HOLLY CORP, 424B4, 1995-06-28

HOLLY CORP
424B4, 1995-06-28
PETROLEUM REFINING

Previous: HANNAFORD BROTHERS CO, S-8, 1995-06-28

Next: HUMANA INC, 11-K, 1995-06-28

<PAGE> 1

PROSPECTUS

PROSPECTUS PURSUANT TO RULE 424(B)(4)

OF THE SECURITIES ACT OF 1933, AS AMENDED.

REGISTRATION NO. 33-59411

1,000,000 SHARES

HOLLY CORPORATION [LOGO]

COMMON STOCK
------------------------

All the shares of common stock, par value $.01 per share (the "Common
Stock"), of Holly Corporation (the "Company") offered hereby (the "Offering")
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 June 27, 1995, the last reported sale price
of the Common Stock on the American Stock Exchange was $23 1/8 per share. See
"Price Range of Common Stock and Dividend Policy."

SEE "RISK FACTORS" BEGINNING ON PAGE 9 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>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING SELLING
PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... $23.125 $1.15 $21.975
- ------------------------------------------------------------------------------------------------------------
Total(2)....................................... $23,125,000 $1,150,000 $21,975,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</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) The Selling Stockholders have granted the Underwriters an option,
exercisable within 30 days after the date hereof, to purchase up to an
additional 150,000 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 and Proceeds to Selling Stockholders will be
$26,593,750, $1,322,500 and $25,271,250, 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 July 3, 1995.

------------------------

MERRILL LYNCH & CO. CS FIRST BOSTON
------------------------

The date of this Prospectus is June 27, 1995.

<PAGE> 2

[PHOTOGRAPH OF THE NAVAJO REFINERY OVER

GRAPHIC OF NAVAJO REFINING COMPANY'S MARKETS]

2
<PAGE> 3

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;

(3) The Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1995; and

(4) The Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 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> 4

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> 5

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.

<PAGE> 6

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 currently 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 Selling Stockholders.......... 1,000,000 shares
Common Stock to be Outstanding after
the Offering.................... 8,253,514 shares
Use of Proceeds..................... The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders. See
"Use of Proceeds."
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>

<PAGE> 7

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 nine months ended April 30,
1994 and at and for the nine months ended April 30, 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 nine months ended April 30, 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>
NINE MONTHS ENDED
APRIL 30, 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............................. $454,733 $400,141 $552,320 $630,621 $506,668 $489,333 $438,882
Income from operations............... 18,489 42,152 43,540 38,671 11,016 20,830 41,772
Interest expense, net................ 5,605 6,548 8,538 9,354 9,654 3,889 4,880
Income before cumulative effect of
accounting change.................. 7,859 21,269 20,717 19,933 2,759 11,734 23,955
Cumulative effect of accounting
change............................. 5,703 -- -- (958) -- -- --
Net income........................... 13,562 21,269 20,717 18,975 2,759 11,734 23,955

Income per common share:
Before cumulative effect of
accounting change................ $ .95 $ 2.58 $ 2.51 $ 2.42 $ .33 $ 1.42 $ 2.90
Cumulative effect of accounting
change........................... .69 -- -- (.12) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income......................... $ 1.64 $ 2.58 $ 2.51 $ 2.30 $ .33 $ 1.42 $ 2.90
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1)............................ $ 30,224 $ 50,203 $ 54,411 $ 54,015 $ 20,401 $ 29,289 $ 48,797
Net cash provided by operating
activities......................... 26,733 27,882 27,684 38,737 961 27,907 33,643
Capital expenditures................. 10,606 18,505 22,521 20,120 22,317 53,899 13,889
Cash dividends per common share...... $ .30 $ .25 $ .35 $ .30 $ .45 $ .48 $ .40
</TABLE>

<TABLE>
<CAPTION>
APRIL 30, 1995
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital.................................................................................... $ 28,374
Total assets....................................................................................... 290,433
Long-term debt (less current maturities)........................................................... 68,832
Stockholders' equity............................................................................... 76,299
</TABLE>

