compliance
with regulatory requirements. See "Financial Condition" below.
1993 Versus 1992
Net income for the year ended July 31, 1993 was $19.9 million before a $1.0
million accounting change related to the adoption of SFAS 109 as discussed
above, compared to $2.8 million in the prior year.
Net income for the year ended July 31, 1993 improved substantially over the
prior year due to 20% and 22% increases in gross margins per barrel and sales
volumes, respectively. The increase in sales volume over the prior year resulted
from higher throughputs made possible by the refinery expansion completed in
December 1991 and the alleviation of product pipeline distribution constraints
in October 1992. Gross margins and sales volumes for the 1993 fiscal year also
may have been favorably affected by a temporary suspension of
17
<PAGE> 19
production during most of the year by a refinery in the Company's principal
market area. In addition, MRC experienced a second consecutive record earnings
year in fiscal 1993. Profitability in fiscal 1993 was reduced due to increases
in operating expenses, principally resulting from a charge taken in the fourth
quarter of $2.9 million to increase the estimate for the planned fall 1993 major
maintenance turnaround and increases in general and administrative expense and
depreciation, depletion and amortization expense, primarily attributable to the
refinery expansion. Net income in the fourth quarter of the 1993 fiscal year was
improved by pretax income of $4 million relating to a settlement of litigation
with a common carrier pipeline company and the $2 million pre-tax charge
established in connection with the DOJ litigation.
Net income in the fourth quarter of fiscal 1992 was improved by the
elimination, as a consequence of the Company's acquisition of the remaining
interest in MRC, of a $2.6 million liability for deferred taxes that had been
reflected on the Company's financial statements.
FINANCIAL CONDITION
Cash flows from operations during the six months ended January 31, 1995
exceeded capital expenditures and dividends paid, resulting in a net increase in
cash and cash equivalents of $9.7 million. Cash flows from operations for fiscal
1994 were slightly less than capital expenditures, debt payments and dividends
paid, resulting in a net decrease in cash and cash equivalents of $3.3 million.
Working capital increased during the first half of 1995 by $10.2 million to
$28.4 million at January 31, 1995. The Company's long-term debt represented
49.0% of total capitalization at January 31, 1995 compared to 53.5% at July 31,
1994. At January 31, 1995, the Company had $25 million of borrowing capacity
under the Credit Agreement, which is available for short term working capital
needs. The Company believes that these sources of funds, together with future
cash flows from operations and the estimated net proceeds from the sale of
1,500,000 shares of Common Stock offered hereby, should provide sufficient
resources, financial strength and flexibility for the Company to satisfy its
liquidity needs, capital requirements (including requirements related to the
identified refinery enhancement projects for the Navajo Refinery) and debt
service obligations and to permit the payment of dividends for the foreseeable
future.
Net cash provided by operating activities amounted to $18.0 million in the
first six months of fiscal 1995, compared to $13.1 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; this factor was partially
offset by the reduction in income before the accounting change. The change in
the method of accounting for turnaround costs had no effect on cash provided
from operations. Net cash provided by operating activities amounted to $27.7
million in fiscal 1994, compared to $38.7 million in fiscal 1993 and $1.0
million in fiscal 1992. The primary reason for the differences in cash provided
from operations during the three years ended July 31, 1994 was differences in
earnings, which were $20.7 million in fiscal 1994, $19.0 million in fiscal 1993
and $2.8 million in fiscal 1992. Additionally, significant amounts of funds were
required in both fiscal 1994 and fiscal 1992 to maintain working capital
accounts compared to the 1993 fiscal year.
Cash flows used for investing activities (consisting solely of capital
expenditures) were $6.6 million in the first six months of fiscal 1995, compared
to $13.0 million in the same period of the prior year. Cash flows used for
investing activities totalled $65.7 million over the last three full fiscal
years, $22.5 million in 1994, $20.1 million in 1993 and $23.1 million in 1992,
principally for capital expenditures. The expenditures in 1992 were primarily
for the final phases of the expansion of the Navajo Refinery's crude capacity
from 40,000 to 60,000 BPD. This expansion included the installation of a new
continuous catalytic regeneration reformer, the modification of the fluid
catalytic cracker, the expansion of the naphtha desulfurizer and the
installation of a new sulphur plant and alkylation unit. In fiscal 1993 and
1994, most of the funds expended were for refinery projects including diesel
desulfurization units at the Navajo and Montana Refineries in order to meet the
October 1993 requirements for lower sulphur content in diesel fuel. The Navajo
Refinery unit was completed in August 1993 and the Montana Refinery unit was
completed in December 1993.
The Company plans to use approximately $15 million of its net proceeds from
this Offering to pay for the identified capital improvement projects to enhance
the Navajo Refinery described under "Capital Improvements Projects -- Identified
Refinery Enhancement Projects." Management believes that the proceeds from
18
<PAGE> 20
the Offering not expended on the currently identified projects, together with
cash flows from operating activities, should be sufficient to fund other
projects under consideration. Excluding the capital improvement projects
described under "Capital Improvements Projects," the Company has a $15 million
capital budget for fiscal 1995, of which $11 million is for refinery projects
with the remaining $4 million for oil and gas exploration. Although there can
be no assurances, management considers the planned maintenance expenditures for
1995 of approximately $8 million to be indicative of the level of capital
spending that will be necessary to maintain the Company's operations in the
future. The majority of the oil and gas budget will be used to fund the
anticipated costs of completion of production facilities for two offshore
properties in which the Company has an interest. Although the Company's capital
expenditures budget contemplates capitalizable costs associated with compliance
with environmental regulations, the regulations implementing recent amendments
to the Clean Air Act could have a substantial impact on the Company's future
capital spending requirements. Final regulations implementing these amendments
have not yet been promulgated; therefore the costs of complying with these
regulations are not yet determinable by the Company. In addition, the Company
is unable to predict the impact that new environmental rules and regulations or
changes in interpretations of existing laws and regulations might have on its
capital spending needs.
Cash flows used for financing activities amounted to $1.7 million in the
first six months of fiscal 1995, compared to $1.2 million in the same period of
the prior year; substantially all these amounts were for dividends. The next
principal payment of $5.6 million on the Company's Senior Notes is due in June
1995. Cash flows used for financing activities amounted to $8.5 million and
$13.4 million in fiscal 1994 and 1993, respectively, compared to cash flows
provided by financing activities of $6.3 million in fiscal 1992. Financing
activities over the last three years included the renewal of the Company's
Credit Agreement in July 1993, which provides for a total facility of $100
million, the full amount of which may be used to support letters of credit and
$25 million of which may be used for direct borrowings for short-term working
capital needs. The Company had $10.5 million of borrowings outstanding under its
Credit Agreement as of July 31, 1992, the full amount of which was repaid during
fiscal 1993. The Company's Credit Agreement will expire August 1, 1995; however,
the Company expects to renew the Credit Agreement on substantially the same
terms. The
Company's first principal payment of $5.6 million on the Senior Notes was made
in June 1994. See Note 6 to the Consolidated Financial Statements for the year
ended July 31, 1994 included elsewhere herein for a summary of the terms of the
Senior Notes and the Credit Agreement, which could restrict the Company's
ability to pay dividends under certain circumstances.
Diamond Shamrock, Inc., an independent refiner and marketer, is building a
420-mile, ten-inch refined products pipeline from its McKee refinery near Dumas,
Texas to El Paso, the Company's largest market. Diamond Shamrock has announced
that it expects to complete that pipeline, which will have an initial capacity
of 25,000 BPD, in October 1995, and that it intends to use its pipeline to
supply fuel to the El Paso, Arizona and northern Mexico markets. The Diamond
Shamrock pipeline could substantially increase the supply of products in the
Company's principal markets. At times in the past, the common carrier pipelines
used by the Company to serve the Tucson and Phoenix markets have been operated
at or near their capacity. In addition, the common carrier pipeline used by the
Company to serve the Albuquerque market currently is operating at or near
capacity. As a result, the volume of refined products that the Company and other
shippers have been able to deliver to these markets at times has been limited.
In general, there is no assurance that the Company will not experience future
constraints on its ability to deliver its products through common carrier
pipelines or that any existing constraints will not worsen. In particular, the
flow of additional product into El Paso for shipment to Arizona, either as a
result of the new Diamond Shamrock pipeline or otherwise, could result in the
reoccurrence of such constraints. See "Business -- Navajo Refining
Company -- Markets and Competition."
In July 1993, the DOJ filed suit against Navajo alleging that, beginning in
September 1990 and continuing through the present, Navajo has violated and
continues to violate RCRA and implementing regulations of the EPA by treating,
storing and disposing of certain hazardous wastes without compliance with
regulatory requirements. The Company believes that the parties are in the final
stage of negotiations that should resolve some, if not all, of the litigation.
Based on those negotiations, the Company would close the existing evaporation
ponds of its wastewater management system, at a cost of approximately $1 million
to be expended over a several year period. The negotiations also contemplate
that the Company would implement
19
<PAGE> 21
one of several alternatives to the existing wastewater treatment system.
Depending upon which approach is utilized, the Company could incur total costs
of approximately $3 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. Any settlement with the DOJ also is expected to
involve the payment of a civil penalty, which, based on negotiations among the
Company, the EPA and the DOJ, the Company does not believe will have a material
adverse effect on its financial position or results of operations. In fiscal
1993, the Company recorded a $2 million reserve for the litigation, principally
to provide for the cost of closing the existing ponds. See "Investment
Considerations -- Environmental Regulation."
20
<PAGE> 22
BUSINESS
OVERVIEW
The Company is an independent refiner of petroleum and petroleum
derivatives and produces high value light products such as gasoline, diesel fuel
and jet fuel for sale primarily in the southwestern United States and northern
Mexico. The Company owns a high-conversion petroleum refinery in Artesia, New
Mexico, which it operates in conjunction with crude, vacuum distillation and
other facilities situated 65 miles away in Lovington, New Mexico. The Navajo
Refinery has a crude capacity of 60,000 BPD and can process a variety of high
sulphur sour crude oils. For the last three fiscal years, sour crude oils have
represented approximately 85% of the crude oils processed by the Navajo
Refinery. The Navajo Refinery's processing capabilities enable management to
vary its crude supply mix to take advantage of changes in raw materials prices
and to respond to fluctuations in the availability of crude oil supplies. The
Navajo Refinery converts approximately 86% of its raw materials throughput into
high value light products. For fiscal 1994, including barrels purchased for
resale, gasoline, diesel fuel and jet fuel represented 56.5%, 19.7% and 11.1%,
respectively, of Navajo's sales volume. For the last three fiscal years,
excluding downtime for scheduled maintenance and turnarounds, the Navajo
Refinery has operated at an average annual crude capacity utilization rate of
approximately 93%.
The Artesia facility is located on a 300-acre site and has fully integrated
crude, FCC, vacuum distillation, alkylation, hydrodesulfurization and reforming
units, and approximately 1.5 million barrels of feedstock and product tank
storage. The Lovington facility is operated as an integrated component of the
Navajo Refinery and refines crude oil into intermediate products, which are
transported, primarily via a Company-owned pipeline, to the Artesia facility for
further processing. Navajo's assets also include a 500-mile crude oil gathering
pipeline system, 30 crude oil and product tank trucks, three refined products
pipelines and product storage at terminals in Tucson, Albuquerque, Artesia and
El Paso in which the Company has 50% or greater interests.
