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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-3876
HOLLY CORPORATION
(Exact name of registrant, as specified in its charter)
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<S> <C>
DELAWARE 75-1056913
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
100 CRESCENT COURT 75201-6927
SUITE 1600 (ZIP CODE)
DALLAS, TEXAS
(Address of principal executive offices)
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Registrant's telephone number, including area code: (214) 871-3555
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 Par Value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On October 19, 1998, the aggregate market value of the Common Stock, par
value $.01 per share, held by non-affiliates of the registrant was $70,000,000.
(This is not to be deemed an admission that any person whose shares were not
included in the computation of the amount set forth in the preceding sentence
necessarily is an "affiliate" of the registrant.)
8,253,514 shares of Common Stock, par value $.01 per share, were
outstanding on October 19, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's proxy statement for its annual meeting of
stockholders in December 1998, which proxy statement will be filed with the
Securities and Exchange Commission within 120 days after July 31, 1998, are
incorporated by reference in Part III.
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TABLE OF CONTENTS
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Item Page
PART I
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1 & 2. Business and Properties..................................................... 3
3. Legal proceedings........................................................... 14
4. Submission of matters to a vote of security stockholders.................... 15
PART II
5. Market for Registrant's common equity and related
stockholder matters...................................................... 18
6. Selected financial data..................................................... 19
7. Management's discussion and analysis of financial condition
and results of operations................................................ 20
7a. Quantitative and qualitative disclosures about market risk.................. 30
8. Financial statements and supplementary data................................. 31
9. Changes in and disagreements with accountants on accounting
and financial disclosure................................................. 56
PART III
10. Directors and executive officers of the Registrant.......................... 56
11. Executive compensation...................................................... 56
12. Security ownership of certain beneficial owners
and management........................................................... 56
13. Certain relationships and related transactions.............................. 56
PART IV
14. Exhibits, financial statement schedules and reports on
Form 8-K.................................................................. 57
Signatures................................................................................ 58
Index to exhibits......................................................................... 60
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This Annual Report on Form 10-K (including documents incorporated by
reference herein) contains statements with respect to the Company's
expectations or beliefs as to future events. These types of statements
are "forward-looking" and are subject to uncertainties. See "Factors
Affecting Forward-Looking Statements" on page 20.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Holly Corporation, including its consolidated and wholly-owned
subsidiaries, herein referred to as the "Company" unless the context otherwise
indicates, 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. Navajo
Refining Company ("Navajo"), one of the Company's wholly-owned subsidiaries,
owns a high-conversion petroleum refinery in Artesia, New Mexico, which Navajo
operates in conjunction with crude, vacuum distillation and other facilities
situated 65 miles away in Lovington, New Mexico (collectively, the "Navajo
Refinery"). The Navajo Refinery has a crude capacity of 60,000 barrels-per-day
("BPD") and can process a variety of high sulphur (sour) crude oils. The Company
also owns Montana Refining Company, a Partnership ("MRC"), which owns a 7,000
BPD petroleum refinery near Great Falls, Montana ("Montana Refinery"), which can
process a variety of high sulfur crude oils and which primarily serves markets
in Montana. In conjunction with the operations of the refineries, the Company
operates approximately 1,700 miles of pipelines as part of its supply and
distribution network.
In addition to its refining operations, the Company also conducts a
small-scale oil and gas exploration and production program.
The Company was incorporated in Delaware in 1947.
The following table sets forth certain information about the refinery
operations of the Company during the last five fiscal years:
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<CAPTION>
Years ended July 31,
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Refinery production (BPD)(1) 61,800(2) 68,600 68,400 68,100 64,300(2)
Crude charge (BPD) (3)......................... 59,435(2) 65,625 65,446 65,636 60,911(2)
Refinery utilization(4)........................ 88.7%(2) 97.9% 97.7% 98.0% 90.9%(2)
Average per barrel:
Net sales.................................... $23.56 $28.23 $26.04 $24.02 $22.88
Raw material costs(5) ....................... 17.82 23.24 20.71 19.02 16.99
------ ------ ------ ------ ------
Gross margin................................. $ 5.74 $ 4.99 $ 5.33 $ 5.00 $ 5.89
====== ====== ====== ====== ======
Product sales (percent of total sales volume)(6):
Gasolines.................................... 54.4% 54.2% 55.4% 55.5% 54.5%
Diesel fuels................................. 21.1 23.1 21.3 20.1 20.1
Jet fuels.................................... 11.2 9.6 10.2 11.3 11.7
Asphalt...................................... 9.3 9.0 8.5 8.4 9.4
LPG and other................................ 4.0 4.1 4.6 4.7 4.3
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Total.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
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</TABLE>
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(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 a
result of a scheduled turnaround for major maintenance at the Navajo
Refinery.
(3) Barrels per day of crude oil processed.
(4) Crude charge divided by crude capacity.
(5) Includes cost of refined products purchased for resale.
(6) Includes refined products purchased for resale representing 6.8%, 3.1%,
2.4%, 2.3% and 3.9%, respectively, of total sales volume for the periods
shown in the table above.
NAVAJO REFINING COMPANY
FACILITIES
The Navajo Refinery's crude capacity is 60,000 BPD and it has the
ability to process a variety of sour crude oils into high value light products
(such as gasoline, diesel fuel and jet fuel).
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 material prices and to respond to
fluctuations in the availability of crude oil supplies. The Navajo Refinery
converts approximately 90% of its raw materials throughput into high value light
products. For fiscal 1998, gasoline, diesel fuel and jet fuel (including volumes
purchased for resale) represented 55.8%, 20.5%, and 12.0%, respectively, of
Navajo's sales volume.
The following table sets forth certain information concerning the
operations of Navajo during the last five fiscal years:
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<CAPTION>
Years ended July 31,
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Refinery production (BPD)(1) 55,300(2) 62,200 61,800 61,900 57,400(2)
Crude charge (BPD) (3)......................... 53,105(2) 59,530 59,022 59,614 54,089(2)
Refinery utilization(4)........................ 88.5%(2) 99.2% 98.4% 99.4% 90.1%(2)
Average per barrel:
Net sales.................................... $23.36 $28.09 $25.91 $23.90 $22.63
Raw material costs(5) ....................... 17.95 23.36 20.79 19.13 17.20
------ ------ ------ ------ ------
Gross margins................................ $ 5.41 $ 4.73 $ 5.12 $ 4.77 $ 5.43
====== ====== ====== ====== ======
</TABLE>
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(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 a
result of a scheduled 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 is located on a 300-acre site and has fully
integrated crude, fluid catalytic cracking ("FCC"), vacuum distillation,
alkylation, hydrodesulfurization, isomerization 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 by means of a Company-owned eight-
inch pipeline.
The Company has approximately 500 miles of crude gathering pipelines
leading to the Artesia and Lovington facilities from various points in
southeastern New Mexico. In addition, the Company acquired in the fourth quarter
of fiscal 1998 from Fina Oil and Chemical Company a crude oil gathering system
in West Texas, which includes approximately 500 miles of pipelines and 0.4
million barrels of tankage and which will be used to provide crude oil
transportation services to third parties as well as to transport West Texas
crude oil which may be exchanged for crude oil used in the Navajo Refinery.
The Company distributes refined products from the Navajo Refinery to its
principal markets primarily through two Company-owned pipelines which extend
from Artesia 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.
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 from El Paso to Tucson and Phoenix via a products pipeline system
owned by Santa Fe Pacific Pipeline.
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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.
Ultramar Diamond Shamrock Corporation ("UDS"), an independent refiner
and marketer, completed in November 1995 the construction of a 408-mile, 10"
refined products pipeline from its McKee refinery near Dumas, Texas to El Paso.
UDS has announced that the pipeline has a capacity of 45,000 BPD, and that, with
the addition of four pump stations to be completed in 1998, it will have a
capacity of 60,000 BPD. UDS has stated its intention to use this pipeline to
supply fuels to the El Paso, New Mexico, Arizona and northern Mexico markets. In
November 1997, UDS agreed to sell to Phillips Petroleum Company ("Phillips") a
25% initial interest, increasing to 33-1/3% after the pipeline capacity is
increased to 60,000 BPD, in the pipeline and a UDS terminal in El Paso. Phillips
has announced plans to complete a 35-mile pipeline from its Borger, Texas
refinery to the existing line at the UDS McKee refinery. Phillips stated that
this arrangement will replace its previously announced plans to build a pipeline
from its Borger, Texas refinery to El Paso and will allow Phillips to supply
fuels to El Paso and other markets in the Southwest. In October 1998, UDS and
Phillips announced that they had signed a letter of intent to merge North
American refining, marketing and transportation assets creating a new company
called Diamond 66.
Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), a partnership
composed of Longhorn Partners GP, L.L.C. as general partner and affiliates of
Exxon Pipeline Company, Amoco Pipeline Company, Williams Pipeline Company, and
The Beacon Group Energy Investment Fund, L.P. as well as Chisholm Holdings as
limited partners, is in the process of reversing an existing crude oil pipeline
and constructing a connecting pipeline for the transportation of petroleum
products from Gulf Coast refineries to El Paso. It has been reported that
Longhorn had planned to transport initially 72,000 BPD of gasoline to the West
Texas markets starting in October 1998 on the reversed existing crude oil
pipeline. It has also been reported that once fully operational the pipeline
would have the ultimate capacity to transport 225,000 BPD of refined products
from Houston to terminals in Midland and El Paso. This new pipeline could
significantly increase the supply of products in the Company's current principal
markets that are served from El Paso. However, a preliminary injunction was
issued by the Federal District Court in Austin, Texas on August 25, 1998,
requiring preparation of an environmental impact statement under the National
Environmental Policy Act before Longhorn Partners uses the pipeline to transport
refined petroleum products across Texas, including areas overlying the Edwards
Aquifer in Central Texas. On August 31, 1998, a lawsuit was filed by Longhorn
Partners in state district court in El Paso, Texas against the Company, two of
its subsidiaries and an Austin, Texas law firm allegedly related to this action.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 11 to the Consolidated Financial Statements for additional
information relating to the lawsuit.