<PAGE> 8

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30 YEARS ENDED JULY 31,
------------------ -------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Refinery production (BPD)(2)............... 67,900 63,300(3) 64,300(3) 65,300 55,200 44,800(3) 46,400
Crude charge (BPD)(4)...................... 65,159 59,404(3) 60,911(3) 62,115 51,723 43,838(3) 46,071
Refinery utilization (BPD)(5).............. 97.3% 88.7%(3) 90.9%(3) 92.7% 88.2% 93.3%(3) 98.0%
Average per barrel:
Net sales................................ $ 23.85 $ 22.63 $ 22.88 $ 25.43 $ 24.84 $ 29.79 $ 25.41
Raw materials costs(6)................... 19.01 16.13 16.99 20.10 20.41 24.61 19.76
------- ------- ------- ------- ------- ------- -------
Gross margin............................. $ 4.84 $ 6.50 $ 5.89 $ 5.33 $ 4.43 $ 5.18 $ 5.65
======= ======= ======= ======= ======= ======= =======
Product sales (percent of total sales
volume)(7):
Gasolines................................ 57.4% 54.9% 54.5% 52.0% 49.4% 46.6% 46.6%
Diesel fuels............................. 19.4 20.7 20.1 23.6 21.1 20.1 18.7
Jet fuels................................ 11.3 11.4 11.7 10.4 13.2 18.2 20.5
Asphalt.................................. 7.3 8.6 9.4 9.8 10.8 8.9 8.1
LPG and other............................ 4.6 4.4 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) Barrels per calendar day of refined products produced from crude oil and
other raw materials.

(3) Refinery production, crude charge 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 2.5%, 3.7%,
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> 9

RISK FACTORS

Prospective purchasers of the shares of Common Stock offered hereby should
consider carefully the following factors, 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; INSURANCE

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
(including its limited exploration and production activities) are subject to
normal business hazards and risks. The Company maintains insurance for its
operations, 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 intends to implement the capital improvement projects it has
identified for enhancing the Navajo Refinery utilizing cash flows from operating
activities. The Company's results of operations will be affected by future
operating margins and other factors, some of which will be beyond its control.
The Company's ability to implement the identified refinery enhancement projects
will also be affected by other factors, some of which also 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 other capital improvement projects
it is currently evaluating, and there can be no assurance that the Company will
have sufficient sources of funds to implement any or all of its currently
identified or other capital projects.

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

9
<PAGE> 10

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 markets through existing pipelines, new
pipelines or otherwise. For example, in June 1995, an investor group announced
that it is negotiating to purchase an existing crude oil pipeline running from
West Texas to a refinery near Houston as part of the investor group's plan to
reverse the line and extend it for use in transporting refined products from the
Gulf Coast to El Paso. 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. The Company also
expects that the settlement will provide for the payment of a civil penalty of
less than $2 million. 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."

10
<PAGE> 11

LIMITED LIQUIDITY OF COMMON STOCK; SHARES ELIGIBLE FOR FUTURE SALE

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 33% of the outstanding Common Stock and the ESOP will
own approximately 15% 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." One hundred-eighty days after the date of this
Prospectus, certain contractual restrictions agreed to by the stockholder
families (see "Underwriting") will expire, and 2,698,167 shares of Common Stock
held by such stockholders (representing approximately 33% of the total shares of
Common Stock outstanding subsequent to the Offering) will be eligible for sale
in the open market, pursuant to Rule 144 or otherwise. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.

<PAGE> 12

USE OF PROCEEDS

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
currently 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 utilizing cash flows from operating activities. The Company's
results of operations will be affected by future operating margins and other
factors, some of which will be beyond its control.

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 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. To the extent available, cash flows from
operating activities could be used to finance the cost of these projects,
although the Company may require additional funds if a decision were made to
implement some or all of these projects. There can be no assurance that the
Company will have sufficient sources of funds to implement any or all of these
other capital projects.

12
<PAGE> 13

CAPITALIZATION

The following table sets forth the unaudited consolidated capitalization of
the Company at April 30, 1995.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Current maturities of long-term debt...................................... $ 5,608
Long-term debt, less current maturities................................... 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
Additional capital...................................................... 6,132
Retained earnings....................................................... 71,059
-----------
77,278
Common stock held in treasury, at cost; 396,768 shares.................. (569)
Deferred charge -- amount due from ESOP................................. (410)
-----------
Total stockholders' equity...................................... 76,299
-----------
Total capitalization............................................ $150,739
===========
</TABLE>

13
<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 (through June 27, 1995).................. 28 1/2 23 1/8 .10
</TABLE>

As of May 31, 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. On June 9, 1995, the Company's Board of Directors declared a regular
quarterly dividend in the amount of $.10 per share payable on July 7, 1995. 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.