The Company also owns a 7,000 BPD petroleum refinery near Great Falls,
Montana, which can process a range of crude oils and which serves primarily the
State of Montana. For fiscal 1994, including barrels purchased for resale,
gasoline, diesel fuel, asphalt and jet fuels, represented 38.6%, 24.3%, 18.6%
and 15.7% of MRC's sales volume. For the last three fiscal years, excluding
downtime for scheduled maintenance and turnarounds, the Montana Refinery has
operated at an average annual crude capacity utilization rate of approximately
94%.
In addition to its refining operations, the Company also conducts a
small-scale oil and gas exploration and production program.
BUSINESS STRENGTHS
Despite fluctuating industry conditions, the Company, which was
incorporated in 1947 and acquired the Navajo Refinery in 1969, has generated
positive net income and cash flow from operations for each of the past 24 years.
The Company had net income and cash from operating activities of $24.0 million
and $33.6 million, respectively, for fiscal 1990, $11.7 million and $27.9
million for fiscal 1991, $2.8 million and $1.0 million for fiscal 1992, $19.0
million and $38.7 million for fiscal 1993, and $20.7 million and $27.7 million
for fiscal 1994. The Company believes that it has certain business strengths
that have contributed to its history of profitable operations. Among those
strengths are the following:
- Geographic location/attractive markets. The Navajo Refinery primarily
serves the growing southwestern United States market, including El Paso,
Albuquerque, Phoenix and Tucson, which generally has favorable supply and
demand characteristics compared to Gulf Coast markets, and the northern
Mexico market, which is expected to experience demand growth over the next
several years. According to data compiled by the United States Bureau of
the Census, from April 1, 1990 to July 1, 1993, the population of the
Navajo Refinery's principal market area in the U.S. (Arizona, New Mexico
and El Paso) grew at a compound annual rate of 2.2%, compared to a
nationwide compound annual growth rate of 1.1% during that period. From
April 1, 1980 to July 1, 1993, this area grew at a compound annual rate of
2.5%, compared to a nationwide rate of 1.0%. The Montana Refinery serves
primarily the
21
<PAGE> 23
State of Montana, which also historically has had relatively favorable
supply and demand characteristics.
- High conversion refinery. The Navajo Refinery converts approximately 86%
of its raw materials throughput into high value light products from a
variety of sour crudes and can vary the refined products it produces to
respond to fluctuations in demand. The Navajo Refinery's processing
facilities also enable management to vary the refinery's crude supply mix
to take advantage of changes in raw materials prices and to respond to
fluctuations in the availability of crude oil supplies. For the last three
fiscal years, sour crude oils have represented approximately 85% of the
crude oils processed by the Navajo Refinery.
- Raw material supply. Located on the northwestern shelf of the Permian
Basin, the Navajo Refinery has direct access to a historically reliable
crude oil supply, which is transported to the refinery primarily through a
500-mile, Company-owned crude oil pipeline gathering system and by crude
oil tank trucks. The Company's crude oil pipelines connect to tankage
facilities in New Mexico and Texas, and are connected to, or are located
in proximity to, a number of common carrier crude oil pipelines. The
Montana Refinery obtains most of its crude oil via a 93-mile,
Company-owned pipeline which runs from near the Canadian border.
- Distribution logistics. The Company distributes refined products from the
Navajo Refinery to its principal markets primarily through (i) a
Company-owned pipeline extending from Artesia to El Paso and (ii) a
Company-owned pipeline extending from Artesia to Orla, Texas, and from
there west to El Paso. Products can be shipped by pipeline from El Paso to
Albuquerque via a products pipeline system owned by Chevron Pipeline
Company and to Tucson and Phoenix via a products pipeline system owned by
Santa Fe Pacific Pipeline. The Company also owns a segment of a products
pipeline running from Orla to Odessa, Texas, which is currently inactive.
The Company believes that the proximity of the Navajo Refinery to its
principal markets and the refinery's products distribution network provide
a transportation cost advantage over Gulf Coast and West Coast refineries
in supplying its markets.
BUSINESS STRATEGY
The Company's strategy has been, and continues to be, to optimize its
refinery operations to increase the proportion of high value products it
produces and to lower operating costs. As part of this strategy, the Company
completed a $63 million expansion of the Navajo Refinery in December 1991,
which, among other things, increased its refining capacity from 40,000 to 60,000
BPD. That expansion consisted principally of the addition of a new continuous
catalytic regeneration unit, the modification of the FCC unit, the expansion of
the naphtha desulfurizer and the installation of new sulphur and alkylation
units. The installation of new equipment and the modification and upgrading of
existing equipment as part of that expansion program increased the proportion of
sour crude oils that the Navajo Refinery can process and increased the
proportion of its throughput that can be converted into higher value products.
The Company continues to evaluate improvements to its operating cost
structure, refineries and crude oil gathering and product distribution systems.
Management believes that certain enhancements and additions to the Navajo
Refinery should better position the Company to respond to competitive pressures
and to meet possible increases in demand for refined products. As part of its
strategy, management intends to spend approximately $15 million over an 18-month
period on identified capital enhancement projects at the Navajo Refinery. Those
projects involve upgrades to the FCC and alkylation units, the construction of
an isomerization unit and the installation of a new SHP unit. Management expects
these projects to increase the Navajo Refinery's total gasoline production and
to improve its ability to produce a greater proportion of "premium" (high
octane) gasoline. In addition, these enhancements and plant additions are
expected to improve management's flexibility to operate using different types of
crude oils and other raw materials and to provide a platform for further
refinery expansion, if appropriate, in the future. In addition, the Company is
evaluating a number of other possible capital improvement projects, including
(i) the redistribution of process activities between the Lovington and Artesia
facilities in order to realize potential operating and transportation cost
savings, (ii) other upgrades to improve the efficiency of the Navajo Refinery,
(iii) modifications to increase
22
<PAGE> 24
product pipeline distribution capacity and (iv) product pipeline reconditioning
and construction to facilitate entry into new markets. See "Capital Improvement
Projects -- Other Projects Under Consideration."
NAVAJO REFINING COMPANY
Facilities
With the completion of a major expansion in December 1991, Navajo's
refining capacity increased from 40,000 to 60,000 BPD. The Navajo Refinery has
the ability to process a variety of sour crude oils and, as a result of the
expansion, has increased the proportion of throughput that can be converted into
high value light products (such as gasoline, diesel fuel and jet fuel). The
expansion has also increased internal high octane capabilities and has augmented
overall operating flexibility.
The following table sets forth certain information concerning the
operations of Navajo during the last five fiscal years and during the six-month
periods ending January 31, 1994 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31, YEARS ENDED JULY 31,
---------------- --------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Refinery production
(BPD)(1)................. 62,200 53,100(2) 57,400(2) 58,600 48,900 38,800(2) 40,000
Crude charge (BPD)(3)...... 59,254 49,075 54,089 55,488 45,363 37,663 39,524
Refinery
utilization(BPD)(4)...... 98.8% 81.8%(2) 90.1%(2) 92.5% 87.8% 94.2%(2) 98.8%
Average per barrel:
Net sales................ $23.77 $22.68 $22.63 $25.39 $24.69 $29.89 $25.59
Raw materials costs(5)... 18.83 16.54 17.20 20.26 20.53 24.67 19.83
------ ------ ------ ------ ------ ------ ------
Gross margin............. $ 4.94 $ 6.14 $ 5.43 $ 5.13 $ 4.16 $ 5.22 $ 5.76
====== ====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Barrels per calendar day of refined products produced from crude oil and
other raw materials.
(2) Refinery production and utilization rates were reduced as the result of a
scheduled four-week turnaround for major maintenance.
(3) Barrels per day of crude oil processed.
(4) Crude charge divided by crude capacity.
(5) Includes cost of refined products purchased for resale.
Navajo's Artesia facility has fully integrated crude, FCC, vacuum
distillation, alkylation, hydrodesulfurization and reforming units, and
approximately 1.5 million barrels of feedstock and product tank storage, as well
as other supporting units and office buildings at the site. The Artesia
facilities are operated in conjunction with integrated refining facilities
located in Lovington, New Mexico, approximately 65 miles east of Artesia. The
principal equipment at Lovington consists of a crude unit and an associated
vacuum unit. The Lovington facility processes crude oil into intermediate
products, which are transported to Artesia through a Company-owned eight-inch
pipeline or by tanker truck.
23
<PAGE> 25
The following table shows the major units of the Navajo Refinery and their
respective dates of construction or last major modification or upgrade:
<TABLE>
<CAPTION>
YEAR OF COMPLETION OR
UNITS MOST RECENT MAJOR MODIFICATION
----------------------------------------------------------- ------------------------------
<S> <C>
Artesia Crude Distillation Unit............................ 1981
Artesia Vacuum Distillation Unit........................... 1981
Lovington Crude Distillation Unit.......................... 1991
Lovington Vacuum Distillation Unit......................... 1991
Diesel Hydrodesulfurization Unit........................... 1993
Naptha/Kerosene Hydrodesulfurization Unit.................. 1991
Fluid Catalytic Cracking Unit*............................. 1991
Alkylation Unit*........................................... 1991
Catalytic Reformer Unit.................................... 1991
</TABLE>
- ---------------
* To be upgraded as part of the capital improvements projects described under
"Capital Improvements Projects -- Identified Refinery Enhancement Projects."
The Company's 500 miles of crude gathering pipelines lead to the Artesia
and Lovington facilities from various points in southeastern New Mexico. The
Company distributes refined products from the Navajo Refinery to its principal
markets primarily through (i) a Company-owned pipeline which extends from
Artesia to El Paso and (ii) a Company owned pipeline extending from Artesia to
Orla, Texas and from there west to El Paso. The Company has product storage at
terminals in Tucson, Albuquerque, Artesia and El Paso in which the Company has
50% or greater interests. The Company also owns a segment of products pipeline
running from Orla to Odessa, Texas, which is currently inactive. The Odessa
pipeline segment could be utilized following certain capital expenditures for
reconditioning.
Markets and Competition
The Navajo Refinery primarily serves the growing southwestern United States
market, including El Paso, Albuquerque, Phoenix and Tucson, and the northern
Mexico market. The Company's products are shipped by pipeline from El Paso to
Albuquerque via a products pipeline system owned by Chevron Pipeline Company and
to Tucson and Phoenix via a products pipeline system owned by Santa Fe Pacific
Pipeline. The map below illustrates the Company's distribution system to its
major markets. Access to the Company's markets by Gulf Coast refiners is limited
primarily by the lack of available products pipelines.
[MAP OF COMPANY'S PRODUCTS DISTRIBUTION SYSTEM]
24
<PAGE> 26
Growth in the Company's principal markets can be illustrated by the
increasing gasoline consumption in the southwestern United States during the
five years ended December 31, 1993, as shown in the following table:
GASOLINE CONSUMPTION IN SOUTHWESTERN STATES
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Barrels per Day:
Arizona..................... 119,925 116,840 113,433 110,524 113,800
New Mexico.................. 56,866 54,688 53,518 52,387 52,898
Texas*...................... 578,414 564,309 554,748 576,802 569,204
Total U.S........... 7,606,918 7,471,633 7,322,877 7,453,498 7,480,858
</TABLE>
<TABLE>
<CAPTION>
COMPOUND
ANNUAL
GROWTH
1992-93 1991-92 1990-91 1989-90 RATE
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Percentage Annual Change:
Arizona............................... 2.6% 3.0% 2.6% -2.9% 1.3%
New Mexico............................ 4.0% 2.2% 2.2% -1.0% 1.8%
Texas*................................ 2.5% 1.7% -3.8% 1.3% 0.4%
Total U.S..................... 1.8% 2.0% -1.8% -0.4% 0.4%
</TABLE>
- ---------------
* Principal market served is El Paso.