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In addition to the projects described above, other projects have been
explored from time to time by refiners and other entities, which projects, if
consummated, could result in a further increase in the supply of products to
some or all of the Company's markets.
Although not currently a significant problem, at times in the past the
common carrier pipelines used by the Company to serve the Arizona and
Albuquerque markets have been operated at or near capacity and have been subject
to periods of proration. As a result, the volumes of refined products that the
Company and other shippers have been able to deliver to these markets have at
times been limited. In particular, the flow of additional products into El Paso
for shipments to Arizona, either as a result of the proposed expanded UDS
pipeline, the Longhorn Pipeline or otherwise, could result in the reoccurrence
of such constraints on deliveries to Arizona. No assurances can be given that
the Company will not experience future constraints on its ability to deliver its
products through the pipelines to Arizona. In the case of the Albuquerque
market, the common carrier pipeline used by the Company to serve this market
currently operates at or near capacity with resulting limitations at times on
the amount of refined products that the Company and other shippers can deliver.
As discussed below (see "Capital Improvement Projects"), the Company has entered
into a Lease Agreement (the "Lease Agreement") with Mid-America Pipeline Company
and is in the process of pursuing several alternatives to address terminalling
needs in Albuquerque. While the Company is proceeding as expeditiously as
possible on this project, it is not possible at present to determine when the
project will be completed. Completion of this project would allow the Company to
transport products directly to Albuquerque on the leased pipeline, thereby
eliminating third party tariff expenses and the risk of future pipeline
constraints on shipments to Albuquerque. Any future constraints on the Company's
ability to transport its refined products could, if sustained, adversely affect
the Company's results of operations and financial condition.
An additional factor that could affect the Company's market is excess
pipeline capacity from the West Coast into the Company's Arizona markets. If
additional refined products become available on the West Coast in excess of
demand in the West Coast markets, additional products may be shipped into the
Company's Arizona markets with resulting possible downward pressure on refined
product prices in the Company's markets.
In recent years, there have been several refining and marketing
consolidations or acquisitions between entities competing in the Company's
geographic market. While these transactions could increase the competitive
pressures on the Company, the specific ramifications of these or other potential
consolidations cannot presently be determined.
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CRUDE OIL AND FEEDSTOCK SUPPLIES
The Navajo Refinery is situated near the Permian Basin in an area which
historically has had abundant supplies of crude oil available both for regional
users, such as the Company, and for export to other areas. 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 both 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. With its recent
purchase of the West Texas gathering system, Navajo will have the ability to
purchase crude oil at the lease in new areas in West Texas which should add to
the continued stability of the Navajo refinery crude oil supply.
PRINCIPAL PRODUCTS AND MARKETS
The Navajo Refinery converts approximately 90% 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:
<TABLE>
<CAPTION>
Years ended July 31,
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1998 1997 1996 1995 1994
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BPD % BPD % BPD % BPD % BPD %
------ ------ ------ ------ ------ ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product sales (percent of
total sales volumes)(1)
Gasolines.................... 34,000 55.8% 34,800 55.8% 36,000 56.9% 36,400 57.8% 33,200 56.5%
Diesel fuels................. 12,500 20.5 14,200 22.7 13,000 20.6 12,300 19.5 11,600 19.7
Jet fuels.................... 7,300 12.0 6,200 9.9 6,600 10.4 6,900 11.0 6,500 11.1
Asphalt...................... 4,800 7.9 4,600 7.4 4,700 7.4 4,500 7.1 4,900 8.3
LPG and other................ 2,300 3.8 2,600 4.2 3,000 4.7 2,900 4.6 2,600 4.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
60,900 100% 62,400 100% 63,300 100% 63,000 100% 58,800 100%
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(1) Includes refined products purchased for resale representing 7.5%, 2.3%,
1.8%, 1.9% and 4.0%, 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 made 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.
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Navajo'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 7,300 BPD of jet fuel to the DFSC in its
1998 fiscal year and has a contract to supply 7,200 BPD to the DFSC for the year
ending September 30, 1999. 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 10% of the Company's revenues for fiscal 1998 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 29 years. Approximately 9% of the Company's revenues for
fiscal 1998 resulted from the sale for export of gasoline and diesel fuel to an
affiliate of PEMEX. Those sales were made under contracts that expire in the
next year. 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. In addition to the United States Government and PEMEX,
another refiner, Tosco Corporation and its affiliates, is a purchaser of
gasoline and diesel fuel for resale to retail customers and accounted for
approximately 17% of the Company's revenues in fiscal 1998. 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 volumes with respect to products whose
end-users are retail customers appears to have been historically more dependent
on general retail demand and product supply in the Company's primary markets
than on sales to any specific purchaser.
CAPITAL IMPROVEMENT PROJECTS
During the past three years, the Company has invested approximately $80
million in capital projects and investments to enhance the Navajo Refinery and
expand its supply and distribution network, as well as to add certain
transportation revenue generating assets. For the 1999 fiscal year, Navajo's
capital budget totals $17 million, of which approximately $5 million is for
various improvements at the Navajo Refinery, including environmental and safety
enhancements, and approximately $12 million for various pipeline and
transportation projects, including the Chevron isobutane pipeline project
described below. In addition, the Company plans to complete in fiscal 1999
certain items totalling $8 million which were approved in previous capital
budgets.
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As part of its efforts to improve operating efficiencies, the Company
has recently enhanced the Navajo Refinery by adding an isomerization unit and
upgrading the FCC unit. The isomerization unit, which was completed in February
1997, increases the refinery's internal octane generating capabilities, thereby
improving light product yields and increasing the refinery's ability to upgrade
additional amounts of lower priced purchased natural gasoline into finished
gasoline. The revamp of the refinery's FCC unit, which was implemented during
the Navajo Refinery's scheduled turnaround in the first quarter and early part
of the second quarter of fiscal 1998, improves the yield of high value products
from the FCC unit by incorporating certain state-of-the-art upgrades. The total
costs of these two projects was $15 million.
In addition to the above projects, the Company purchased for $5 million
in November 1997 a hydrotreater unit from a closed refinery. This purchase will
give the Company the ability, if market conditions dictate, to reconstruct the
unit at the Navajo Refinery at a substantial savings as compared to the cost of
a new unit. The hydrotreater would enhance product yields and facilitate the
Company's ability to meet the present California Air Resources Board ("CARB")
standards, which have recently been adopted for the winter months in Phoenix
starting in the latter part of 2000.
The Company has leased from Mid-America Pipeline Company more than 300
miles of 8" pipeline running from Chavez County to San Juan County, New Mexico
(the "Leased Pipeline"). The Company has completed a 12" pipeline from the
Navajo Refinery to the Leased Pipeline and is in the process of completing
terminalling facilities in Bloomfield. Although portions of the construction
project have been completed, several alternatives are still being pursued to
address terminalling needs in Albuquerque. When the project, including the
Albuquerque portion, is completed, these facilities will allow the Company to
use the Leased Pipeline to transport petroleum products from the Navajo Refinery
to Albuquerque and markets in northwest New Mexico. The Leased Pipeline and
recently constructed facilities will be available during fiscal 1999 for the
transport of petroleum products to certain markets in northwest New Mexico. The
total estimated cost of this project is $17 million, of which $7 million remains
to be spent.
The Company has a 25% interest in a pipeline joint venture ("Rio
Grande") with Mid-America Pipeline Company and Amoco Pipeline Company to
transport liquid petroleum gases to Mexico. Deliveries by Rio Grande began in
April 1997. The Company completed in October 1996 a new 12" refined products
pipeline from Orla to El Paso, Texas, which replaced a portion of an 8" pipeline
previously used by Navajo that was transferred to the Rio Grande joint venture.
The Company's total net cash investment in these projects (in addition to the
contribution of the existing 8" pipeline to the joint venture) was $8 million,
including a cash investment in Rio Grande of $4.1 million.
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The additional pipeline capacity resulting from the new pipelines
constructed in conjunction with the Rio Grande joint venture and expected to
result from the Leased Pipeline and completion of the planned related pipeline
and terminalling facilities should reduce pipeline operating expenses at current
throughputs. In addition, the new pipeline capacity would allow the Company to
increase volumes, through refinery expansion or otherwise, that are shipped into
existing and new markets and could allow the Company to shift volumes among
markets in response to any future increased competition in particular markets.
In the fourth quarter of fiscal 1998, the Company purchased from Fina
Oil and Chemical Company for $12 million a crude oil gathering system in West
Texas. The assets purchased include approximately 500 miles of pipelines and
over 350,000 barrels of tankage. More than 27,000 barrels per day of crude oil
is currently gathered on these systems. These assets should generate a stable
source of transportation service income, and will give Navajo the ability to
purchase crude oil at the lease in new areas, thus potentially enhancing the
continued stability of the crude oil supply for the Navajo Refinery.
The Company plans to construct for approximately $5 million 65 miles of
new pipeline between Lovington and Artesia, NM, to permit the delivery of
isobutane (and/or other LPGs) to the Chevron refinery in El Paso.