14
<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 nine months ended April
30, 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
nine months ended April 30, 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>
NINE MONTHS ENDED
APRIL 30, 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....................... $ 454,733 $ 400,141 $ 552,320 $ 630,621 $ 506,668 $ 489,333 $ 438,882
Costs and expenses:
Cost of sales................ 412,322 337,921 480,916 565,638 474,151 448,356 377,853
General and administrative... 9,629 9,153 12,369 11,951 9,263 9,200 9,699
Depreciation, depletion and
amortization............... 11,735 8,051 10,871 11,344 10,085 6,984 6,515
Exploration expenses,
including dry holes........ 2,451 2,706 4,441 2,867 2,005 3,834 2,576
Miscellaneous................ 107 158 183 150 148 129 467
--------- --------- --------- --------- --------- --------- ---------
436,244 357,989 508,780 591,950 495,652 468,503 397,110
--------- --------- --------- --------- --------- --------- ---------
Income from operations......... 18,489 42,152 43,540 38,671 11,016 20,830 41,772
Other income (expense)
Interest income.............. 732 254 447 169 432 419 517
Interest expense............. (6,337) (6,802) (8,985) (9,523) (10,086) (4,308) (5,397)
Other........................ -- -- -- 4,000 (700) 1,475 510
--------- --------- --------- --------- --------- --------- ---------
(5,605) (6,548) (8,538) (5,354) (10,354) (2,414) (4,370)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
cumulative effect of
accounting change............ 12,884 35,604 35,002 33,317 662 18,416 37,402
Income tax provision
(benefit).................... 5,025 14,335 14,285 13,384 (2,097) 6,682 13,447
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect
of accounting change......... 7,859 21,269 20,717 19,933 2,759 11,734 23,955
Cumulative effect of accounting
change....................... 5,703 -- -- (958) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income..................... $ 13,562 $ 21,269 $ 20,717 $ 18,975 $ 2,759 $ 11,734 $ 23,955
========= ========= ========= ========= ========= ========= =========
Income per common share:
Income before cumulative
effect of accounting
change..................... $ .95 $ 2.58 $ 2.51 $ 2.42 $ .33 $ 1.42 $ 2.90
Cumulative effect of
accounting change.......... .69 -- -- (.12) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................... $ 1.64 $ 2.58 $ 2.51 $ 2.30 $ .33 $ 1.42 $ 2.90
========= ========= ========= ========= ========= ========= =========
</TABLE>

15
<PAGE> 16

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, 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)...................... $ 30,224 $ 50,203 $ 54,411 $ 54,015 $ 20,401 $ 29,289 $ 48,797
Net cash provided by operating
activities................... 26,733 27,882 27,684 38,737 961 27,907 33,643
Capital expenditures........... 10,606 18,505 22,521 20,120 22,317 53,899 13,889
Cash dividends per common
share........................ $ .30 $ .25 $ .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)... 67,900 63,300(3) 64,300(3) 65,300 55,200 44,800(3) 46,400
Crude charge (BPD)(4).......... 65,139 59,404(3) 60,911(3) 62,115 51,723 43,838(3) 46,071
Refinery utilization
(BPD)(5)..................... 97.3% 88.7%(3) 90.9%(3) 92.7% 88.2% 93.3%(3) 98.0%
Average per barrel:
Net sales.................... $ 23.85 $ 22.63 $ 22.88 $ 25.43 $ 24.84 $ 29.79 $ 25.41
Raw materials costs(6)....... 19.01 16.13 16.99 20.10 20.41 24.61 19.76
--------- --------- --------- --------- --------- --------- ---------
Gross margin................. $ 4.84 $ 6.50 $ 5.89 $ 5.33 $ 4.43 $ 5.18 $ 5.65
========= ========= ========= ========= ========= ========= =========
Product sales (percent of total
sales volume)(7):
Gasolines.................... 57.4% 54.9% 54.5% 52.0% 49.4% 46.6% 46.6%
Diesel fuels................. 19.4 20.7 20.1 23.6 21.1 20.1 18.7
Jet fuels.................... 11.3 11.4 11.7 10.4 13.2 18.2 20.5
Asphalt...................... 7.3 8.6 9.4 9.8 10.8 8.9 8.1
LPG and other................ 4.6 4.4 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>
APRIL 30, 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................ $ 28,374 $ 23,568 $ 18,236 $ 12,145 $ 5,031 $ 18,658 $ 11,608
Total assets................... 290,433 266,390 281,814 249,807 245,462 212,095 149,503
Long-term debt (less current
maturities).................. 68,832 74,440 68,840 74,448 80,056 80,164 34,136
Stockholders' equity........... 76,299 66,134 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, crude charge 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 2.5%, 3.7%,
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.