Source: U.S. Department of Transportation.
The petroleum refining business is highly competitive. Among the Company's
competitors are some of the world's largest integrated petroleum companies,
which have their own crude oil supplies, distribution and marketing systems. The
Company competes with independent refiners as well. Competition in particular
geographic markets is affected primarily by the amounts of refined products
produced by refineries located in such markets and by the availability of
refined products and the cost of transportation to such markets from refineries
located outside those markets. Diamond Shamrock, Inc., an independent refiner
and marketer, is building a 420-mile, ten-inch refined products pipeline from
its McKee refinery near Dumas, Texas to El Paso, the Company's largest market.
Diamond Shamrock has announced that it expects to complete that pipeline, which
will have an initial capacity of 25,000 BPD, in October 1995, and that it
intends to use its pipeline to supply fuel to the El Paso, Arizona and northern
Mexico markets. The Diamond Shamrock pipeline could substantially increase the
supply of refined products in the Company's principal markets. In addition,
there is excess pipeline capacity from the West Coast into the Company's Arizona
markets. There can be no assurance that West Coast refiners will not seek to
increase shipments of refined products into the Company's markets or that other
industry participants will not seek to deliver their products to the Company's
markets through existing pipelines, new pipelines or otherwise. An increased
supply of products in the Company's markets could adversely affect its sales
volume and the prices it can obtain for its products.
At times in the past, the common carrier pipelines used by the Company to
serve the Arizona markets have been operated at or near their capacity and have
been subject to periods of proration. In July 1993, the Company entered into a
settlement agreement regarding that pipeline system. Under the agreement, the
occurrence of certain defined events will require increases in the capacity of
the pipeline. It is anticipated that this settlement lessens, at least in the
foreseeable future, the likelihood of prolonged future constraints on the
movement of the Company's products into Arizona. In addition, the common carrier
pipeline used by the Company to serve the Albuquerque market currently is
operating at or near capacity. As a result, the volume of refined products that
the Company and other shippers have been able to deliver to these markets at
times has been limited. In general, no assurances can be given that the Company
will not experience future constraints on its ability to deliver its products
through common carrier pipelines or that any existing constraints will not
worsen. In particular, the flow of additional product into El Paso for shipment
to Arizona, either as a result of the new Diamond Shamrock pipeline or
otherwise, could result in the reoccurrence of such constraints.
25
<PAGE> 27
Crude Oil and Feedstock Supplies
The Navajo Refinery is situated near the Permian Basin in an area with
historically abundant crude supplies. The Company purchases crude oil from
producers in nearby southeastern New Mexico and west Texas, from major oil
companies and on the spot market. Crude oil is gathered through the Company's
pipelines and tank trucks and through third party crude oil pipeline systems.
Crude oil acquired in locations distant from the refinery is exchanged for crude
oil that is transportable to the refinery. In 1993, the Company reactivated a
subsidiary, Navajo Crude Oil Marketing Company, to facilitate the purchase of
crude oil from leases in west Texas and New Mexico.
Principal Products and Customers
The Navajo Refinery converts approximately 86% of its raw materials
throughput into high value light products. Set forth below is certain
information regarding the principal products of Navajo during the last five
fiscal years and during the six-month periods ending January 31, 1994 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31, YEARS ENDED JULY 31,
------------------------------ -------------------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------------- ------------ -------------- -------------- ------------ -------------- --------------
BPD % BPD % BPD % BPD % BPD % BPD % BPD %
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product
sales
(percent
of
total
sales
volumes)
(1):
Gasolines.. 38,100 60.3% 29,800 55.9% 33,200 56.5% 32,600 53.4% 24,800 50.3% 18,500 47.7% 19,700 48.5%
Diesel
fuels........ 12,000 19.0 11,200 21.0 11,600 19.7 14,500 23.7 10,300 20.9 7,600 19.6 7,400 18.2
Jet
fuels...... 6,700 10.6 5,500 10.3 6,500 11.1 5,900 9.7 6,200 12.6 7,200 18.5 8,400 20.7
Asphalt.... 3,600 5.7 4,900 9.2 4,900 8.3 5,500 9.0 5,000 10.1 2,900 7.5 2,500 6.2
LPG
and
other...... 2,800 4.4 1,900 3.6 2,600 4.4 2,600 4.2 3,000 6.1 2,600 6.7 2,600 6.4
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
63,200 100.0% 53,300 100.0% 58,800 100.0% 61,100 100.0% 49,300 100.0% 38,800 100.0% 40,600 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- ---------------
(1) Includes refined products purchased for resale representing 2.4%, 4.0%,
4.0%, 3.2%, 0.4%, 0.5% and 0.2%, respectively, of total sales volume for the
periods shown in the table above.
Light products are shipped by product pipelines or are made available at
distant points by exchanges with others. Light products are also available to
customers through truck loading facilities at the refineries and at terminals.
The demand for the Company's gasoline and asphalt products has historically been
stronger from March through October, which are the peak "driving" and road
construction months, than during the rest of the year.
The Company's principal customers for gasoline include other refiners,
convenience store chains, independent marketers, an affiliate of PEMEX (the
government-owned energy company of Mexico) and retailers. Navajo's gasoline is
marketed in the southwestern United States, including the metropolitan areas of
El Paso, Phoenix, Albuquerque, and Tucson, and in portions of northern Mexico.
Diesel fuel is sold to other refiners, wholesalers, independent dealers and
railroads. Jet fuel is sold primarily for military use. Military jet fuel is
sold to the Defense Fuel Supply Center (the "DFSC") of the Defense Logistics
Agency under a series of one-year contracts that can vary significantly from
year to year. Navajo sold approximately 7,000 BPD of jet fuel to the DFSC in its
1994 fiscal year and has a contract to supply 8,100 BPD to the DFSC for the year
ending September 30, 1995. Asphalt is sold to contractors and government
authorities for highway construction and maintenance. Carbon black oil is sold
for further processing, and LPGs are sold to petrochemical plants and are used
as fuel in refinery operations.
Approximately 12% of the Company's revenues for the first half of fiscal
1995 and 12% of revenues for fiscal 1994 resulted from the sale of military jet
fuel to the United States government. Although there can be no assurance that
the Company will be awarded such contracts in the future, the Company has had a
supply contract with the United States government for each of the last 26 years.
Approximately 8% of the Company's revenues for the first half of fiscal 1995 and
11% of revenues for fiscal 1994 resulted from the sale of gasoline to an
affiliate of PEMEX. Those sales were made under a contract that expires in
mid-1997. The loss of the
26
<PAGE> 28
Company's supply contract with the United States government or with PEMEX could
have a material adverse effect on the Company's results of operations.
CAPITAL IMPROVEMENT PROJECTS
Identified Refinery Enhancement Projects
As part of its efforts to improve operating efficiencies, management
intends to enhance the Navajo Refinery by upgrading the alkylation and FCC
units, constructing an isomerization unit and installing a new SHP unit. These
projects are intended to improve the Navajo Refinery's ability to produce a
greater proportion of higher yielding products, principally "premium" (high
octane) gasolines, and to enhance management's flexibility to choose among
different types of crude oils and other raw materials in response to changing
prices of supplies. The Company currently estimates that the cost of these
projects will be approximately $15 million and expects to implement them over an
18-month period.
The modified FCC unit is expected to permit the refining of heavier
feedstocks than are currently processed, which would enhance the Company's
ability to take advantage of price differentials between sweet and sour crude
oils. Similarly, the isomerization unit is expected to provide the Company with
the ability to upgrade additional quantities of lower priced natural gasoline
into finished gasoline. It is anticipated that the SHP unit and the upgraded
alkylation unit will increase the refinery's production capacity for alkylate, a
high octane gasoline blendstock, which also would contribute to the refinery's
improved ability to produce premium unleaded gasolines and to upgrade natural
gasoline into a refined product. Consequently, the Company expects that the
enhancements to the Navajo Refinery will provide management with additional
flexibility in managing the refinery's crude oil and other raw materials
supplies. Further, based on industry studies concerning new environmental
regulations promulgated by the California Air Resources Board and scheduled to
go into effect in California in 1996, it appears that California refiners may
require increased supplies of alkylates to produce the cleaner burning gasolines
called for by the new regulations. In that event, the Navajo Refinery's
increased production of alkylate could be made available for sale to California
refineries.
The Company expects to commence its identified refinery enhancement
projects promptly. However, management intends to bring the new and upgraded
equipment on-line in a manner that will minimize disruption to the Navajo
Refinery's operations. Consequently, management does not expect to make the FCC
modifications until the scheduled fall 1996 maintenance turnaround of the
refinery.
Other Capital Projects
The Company is currently evaluating certain other enhancements and
additions to the Navajo Refinery and the related supply and distribution systems
to better position it to respond to competitive pressures and to meet possible
increases in demand for refined products. Future capital projects that are being
considered include (i) the redistribution of process activities between the
Lovington and Artesia facilities in order to realize potential operating and
transportation cost savings, (ii) other upgrades to improve the efficiency of
the Navajo Refinery, (iii) modifications to increase product pipeline
distribution capacity and (iv) product pipeline reconditioning and construction
to facilitate entry into new markets. Management believes that the proceeds from
the Offerings not expended on the currently identified projects, together with
cash flows from operating activities, should be sufficient to fund the other
projects under consideration.
MONTANA REFINING COMPANY
MRC owns a 7,000 BPD petroleum refinery near Great Falls, Montana, which
can process a range of crude oils and which serves primarily the State of
Montana. For the last three fiscal years, excluding downtime for scheduled
maintenance and turnarounds, the Montana Refinery has operated at an average
annual crude capacity utilization rate of approximately 94%.
27
<PAGE> 29
The following table sets forth certain information regarding the principal
products of MRC during the last five years and during the six-month periods
ending January 31, 1994 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31, YEARS ENDED JULY 31,
------------------------------ ---------------------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------------- ------------- ------------- ------------- ------------- ------------- -------------
BPD % BPD % BPD % BPD % BPD % BPD % BPD %
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product
sales
(percent
of
total
sales
volumes)
(1):
Gasolines... 2,300 35.9% 2,600 37.1% 2,700 38.6% 2,700 39.1% 2,800 42.4% 2,400 40.0% 2,400 36.4%
Diesel
fuels... 1,600 25.0 1,700 24.3 1,700 24.3 1,600 23.2 1,500 22.7 1,400 23.4 1,400 21.2
Jet
fuels... 900 14.1 1,300 18.6 1,100 15.7 1,200 17.4 1,100 16.7 900 15.0 1,200 18.2
Asphalt... 1,300 20.3 1,200 17.1 1,300 18.6 1,200 17.4 1,100 16.7 1,100 18.3 1,300 19.7
LPG and
other... 300 4.7 200 2.9 200 2.8 200 2.9 100 1.5 200 3.3 300 4.5
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 6,400 100.0% 7,000 100.0% 7,000 100.0% 6,900 100.0% 6,600 100.0% 6,000 100.0% 6,600 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes refined products purchased for resale representing 8.3%, 3.1%,
3.4%, 3.2%, 2.6%, 2.1% and 1.1%, respectively, of total sales volume for
the periods shown in the table above.