The Company announced in February 1997 the formation of an alliance with
FINA, Inc. ("FINA") to create a comprehensive supply network that can increase
substantially the supplies of gasoline and diesel fuel in the West Texas, New
Mexico, and Arizona markets to meet expected increasing demand in the coming
years. FINA constructed a 50-mile pipeline which connected an existing FINA
pipeline system to the Company's 12" pipeline extending between Orla, Texas and
El Paso, Texas. In August 1998, FINA began transporting to El Paso gasoline and
diesel fuel from its Big Spring, Texas refinery. Pursuant to a long-term
agreement, FINA will ultimately have the right to transport up to 20,000 BPD to
El Paso on this interconnected system. However, if conditions dictate and if
mutually agreed by the Company and FINA, volumes from Big Spring could be
substantially increased to utilize more fully this 10"-12" pipeline network in
meeting future demand increases in New Mexico, West Texas and Arizona. In August
1998, the Company began to realize pipeline and terminalling revenues from FINA
under these agreements.
MONTANA REFINING COMPANY
MRC owns a 7,000 BPD petroleum refinery near Great Falls, Montana, which
can process a wide range of crude oils and which serves primarily markets in
Montana. For the last three fiscal years, excluding downtime for scheduled
maintenance and turnarounds, the Montana Refinery has operated at an average
annual crude capacity utilization rate of approximately 92%.
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The following table sets forth certain information regarding the
principal products of MRC during the last five years:
<TABLE>
<CAPTION>
Years ended July 31,
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1998 1997 1996 1995 1994
-------------- --------------- --------------- --------------- --------------
BPD % BPD % BPD % BPD % BPD %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product sales (percent of
total sales volumes)(1)
Gasolines ............. 2,800 39.4% 2,700 39.1% 2,900 40.3% 2,400 35.3% 2,700 38.6%
Diesel fuels .......... 1,800 25.4 1,700 24.6 2,000 27.8 1,700 25.0 1,700 24.3
Jet fuels ............. 300 4.2 500 7.3 500 6.9 1,100 16.2 1,100 15.7
Asphalt ............... 1,900 26.8 1,700 24.6 1,500 20.8 1,300 19.1 1,300 18.6
LPG and other ......... 300 4.2 300 4.4 300 4.2 300 4.4 200 2.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
7,100 100% 6,900 100% 7,200 100% 6,800 100% 7,000 100 %
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- - ----------------
(1) Includes refined products purchased for resale representing 5.0%, 12.2%,
7.5%, 6.5% and 3.4%, 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 the
Canadian border to the refinery. The Montana Refinery's principal markets
include Great Falls, Helena, Bozeman and Billings, Montana. MRC competes
principally with three other Montana refineries.
For the 1999 fiscal year, MRC's capital budget totals $2 million, most
of which is for various improvements at the Montana Refinery, including
environmental and safety enhancements.
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, owns and operates an asphalt marketing facility near Phoenix. In
addition to marketing asphalt produced at the Navajo Refinery, Navajo Western
markets asphalt produced by third parties.
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<PAGE> 13
EXPLORATION AND PRODUCTION
The Company conducts a small-scale oil and gas exploration and
production program. For fiscal 1999, the Company has budgeted approximately $1
million for capital expenditures related to oil and gas exploration activities.
EMPLOYEES AND LABOR RELATIONS
The Company has approximately 588 employees. Of its employees, 218 are
covered by collective bargaining agreements ("covered employees"). Contracts
relating to the covered employees at all facilities will expire during 2001 and
2002. The Company considers its employee relations to be good.
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 or will result in changes of operating
procedures and in capital expenditures by the Company. Compliance with
applicable environmental laws and regulations will continue to have an impact on
the Company's operations, results of operations and capital requirements.
Effective January 1, 1995, certain cities in the country were required
to use only reformulated gasoline ("RFG"), a cleaner burning fuel. Phoenix is
the only principal market of the Company that currently requires RFG although
this requirement could be implemented in other markets over time. Phoenix has
adopted even more rigorous CARB fuel specifications for winter months beginning
in the latter part of 2000. This new requirement, other requirements of the
Clean Air Act or other presently existing or future environmental regulations
could cause the Company to expend substantial amounts to permit the Company's
refineries to produce products that meet applicable requirements. The specifics
and extent of these or other regulations 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 United States Department of Justice ("DOJ"), on behalf of
the EPA, and which is discussed in the Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Note 11 to the Consolidated
Financial Statements. In addition to the expenditures that have been and will be
incurred in connection with a resolution of this matter, current and future
environmental regulations inevitably will require other expenditures, including
remediation, at the New Mexico and Montana refineries. The extent of any such
expenditures cannot presently be determined.
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<PAGE> 14
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, recently
enacted comprehensive health and safety legislation have required and continue
to require substantial expenditures.
INSURANCE
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company maintains
various insurance coverages, including business interruption insurance, subject
to certain deductibles. The Company is not fully insured against certain risks
because such risks are not fully insurable, coverage is unavailable or premium
costs, in the judgment of the Company, do not justify such expenditures.
ITEM 3. LEGAL PROCEEDINGS
In July 1993, the United States Department of Justice ("DOJ"), on behalf
of the United States Environmental Protection Agency ("EPA"), filed a suit
against the Company's subsidiary, Navajo Refining Company ("Navajo") alleging
that, beginning in September 1990 and continuing through the present, Navajo has
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 in the refinery's wastewater treatment
system without compliance with regulatory requirements. Navajo, the DOJ and the
State of New Mexico have settled this litigation, with the settlement
anticipated to become final in the next several months. Under the settlement
agreement, the Company will close the existing evaporation ponds of its
wastewater treatment system. The agreement also provides that the Company will
utilize an alternative to the existing wastewater treatment system at an
estimated total cost of approximately $5 million, of which $2 million already
has been incurred. The costs to implement the alternative wastewater treatment
system will be capitalized and amortized over the future useful life of the
resulting asset in accordance with generally accepted accounting principles.
Finally, the agreement involves the payment of a civil penalty of less than $2
million. In fiscal 1993, the Company recorded a $2 million reserve for this
litigation.
On August 31, 1998, a lawsuit (the "Longhorn Suit") was filed in state
district court in El Paso, Texas against the Company, two of its subsidiaries
and an Austin, Texas law firm. The suit was filed by Longhorn Partners Pipeline,
L.P. ("Longhorn Partners"), a Delaware limited partnership composed of Longhorn
Partners GP, L.L.C. as general partner and affiliates of Exxon Pipeline Company,
Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy
Investment Fund, L.P. as well as Chisholm Holdings as limited partners. The suit
seeks damages against the Company and the law firm alleged to total up to
$1,050,000,000 and injunctive relief based on claims of violations of the Texas
Free Enterprise and Antitrust Act, unlawful interference with contractual
relations, and conspiracy to abuse process. The Longhorn Suit appears to relate
principally to the alleged involvement of subsidiaries of the Company and the
named law firm in a federal lawsuit (the "Environmental Suit") in Austin, Texas
filed by ranchers and joined by the Barton Springs-Edwards Aquifer
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<PAGE> 15
Conservation District, the City of Austin and the Lower Colorado River
Authority. The Environmental Suit resulted in a preliminary injunction issued by
the Federal Court on August 25, 1998 requiring preparation of an environmental
impact statement under the National Environmental Policy Act before Longhorn
Partners uses an existing crude oil pipeline and a newly constructed pipeline to
transport refined petroleum products across Texas, including areas overlying the
Edwards Aquifer in Central Texas. The Company believes that the Longhorn Suit is
wholly without merit and plans to defend itself vigorously. The Company also
plans to pursue at the appropriate time any affirmative remedies that may be
available to it with respect to the filing of the Longhorn Suit.
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 or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held on June 26, 1998. Proxies for
the meeting were solicited under Regulation 14A. The meeting did not involve the
election of directors. The matter voted on and the results of the voting were as
follows:
(1) Adoption of the merger (the "Merger") of Holly Corporation
("Holly") with and into Giant Industries, Inc. ("Giant"), the
Agreement and Plan of Merger, dated April 14, 1998 (the "Merger
Agreement"), between Holly and Giant, and the transactions
contemplated thereby.
<TABLE>
<CAPTION>
Shares voted Shares voted Shares voted
"For" "Against" "Abstain"
- - ------------ -------------- --------------
<S> <C> <C>
7,026,873 59,124 20,402
</TABLE>
On September 1, 1998, Holly Corporation and Giant Industries, Inc.
mutually agreed to terminate their proposed merger which had been approved by
the stockholders of both companies on June 26, 1998. The decision to terminate
the merger was made as a result of the August 31, 1998 filing of a lawsuit by
Longhorn Partners Pipeline, L.P. against Holly and others, which Holly believes
to be wholly without merit, and as a result of continuing delays and
uncertainties in negotiations with the Federal Trade Commission and the New
Mexico Attorney General's Office concerning federal and state clearance of the
merger.
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<PAGE> 16
Executive Officers of Registrant (per instruction 3 to Item 401(b) of
Regulation S-K)
The executive officers of the Company as of October 21, 1998 are as
follows:
<TABLE>
<CAPTION>
Executive
Name Age Position Officer Since
---- --- -------- --------------
<S> <C> <C> <C>
Lamar Norsworthy 52 Chairman of the Board 1971
and Chief Executive Officer
Matthew P. Clifton 47 President and Director 1988
Jack P. Reid 62 Executive Vice President, 1976
Refining and Director
William J. Gray 57 Senior Vice President, 1976
Marketing and Supply
and Director
David G. Blair 40 Vice President, Marketing 1994
Asphalt and LPG
Christopher L. Cella 41 Vice President, General 1990
Counsel and Secretary
Randall R. Howes 41 Vice President, Engineering 1997
and Economics
John A. Knorr 48 Vice President, Crude Oil 1988
Supply and Trading
Virgil R. Langford 53 Vice President, Refining 1989
Mike Mirbagheri 59 Vice President, International 1982
Crude Oil and Refined
Products
Henry A. Teichholz 55 Vice President, Treasurer 1984
and Controller
James G. Townsend 43 Vice President, Pipelines and Terminals 1997
Gregory A. White 41 Vice President, Marketing 1994
Light Oils
</TABLE>
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<PAGE> 17
In addition to the persons listed above, Kathryn Walker, age 48, was
appointed Controller of Navajo Refining Company in August 1993; prior thereto
she served from 1985 as Assistant Controller of Navajo.