16
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION

OVERVIEW

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

Nine Months ended April 30, 1995 Versus Nine Months ended April 30, 1994

For the nine months ended April 30, 1995, net income was $13.6 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 $21.3 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
nine months of fiscal 1995 by $1.0 million to $7.9 million. If the accounting
change for turnaround costs had been retroactively applied, pro forma net income
for the nine months ended April 30, 1994 would have increased by $1.2 million to
$22.4 million and pro forma net income for the full 1994 fiscal year would have
increased by $1.3 million to $22.0 million.

17
<PAGE> 18

Excluding the effects of the change in accounting for turnarounds, the
$13.4 million decrease in net income for the first nine months of 1995 compared
to the prior year period is due primarily to a 26% reduction in gross margins
per barrel, offset partially by an 8% 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 18% over the prior year, while product
prices per barrel increased only 5%. Gross margins per barrel at the Montana
Refinery were 34% 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 27%; gross margins were weakest in the latter part of the
second quarter and the early part of the third quarter of 1995. In addition,
gross margins per barrel at the Navajo Refinery in the third quarter of 1995
were approximately 32% below the comparable prior year period, which was the
primary reason for the $400,000 loss for the third quarter. Revenues for the
nine months ended April 30, 1995 were 14% higher than in the comparable prior
year period due to an 8% increase in sales volumes in the current year period
and 5% higher product prices per barrel in the first nine months 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
costs 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 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

18
<PAGE> 19

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 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
affected 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 nine months ended April 30, 1995
exceeded capital expenditures and dividends paid, resulting in a net increase in
cash and cash equivalents of $13.6 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 nine months of 1995 by $10.1
million to $28.4 million at April 30, 1995. The Company's long-term debt
represented 49.4% of total capitalization at April 30, 1995 compared to 53.5% at
July 31, 1994. At April 30, 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, 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 $26.7 million in the
first nine months of fiscal 1995, compared to $27.9 million in the same period
of the prior year. The principal reason for the slight decrease in cash provided
from operations was the reduction in income before the accounting change, which
was almost offset by changes in working capital accounts. 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 $10.6 million in the first nine months of fiscal 1995,
compared to $18.5 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 currently plans to use approximately $15 million of its future
operating cash flow to pay for the identified capital improvement projects to
enhance the Navajo Refinery described under "Capital

19
<PAGE> 20

Improvement Projects -- Identified Refinery Enhancement Projects." The Company's
results of operations will be affected by future operating margins and other
factors, some of which will be beyond its control. There can be no assurance
that the Company will have sufficient sources of funds to implement any or all
of these projects. Excluding the capital improvement projects described under
"Capital Improvement 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 $2.5 million in the
first nine months of fiscal 1995, compared to $2.1 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. In addition, in June 1995, an investor group
announced that it is negotiating to purchase an existing crude oil pipeline
running from West Texas to a refinery near Houston as part of the investor
group's plan to reverse the line and extend it for use in transporting refined
products from the Gulf Coast to El Paso. 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, on behalf of the EPA, filed suit against Navajo
alleging that, beginning in September 1990 and continuing through the present,
Navajo has violated and continues to violate RCRA and