The Montana Refinery obtains its supply of crude oils primarily from
suppliers in Canada via a 93-mile, Company-owned pipeline, which runs from near
the Canadian border. The Montana Refinery's principal markets include Great
Falls, Helena, Bozeman and Billings, Montana. MRC competes principally with
three other Montana refineries.
JET FUEL TERMINAL
The Company owns and operates a 120,000 barrel capacity jet fuel terminal
near Mountain Home, Idaho, which serves as a terminalling facility for jet fuel
sold by unaffiliated producers to the Mountain Home United States Air Force
Base.
NAVAJO WESTERN ASPHALT COMPANY
Navajo Western Asphalt Company, a wholly-owned subsidiary of the Company,
operates an asphalt marketing facility near Phoenix. The Company has recently
completed construction of asphalt processing and storage facilities that should
allow it to expand this operation. In addition to serving as a marketing outlet
for asphalt produced by Navajo at the Lovington facility, Navajo Western markets
asphalt for third parties.
EXPLORATION AND PRODUCTION
The Company contracts with two independent oil and gas consulting groups
that identify oil and gas exploration and production projects for the Company.
The scope of this activity is presently modest relative to the Company's
refining operations. For fiscal 1995, the Company has budgeted approximately $4
million for capital expenditures related to oil and gas exploration activities.
The majority of that budget will be used to fund the anticipated costs to
complete production facilities at two offshore properties in which the Company
has an interest.
EMPLOYEES AND LABOR RELATIONS
As of April 30, 1995, the Company had approximately 540 employees, of whom
451 were employed by the Navajo Refinery and 73 were employed at the Montana
Refinery. Of its employees, 216 are covered by collective bargaining agreements
("covered employees"). Contracts relating to the covered employees at all
facilities were negotiated during 1993 and will expire in 1996. The Company
considers its employee relations to be good.
28
<PAGE> 30
REGULATION
Refinery operations are subject to federal, state and local laws regulating
the discharge of matter into the environment or otherwise relating to the
protection of the environment. Over the years, there have been and continue to
be ongoing communications, including notices of violations, and discussions
about environmental matters, between the Company and federal and state
authorities, some of which have resulted in changes in operating procedures and
certain capital expenditures by the Company. Compliance with applicable
environmental laws and regulations will continue to have an impact on the
Company's operations and capital requirements. For example, the final form of
the regulations implementing recent amendments to the Clean Air Act could have a
substantial impact on the future capital spending requirements of the Company
and the refining industry as a whole.
The EPA has promulgated regulations which substantially reduced the
allowable sulfur content of diesel fuel for sales starting in October 1993. In
fiscal 1994, the Company completed projects which allow Navajo and MRC to meet
this new standard.
Effective January 1, 1995, certain cities in the country were required to
use only reformulated gasoline ("RFG"), a cleaner burning fuel. While none of
the Company's principal markets presently require RFG, this requirement could be
implemented over time. Further, other requirements of the Clean Air Act could
cause the Company to be required to expend substantial amounts for compliance at
its refineries. Expenditures in connection with Clean Air Act at the Montana
Refinery could be proportionally larger than similar expenditures anticipated
for the Navajo Refinery. However, the specifics of these requirements and their
attendant costs are not presently determinable.
The Company is and has been the subject of various state, federal and
private proceedings relating to environmental regulations, conditions and
inquiries. The most significant of these is the enforcement action which has
been brought by the DOJ, on behalf of the EPA, and which is discussed in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Financial Condition" and in Note 12 to the Consolidated Financial
Statements for the year ended July 31, 1994 included elsewhere herein. In
addition to the expenditures that will likely be incurred in connection with a
resolution of this matter, current or future environmental regulations likely
will require additional remediation or other expenditures at the Navajo and
Montana Refineries. The extent of any such expenditures cannot be presently
determined.
The Company's operations are also subject to various laws and regulations
relating to occupational health and safety. The Company maintains safety,
training and maintenance programs as part of its ongoing efforts to ensure
compliance with applicable laws and regulations. Moreover, while recently
enacted comprehensive health and safety legislation have required, and will
continue to require, substantial expenditures and modifications of procedures,
the Company believes it is taking the appropriate steps to ensure compliance.
Notwithstanding the Company's efforts, following an eight-month series of
inspections at MRC, the Occupational Safety and Health Administration recently
issued numerous citations alleging a variety of matters of noncompliance. MRC
has contested all citations and it cannot presently determine the extent of any
fines for which it will ultimately be responsible.
INSURANCE
The Company's operations are subject to normal hazards of refinery
operations, including fire, explosion and weather-related perils. The Company
maintains various insurance coverages, including business interruption
insurance, subject to certain deductibles. The Company is not fully insured
against those risks that are not fully insurable or for which coverage is
unavailable or premium costs are prohibitive.
LEGAL PROCEEDINGS
In July 1993, the DOJ, acting on behalf of the EPA, filed a complaint in
the United States District Court for the District of New Mexico alleging that
Navajo, beginning in September 1990 and continuing until the present, had
violated and continues to violate RCRA and implementing regulations of the EPA
by treating, storing and disposing of certain hazardous wastes without necessary
authorization and without compliance
29
<PAGE> 31
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. The Company believes that the parties are in the final stages of
negotiations that should resolve some, if not all, of the litigation. Based on
these negotiations, the Company would close the existing evaporation ponds of
its wastewater management system and implement an alternative waste water
treatment system. Any settlement with DOJ also is expected to involve payment of
a civil penalty. See "Investment Considerations -- Environmental Regulation,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Notes to the Consolidated Financial Statements included
elsewhere herein.
The Company is a party to various other litigation and proceedings which it
believes, based on advice of counsel, will not have a material adverse impact on
its financial condition or results of operations.
MANAGEMENT AND DIRECTORS
EXECUTIVE OFFICERS
The following table identifies the executive officers of the Company:
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITION OFFICER SINCE
---------------------------- --- ---------------------------------------- -------------
<S> <C> <C> <C>
Lamar Norsworthy............ 48 Chairman of the Board, President and 1971
Chief Executive Officer
Jack P. Reid................ 58 Executive Vice President, Refining and 1976
Director
William J. Gray............. 54 Senior Vice President, Marketing and 1976
Supply
Matthew P. Clifton.......... 43 Senior Vice President 1988
David G. Blair.............. 37 Vice President, Marketing Asphalt and 1994
LPG
Christopher L. Cella........ 38 Vice President, General Counsel and 1990
Secretary
Karl N. Knapp............... 36 Vice President 1994
John A. Knorr............... 44 Vice President, Crude Oil Supply and 1988
Trading
Virgil R. Langford.......... 49 Vice President, Refining 1989
Mike Mirbagheri............. 56 Vice President, International Crude Oil 1982
and Refined Products
Henry A. Teichholz.......... 52 Vice President, Treasurer and Controller 1984
Gregory A. White............ 37 Vice President, Marketing Light Oils 1994
</TABLE>
In addition to the persons listed above, Kathryn Walker, age 44, was
appointed Controller of Navajo Refining Company in August 1993; prior thereto
she served from November 1985 as Assistant Controller of Navajo.
30
<PAGE> 32
All officers of the Company are elected annually to serve until their
successors have been elected. Mr. Cella joined the Company in 1990, having
previously been associated with the law firm of Gibson, Dunn & Crutcher since
1982. Mr. Clifton previously served as Vice President, Economics, Engineering
and Legal Affairs from 1988 to 1991. Mr. Knorr serves as the General Manager of
MRC. Mr. Langford became Navajo's refinery manager in January 1989 and had held
a similar position with MRC since 1985. Messrs. Blair, Knapp and White were
elected to their respective positions in September 1994. Mr. Blair has served as
Marketing Manager of Asphalt and LPG of Navajo since 1989 and previously held
various marketing and supply positions. Mr. Knapp joined the Company in 1992 and
served as Director of Corporate Development from 1992 to 1994. Mr. Knapp was
Director of Corporate Planning for Northwest Airlines from 1991 to 1992, and
prior to that was associated with the management consulting firm of Monitor
Company from 1987 to 1991. Mr. White has served as Marketing Manager of Light
Oils of Navajo since 1989 and previously held various marketing and supply
positions.
DIRECTORS
The following table identifies the directors of the Company:
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE
-------------------------------------------------------- --- --------------
<S> <C> <C>
W. John Glancy.......................................... 53 1975
Marcus R. Hickerson..................................... 68 1960
A.J. Losee.............................................. 70 1978
Thomas K. Matthews, II.................................. 69 1978
Robert G. McKenzie...................................... 56 1992
Lamar Norsworthy........................................ 48 1967
E.I. Parsons............................................ 66 1976
Jack P. Reid............................................ 58 1977
</TABLE>
W. John Glancy has been a partner in Weil, Gotshal & Manges since April
1995 and previously practiced in the Law Offices of W. John Glancy from January
1991. From 1988 to 1990, Mr. Glancy was a partner in the law firm of Hughes &
Luce.
Marcus R. Hickerson has been a consultant to Centex Development Company
since 1987.
A. J. Losee is a shareholder in the Artesia, New Mexico law firm of Losee,
Carson, Haas & Carroll, P.A., and has practiced law for more than 40 years.
Thomas K. Matthews, II, is a financial consultant.
Robert G. McKenzie has been Executive Vice President and Chief Operating
Officer of Brown Brothers Harriman Trust Company of Texas since January 1990.
Previously, he was Executive Vice President of NCNB Texas National Bank and of
First Republic Bank Dallas N.A. and Senior Vice President of RepublicBank
Dallas, N.A.
Lamar Norsworthy is Chairman of the Board, Chief Executive Officer and
President of the Company.
E. I. Parsons until his retirement in January 1992 was Vice Chairman of the
Board of the Company.
Jack P. Reid is Executive Vice President, Refining, of the Company.
31
<PAGE> 33
SELLING STOCKHOLDERS
The following table sets forth the names of the Selling Stockholders, the
aggregate number of shares of Common Stock identified by the Selling
Stockholders as being beneficially owned by them as of May 15, 1995, and the
aggregate number of shares of Common Stock being sold by each of them in the
Offering.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF SHARES OF PERCENT OF COMMON
SHARES OF SHARES OF COMMON STOCK STOCK OUTSTANDING
COMMON STOCK COMMON STOCK TO BE OWNED ---------------------
NAME AND ADDRESS OF OWNED BEFORE TO BE SOLD AFTER BEFORE AFTER
BENEFICIAL OWNER OFFERING IN OFFERING OFFERING OFFERING OFFERING
- ---------------------------------------------- ------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Brown Brothers Harriman Trust Company of
Texas, as trustee of trusts in the names of
Betty Regard, Margaret Simmons and Suzanne
Bartolucci.................................. 2,021,136 24.5%
Brown Brothers Harriman Trust Company of
Texas, as trustee for three trusts for the
benefit of David and Lamar Norsworthy and
Nona Barrett, respectively(1)............... 281,562 3.4
David Norsworthy(2)........................... 250,752 3.0
Lamar Norsworthy(1)(2)........................ 428,581 5.2
Nona Barrett.................................. 430,278 5.2
David Norsworthy, Lamar Norsworthy and Brown
Brothers Harriman Trust Company of Texas, as
co-trustees of three trusts for the benefit
of David and Lamar Norsworthy and Nona
Barrett, respectively(1).................... 285,858 3.5
</TABLE>
- ---------------
(1) Lamar Norsworthy is Chairman of the Board, President, Chief Executive
Officer and a director of the Company.