All officers of the Company are elected annually to serve until their
successors have been elected. Mr. Norsworthy occupied the additional office of
President from 1988 to 1995. Mr. Clifton previously served as Senior Vice
President from 1991 to 1995. Mr. Cella has occupied the additional office of
Secretary since December 1994. Mr. Knorr is also President of one of the
partners of MRC and serves as the General Manager of MRC. Messrs. Blair and
White were elected to their respective positions in September 1994. Mr. Blair
has served as Marketing Manager of Asphalt and LPG of Navajo since 1989 and
previously held various marketing and supply positions. Mr. White has served as
Marketing Manager of Light Oils of Navajo since 1989 and previously held various
marketing and supply positions. Messrs. Howes and Townsend were elected to their
respective positions in September 1997. Mr. Howes has served as Manager of
Technical Services of Navajo since 1991 and previously held various engineering,
operations and maintenance positions. Mr. Townsend has served as Manager of
Transportation of Navajo since 1995 and previously held various
transportation/pipeline positions.
-17-
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The Company's 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 sales prices per share of common stock, dividends paid per share
and the trading volume of common stock for the periods indicated:
<TABLE>
<CAPTION>
Total
Fiscal years ended July 31 High Low Dividends Volume
- - -------------------------- ---- --- --------- ------
<S> <C> <C> <C> <C>
1997
First Quarter................ $29 5/8 $24 3/4 $.12 286,700
Second Quarter............... 28 24 .12 621,500
Third Quarter................ 27 1/4 23 1/8 .12 338,600
Fourth Quarter............... 27 1/4 24 3/16 .15 1,314,900
1998
First Quarter................ $28 13/16 $25 13/16 $.15 721,200
Second Quarter............... 28 24 7/8 .15 416,900
Third Quarter................ 33 3/8 25 5/8 .15 871,500
Fourth Quarter............... 31 3/4 24 1/8 .15 648,600
</TABLE>
As of July 31, 1998, the Company had approximately 1,800 stockholders of
record.
On September 30, 1998, the Company's Board of Directors declared a
regular quarterly dividend in the amount of $.16 per share payable on October
14, 1998. The Company intends to consider the declaration of a dividend on a
quarterly basis, although there is no assurance as to future dividends since
they are dependent upon future earnings, capital requirements, financial
condition of the Company and other factors. The Senior Notes and credit
agreement limit the payment of dividends. See Note 6 to the Consolidated
Financial Statements.
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following table shows selected financial information for the Company as of
the dates or for the periods indicated. This table should be read in conjunction
with the consolidated financial statements of the Company and related notes
thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
($ in thousands, except per share amounts)
Years ended July 31, 1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
For the year
Revenues .............................. $ 589,604 $ 721,346 $ 676,290 $ 614,830 $ 552,320
Income before income taxes and
cumulative effect of
accounting change ................... $ 24,866 $ 21,819 $ 31,788 $ 20,147 $ 35,002
Income tax provision .................. 9,699 8,732 12,554 7,730 14,285
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of accounting change ............... 15,167 13,087 19,234 12,417 20,717
Cumulative effect of
accounting change .................. -- -- -- 5,703 --
---------- ---------- ---------- ---------- ----------
Net income ............................ $ 15,167 $ 13,087 $ 19,234 $ 18,120 $ 20,717
========== ========== ========== ========== ==========
Income per common share
Income before cumulative
effect of accounting
change (basic and diluted) ...... $ 1.84 $ 1.59 $ 2.33 $ 1.51 $ 2.51
Cumulative effect of
accounting change ............... -- -- -- .69 --
---------- ---------- ---------- ---------- ----------
Net income
(basic and diluted) ............. $ 1.84 $ 1.59 $ 2.33 $ 2.20 $ 2.51
========== ========== ========== ========== ==========
Cash dividends per common
share .............................. $ .60 $ .51 $ .42 $ .40 $ .35
Average number of shares of
common stock outstanding ........... 8,254,000 8,254,000 8,254,000 8,254,000 8,254,000
Net cash provided by
operating activities ................. $ 38,193 $ 5,457 $ 44,452 $ 34,241 $ 27,684
At end of year
Working capital ....................... $ 14,793 $ 45,241 $ 66,649 $ 17,740 $ 18,236
Total assets .......................... $ 349,857 $ 349,803 $ 351,271 $ 287,384 $ 281,814
Long-term debt (including
current portion) ................... $ 75,516 $ 86,291 $ 97,065 $ 68,840 $ 74,448
Stockholders' equity .................. $ 114,349 $ 105,121 $ 96,243 $ 80,043 $ 64,772
</TABLE>
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts included
in this Form 10-K, including without limitation those under "Markets and
Competition" under Items 1 and 2 and "Liquidity and Capital Resources" and
"Additional Factors that May Affect Future Results" (including "Risk Management"
and "The Year 2000 Problem") under this Item 7 regarding the Company's financial
position and results of operations, are forward-looking statements. Such
statements are subject to risks and uncertainties, including but not limited to
risks and uncertainties with respect to the actions of actual or potential
competitive suppliers of refined petroleum products in the Company's markets,
the demand for and supply of crude oil and refined products, the spread between
market prices for refined products and crude oil, the possibility of constraints
on the transportation of refined products, the possibility of inefficiencies or
shutdowns in refinery operations, governmental regulations and policies, the
availability of financing to the Company on favorable terms, the effectiveness
of Company capital investments and marketing strategies, the accuracy of
technical analysis and evaluations relating to the Year 2000 Problem, and the
abilities of third-party suppliers to the Company to avoid adverse effects of
the Year 2000 Problem on their capacities to supply the Company. Should one or
more of these risks or uncertainties, among others as set forth in this Form
10-K, materialize, actual results may vary materially from those estimated,
anticipated or projected. Although the Company believes that the expectations
reflected by such forward-looking statements are reasonable based on information
currently available to the Company, no assurances can be given that such
expectations will prove to have been correct. Cautionary statements identifying
important factors that could cause actual results to differ materially from the
Company's expectations are set forth in this Form 10-K, including without
limitation in conjunction with the forward- looking statements included in this
Form 10-K that are referred to above. All forward-looking statements included in
this Form 10-K and all subsequent oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements.
RESULTS OF OPERATIONS
1998 Compared to 1997
For the 1998 fiscal year, net income was $15.2 million as compared to
$13.1 million for fiscal 1997. Transaction costs associated with the planned
merger with Giant Industries, Inc., which was recently terminated, reduced
earnings by $1.2 million for the 1998 fiscal year.
The increase in income in the 1998 fiscal year was principally due to
increased refinery margins as compared to the prior year. Refinery margins were
particularly strong in the fourth quarter of fiscal 1998. Increases in refinery
margins resulted from crude oil prices decreasing at a greater rate than refined
product prices in the Company's markets. For the year ended
-20-
<PAGE> 21
July 31, 1998, a 10% reduction in production of refined products partially
offset the year-over- year refinery margin increases. The reduced production for
the 1998 fiscal year resulted from a planned maintenance shutdown (a turnaround)
at the Company's Navajo Refinery. The turnaround, which is scheduled every four
years, was conducted in the first quarter and early part of the second quarter
of fiscal 1998. This turnaround included an upgrade of the fluid catalytic
cracking unit ("FCC") to state-of-the-art technology. The effects of this
upgrade combined with the effects of the new isomerization unit which became
operational at the end of the last fiscal year have substantially improved the
high value product yields of the Navajo facility. These upgrades contributed
favorably to refinery margins beginning with the second quarter of fiscal 1998.
Earnings in fiscal 1998 were adversely impacted by an increase in depreciation,
depletion and amortization resulting from the amortization of higher turnaround
costs beginning in the second quarter. Additionally impacting earnings for the
1998 fiscal year was the inclusion in operating expenses of costs associated
with the lease of 300 miles of 8" pipeline which began late in the fourth
quarter of fiscal 1997. The Company plans to utilize this pipeline to transport
petroleum products from the Navajo Refinery to markets in northwest New Mexico
during the 1999 fiscal year and intends to complete as soon as possible a
project that will permit the leased pipeline to be used for transportation of
petroleum products to Albuquerque. Also reducing earnings for fiscal 1998 was a
decrease in interest income due to the lower level of cash investments in fiscal
1998 as compared to fiscal 1997. Revenues decreased in the year ended July 31,
1998 from the prior year as a result of reduced sales prices and reduced overall
sales volumes for the 1998 fiscal year.
Although refinery margins were strong during the fourth quarter of
fiscal 1998, they have since declined as crude oil prices have increased at a
greater rate than product prices.
1997 Compared To 1996
For the 1997 fiscal year, net income was $13.1 million as compared to
$19.2 million for fiscal 1996. The decrease in earnings for the fiscal year
ended July 31, 1997 was principally due to reductions in refining margins in the
fourth quarter of fiscal 1997 as compared to the prior year. The Company's
refining margins were greatly influenced by West Coast prices which were low
relative to other parts of the country in fiscal 1997. For the 1997 fiscal year,
revenues were higher than for the 1996 fiscal year due principally to overall
increases in selling prices from the prior year.
-21-
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased during the year ended July 31, 1998
by $17.4 million, as cash flows required for capital expenditures, debt payments
and dividends were greater than cash flows generated from operations and from
new borrowings under the Credit Agreement. Working capital decreased during
fiscal 1998 by $30.4 million to $14.8 million. The Company's long-term debt at
July 31, 1998 represents 39.8% of total capitalization as compared to 45.1% at
July 31, 1997. In October 1997, the Company entered into a new credit agreement
which can be used for direct borrowings of up to $50 million. The Company
believes that these sources of funds, together with future cash flows from
operations, should provide sufficient resources, financial strength and
flexibility to enable the Company for the foreseeable future to satisfy its
liquidity needs, capital requirements, and debt service obligations while
continuing the payment of dividends.