20
<PAGE> 21
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 negotiating a
resolution of the litigation. If settled as anticipated, the Company would close
the existing evaporation ponds of its wastewater management system at a cost
believed to be substantially less than $1 million. The settlement also
contemplates that the Company would implement one of several alternatives to the
existing wastewater treatment system. Depending upon which approach were
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. The settlement with the DOJ also is expected to involve the payment
of a civil penalty of less than $2 million. In fiscal 1993, the Company recorded
a $2 million reserve for the litigation. See "Risk Factors -- Environmental
Regulation."
21
<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

22
<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 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

23
<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 nine-month
periods ending April 30, 1994 and 1995:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, 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 56,400(2) 57,400(2) 58,600 48,900 38,800(2) 40,000
Crude charge (BPD)(3)..... 59,527 52,531(2) 54,089(2) 55,488 45,363 37,663(2) 39,524
Refinery
utilization(BPD)(4)..... 99.2% 87.6%(2) 90.1%(2) 92.5% 87.8% 94.2%(2) 98.8%
Average per barrel:
Net sales............... $23.74 $22.39 $22.63 $25.39 $24.69 $29.89 $25.59
Raw materials
costs(5)............. 19.10 16.35 17.20 20.26 20.53 24.67 19.83
------ ------ ------ ------ ------ ------ ------
Gross margin............ $ 4.64 $ 6.04 $ 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, crude charge 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.

24
<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 Improvement 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]

25
<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. In addition, in
June 1995, an investor group announced that it is negotiating to purchase an
existing crude oil pipeline running from West Texas to a refinery near Houston
as part of the investor group's plan to reverse the line and extend it for use
in transporting refined products from the Gulf Coast to El Paso. 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 this market 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

26
<PAGE> 27
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.

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 nine-month periods ending April 30, 1994 and 1995:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, 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....... 37,600 59.5% 32,700 56.6% 33,200 56.5% 32,600 53.4% 24,800 50.3% 18,500 47.7% 19,700 48.5%
Diesel fuels.... 11,800 18.7 11,700 20.2 11,600 19.7 14,500 23.7 10,300 20.9 7,600 19.6 7,400 18.2
Jet fuels....... 6,900 10.9 6,100 10.6 6,500 11.1 5,900 9.7 6,200 12.6 7,200 18.5 8,400 20.7
Asphalt......... 4,000 6.3 4,700 8.1 4,900 8.3 5,500 9.0 5,000 10.1 2,900 7.5 2,500 6.2
LPG and other... 2,900 4.6 2,600 4.5 2,600 4.4 2,600 4.2 3,000 6.1 2,600 6.7 2,600 6.4
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
63,200 100.0% 57,800 100.0% 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 1.9%, 3.8%,
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 nine months 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 7% of the Company's revenues for the first nine
months of fiscal 1995 and 11% of revenues for fiscal 1994 resulted

<PAGE> 28

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 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
currently 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 utilizing cash flows from operating activities. The Company's
results of operations will be affected by future operating margins and other
factors, some of which will be beyond its control.

Other Capital Projects

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

28
<PAGE> 29

for scheduled maintenance and turnarounds, the Montana Refinery has operated at
an average annual crude capacity utilization rate of approximately 94%.

The following table sets forth certain information regarding the principal
products of MRC during the last five years and during the nine-month periods
ending April 30, 1994 and 1995:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, 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 36.5% 2,700 40.3% 2,700 38.6% 2,700 39.1% 2,800 42.4% 2,400 40.0% 2,400 36.4%
Diesel
fuels... 1,700 27.0 1,700 25.4 1,700 24.3 1,600 23.2 1,500 22.7 1,400 23.4 1,400 21.2
Jet fuels.. 900 14.3 1,200 17.9 1,100 15.7 1,200 17.4 1,100 16.7 900 15.0 1,200 18.2
Asphalt.... 1,100 17.4 900 13.4 1,300 18.6 1,200 17.4 1,100 16.7 1,100 18.3 1,300 19.7
LPG and
other.... 300 4.8 200 3.0 200 2.8 200 2.9 100 1.5 200 3.3 300 4.5
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 6,300 100.0% 6,700 100.0% 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 9.0%, 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.

29
<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 has 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 and related costs for which it will ultimately be responsible. The parties
have recently been engaged in substantive settlement discussions; however, no
assurance can be given that a settlement will ultimately be reached.