(2) Does not include shares which are beneficially owned by three trusts of
which this owner is a co-trustee and which are listed separately.
32
<PAGE> 34
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") among the Company, the Selling Stockholders and each
of the underwriters named below (the "Underwriters"), the Company and the
Selling Stockholders have agreed to sell to each of the Underwriters, and each
of the Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
and CS First Boston Corporation are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth below
opposite their respective names. The Underwriters are committed to purchase all
of such shares if any are purchased. Under certain circumstances, the
commitments of nondefaulting Underwriters may be increased as set forth in the
Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
--------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................................
CS First Boston Corporation................................................
---------
Total......................................................... 2,500,000
========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may
re-allow, a discount not in excess of $ per share on sales to certain
other dealers. After the public offering, the public offering price, concession
and discount may be changed.
The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable by the Representatives, to purchase up to 375,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discount. Such options, which expire 30 days after the date of this
Prospectus, may be exercised solely to cover over-allotments. To the extent that
the Representatives exercise such options, each of the Underwriters will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of the option shares that the number of shares of Common Stock to be
purchased initially by that Underwriter bears to the total number of shares to
be purchased initially by the Underwriters.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
Each of the Company and the Selling Stockholders has agreed that it will
not, without the prior written consent of the Representatives, directly or
indirectly, sell, offer to sell, grant any option for the sale of or otherwise
dispose of, any shares of Common Stock or any security convertible into or
exchangeable or exercisable for any such shares of Common Stock for a period of
180 days from the date of this Prospectus.
33
<PAGE> 35
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and the Selling Stockholders by Weil, Gotshal &
Manges (a partnership including professional corporations), Dallas, Texas.
Certain legal matters in connection with the sale of the Common Stock offered
hereby will be passed upon for the Underwriters by Baker & Botts L.L.P., Dallas,
Texas. W. John Glancy, a director of the Company, is a partner in Weil, Gotshal
& Manges and beneficially owns 200 shares of Common Stock.
EXPERTS
The consolidated financial statements of Holly Corporation at July 31, 1994
and 1993, and for each of the three years in the period ended July 31, 1994,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
herein in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
34
<PAGE> 36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Annual Financial Statements
Report of Independent Auditors...................................................... F-2
Consolidated Balance Sheet at July 31, 1994 and 1993................................ F-3
Consolidated Statement of Income for the years ended July 31, 1994, 1993 and 1992... F-4
Consolidated Statement of Cash Flows for the years ended July 31, 1994, 1993 and
1992............................................................................. F-5
Consolidated Statement of Stockholders' Equity for the years ended
July 31, 1994, 1993 and 1992..................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
Interim Financial Statements
Condensed Consolidated Balance Sheet -- January 31, 1995 (Unaudited)................ F-17
Condensed Consolidated Statement of Income (Unaudited) for the six months ended
January 31, 1995 and 1994........................................................ F-18
Condensed Consolidated Statement of Cash Flows (Unaudited) for the six months ended
January 31, 1995 and 1994........................................................ F-19
Notes to Condensed Consolidated Financial Statements................................ F-20
</TABLE>
F-1
<PAGE> 37
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
The Board of Directors
and Stockholders of Holly Corporation
We have audited the accompanying consolidated balance sheet of Holly
Corporation (the "Company") at July 31, 1994 and 1993, and the related
consolidated statements of income, cash flows and stockholders' equity for each
of the three years in the period ended July 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Holly Corporation at July 31, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 20, 1994
F-2
<PAGE> 38
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JULY 31,
---------------------
1994 1993
-------- --------
($ IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 6)................................... $ 3,297 $ 6,631
Accounts receivable (Notes 3 and 6).................................. 94,280 76,867
Inventories (Notes 4 and 6).......................................... 43,995 37,972
Income taxes receivable.............................................. 697 --
Prepayments and other................................................ 9,340 7,082
-------- --------
Total current assets.............................................. 151,609 128,552
Properties, plants and equipment, net (Note 5)......................... 128,962 118,821
Other assets........................................................... 1,243 2,434
-------- --------
$281,814 $249,807
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable..................................................... $112,084 $ 86,787
Accrued liabilities.................................................. 14,945 16,648
Income taxes payable................................................. 736 7,364
Current maturities of long-term debt (Note 6)........................ 5,608 5,608
-------- --------
Total current liabilities......................................... 133,373 116,407
Deferred income taxes (Note 7)......................................... 14,829 12,474
Long-term debt, less current maturities (Note 6)....................... 68,840 74,448
Contingencies (Notes 10 and 12)
Stockholders' equity (Notes 6, 8 and 9)
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.................................................... 59,942 42,058
-------- --------
66,161 48,277
Common stock held in treasury, at cost -- 396,768 shares............. (569) (569)
Deferred charge -- amount due from ESOP.............................. (820) (1,230)
-------- --------
Total stockholders' equity................................... 64,772 46,478
-------- --------
$281,814 $249,807
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 39
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------
1994 1993 1992
-------- -------- --------
($ IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net sales................................................ $550,903 $629,884 $506,185
Miscellaneous............................................ 1,417 737 483
-------- -------- --------
552,320 630,621 506,668
COSTS AND EXPENSES
Cost of sales............................................ 480,916 565,638 474,151
General and administrative............................... 12,369 11,951 9,263
Depreciation, depletion and amortization................. 10,871 11,344 10,085
Exploration expenses, including dry holes................ 4,441 2,867 2,005
Miscellaneous............................................ 183 150 148
-------- -------- --------
508,780 591,950 495,652
-------- -------- --------
Income from operations..................................... 43,540 38,671 11,016
OTHER INCOME (EXPENSE)
Interest income.......................................... 447 169 432
Interest expense (Note 6)................................ (8,985) (9,523) (10,086)
Other (Note 11).......................................... -- 4,000 (700)
-------- -------- --------
(8,538) (5,354) (10,354)
-------- -------- --------
Income before income taxes and cumulative effect of change
in accounting for income taxes........................... 35,002 33,317 662
Income tax provision (benefit) (Notes 2, 7 and 10)
Current.................................................. 11,785 12,647 (966)
Deferred................................................. 2,500 737 (1,131)
-------- -------- --------
14,285 13,384 (2,097)
-------- -------- --------
Income before cumulative effect of change in
accounting principle..................................... 20,717 19,933 2,759
Cumulative effect to August 1, 1992 of change in
accounting for income taxes (Note 2)..................... -- (958) --
-------- -------- --------
Net income................................................. $ 20,717 $ 18,975 $ 2,759
======== ======== ========
Income per common share
Income before cumulative effect of change in
accounting principle.................................. $ 2.51 $ 2.42 $ .33
Cumulative effect to August 1, 1992 of change in
accounting for income taxes........................... -- (.12) --
-------- -------- --------
Net income............................................... $ 2.51 $ 2.30 $ .33
======== ======== ========
Cash dividends paid per share.............................. $ .35 $ .30 $ .45
======== ======== ========
Average number of shares of common stock outstanding
(in thousands)........................................... 8,254 8,254 8,254
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 40
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------
1994 1993 1992
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 20,717 $ 18,975 $ 2,759
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization.............. 10,871 11,344 10,085
Deferred income taxes................................. 2,500 737 (1,131)
Dry hole costs and leasehold impairment............... 1,509 1,175 369
Cumulative effect to August 1, 1992 of change in
accounting for income taxes......................... -- 958 --
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable.......... (17,413) 12,222 (27,388)
Increase in inventories............................. (6,023) (2,365) (5,984)
(Increase) decrease in income taxes receivable...... (697) 2,115 (1,876)
Increase in prepayments and other................... (2,403) (197) (1,581)
(Increase) decrease in accounts payable............. 25,297 (19,964) 26,005
(Increase) decrease in accrued liabilities.......... (1,703) 6,419 858
(Increase) decrease in income taxes payable......... (6,572) 7,427 (1,970)
Other, net............................................ 1,601 (109) 815
-------- -------- --------
Net cash provided by operating activities........ 27,684 38,737 961
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable.................. -- (10,500) 10,500
Reduction of long-term debt........................... (5,608) (108) (474)
Issuance costs of debt................................ -- (291) --
Cash dividends........................................ (2,889) (2,476) (3,714)
-------- -------- --------
Net cash provided by (used for) financing
activities..................................... (8,497) (13,375) 6,312
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment......... (22,521) (20,120) (22,317)
Additional cost of partnership........................ -- -- (739)
-------- -------- --------
Net cash used for investing activities........... (22,521) (20,120) (23,056)
-------- -------- --------
CASH AND CASH EQUIVALENTS
(Increase) decrease for the year...................... (3,334) 5,242 (15,783)
Beginning of year..................................... 6,631 1,389 17,172
-------- -------- --------
End of year........................................... $ 3,297 $ 6,631 $ 1,389
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 41
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AMOUNT
DUE TOTAL
COMMON ADDITIONAL RETAINED TREASURY FROM STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK ESOP EQUITY
------ ---------- -------- -------- --------- ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1991.... $ 87 $6,132 $26,212 $ (569) $(2,051) $ 29,811
Net income.................. -- -- 2,759 -- -- 2,759
Dividends paid.............. -- -- (3,714) -- -- (3,714)
Reduction in amount due from
ESOP...................... -- -- -- -- 410 410
Tax benefit of dividends
paid to ESOP.............. -- -- 239 -- -- 239
------ ---------- -------- -------- --------- ------------
BALANCE AT JULY 31, 1992.... 87 6,132 25,496 (569) (1,641) 29,505
Net income.................. -- -- 18,975 -- -- 18,975
Dividends paid.............. -- -- (2,476) -- -- (2,476)
Reduction in amount due from
ESOP...................... -- -- -- -- 411 411
Tax benefit of dividends
paid to ESOP on
unallocated shares........ -- -- 63 -- -- 63
------ ---------- -------- -------- --------- ------------
BALANCE AT JULY 31, 1993.... 87 6,132 42,058 (569) (1,230) 46,478
Net income.................. -- -- 20,717 -- -- 20,717
Dividends paid.............. -- -- (2,889) -- -- (2,889)
Reduction in amount due from
ESOP...................... -- -- -- -- 410 410
Tax benefit of dividends
paid to ESOP on
unallocated shares........ -- -- 56 -- -- 56
------ ---------- -------- -------- --------- ------------
BALANCE AT JULY 31, 1994.... $ 87 $6,132 $59,942 $ (569) $ (820) $ 64,772
====== ========== ======== ======== ========= ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 42
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company is principally engaged in the refining of petroleum products.
Although the Company is also engaged in certain oil and gas exploration and
production activities, such activities do not represent a significant segment of
the Company's assets or operations.
The consolidated financial statements include the accounts of the Company,
its subsidiaries and Montana Refining Company, a Partnership (MRC).
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost, using the last-in, first-out
(LIFO) method for crude oil and refined products and the average cost method for
materials and supplies, or market.