Net cash provided by operating activities amounted to $38.2 million in
fiscal 1998, compared to $5.5 million in fiscal 1997 and $44.5 million in fiscal
1996. Comparing fiscal 1998 to the previous year, cash provided from operating
activities was significantly higher. The increase was principally due to changes
in working capital items along with the increase in cash generated by earnings,
offset partially by expenditures incurred in fiscal 1998 of $18.8 million
relating to the recent Navajo turnaround compared to advance expenditures of
$7.1 million in the latter part of fiscal 1997 relating to the turnaround. In
fiscal 1997 there was a $19.6 million increase in inventories, much of which was
part of the preparation for the turnaround in fiscal 1998. A significant portion
of the inventory increase was liquidated in fiscal 1998; however the effect of
this inventory liquidation was reduced because of an increase in inventory
required due to the Company's purchase of the West Texas crude gathering system
as described below. Comparing fiscal 1997 to fiscal 1996, the most important
factor causing the reduction in cash provided from operations was the increase
in inventories in fiscal 1997. In addition, the advance expenditures relating to
the fiscal 1998 turnaround and the lower net income in fiscal 1997 reduced cash
flows from operations. The timing of required income tax payments also
negatively impacted cash provided from operations in fiscal 1997 as compared to
fiscal 1998 and more significantly as compared to fiscal 1996.
Cash flows used for financing activities amounted to $4.7 million in
fiscal 1998 and $15.0 million in fiscal 1997, as compared to cash flows provided
by financing activities of $24.4 million in fiscal 1996. With the Company's
then-existing credit agreement scheduled to expire in November 1997, the Company
in October 1997 entered into a new three-year credit agreement ("Credit
Agreement") with a different group of banks, some of which had also been
included in the previous credit agreement. The new Credit Agreement provides for
a total facility of $100 million, the full amount of which may be used to
support letters of credit and $50 million of which may be used for direct
borrowings. As of July 31, 1998 the Company had direct borrowings outstanding
under the Credit Agreement of $11.6 million. The other terms of the new Credit
Agreement are substantially similar to those of the previous credit
-22-
<PAGE> 23
agreement. In November 1995, the Company completed the funding from a group of
insurance companies of a new private placement of Senior Notes in the amount of
$39 million and the extension of $21 million of previously outstanding Senior
Notes. This private placement was intended to enhance the Company's future
investment flexibility and financial strength. The company made principal
payments of $10.8 million on the Senior Notes in each of June 1998, 1997 and
1996. A $5.2 million principal payment on the Senior Notes will be due in June
1999.
See Note 6 to the Consolidated Financial Statements for a summary of the
terms and conditions of the Senior Notes and of the Credit Agreement.
Cash flows used for investing activities totalled $103.6 million over
the last three years, $51.0 million in 1998, $34.4 million in 1997 and $18.3
million in 1996. All of these amounts were expended on capital projects with the
exceptions for fiscal 1998 of $2.0 million invested in and advanced to a joint
venture operating retail gasoline stations and convenience stores in Montana and
$3.0 million invested in shares of common stock of a publicly traded company
and for fiscal 1997 of $4.1 million invested in the Rio Grande joint venture
described below. The net negative cash flow for investing activities was
reduced for fiscal 1998 by a $3.7 million distribution to the Company from the
Rio Grande joint venture. The Company has adopted capital budgets totalling $20
million for fiscal 1999. The components of this budget are $7 million for
various refinery improvements and environmental and safety enhancements, $12
million for various pipeline and transportation projects and $1 million for oil
and gas exploration and production activities. In addition to these projects,
the Company plans to expend in the 1999 fiscal year a total of $8 million on
items that were approved in previous capital budgets. These include projects at
the Navajo Refinery, certain environmental enhancements, and additional
expenditures for connecting pipelines and related product terminals to be used
in conjunction with the leased pipeline to northwest New Mexico described
below.
As part of its efforts to improve operating efficiencies, the Company
has enhanced the Navajo Refinery by recently adding an isomerization unit and
upgrading the FCC unit. The isomerization unit, which was completed in February
1997, increases the refinery's internal octane generating capabilities, thereby
improving light product yields and increasing the refinery's ability to upgrade
additional amounts of lower priced purchased natural gasoline into finished
gasoline. The revamp of the refinery's FCC unit, which was implemented during
the Navajo Refinery's scheduled turnaround in the first quarter and early part
of the second quarter of fiscal 1998, improves the yield of high value products
from the FCC unit by incorporating certain state-of-the-art upgrades. The total
costs of these two projects was $15 million.
In addition to the above projects, the Company purchased for $5 million
in November 1997 a hydrotreater unit from a closed refinery. This purchase will
give the Company the ability, if market conditions necessitate, to reconstruct
the unit at the Navajo Refinery at a substantial savings as compared to the cost
of a new unit. The hydrotreater would enhance product yields and facilitate the
Company's ability to meet the present California Air Resources Board ("CARB")
standards, which have been adopted for Phoenix for winter months beginning in
the latter part of 2000 and may be adopted in other markets that the Company
serves.
-23-
<PAGE> 24
The Company has leased from Mid-America Pipeline Company more than 300
miles of 8" pipeline running from Chavez County to San Juan County, New Mexico
(the "Leased Pipeline"). The Company has completed a 12" pipeline from the
Navajo Refinery to the Leased Pipeline and is in the process of completing
terminalling facilities in Bloomfield. Although portions of the construction
project have been completed, several alternatives are still being pursued to
address terminalling needs in Albuquerque. When the project, including the
Albuquerque portion, is completed, these facilities will allow the Company to
use the Leased Pipeline to transport petroleum products from the Navajo Refinery
to Albuquerque and markets in northwest New Mexico. The Leased Pipeline and
recently constructed facilities will be available during fiscal 1999 for the
transport of petroleum products to certain markets in northwest New Mexico. The
total estimated cost of this project is $17 million, of which $7 million remains
to be spent.
The Company has a 25% interest in a pipeline joint venture ("Rio
Grande") with Mid-America Pipeline Company and Amoco Pipeline Company to
transport liquid petroleum gases to Mexico. Deliveries by the joint venture
began in April 1997. The Company completed in October 1996 a new 12" refined
products pipeline from Orla to El Paso, Texas, which replaced a portion of an 8"
pipeline previously used by Navajo that was transferred to Rio Grande. The
Company's total net cash investment in these projects (in addition to the
contribution of the existing 8" pipeline to Rio Grande) was $8 million,
including a cash investment in the joint venture of $4.1 million in fiscal 1997.
The additional pipeline capacity resulting from the new pipelines
constructed in conjunction with the Rio Grande joint venture and expected to
result from the Leased Pipeline and completion of the planned related pipeline
and terminalling facilities should reduce pipeline operating expenses at current
throughputs. In addition, the new pipeline capacity would allow the Company to
increase volumes, through refinery expansion or otherwise, that are shipped into
existing and new markets and could allow the Company to shift volumes among
markets in response to any future increased competition in particular markets.
In the fourth quarter of fiscal 1998, the Company purchased from Fina
Oil and Chemical Company for $12 million a crude oil gathering system in West
Texas. The assets purchased include approximately 500 miles of pipelines and
over 350,000 barrels of tankage. More than 27,000 barrels per day of crude oil
is currently gathered on these systems. These assets should generate a stable
source of transportation service income, and will give Navajo the ability to
purchase crude oil at the lease in new areas, thus potentially enhancing the
continued stability of the crude oil supply for the Navajo Refinery.
The Company plans to construct for approximately $5 million 65 miles of
new pipeline between Lovington and Artesia, NM, to permit the delivery of
isobutane (and/or other LPGs) to the Chevron refinery in El Paso.
The Company announced in February 1997 the formation of an alliance with
FINA, Inc. ("FINA") to create a comprehensive supply network that can increase
substantially the supplies of gasoline and diesel fuel in the West Texas, New
Mexico, and Arizona markets to meet expected increasing demand in the coming
years. FINA constructed a 50-mile pipeline which connected an existing FINA
pipeline system to the Company's 12" pipeline extending between
-24-
<PAGE> 25
Orla, Texas and El Paso, Texas. In August 1998, FINA began transporting to El
Paso gasoline and diesel fuel from its Big Spring, Texas refinery. Pursuant to a
long-term agreement, FINA will ultimately have the right to transport up to
20,000 BPD to El Paso on this interconnected system. However, if conditions
dictate and if mutually agreed by the Company and FINA, volumes from Big Spring
could be substantially increased to utilize more fully this 10"-12" pipeline
network in meeting future demand increases in New Mexico, West Texas and
Arizona. In August 1998, the Company began to realize pipeline and terminalling
revenues from FINA under these agreements.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's operating results have been, and will continue to be,
affected by a wide variety of factors, many of which are beyond the Company's
control, that could have adverse effects on profitability during any particular
period. Among these factors are the demand for crude oil and refined products,
which is largely driven by the conditions of local and worldwide economies as
well as by weather patterns and the taxation of these products relative to other
energy sources. Governmental regulations and policies, particularly in the areas
of taxation, energy and the environment, also have a significant impact on the
Company's activities. Operating results can be affected by these industry
factors, by competition in the particular geographic markets that the Company
serves and by factors that are specific to the Company, such as the success of
particular marketing programs and the efficiency of the Company's refinery
operations.