INSURANCE

The Company's operations (including its limited exploration and production
activities) are subject to normal business hazards, 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,

30
<PAGE> 31

storing and disposing of certain hazardous wastes without necessary
authorization and without compliance with regulatory requirements. The complaint
seeks a court order directing Navajo to comply with these regulatory standards
and civil penalties for the alleged non-compliance. The Company believes that
the parties are in the final stages of negotiations that should resolve 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 and EPA also
is expected to involve payment of a civil penalty. See "Risk
Factors -- 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............... 37 Vice President 1994
John A. Knorr............... 44 Vice President, Crude Oil Supply and 1988
Trading
Virgil R. Langford.......... 50 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.

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

31
<PAGE> 32

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.

32
<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, Suzanne
Bartolucci, Lamar Norsworthy and Nona
Barrett..................................... 2,208,844 697,708 1,511,136 26.8% 18.3%
David Norsworthy(1)........................... 250,752 98,000 152,752 3.0 1.9
Lamar Norsworthy(2)(3)........................ 428,581 102,146 326,435 5.2 4.0
Nona Barrett(4)............................... 430,278 102,146 328,132 5.2 4.0
</TABLE>

- ---------------

(1) Does not include 93,854 shares held by a trust of which this Selling
Shareholder is a beneficiary. In addition, does not include 285,858 shares
beneficially owned by three trusts of which the Selling Shareholder is a
co-trustee; the Selling Shareholder disclaims that he is a beneficial owner
except as to 1,430 of these shares.

(2) Does not include 93,854 shares held by a trust of which this Selling
Shareholder is a beneficiary, which shares are being sold in the Offering
by Brown Brothers Harriman Trust Company of Texas as trustee of such trust.
In addition, does not include 285,858 shares beneficially owned by three
trusts of which the Selling Shareholder is a co-trustee; the Selling
Shareholder disclaims that he is a beneficial owner except as to 1,430 of
these shares.

(3) Lamar Norsworthy is Chairman of the Board, President, Chief Executive
Officer and a director of the Company.

(4) Does not include 93,854 shares held by a trust of which this Selling
Shareholder is a beneficiary, which shares are being sold in the Offering
by Brown Brothers Harriman Trust Company of Texas as trustee of such trust.
In addition, does not include 285,858 shares beneficially owned by David
Norsworthy, Lamar Norsworthy, and Brown Brothers Harriman Trust Company of
Texas, as co-trustees of trusts for the benefit of the Selling Shareholder,
David Norsworthy and Lamar Norsworthy.

33
<PAGE> 34

DESCRIPTION OF COMMON STOCK

The following description of the Common Stock is qualified in its entirety
by reference to the portions of the Company's Restated Certificate of
Incorporation and Revised By-laws, which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.

The Company is authorized to issue 20,000,000 shares of Common Stock, par
value of $0.01 per share. Except as expressly required by law or provided in the
Restated Certificate of Incorporation of the Company or the Revised By-laws of
the Company, each holder of Common Stock shall be entitled to one vote, in
person or by proxy, for each share of Common Stock recorded in the stock records
of the Company in such stockholder's name. No holder of the Common Stock shall
be entitled as of right to subscribe for, purchase or receive any part of any
new or additional shares of stock of any class, whether now or hereafter
authorized, or of bonds, debentures or other evidences of indebtedness
convertible into or exchangeable for stock, but all such new or additional
shares of stock of any class, or bonds, debentures or other evidences of
indebtedness convertible into or exchangeable for stock, may be issued and
disposed of by the Board of Directors on such terms and for such consideration,
so far as may be permitted by law, and to such person or persons as the Board of
Directors in its absolute discretion may deem advisable. The holders of the
Common Stock have such rights to receive dividends and to receive distributions
upon a dissolution or liquidation of the Company as are provided for under the
General Corporation Law of Delaware. In addition to the Common Stock, the
Company is authorized to issue up to 1,000,000 shares of preferred stock, par
value $1.00 per share (the "Preferred Stock"), having such designations as may
be fixed by the Board of Directors of the Company. The rights of the holders of
the Common Stock are subject to the terms of any Preferred Stock issued, and in
the event of a liquidation or dissolution of the Company, would be subordinate
to distributions made with respect to the liquidation preferences of holders of
Preferred Stock, if any shares of Preferred Stock were then outstanding.