REVENUE RECOGNITION
Sales and related cost of sales are recognized when products are shipped to
customers and title passes. Sales are reported exclusive of excise taxes.
DEPRECIATION
Depreciation is provided by the straight-line method over the estimated
useful lives of the assets, primarily 10 to 30 years for refining and pipeline
facilities and 3 to 10 years for corporate and other assets.
OIL AND GAS EXPLORATION AND DEVELOPMENT
The Company accounts for the acquisition, exploration, development and
production costs of its oil and gas activities using the successful efforts
method of accounting. Lease acquisition costs are capitalized; undeveloped
leases are written down when determined to be impaired and written off upon
expiration or surrender. Geological and geophysical costs and delay rentals are
expensed as incurred. Exploratory well costs are initially capitalized, but if
the effort is unsuccessful, the costs are charged against earnings. Development
costs, whether or not successful, are capitalized. Productive properties are
stated at the lower of amortized cost or estimated realizable value of
underlying proved oil and gas reserves. Depreciation, depletion and amortization
of such properties is computed by the unit-of-production method.
EARNINGS PER SHARE
Earnings per share amounts are based upon the weighted average number of
common shares outstanding during each period.
FUTURES CONTRACTS
The Company enters into futures contracts to hedge a portion of the price
risk associated with crude oil and refined products. Gains or losses on
contracts are recognized when the related inventory is sold or the hedged
transaction is consummated.
F-7
<PAGE> 43
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
2. ACCOUNTING CHANGE
Effective August 1, 1992, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which amends
the accounting for income taxes from the deferral method to the liability
method. Under the liability method, deferred taxes are stated at the income tax
rates currently in effect or scheduled to be implemented rather than at the tax
rate in effect when the taxes were provided. The cumulative effect of this
accounting change through the 1992 fiscal year was a $958,000 increase in the
Company's deferred tax liability at August 1, 1992. This additional income tax
expense was reflected as a reduction of $958,000 in net income in the first
quarter of the 1993 fiscal year or $.12 per share. Excluding the provision for
the cumulative effect upon adoption of the new standard, the effect of the
change on net income was not material.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1994 1993
------- -------
($ IN THOUSANDS)
<S> <C> <C>
Product.......................................................... $45,259 $40,412
Crude oil resales................................................ 49,021 36,455
------- -------
$94,280 $76,867
======= =======
</TABLE>
Crude oil resales accounts receivable principally represent the sell side
of reciprocal crude oil buy/sell exchange arrangements involved in supplying
crude oil to the refineries, with an approximate like amount reflected in
accounts payable. The net differential of these crude oil buy/sell exchanges is
reflected in cost of sales. The exchange differentials result principally from
crude oil type and location differences.
Credit losses are provided for in the financial statements and consistently
have been minimal.
4. INVENTORIES
<TABLE>
<CAPTION>
1994 1993
------- -------
($ IN THOUSANDS)
<S> <C> <C>
Crude oil and refined products................................... $37,949 $32,625
Materials and supplies........................................... 6,046 5,347
------- -------
$43,995 $37,972
======= =======
</TABLE>
The excess of current costs over the LIFO value of inventory was
$12,228,000 and $5,990,000 at July 31, 1994 and 1993, respectively.
5. PROPERTIES, PLANTS AND EQUIPMENT
<TABLE>
<CAPTION>
1994 1993
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Properties, plants and equipment, at cost
Refining and pipeline facilities............................. $224,540 $207,935
Oil and gas exploration and development...................... 10,607 6,651
Corporate and other.......................................... 1,038 1,017
-------- --------
236,185 215,603
Accumulated depreciation, depletion and amortization........... 107,223 96,782
-------- --------
$128,962 $118,821
======== ========
</TABLE>
F-8
<PAGE> 44
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
Refining and pipeline facilities at July 31, 1994 and 1993 include
$4,452,000 and $12,002,000, respectively, of construction in progress which was
not being depreciated at those dates, pending completion of the construction
projects.
6. DEBT
<TABLE>
<CAPTION>
1994 1993
------- -------
($ IN THOUSANDS)
<S> <C> <C>
Senior Notes..................................................... $74,400 $80,000
Other............................................................ 48 56
------- -------
74,448 80,056
Less current maturities of long-term debt........................ 5,608 5,608
------- -------
$68,840 $74,448
======= =======
</TABLE>
SENIOR NOTES
In June 1991, the Company sold $80 million of Senior Notes to a group of
insurance companies. The Senior Notes were issued in two Series and are
unsecured. The Series A Notes are in the principal amount of $28 million, have a
7-year life, require equal annual principal payments of $5,600,000 beginning
June 15, 1994 and bear interest at 9.72%. The Series B Notes are in the
principal amount of $52 million, have a 10-year life, require equal annual
principal payments of $8,667,000 beginning June 15, 1996 and bear interest at
10.16%. The note agreement imposes certain restrictive covenants, including
limitations on liens, additional indebtedness, sale of assets, investments,
business combinations and dividends, which limitations collectively are less
restrictive than the terms of the bank Credit Agreement.
CREDIT AGREEMENT
In July 1993, the Company and certain of its subsidiaries entered into a
new two-year bank Credit Agreement (Credit Agreement), which provides a $100
million facility for letters of credit or for direct borrowings of up to $25
million, with such borrowings being subject to an annual 20-day cleanup period.
Interest on borrowings is based upon, at the Company's option, (i) the agent
bank's prime rate plus 1/2% per annum; (ii) various Eurodollar related rates;
and (iii) various certificate of deposit related rates. A fee of 1% per annum is
payable quarterly on the outstanding balance of all letters of credit, and a
commitment fee of 3/8 of 1% per annum is payable on the unused portion of the
facility. The borrowing base for the facility consists of cash, cash
equivalents, accounts receivable and inventory, all of which secure the
facility. The Credit Agreement imposes certain restrictions, including: (i) a
prohibition of other indebtedness in excess of $3 million with exceptions for,
among other things, indebtedness under the Company's Senior Notes and certain
nonrecourse debt; (ii) maintenance of certain levels of net worth, working
capital and interest coverage; (iii) limitations on investments and dividends;
and (iv) a prohibition of incursions on controlling ownership, material changes
in senior management and business combinations with unaffiliated entities.
At July 31, 1994, the Company had outstanding letters of credit totalling
$51,376,000 and no borrowings. The unused commitment under the Credit Agreement
at July 31, 1994 was $48,624,000, of which up to $25,000,000 may be used for
additional direct borrowings.
F-9
<PAGE> 45
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
The average and maximum amounts outstanding and the effective average
interest rate for borrowings under the Company's current and prior credit
agreements were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Average amount outstanding............................. $ 39 $ 3,565 $ 7,558
Maximum balance........................................ $ 1,900 $ 22,330 $ 23,100
Effective average interest rate........................ 6.6% 6.6% 7.7%
</TABLE>
The Senior Notes and Credit Agreement restrict investments and
distributions, including dividends, to an amount in the aggregate not to exceed
75% of cumulative consolidated net income (as defined). Under the most
restrictive of these covenants, at July 31, 1994 approximately $20.7 million was
available for the payment of dividends.
Maturities of long-term debt for the next five fiscal years are as follows:
1995 -- $5,608,000; 1996 -- $14,275,000; 1997 -- $14,275,000;
1998 -- $14,275,000 and 1999 -- $8,675,000.
The Company made interest payments of $8,744,000 in 1994, $9,058,000 in
1993 and $9,361,000 in 1992.
Based on the borrowing rates that the Company believes would be available
for replacement loans with similar terms and maturities of the debt of the
Company now outstanding, the fair value of long-term debt including current
maturities would be $79.3 million at July 31, 1994.
7. INCOME TAXES
Effective August 1, 1992, the Company adopted SFAS No. 109 to account for
income taxes (see Note 2).
The statutory federal income tax rate applied to pre-tax book income
reconciles to income tax expense as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Tax computed at statutory rate........................ $12,251 $11,521(1) $ 225
State income taxes, net of federal tax benefit........ 1,888 1,744 35
Adjustment of deferred tax provision relating to MRC
(see Note 10)....................................... -- -- (2,579)
Other................................................. 146 119 222
------- ------- -------
$14,285 $13,384 $(2,097)
======= ======= =======
</TABLE>
(1) Blended rate, as federal income tax rate changed effective January 1, 1993.
Additionally, tax benefit of $56,000, $63,000 and $239,000 for dividends
paid in fiscal 1994, 1993 and 1992, respectively, to the Company's Employee
Stock Ownership Plan was directly credited to retained earnings.
Operations of the corporation that was the sole limited partner of MRC
prior to the acquisition of such corporation by the Company (See Note 10)
resulted in unused net operating loss carryforwards of approximately $7,000,000,
which are expected to be available to the Company to a limited extent each year
through 2006 based on the income of such corporation. As of July 31, 1994,
approximately $6,000,000 of these net operating loss carryforwards remain
available to offset future income. For financial reporting purposes, any benefit
of these net operating loss carryforwards is being offset against any contingent
future payments relating to the acquisition of such corporation.
F-10
<PAGE> 46
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
The Company's deferred income tax assets and liabilities as of July 31,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994
-----------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Deferred taxes
Nondeductible employee benefits............................ $1,376 $ -- $ 1,376
Provision for future maintenance........................... 1,353 -- 1,353
Prepayments and other...................................... 1,339 (1,747) (408)
------ ----------- --------
Total current................................................ 4,068 (1,747) 2,321
Properties, plants and equipment (primarily tax in excess
of book depreciation)................................... -- (16,038) (16,038)
Intangible drilling costs.................................. -- (704) (704)
Nondeductible oil and gas costs............................ 1,813 -- 1,813
Other...................................................... 152 (52) 100
------ ----------- --------
Total noncurrent............................................. 1,965 (16,794) (14,829)
------ ----------- --------
6,033 (18,541) (12,508)
Valuation allowance.......................................... -- -- --
------ ----------- --------
Total........................................................ $6,033 $ (18,541) $(12,508)
====== =========== ========
</TABLE>
<TABLE>
<CAPTION>
1993
-----------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Deferred taxes
Nondeductible employee benefits............................ $1,107 $ -- $ 1,107
Provision for future maintenance........................... 2,477 -- 2,477
Prepayments and other...................................... 521 (1,639) (1,118)
------ ----------- --------
Total current................................................ 4,105 (1,639) 2,466
Properties, plants and equipment (primarily tax in excess
of book depreciation)................................... -- (13,423) (13,423)
Intangible drilling costs.................................. -- (375) (375)
Nondeductible oil and gas costs............................ 1,173 -- 1,173
Other...................................................... 151 -- 151
------ ----------- --------
Total noncurrent............................................. 1,324 (13,798) (12,474)
------ ----------- --------
5,429 (15,437) (10,008)
Valuation allowance.......................................... -- -- --
------ ----------- --------
Total........................................................ $5,429 $ (15,437) $(10,008)
====== =========== ========
</TABLE>
F-11
<PAGE> 47
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
The deferred income tax benefits for the 1992 fiscal year (prior to the
adoption of SFAS No. 109) are as follows:
<TABLE>
<CAPTION>
1992
----------------
($ IN THOUSANDS)
<S> <C>
Excess tax (book) depreciation........................................ $ 1,361
Provision for future maintenance...................................... (423)
Adjustment of prior years' deferred tax provision relating to
MRC (see Note 10)................................................... (1,483)
Other................................................................. (586)
----------------
$ (1,131)
================
</TABLE>
The Company made income tax payments of $18,893,000 in 1994, $5,138,000 in
1993 and $2,503,000 in 1992.