In addition, the Company's profitability depends largely on the spread
between market prices for refined petroleum products and crude oil prices. This
margin is continually changing and may significantly fluctuate from time to
time. Crude oil and refined products are commodities whose price levels are
determined by market forces beyond the control of the Company. Additionally, due
to the seasonality of refined products markets and refinery maintenance
schedules, results of operations for any particular quarter of a fiscal year are
not necessarily indicative of results for the full year. In general, prices for
refined products are significantly influenced by the price of crude oil.
Although an increase or decrease in the price for crude oil generally results in
a similar increase or decrease in prices for refined products, there is normally
a time lag in the realization of the similar increase or decrease in prices for
refined products. The effect of changes in crude oil prices on operating results
therefore depends in part on how quickly refined product prices adjust to
reflect these changes. A substantial or prolonged increase in crude oil prices
without a corresponding increase in refined product prices, a substantial or
prolonged decrease in refined product prices without a corresponding decrease in
crude oil prices, or a substantial or prolonged decrease in demand for refined
products could have a significant negative effect on the Company's earnings and
cash flows.
The Company is dependent on the production and sale of quantities of
refined products at margins sufficient to cover operating costs, including any
increases in costs resulting from future inflationary pressures. The refining
business is characterized by high fixed costs resulting from the significant
capital outlays associated with refineries, terminals, pipelines and related
facilities. Furthermore, future regulatory requirements or competitive pressures
could result in additional capital expenditures, which may or may not produce
the results intended.
-25-
<PAGE> 26
Such capital expenditures may require significant financial resources that may
be contingent on the Company's continued access to capital markets and
commercial bank financing on favorable terms.
Ultramar Diamond Shamrock Corporation ("UDS"), an independent refiner
and marketer, completed in November 1995 the construction of a 408-mile, 10"
refined products pipeline from its McKee refinery near Dumas, Texas to El Paso.
UDS has announced that the pipeline has a capacity of 45,000 BPD, and that, with
the addition of four pump stations to be completed in 1998, it will have a
capacity of 60,000 BPD. UDS has stated its intention to use this pipeline to
supply fuels to the El Paso, New Mexico, Arizona and northern Mexico markets. In
November 1997, UDS agreed to sell to Phillips Petroleum Company ("Phillips") a
25% initial interest, increasing to a 33-1/3% interest after the pipeline
capacity is increased to 60,000 BPD, in the pipeline and a UDS terminal in El
Paso. Phillips has announced plans to complete a 35-mile pipeline from its
Borger, Texas refinery to the existing line at the UDS McKee refinery. Phillips
stated that this arrangement will replace its previously announced plans to
build a pipeline from its Borger, Texas refinery to El Paso and will allow
Phillips to supply fuels to El Paso and other markets in the Southwest. In
October 1998, UDS and Phillips announced that they signed a letter of intent to
merge North American refining, marketing and transportation assets creating a
new company called Diamond 66.
Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), a partnership
composed of Longhorn Partners GP, L.L.C. as general partner and affiliates of
Exxon Pipeline Company, Amoco Pipeline Company, Williams Pipeline Company, and
The Beacon Group Energy Investment Fund, L.P. as well as Chisholm Holdings as
limited partners, is in the process of reversing an existing crude oil pipeline
and constructing a connecting pipeline for the transportation of petroleum
products from Gulf Coast refineries to El Paso. It has been reported that
Longhorn had planned to transport initially 72,000 BPD of gasoline to the West
Texas markets starting in October 1998 on the reversed existing crude oil
pipeline. It had also been reported that once fully operational the pipeline
would have the ultimate capacity to transport 225,000 BPD of refined products
from Houston to terminals in Midland and El Paso. This new pipeline could
significantly increase the supply of products in the Company's current principal
markets that are served from El Paso.
On August 31, 1998, a lawsuit (the "Longhorn Suit") was filed by
Longhorn Partners in state district court in El Paso, Texas against the Company,
two of its subsidiaries and an Austin, Texas law firm. The suit seeks damages
against the Company and the law firm alleged to total up to $1,050,000,000 and
injunctive relief based on claims of violations of the Texas Free Enterprise and
Antitrust Act, unlawful interference with contractual relations, and conspiracy
to abuse process. The Longhorn Suit appears to relate principally to the alleged
involvement of subsidiaries of the Company and the named law firm in a federal
lawsuit (the "Environmental Suit") in Austin, Texas filed by ranchers and joined
by the Barton Springs- Edwards Aquifer Conservation District, the City of Austin
and the Lower Colorado River Authority. The Environmental Suit resulted in a
preliminary injunction issued by the Federal Court on August 25, 1998 requiring
preparation of an environmental impact statement under
-26-
<PAGE> 27
the National Environmental Policy Act before Longhorn Partners uses the pipeline
to transport refined petroleum products across Texas, including areas overlying
the Edwards Aquifer in Central Texas. The Company believes the Longhorn Suit is
wholly without merit and plans to defend itself vigorously. The Company also
plans to pursue at the appropriate time any affirmative remedies that may be
available to it with respect to the filing of the Longhorn Suit.
In addition to the projects described above, other projects have been
explored from time to time by refiners and other entities, which projects, if
consummated, could result in a further increase in the supply of products to
some or all of the Company's markets.
In recent years there have been several refining and marketing
consolidations or acquisitions between entities competing in the Company's
geographic market. While these transactions could increase the competitive
pressures on the Company, the specific ramifications of these or other potential
consolidations cannot presently be determined.
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. The addition
of the Leased Pipeline to northwest New Mexico and related capital investments
by the Company are expected ultimately to alleviate the pipeline constraint
associated with the Albuquerque market. However, 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 products into El Paso for
shipment to Arizona could result in the reoccurrence of such constraints.
Effective January 1, 1995, certain cities in the country were required
to use only reformulated gasoline ("RFG"), a cleaner burning fuel. Phoenix is
the only principal market of the Company that currently requires RFG although
this requirement could be implemented in other markets over time. Phoenix has
adopted even more rigorous California Air Resources Board ("CARB") fuel
specifications for winter months beginning in the latter part of 2000. This new
requirement, other requirements of the Clean Air Act or other presently existing
or future environmental regulations could cause the Company to expend
substantial amounts to permit the Company's refineries to produce products that
meet applicable requirements. The specifics and extent of these or other
regulations and their attendant costs are not presently determinable.
In July 1993, the United States Department of Justice ("DOJ"), on behalf
of the United States Environmental Protection Agency ("EPA"), filed a suit
against the Company's subsidiary, Navajo Refining Company ("Navajo") alleging
that, beginning in September 1990 and continuing through the present, Navajo has
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 in the refinery's wastewater treatment
system without compliance with regulatory requirements. Navajo, the DOJ and the
State of New Mexico have settled this litigation, with the settlement
anticipated to become final in the next several months. Under the settlement
agreement, the Company will close the existing evaporation ponds of its
wastewater treatment system. The agreement also provides
-27-
<PAGE> 28
that the Company will utilize an alternative to the existing wastewater
treatment system at an estimated total cost of approximately $5 million, of
which $2 million already has been incurred. The costs to implement the
alternative wastewater treatment system will be capitalized and amortized over
the future useful life of the resulting asset in accordance with generally
accepted accounting principles. Finally, the agreement involves the payment of a
civil penalty of less than $2 million. In fiscal 1993, the Company recorded a $2
million reserve for this litigation.
Risk Management
The Company uses certain strategies to reduce some commodity price and
operational risks. The Company does not attempt to eliminate all market risk
exposures, when the Company believes that the exposure relating to such risk
would not be significant to the Company's future earnings, financial position,
capital resources or liquidity.
As previously noted, the Company's profitability depends largely on the
spread between market prices for refined products and crude oil prices. A
substantial or prolonged decrease in this spread could have a significant
negative effect on the Company's earnings, financial condition and cash flows.
At times, the Company utilizes petroleum commodity future contracts to minimize
a portion of its exposure to price fluctuations associated with crude oil and
refined products. Such contracts do not increase the market risks to which the
Company is exposed and are used solely to help manage the price risk inherent in
purchasing crude oil in advance of the delivery date and as a hedge for
fixed-price sales contracts of refined products. Gains and losses on contracts
are deferred and recognized in cost of refined products when the related
inventory is sold or the hedged transaction is consummated.
As disclosed in Note 6 to the Consolidated Financial Statements, the
Company has outstanding unsecured debt of $75.5 million and short-term
borrowings under the Credit Agreement of $11.6 million at July 31, 1998. The
Company does not have significant exposure to changing interest rates on its
long-term debt because the interest rates are fixed and long-term debt now
represents less than 40% of the Company's total capitalization. Borrowings under
the Credit Agreement are based primarily on the bank's daily effective prime
rate, thus the interest rate market risk is very low. Additionally, the Company
invests any available cash only in investment grade, highly liquid investments
with maturities of three months or less. As a result, the interest rate market
risk implicit in these cash investments is low, as the investments mature within
three months. A ten percent change in the market interest rate over the next
year would not materially impact the Company's earnings or cash flow, as the
interest rates on the Company's long-term debt are fixed and the Company's
borrowings under the Credit Agreement and cash investments are short-term, and
such a change in interest rates would therefore not have a material effect on
the value of such debt or cash investments.
The Company's operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. The Company maintains
various insurance coverage, including business interruption insurance, subject
to certain deductibles. The Company is not fully insured against certain risks
because such risks are not fully insurable, coverage is unavailable or premium
costs, in the judgement of the Company, do not justify such expenditures.
-28-
<PAGE> 29
The Year 2000 Problem
The Year 2000 Problem is the result of older computer systems using a
two-digit format rather than a four-digit format to define the applicable year
with the result that such computer systems may be unable to interpret properly
dates beyond the year 1999. This inability could lead to a failure of
information systems and disruptions of business and financial operations. Year
2000 risks exist both in information technology ("IT") systems that employ
computer hardware and software and in non-IT systems such as embedded computer
chips or microcontrollers that control the operation of the equipment in which
they are installed. Computer failures because of the Year 2000 problem could
affect the Company either because of failures of computers used in the Company's
operations and record-keeping or because of computer failures that adversely
affect third parties that are suppliers to or customers of the Company.