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 Selling Stockholders
have agreed to sell to each of the Underwriters, and each of the Underwriters
has severally agreed to purchase from 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.................................................. 500,000
CS First Boston Corporation................................................ 500,000
---------
Total......................................................... 1,000,000
=========
</TABLE>

The Underwriters 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 $.60 per share. The Underwriters may allow, and such dealers may re-allow, a
discount not in excess of $.10 per share on sales to certain other dealers.
After the public offering, the public offering price, concession and discount
may be changed.

The Selling Stockholders have granted the Underwriters an option to
purchase up to 150,000 additional shares of Common Stock at the initial public
offering price, less the underwriting discount. Such option, which expires 30
days after the date of this Prospectus, may be exercised solely to cover
over-allotments. To the extent that the Underwriters 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

34
<PAGE> 35

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, the Selling Stockholders and certain trusts for the
benefit of the Selling Stockholders has agreed that it will not, without the
prior written consent of the Underwriters, 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.

LEGAL MATTERS

Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for 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. Baker & Botts, L.L.P. from time to
time provides legal services to the Company.

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.

35
<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 -- April 30, 1995 (Unaudited).................. F-17
Condensed Consolidated Statement of Income (Unaudited) for the nine months ended
April 30, 1995 and 1994.......................................................... F-18
Condensed Consolidated Statement of Cash Flows (Unaudited) for the nine months ended
April 30, 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
APRIL 30,
1995
----------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents....................................................... $ 16,940
Accounts receivable: Trade...................................................... 39,742
Crude oil................................................ 46,386
----------
86,128
Inventories: Crude oil and refined products..................................... 33,631
Materials and supplies............................................. 6,349
----------
39,980
Income taxes receivable......................................................... 3,822
Prepayments and other........................................................... 9,435
----------
Total current assets.................................................... 156,305
Properties, plants and equipment, at cost......................................... 245,713
Less accumulated depreciation, depletion and amortization......................... 115,778
----------
129,935
Other assets...................................................................... 4,193
----------
$ 290,433
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................................ $ 106,935
Accrued liabilities............................................................. 14,763
Income taxes payable............................................................ 625
Current maturities of long-term debt............................................ 5,608
----------
Total current liabilities............................................... 127,931
Deferred income taxes............................................................. 17,371
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............................................................... 71,059
----------
77,278
Common stock held in treasury, at cost -- 396,768 shares........................ (569)
Deferred charge -- amount due from ESOP......................................... (410)
----------
Total stockholders' equity.............................................. 76,299
----------
$ 290,433
==========
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.