The Company's federal income tax returns have been examined by the Internal
Revenue Service through 1990.
8. STOCKHOLDERS' EQUITY
STOCK OPTIONS
At July 1, 1994 and 1993, no stock options were outstanding and 751,500
shares of common stock were reserved for issuance under the Company's stock
option plan.
9. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has non-contributory defined benefit retirement plans that
cover substantially all employees. The Company's policy is to make contributions
annually of not less than the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Benefits are based on the employee's
years of service and compensation.
Pension expense includes the following components:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year....... $ 1,014 $ 1,124 $ 908
Interest cost on projected benefit obligations........ 1,603 1,711 1,557
Actual return on plan assets.......................... (841) (1,802) (2,110)
Net amortization and deferral......................... (1,252) (379) 35
------- ------- -------
Pension expense....................................... $ 524 $ 654 $ 390
======= ======= =======
</TABLE>
F-12
<PAGE> 48
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
The following table sets forth the funded status of the plans and amounts
recognized in the consolidated balance sheet:
<TABLE>
<CAPTION>
1994 1993
------- -------
($ IN THOUSANDS)
<S> <C> <C>
Plan assets at fair value........................................ $23,256 $23,478
Actuarial present value of projected benefit obligations:
Accumulated benefit obligations:
Vested...................................................... 17,733 17,034
Unvested.................................................... 222 303
Provision for future salary increases.......................... 6,171 6,289
------- -------
Projected benefit obligations.................................... 24,126 23,626
------- -------
Plan assets less than projected benefit obligations.............. (870) (148)
Unrecognized net loss............................................ 248 227
Unrecognized prior service cost.................................. 108 144
Unrecognized transition net asset................................ (1,435) (1,648)
------- -------
Accrued pension liability recognized in the consolidated balance
sheet.......................................................... $(1,949) $(1,425)
======= =======
</TABLE>
The principal actuarial assumptions were:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate................................................. 7.5% 7.5% 7.5%
Rate of future compensation increases......................... 5% 5% 6%
Expected long-term rate of return on assets................... 8.5% 8.5% 9%
</TABLE>
Pension costs are determined using the assumptions as of the beginning of
the year. The funded status is determined using the assumptions as of the end of
the year.
Approximately 52% of plan assets is invested in equity securities and 48%
is invested in fixed income securities and other instruments at July 31, 1994.
EMPLOYEE STOCK OWNERSHIP PLAN
In December 1985, the Company established an Employee Stock Ownership Plan
(ESOP). The ESOP is non-contributory and includes substantially all employees of
the Company and its subsidiaries who meet certain length of service requirements
and are not covered by a collective bargaining agreement.
In 1985, the ESOP borrowed from the Company the $4,102,000 needed to
purchase 1,500,000 shares of the Company's common stock. The loan is repayable
in ten annual installments of $410,000 (subject to certain adjustments)
commencing August 1, 1986 and bears interest at 12% per annum. The Company is
obligated to make annual contributions sufficient to enable the ESOP to repay
the loan with interest. The unearned compensation of $4,102,000 was recorded as
a reduction of stockholders' equity and is being reduced as payments are made.
Interest income earned on the note due from the ESOP is offset against an equal
amount contributed to the ESOP by the Company.
10. MONTANA REFINING COMPANY, A PARTNERSHIP
The Company acquired on July 31, 1992, the corporation that was the limited
partner in MRC in connection with a settlement of litigation. The acquisition
involved among other items contingent future payments of up to $189,000 per year
over the period 1993 through 2005.
F-13
<PAGE> 49
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
As a consequence of the acquisition of the limited partner in MRC, certain
deferred taxes have been eliminated, resulting in a decrease for fiscal 1992 of
$2,579,000 in the provision for income taxes, of which $1,483,000 relates to
income taxes provided in prior years.
11. OTHER INCOME (EXPENSE)
The amounts in other income (expense) relate principally to settlements.
The 1993 fiscal year included income of $4,000,000 relating to a settlement with
a common carrier pipeline concerning product pipeline distribution constraints.
The 1992 fiscal year included a charge of $700,000 relating to a settlement of a
lawsuit with the limited partner of MRC (see Note 10).
12. CONTINGENCIES
In July 1993, the United States Department of Justice, acting on behalf of
the United States 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 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
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. 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. In such event, 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.
The Company is a party to various other litigation and proceedings which it
believes, based on advice of counsel, will not have a materially adverse impact
on its financial condition of operations.
13. SIGNIFICANT CUSTOMERS
Virtually all revenues were domestic revenues (including domestic sales for
export to Mexico). Approximately $67,000,000 (12%) of the Company's revenues for
fiscal 1994, $65,000,000 (10%) of revenues for fiscal 1993 and $67,000,000 (13%)
for fiscal 1992 were from the sale of military jet fuel to the United States
Government. Approximately $58,000,000 (11%) of the Company's revenues for fiscal
1994 were from the sale of gasoline to an affiliate of PEMEX (the
government-owned energy company of Mexico). In addition to the United States
Government and PEMEX, another refiner, which is a purchaser of gasoline and
diesel for resale to retail customers, accounted for approximately $75,000,000
(12%) of the Company's
F-14
<PAGE> 50
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
revenues in fiscal 1993 and $96,000,000 (19%) in fiscal 1992. While a loss of,
or reduction in amounts purchased by, major purchasers that resell to retail
customers could have an adverse effect on the Company, the Company believes that
the impact of such a loss on the Company's results of operations should be
limited because the Company's sales volume with respect to products whose
end-users are retail customers is more dependent on the general retail demand in
the Company's primary markets than on sales to any specific customer.
14. QUARTERLY INFORMATION (UNAUDITED)
FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1994
Revenues $135,518 $120,689 $143,934 $152,179 $552,320
Operating margin (net sales less cost of
sales)................................. $ 22,570 $ 15,790 $ 23,420 $ 8,207 $ 69,987
Income (loss) before income taxes......... $ 13,835 $ 7,134 $ 14,635 $ (602) $ 35,002
Net income (loss)......................... $ 8,273 $ 4,266 $ 8,730 $ (552) $ 20,717
Income (loss) per common share............ $ 1.00 $ .52 $ 1.06 $ (.07) $ 2.51
Dividends per share....................... $ .075 $ .075 $ .10 $ .10 $ .35
Average number of shares of common stock
outstanding (in thousands)............. 8,254 8,254 8,254 8,254 8,254
1993
Revenues.................................. $151,910 $149,871 $161,695 $167,145 $630,621
Operating margin (net sales less cost of
sales)................................. $ 12,296 $ 11,683 $ 16,783 $ 23,484 $ 64,246
Income before income taxes and cumulative
effect of change in accounting for
income taxes........................... $ 4,209 $ 2,830 $ 7,729 $ 18,549 $ 33,317
Income before cumulative effect of change
in accounting principle................ $ 2,556 $ 2,052 $ 4,693 $ 10,632 $ 19,933
Cumulative effect to August 1, 1992 of
change in accounting for income
taxes.................................. (958) -- -- -- (958)
-------- -------- -------- -------- --------
Net income............................. $ 1,598 $ 2,052 $ 4,693 $ 10,632(1) $ 18,975
======== ======== ======== ======== ========
Income per common share
Income before cumulative effect of
change in accounting principle....... $ .31 $ .25 $ .57 $ 1.29 $ 2.42
Cumulative effect to August 1, 1992 of
change in accounting for income
taxes................................ (.12) -- -- -- (.12)
-------- -------- -------- -------- --------
Net income............................. $ .19 $ .25 $ .57 $ 1.29 $ 2.30
======== ======== ======== ======== ========
Dividends per share....................... $ .075 $ .075 $ .075 $ .075 $ .30
Average number of shares of common stock
outstanding (in thousands)............. 8,254 8,254 8,254 8,254 8,254
</TABLE>
(1) Includes pre-tax income of $4 million relating to a settlement and a pre-tax
reserve of $2 million relating to EPA litigation (see Notes 11 and 12).
F-15
<PAGE> 51
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1993 AND 1992
OPERATING DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
(BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
1994
Sales of refined products.............. 58,500 62,300 73,100 69,600 65,800
Refinery production.................... 54,100 66,000 69,900 67,500 64,300
1993
Sales of refined products.............. 63,400 66,100 70,700 70,900 67,800
Refinery production.................... 60,600 69,000 66,500 65,200 65,300
</TABLE>
F-16
<PAGE> 52
HOLLY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNAUDITED
JANUARY 31,
1995
------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents...................................................... $ 13,006
Accounts receivable: Trade..................................................... 35,025
Crude oil............................................... 45,874
------------
80,899
Inventories: Crude oil and refined products.................................... 33,622
Materials and supplies............................................ 6,080
------------
39,702
Income taxes receivable........................................................ 2,843
Prepayments and other.......................................................... 9,027
------------
Total current assets................................................... 145,477
Properties, plants and equipment, at cost........................................ 242,109
Less accumulated depreciation, depletion and amortization........................ 112,520
------------
129,589
Other assets..................................................................... 5,232
------------
$280,298
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................... $ 99,556
Accrued liabilities............................................................ 11,294
Income taxes payable........................................................... 625
Current maturities of long-term debt........................................... 5,608
------------
Total current liabilities.............................................. 117,083
Deferred income taxes............................................................ 16,893
Long-term debt, less current maturities.......................................... 68,832
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
Additional capital............................................................. 6,132
Retained earnings.............................................................. 72,250
------------
78,469
Common stock held in treasury, at cost -- 396,768 shares....................... (569)
Deferred charge -- amount due from ESOP........................................ (410)
------------
Total stockholders' equity............................................. 77,490
------------
$280,298
============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-17
<PAGE> 53
HOLLY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
JANUARY 31,
---------------------
1995 1994
-------- --------
($ IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues:
Net sales............................................................ $306,863 $255,910
Miscellaneous........................................................ 823 297
-------- --------
307,686 256,207
Costs and expenses:
Cost of sales........................................................ 274,650 217,550
General and administrative........................................... 6,670 5,879
Depreciation, depletion and amortization............................. 7,400 5,367
Exploration expenses, including dry holes............................ 1,270 1,910
Miscellaneous........................................................ 82 135
-------- --------
290,072 230,841
-------- --------
Income from operations................................................. 17,614 25,366
Other:
Interest income...................................................... 443 153
Interest expense..................................................... (4,242) (4,550)
-------- --------
(3,799) (4,397)
-------- --------
Income before income taxes and cumulative effect of
change in accounting for turnarounds................................. 13,815 20,969
Income tax provision:
Current.............................................................. 4,555 7,098
Deferred............................................................. 1,025 1,332
-------- --------
5,580 8,430
-------- --------
Income before cumulative effect of change in accounting method......... 8,235 12,539
Cumulative effect to August 1, 1994 of change in accounting for
turnarounds, net of taxes............................................ 5,703 --
-------- --------
Net income............................................................. $ 13,938 $ 12,539
======== ========
Income per common share:
Income before cumulative effect of change in accounting method....... $ 1.00 $ 1.52
Cumulative effect to August 1, 1994 of change in accounting for
turnarounds, net of taxes......................................... .69 --
-------- --------
Net income........................................................... $ 1.69 $ 1.52
======== ========
Cash dividends paid per share.......................................... $ .20 $ .15
Average number of shares of common stock outstanding (in thousands).... 8,254 8,254
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-18
<PAGE> 54
HOLLY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
JANUARY 31,
---------------------
1995 1994
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 13,938 $ 12,539
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization........................ 7,400 5,367
Deferred income taxes........................................... 1,025 1,332
Dry hole costs and leasehold impairment......................... 374 956
Cumulative effect to August 1, 1994 of change in accounting
for turnarounds.............................................. (5,703) --
Changes in other assets and liabilities:
Decrease in accounts receivable.............................. 13,381 7,037
(Increase) decrease in inventories........................... 4,293 (1,402)
Increase in income taxes receivable.......................... (2,125) --
(Increase) decrease in prepayments and other................. 1,893 (1,691)
Decrease in accounts payable................................. (12,528) (285)
Decrease in accrued liabilities.............................. (1,060) (4,891)
Decrease in income taxes payable............................. (111) (6,377)
Other, net...................................................... (2,765) 556
-------- --------
Net cash provided by operating activities......................... 18,012 13,141
Cash flows from financing activities:
Reduction in long-term debt.......................................... (8) (8)
Cash dividends....................................................... (1,651) (1,238)
-------- --------
Net cash used for financing activities............................ (1,659) (1,246)
Cash flows from investing activities:
Additions to properties, plants and equipment........................ (6,644) (12,986)
-------- --------
Net cash used for investing activities............................ (6,644) (12,986)
-------- --------
Cash and cash equivalents:
Increase (decrease) for the period................................... 9,709 (1,091)
Beginning of year.................................................... 3,297 6,631
-------- --------
End of period........................................................ $ 13,006 $ 5,540
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest.......................................................... $ 4,242 $ 4,416
Income taxes...................................................... $ 6,744 $ 13,407
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-19
<PAGE> 55
HOLLY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, except for the accounting
change as described in Note B below) necessary to present fairly the Company's
consolidated financial position as of January 31, 1995, the consolidated results
of operations for the six months ended January 31, 1995 and 1994, and
consolidated cash flows for the six months ended January 31, 1995 and 1994.