Partly with the assistance of outside consultants, the Company has taken
steps to identify key financial, informational and operational systems that may
be affected by the Year 2000 Problem. Based on certifications by third-party
suppliers of the Company's principal IT systems, the Company believes that its
principal IT systems either are now unaffected by the Year 2000 Problem or are
the subject of currently scheduled replacement or upgrading that will make these
systems free of Year 2000 issues. Under the Company's current plans, all IT
systems believed by the Company to have significance to the Company's operations
or financial condition will be free of Year 2000 issues by September 1999.
Because of the nature of non-IT systems embedded in equipment used in
the Company's operations, the Company has not yet fully assessed the extent to
which these non-IT systems could fail because of the Year 2000 Problem and
thereby cause significant problems for the Company's operations, financial
condition or liquidity. The Company plans by January 1999 to identify, based on
information and/or certifications from suppliers or other third parties, the
types of non-IT systems that appear to be significantly at risk of failure due
to the Year 2000 Problem; by January 1999 it is planned that items of equipment
possibly or certainly containing at-risk chips will be identified and ranked in
order of the consequences of a failure on the Company's operations; the Company
plans by April 1999 to repair or replace those pieces of equipment for which a
failure would be expected to create serious problems for Company operations.
Because of the nature of the non-IT systems, there can be no assurance that the
Company will correctly identify all non-IT systems that are subject to failure
because of the Year 2000 Problem or that all non-IT systems significant to the
Company's operations will be repaired or replaced as necessary prior to the end
of 1999.
To the extent possible the Company plans to test or receive
certifications with respect to all significant IT and non-IT systems by
September 30, 1999.
-29-
<PAGE> 30
The Company has begun to assess the possible effects of the Year 2000
Problem on third parties that are important to the Company's operations. The
Company plans to communicate regularly on this issue with critical third
parties, such as suppliers of power or telecommunications services to the
Company's operational facilities, third-party carriers of raw materials and
refined products, and major customers. As problems of third parties are
identified, the Company will take any steps available to reduce the impact on
the Company of a failure in a third party caused by the Year 2000 Problem.
The cost to the Company of dealing with the Year 2000 Problem is not
expected to be material. Although a portion of the time of IT personnel and
related management has been and will be employed in evaluating the problem,
taking corrective actions and preparing contingency plans, the Company does not
believe that other IT projects or operations have been or will be adversely
affected. Monetary costs expected to be involved in dealing with the Year 2000
Problem are not expected to be significant: all costs of review, analysis and
corrective action (excluding IT system upgrades that were scheduled to be
implemented without regard to the Year 2000 Problem) are expected to total less
than $250,000.
Based on the analysis performed to this point, the Company believes that
the most important risk of the Year 2000 Problem to the Company's results of
operations and financial condition is that third-party suppliers important to
the operations of the Company's principal operating asset, the Navajo refinery
at Artesia and Lovington, New Mexico, would for a period of time be unable to
perform their normal roles because of difficulties created by the Year 2000
Problem for the third parties and/or for persons supplying the third parties.
The greatest vulnerability is in the case of providers that are the Company's
principal or sole source for an essential input -- for example power to operate
the refinery. If such a provider were to be unable to continue supplying the
refinery because of the Year 2000 Problem, the Company would be forced to
suspend the affected operations until the provider could solve the problem or in
some cases until an alternative supply could be arranged. The Company has begun,
and intends to continue until the year 2000, regular contacts with critical
suppliers to determine their evaluations of their vulnerability to the Year 2000
Problem. In the event that a particular supplier appears to be vulnerable, the
Company will seek to obtain alternative supplies to the extent they are
available. However, in the case of some inputs, alternative supplies may not
realistically be available even if the supply problem is identified months in
advance. In other cases, an unexpected third-party failure could occur in spite
of extensive prior communications with key suppliers and the only feasible
remedy to the Company for a substantial period might be emergency corrective
action by the affected third party if the third party were capable of taking
such action.
The Company has begun contingency planning for actions to be taken in
the event its operations are adversely affected by the Year 2000 Problem. A
contingency plan is expected to be completed by July 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
-30-
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C>
Report of Independent Auditors................................. 32
Consolidated Balance Sheet at July 31,
1998 and 1997............................................... 33
Consolidated Statement of Income for the
years ended July 31, 1998, 1997 and 1996.................... 34
Consolidated Statement of Cash Flows for
the years ended July 31,
1998, 1997 and 1996......................................... 35
Consolidated Statement of Stockholders' Equity
for the years ended July 31, 1998, 1997
and 1996.................................................... 36
Notes to Consolidated Financial
Statements.................................................. 37
</TABLE>
-31-
<PAGE> 32
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 at July 31, 1998 and 1997, and the related consolidated statements
of income, cash flows and stockholders' equity for each of the three years in
the period ended July 31, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 24, 1998
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<PAGE> 33
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
($ in thousands, except per share amounts) July 31,
------------------------
1998 1997
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................... $ 2,602 $ 20,042
Accounts receivable (Notes 3 and 6) .......................... 82,379 105,821
Inventories (Notes 4 and 6) .................................. 55,842 58,273
Income taxes receivable ...................................... 653 1,319
Prepayments and other ........................................ 12,911 9,273
---------- ----------
Total current assets ...................................... 154,387 194,728
Properties, plants and equipment, net (Note 5) .................. 173,297 143,540
Investments and advances to joint ventures ...................... 5,510 5,235
Other assets .................................................... 16,663 6,300
---------- ----------
$ 349,857 $ 349,803
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable (Note 3) .................................... $ 109,139 $ 124,585
Accrued liabilities (Notes 9 and 11) ......................... 13,392 13,730
Income taxes payable ......................................... 288 397
Current maturities of long-term debt (Note 6) ................ 5,175 10,775
Borrowings under credit agreement (Note 6) ................... 11,600 --
---------- ----------
Total current liabilities ................................. 139,594 149,487
Deferred income taxes (Note 7) .................................. 25,573 19,679
Long-term debt, less current maturities (Note 6) ................ 70,341 75,516
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity (Notes 6 and 8)
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 ............................................ 109,686 99,471
---------- ----------
115,905 105,690
Common stock held in treasury, at cost - 396,768 shares ...... (569) (569)
Net unrealized loss on securities available for sale ......... (987) --
---------- ----------
Total stockholders' equity ................................ 114,349 105,121
---------- ----------
$ 349,857 $ 349,803
========== ==========
</TABLE>
See accompanying notes.
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<PAGE> 34
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
($ in thousands, except per share amounts) Years ended July 31,
--------------------------------------
1998 1997 1996
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Refined products (Note 12) .................... $ 582,043 $ 713,614 $ 670,094
Oil and gas ................................... 6,824 5,779 5,365
Miscellaneous ................................. 737 1,953 831
---------- ---------- ----------
589,604 721,346 676,290
COSTS AND EXPENSES
Cost of refined products ...................... 515,767 656,613 600,478
General and administrative .................... 13,714 13,348 14,081
Depreciation, depletion and amortization ...... 24,379 20,153 19,315
Exploration expenses, including dry holes ..... 2,979 3,732 4,018
---------- ---------- ----------
556,839 693,846 637,892
---------- ---------- ----------
Income from operations ........................... 32,765 27,500 38,398
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures .......... 1,766 414 --
Interest income ............................... 646 3,244 3,024
Interest expense (Note 6) ..................... (8,371) (9,339) (9,634)
Transaction costs of terminated
merger (Note 13) ........................... (1,940) -- --
---------- ---------- ----------
(7,899) (5,681) (6,610)
---------- ---------- ----------
Income before income taxes ....................... 24,866 21,819 31,788
Income tax provision (benefit) (Note 7)
Current ....................................... 3,121 7,251 13,365
Deferred ...................................... 6,578 1,481 (811)
---------- ---------- ----------
9,699 8,732 12,554
---------- ---------- ----------
Net income ....................................... $ 15,167 $ 13,087 $ 19,234
========== ========== ==========
Net income per common share
(basic and diluted) ............................ $ 1.84 $ 1.59 $ 2.33
========== ========== ==========
Cash dividends paid per common share ............. $ .60 $ .51 $ .42
========== ========== ==========
Average number of shares of common
stock outstanding (in thousands) .............. 8,254 8,254 8,254
========== ========== ==========
</TABLE>
See accompanying notes.
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<PAGE> 35
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
($ in thousands) Years ended July 31,
--------------------------------------
1998 1997 1996
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................... $ 15,167 $ 13,087 $ 19,234
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization ........ 24,379 20,153 19,315
Deferred income taxes ........................... 6,578 1,481 (811)
Equity in earnings of joint ventures ............ (1,766) (414) --
Dry hole costs and leasehold impairment ......... 1,190 1,760 1,976
(Increase) decrease in operating assets
Accounts receivable ........................... 23,442 (1,435) (18,561)
Inventories ................................... 2,431 (19,600) 3,508
Income taxes receivable ....................... 666 (1,319) 1,540
Prepayments and other ......................... 746 (360) 314
Increase (decrease) in operating liabilities
Accounts payable .............................. (15,446) 2,164 15,604
Accrued liabilities ........................... (338) 1,277 (694)
Income taxes payable .......................... (109) (4,331) 4,274
Turnaround expenditures ......................... (18,771) (7,147) (1,858)
Other, net ...................................... 24 141 611
---------- ---------- ----------
Net cash provided by operating activities ... 38,193 5,457 44,452
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under credit agreement ....... 11,600 -- --
Increase in notes payable ........................... -- -- 39,000
Payment of long-term debt ........................... (10,775) (10,774) (10,775)
Debt issuance costs ................................. (547) -- (403)
Cash dividends ...................................... (4,952) (4,209) (3,466)
---------- ---------- ----------
Net cash provided by (used for)
financing activities ....................... (4,674) (14,983) 24,356
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment ....... (49,715) (30,304) (18,281)
Investments and advances to joint ventures .......... (2,000) (4,087) --
Distributions from joint venture .................... 3,734 -- --
Investment in equity securities ..................... (2,978) -- --
---------- ---------- ----------
Net cash used for investing activities ...... (50,959) (34,391) (18,281)
---------- ---------- ----------
CASH AND CASH EQUIVALENTS
Increase (decrease) for the year .................... (17,440) (43,917) 50,527
Beginning of year ................................... 20,042 63,959 13,432
---------- ---------- ----------
End of year ......................................... $ 2,602 $ 20,042 $ 63,959
========== ========== ==========
</TABLE>
See accompanying notes.