F-17
<PAGE> 53

HOLLY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS ENDED
APRIL 30,
---------------------
1995 1994
-------- --------
($ IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues:
Net sales............................................................ $453,786 $399,701
Miscellaneous........................................................ 947 440
-------- --------
454,733 400,141
Costs and expenses:
Cost of sales........................................................ 412,322 337,921
General and administrative........................................... 9,629 9,153
Depreciation, depletion and amortization............................. 11,735 8,051
Exploration expenses, including dry holes............................ 2,451 2,706
Miscellaneous........................................................ 107 158
-------- --------
436,244 357,989
-------- --------
Income from operations................................................. 18,489 42,152
Other:
Interest income...................................................... 732 254
Interest expense..................................................... (6,337) (6,802)
-------- --------
(5,605) (6,548)
-------- --------
Income before income taxes and cumulative effect of
change in accounting for turnarounds................................. 12,884 35,604
Income tax provision:
Current.............................................................. 3,586 12,416
Deferred............................................................. 1,439 1,919
-------- --------
5,025 14,335
-------- --------
Income before cumulative effect of change in accounting method......... 7,859 21,269
Cumulative effect to August 1, 1994 of change in accounting for
turnarounds,
net of taxes......................................................... 5,703 --
-------- --------
Net income............................................................. $ 13,562 $ 21,269
======== ========
Income per common share:
Income before cumulative effect of change in accounting method....... $ .95 $ 2.58
Cumulative effect to August 1, 1994 of change in accounting for
turnarounds, net of taxes......................................... .69 --
-------- --------
Net income........................................................... $ 1.64 $ 2.58
======== ========
Cash dividends paid per share.......................................... $ 30 $ .25
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
NINE MONTHS ENDED
APRIL 30,
---------------------
1995 1994
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 13,562 $ 21,269
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization........................ 11,735 8,051
Deferred income taxes........................................... 1,439 1,919
Dry hole costs and leasehold impairment......................... 652 1,037
Cumulative effect to August 1, 1994 of change in accounting
for turnarounds.............................................. (5,703) --
Changes in other assets and liabilities:
(Increase) decrease in accounts receivable................... 8,152 (1,282)
Decrease in inventories...................................... 4,015 869
Increase in income taxes receivable.......................... (3,094) --
(Increase) decrease in prepayments and other................. 1,458 (614)
Increase (decrease) in accounts payable...................... (5,149) 21
Increase (decrease) in accrued liabilities................... 2,473 (1,566)
Decrease in income taxes payable............................. (111) (2,452)
Other, net...................................................... (2,696) 630
-------- --------
Net cash provided by operating activities......................... 26,733 27,882
Cash flows from financing activities:
Reduction in long-term debt.......................................... (8) (8)
Cash dividends....................................................... (2,476) (2,063)
-------- --------
Net cash used for financing activities............................ (2,484) (2,071)
Cash flows from investing activities:
Additions to properties, plants and equipment........................ (10,606) (18,505)
-------- --------
Net cash used for investing activities............................ (10,606) (18,505)
-------- --------
Cash and cash equivalents:
Increase for the period.............................................. 13,643 7,306
Beginning of year.................................................... 3,297 6,631
-------- --------
End of period........................................................ $ 16,940 $ 13,937
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest.......................................................... $ 4,249 $ 4,569
Income taxes...................................................... $ 6,744 $ 14,752
</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 April 30, 1995, the consolidated results
of operations for the nine months ended April 30, 1995 and 1994, and
consolidated cash flows for the nine months ended April 30, 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 nine
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 nine months ended
April 30, 1995 by $950,000 or $.12 per common share. If the accounting change
for turnaround costs had been retroactively applied, pro forma net income for
the nine months ended April 30, 1994 would have increased by $1,162,000 or $.14
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 negotiating a resolution of the litigation. If settled as anticipated,
the Company would close the existing evaporation ponds of its wastewater
management system at a cost believed to be substantially less than $1 million.
The settlement also contemplates 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. The settlement with the DOJ also is expected to involve
the payment of a civil penalty of less than $2 million. In fiscal 1993, the
Company recorded a $2 million reserve for the litigation.

F-20
<PAGE> 56

HOLLY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE D -- SUBSEQUENT EVENT

The Company filed a Form S-3 Registration Statement on May 17, 1995
relating to the sale of up to 2,500,000 shares of common stock (before an
over-allotment option of up to 375,000 shares granted to the underwriters for
such offering by certain selling stockholders (the "Selling Stockholders")). Of
those shares, 1,500,000 shares will be sold by the Company and 1,000,000 shares
(plus up to 375,000 shares subject to the over-allotment option) will be sold by
the Selling Stockholders. The Company will not receive any portion of the
proceeds from the sale of shares of common stock by the Selling Stockholders.

The Company will use $15 million of the net offering proceeds to pay for
certain capital improvements to enhance its Navajo Refinery, located in New
Mexico. It will use the balance of the net offering proceeds, together with
internally generated funds, for other capital improvement projects currently
being evaluated and/or for general corporate purposes.

F-21
<PAGE> 57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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 Documents by
Reference........................... 3
Prospectus Summary.................... 4
Risk Factors.......................... 9
Use of Proceeds....................... 12
Capital Improvement Projects.......... 12
Capitalization........................ 13
Price Range of Common Stock and
Dividend Policy..................... 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. 17
Business.............................. 22
Management and Directors.............. 31
Selling Stockholders.................. 33
Description of Common Stock........... 34
Underwriting.......................... 34
Legal Matters......................... 35
Experts............................... 35
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

1,000,000 SHARES

HOLLY CORPORATION [LOGO]

COMMON STOCK
---------------------------

PROSPECTUS
---------------------------

MERRILL LYNCH & CO.

CS FIRST BOSTON

JUNE 27, 1995

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------