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 six
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 second quarter of
fiscal 1995 by $102,000 or $.01 per common share and increased net income for
the six months ended January 31, 1995 by $1,022,000 or $.12 per common share. If
the accounting change for turnaround costs had been retroactively applied, pro
forma net income for both the quarter and the six months ended January 31, 1994
would have increased by $1,058,000 or $.13 per share over 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.
NOTE C -- CONTINGENCIES
In July 1993, the DOJ filed suit against Navajo alleging that, beginning in
September 1990 and continuing through the present, Navajo has violated and
continues to violate RCRA and implementing regulations of the EPA by treating,
storing and disposing of certain hazardous wastes without compliance with
regulatory requirements. The Company believes that the parties are in the final
stage of negotiations that should resolve some, if not all, of the litigation.
Based on those negotiations, the Company would close the existing evaporation
ponds of its wastewater management system, at a cost of approximately $1 million
to be expended over a several year period. The negotiations also contemplate
that the Company would implement one of several alternatives to the existing
wastewater treatment system. Depending upon which approach is utilized, the
Company could incur total costs of approximately $3 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. Any
settlement with the DOJ also is expected to involve the payment of a civil
penalty, which, based on negotiations among the Company, the EPA and the DOJ,
the Company does not believe will have a material adverse effect on its
financial position or results of operations. In fiscal 1993, the Company
recorded a $2 million reserve for the litigation, principally to provide for the
cost of closing the existing ponds.
F-20
<PAGE> 56
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN, OR INCORPORATED BY
REFERENCE IN, THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR
TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Incorporation of Certain Information
by Reference........................ 3
Prospectus Summary.................... 4
Investment Considerations............. 9
Use of Proceeds....................... 11
Capital Improvement Projects.......... 11
Capitalization........................ 12
Price Range of Common Stock and
Dividend Policy..................... 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. 16
Business.............................. 21
Management and Directors.............. 30
Selling Stockholders.................. 32
Underwriting.......................... 33
Legal Matters......................... 34
Experts............................... 34
Index to Financial Statements......... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
CS FIRST BOSTON
, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 57
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be paid by the Registrant in
connection with this Registration Statement. All such fees are estimates, other
than the fees payable to the SEC, the NASD and the American Stock Exchange.
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 28,254
NASD Filing Fee........................................................... 8,694
American Stock Exchange Additional Listing Fee............................ 17,500
Accounting Fees and Expenses.............................................. 30,000
Legal Fees and Expenses................................................... 100,000
Blue Sky Fees and Expenses (including legal fees)......................... 7,500
Printing Expenses......................................................... 150,000
Miscellaneous............................................................. 7,500
---------
Total........................................................... $ 349,448
=========
</TABLE>
The expenses of the Selling Stockholders (other than underwriting discounts)
will be borne by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The law of the State of Delaware authorizes corporations to limit the
personal liability of directors to corporations and their stockholders for
monetary damages for certain breaches of a director's fiduciary duties. The
Registrant's Restated Certificate of Incorporation provides that a director will
not be personally liable for monetary damages for the breach of his or her
fiduciary duties as a director, except for liability imposed by the General
Corporation Law of the State of Delaware or imposed by other law for (i) a
breach of the director's duty of loyalty to the Registrant or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, or (iii) a transaction from which the director
derived an improper personal benefit.
The Bylaws of the Registrant provide that the Registrant shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the Registrant) by reason of the fact that he is or
was a director, officer, employee or agent of the Registrant, to the fullest
extent permitted by the General Corporation Law of the State of Delaware
provided such person gives the Registrant appropriate notice and permits the
Registrant, at its option, to participate in or to direct in good faith any
defense of such person. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, the Registrant has the power under
specified circumstances to indemnify such persons against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with such action, suit or proceeding.
The power to indemnify generally applies only if such person acted in good
faith and in a manner he or she reasonably believed to be in the best interest,
or not opposed to the best interest, of the Registrant and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. In actions brought by or in the right of the Registrant, however,
the power to indemnify applies only to expenses reasonably incurred in
connection with the defense and settlement of an action or suit and not to the
satisfaction of a judgment or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of liability for the Corporation unless the court, in
its discretion, believes that in light of all the circumstances indemnification
should apply. The General Corporation Law of the State of Delaware further
specifically provides that the indemnification authorized thereby shall not be
deemed exclusive of any other rights to which any such officer or director may
be entitled under any bylaws, agreements, vote of stockholders or disinterested
directors, or otherwise.
II-1
<PAGE> 58
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
referred to above in this Item 15, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
ITEM 16. EXHIBITS.
The following is a list of all exhibits filed as a part of this
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------------- ------------------------------------------------------------------------
<S> <C>
1.1 -- Form of Purchase Agreement, dated as of , among the
Registrant, the Selling Stockholders and Merrill Lynch, Pierce,
Fenner & Smith Incorporated and CS First Boston Corporation, as
representatives of the Underwriters.*
4.1 -- Portions of Restated Certificate of Incorporation of the Registrant,
as amended, relating to the rights of holders of Common Stock.*
4.2 -- Portions of Bylaws of the Registrant, as amended, relating to the
rights of holders of Common Stock.*
5 -- Opinion of Weil, Gotshal & Manges.*
23.1 -- Consent of Weil, Gotshal & Manges (included in Exhibit 5).*
23.2 -- Consent of Ernst & Young LLP.
24 -- Power of Attorney (included on page II-4 of this Registration
Statement).
99 -- Copy of civil action against the Company's subsidiary, Navajo
Refining Company, filed on July 16, 1993 by the United States, in the
United States District Court for the District of New Mexico, seeking
civil penalties and other compliance measures under the Resource
Conservation and Recovery Act and implementing regulations of the
Environmental Protection Agency (incorporated by reference to Exhibit
28 of Registrant's Form 8-K dated July 16, 1993, File No. 1-3876).
</TABLE>
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes the following:
(a)(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 59
(b) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) See Item 15.
II-3
<PAGE> 60
POWER OF ATTORNEY
Each person whose signature to this Registration Statement appears below
hereby appoints Lamar Norsworthy, Henry A. Teichholz, Christopher L. Cella and
Karl N. Knapp, and each of them, any one of whom may act without the joinder of
the other, as his attorney-in-fact to sign on his behalf individually and in the
capacity stated below and to file all amendments and post-effective amendments
to this Registration Statement, which amendments may make such changes in and
additions to this Registration Statement as such attorney-in-fact may deem
necessary or appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on May 17, 1995.
HOLLY CORPORATION
By: /s/ LAMAR NORSWORTHY
Lamar Norsworthy
Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------------- -------------
<S> <C> <C>
/s/ LAMAR NORSWORTHY Chairman of the Board, President and May 17, 1995
Lamar Norsworthy Chief Executive Officer (Principal
Executive Officer)
/s/ JACK P. REID Executive Vice President -- Refining May 17, 1995
Jack P. Reid and Director
/s/ HENRY A. TEICHHOLZ Vice President, Treasurer and Controller May 17, 1995
Henry A. Teichholz (Principal Financial and Accounting
Officer)
/s/ W. JOHN GLANCY Director May 17, 1995
W. John Glancy
/s/ MARCUS R. HICKERSON Director May 17, 1995
Marcus R. Hickerson
/s/ A. J. LOSEE Director May 17, 1995
A. J. Losee
/s/ ROBERT G. MCKENZIE Director May 17, 1995
Robert G. McKenzie
/s/ THOMAS W. MATTHEWS, II Director May 17, 1995
Thomas W. Matthews, II
/s/ E. I. PARSONS Director May 17, 1995
E. I. Parsons
</TABLE>
II-4
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBITS PAGE
- --------- -----------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Purchase Agreement, dated as of , among the
Registrant, the Selling Stockholders and Merrill Lynch, Pierce,
Fenner & Smith Incorporated and CS First Boston Corporation, as
representatives of the Underwriters.*
4.1 -- Portions of Restated Certificate of Incorporation of the Registrant,
as amended, relating to the rights of holders of Common Stock.*
4.2 -- Portions of Bylaws of the Registrant, as amended, relating to the
rights of holders of Common Stock.*
5 -- Opinion of Weil, Gotshal & Manges.*
23.1 -- Consent of Weil, Gotshal & Manges (included in Exhibit 5).*
23.2 -- Consent of Ernst & Young LLP.
24 -- Power of Attorney (included on page II-4 of this Registration
Statement).
99 -- Copy of civil action against the Company's subsidiary, Navajo
Refining Company, filed on July 16, 1993 by the United States, in the
United States District Court for the District of New Mexico, seeking
civil penalties and other compliance measures under the Resource
Conservation and Recovery Act and implementing regulations of the
Environmental Protection Agency (incorporated by reference to Exhibit
28 of Registrant's Form 8-K dated July 16, 1993, File No. 1-3876).
</TABLE>
* To be filed by amendment.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and the related Prospectus of Holly
Corporation for the registration of 2,875,000 shares of its common stock and to
the inclusion therein of our report dated September 20, 1994, with respect to
the consolidated financial statements of Holly Corporation included in its
Annual Report (Form 10-K) for the year ended July 31, 1994, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
May 16, 1995