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<PAGE> 36
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
($ in thousands)
Net
unrealized
loss on Amount Total
securities due stock-
Common Additional Retained Treasury available from holders'
stock capital earnings stock for sale ESOP equity
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1995 ............. $ 87 $ 6,132 $ 74,803 $ (569) $ -- $ (410) $ 80,043
Net income ........................... -- -- 19,234 -- -- -- 19,234
Dividends paid ....................... -- -- (3,466) -- -- -- (3,466)
Reduction in amount due
from ESOP .......................... -- -- -- -- -- 410 410
Tax benefit of dividends
paid to ESOP on
unallocated shares ................ -- -- 22 -- -- -- 22
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1996 ............. 87 6,132 90,593 (569) -- -- 96,243
Net income ........................... -- -- 13,087 -- -- -- 13,087
Dividends paid ....................... -- -- (4,209) -- -- -- (4,209)
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1997 ............. 87 6,132 99,471 (569) -- -- 105,121
Net income ........................... -- -- 15,167 -- -- -- 15,167
Dividends paid ....................... -- -- (4,952) -- -- -- (4,952)
Net unrealized loss on securities
available for sale ................ -- -- -- -- (987) -- (987)
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1998 ............. $ 87 $ 6,132 $ 109,686 $ (569) $ (987) $ -- $ 114,349
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
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<PAGE> 37
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Holly Corporation, including its consolidated and wholly-owned
subsidiaries, herein referred to as the "Company" unless the context otherwise
indicates, is an independent refiner of petroleum and petroleum derivatives
which produces a high proportion of high value light products such as gasoline,
diesel fuel and jet fuel for sale primarily in the southwestern United States
and northern Mexico. Navajo Refining Company ("Navajo"), one of the wholly-owned
subsidiaries, 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 (collectively, the
"Navajo Refinery"). The Navajo Refinery has a crude capacity of 60,000
barrels-per-day ("BPD") and can process a variety of high sulphur sour crude
oils. The Company also owns Montana Refining Company, a Partnership ("MRC"),
which 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.
In addition to its refining operations, the Company also conducts a
small-scale oil and gas exploration and production program, which activities do
not represent a significant segment of the Company's assets or operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its subsidiaries and MRC. All significant intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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.
-37-
<PAGE> 38
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
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.
INVESTMENTS IN JOINT VENTURES
In fiscal 1996, the Company entered into a joint venture to transport
liquid petroleum gas to Mexico. The Company has a 25% interest in the joint
venture and accounts for earnings using the equity method. In addition to the
cash investment made in fiscal 1997, the Company contributed to the joint
venture properties which had a net book value of $734,000 in fiscal 1996 and
$227,000 in fiscal 1998.
In fiscal 1998, the Company entered into a joint venture of retail
service stations and convenience stores in Montana. The Company has a 49%
interest in the joint venture and accounts for earnings using the equity method.
INVESTMENTS IN EQUITY SECURITIES
Investments in equity securities are classified as available-for-sale
and are reported at fair value with unrealized gains or losses, net of tax,
recorded as a separate component of stockholders' equity.
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.
Intercompany oil and gas sales of $544,000 in 1998, $913,000 in 1997 and
$885,000 in 1996 have been eliminated.
DEPRECIATION
Depreciation is provided by the straight-line method over the estimated
useful lives of the assets, primarily 10 to 16 years for refining and pipeline
facilities and 3 to 10 years for corporate and other assets.
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
three to five year intervals. Turnaround costs are deferred and amortized over
the period until the next scheduled turnaround.
-38-
<PAGE> 39
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
ENVIRONMENTAL COSTS
Environmental costs are expensed if they relate to an existing condition
caused by past operations and do not contribute to current or future revenue
generation. Liabilities are recorded when site restoration and environmental
remediation and cleanup obligations are either known or considered probable and
can be reasonably estimated. Recoveries of environmental costs through
insurance, indemnification arrangements or other sources are included in other
assets to the extent such recoveries are considered probable.
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. At July 31,
1998, the Company had not discovered a material amount of proven reserves.
INCOME TAXES
Provisions for income taxes include deferred taxes resulting from
temporary differences in income for financial and tax purposes, using the
liability method of accounting for income taxes. The liability method requires
the effect of tax rate changes on current and accumulated deferred income taxes
to be reflected in the period in which the rate change was enacted. The
liability method also requires that deferred tax assets be reduced by a
valuation allowance unless it is more likely than not that the assets will be
realized.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128, which establishes standards for computing and
presenting earnings per share, is effective for interim and annual periods
ending after December 15, 1997 and requires restatement of earnings per share
data presented in prior periods. The Company adopted SFAS No. 128 in the
quarterly period ending January 31, 1998. The adoption of SFAS No. 128 did not
have an impact on reported earnings per share. This new standard requires dual
presentation of "basic" and "diluted" EPS calculations (see note 2). Basic
earnings per common share is computed based on the weighted average number of
shares of common stock outstanding during each
-39-
<PAGE> 40
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
period. Earnings per common share assuming dilution is computed based on the
weighted average number of shares of common stock outstanding plus additional
shares representing the exercise of outstanding common stock options using the
treasury stock method.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages
companies to adopt a fair value approach to valuing stock options that would
require compensation cost to be recognized based on the fair value of stock
options granted. The company has elected, as permitted by the standard, to
continue to follow its intrinsic value based method of accounting for stock
options consistent with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock issued to Employees." Under the intrinsic method,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the company's stock at the measurement date over the
exercise price.
DERIVATIVE INSTRUMENTS
The Company utilizes petroleum commodity future contracts, at times, to
minimize a portion of its exposure to the price fluctuations associated with
crude oil and refined products. Such contracts are used principally to help
manage the price risk inherent in purchasing crude oil in advance of the
delivery date and as a hedge for fixed-price sales contracts of refined
products. Gains and losses on contracts are deferred and recognized in cost of
refined products when the related inventory is sold or the hedged transaction is
consummated.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to current classifications.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." All
three Statements become effective for fiscal years beginning after December 15,
1997 with early adoption permitted. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
becomes effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 with early adoption permitted. The Statements will not have a
material effect on the Company's results of operations, financial position,
capital resources or liquidity.
-40-
<PAGE> 41
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
2. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for income as required by SFAS No.
128:
<TABLE>
<CAPTION>
1998
---------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Income per common share - basic
Net income $15,167 8,254 $1.84
Effect of dilutive stock options 4
------- ------ -----
Income per common share -
assuming dilution
Net income $15,167 8,258 $1.84
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Income per common share - basic
Net income $13,087 8,254 $1.59
Effect of dilutive stock options --
------- ------ -----
Income per common share -
assuming dilution
Net income $13,087 8,254 $1.59
======= ====== =====
</TABLE>
In fiscal 1996, no stock options were outstanding. There were no
transactions subsequent to July 31, 1998, which, had the transactions occurred
before July 31, 1998, would materially change the number of common shares or
potential common shares outstanding as of July 31, 1998.
-41-
<PAGE> 42
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
-------- --------
<S> <C> <C>
Product............................ $ 33,346 $ 45,608
Crude oil resales.................. 49,033 60,213
-------- --------
$ 82,379 $105,821
======== ========
</TABLE>
Crude oil resales accounts receivable principally represent the sell side
of reciprocal crude oil buy/sell exchange arrangements involved in supplying
crude oil to the refineries, with an approximate like amount reflected in
accounts payable. The net differential of these crude oil buy/sell exchanges is
reflected in cost of sales. The exchange differentials result principally from
crude oil type and location differences.
The majority of the Company's accounts receivable are due from companies
in the petroleum industry. Credit is extended based on evaluation of the
customer's financial condition and, in certain circumstances, collateral, such
as letters of credit or guaranties is required.
Credit losses are provided for in the financial statements and
consistently have been minimal.
4. INVENTORIES
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
-------- --------
<S> <C> <C>
Crude oil and refined products......... $ 46,754 $ 50,654
Materials and supplies................. 12,081 8,844
-------- --------
58,835 59,498
Reserve for lower of cost or market.... 2,993 1,225
-------- --------
$ 55,842 $ 58,273
======== ========
</TABLE>
The excess of current cost over the LIFO value of inventory was
$11,260,000 at July 31, 1997. Current cost approximates the LIFO value of
inventory at July 31, 1998.
-42-
<PAGE> 43
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
5. PROPERTIES, PLANTS AND EQUIPMENT
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
-------- --------
<S> <C> <C>
Properties, plants and equipment, at cost
Refining and pipeline facilities ................... $303,143 $254,486
Oil and gas exploration
and development .................................. 21,749 23,095
Corporate and other ................................ 1,101 1,126
-------- --------
325,993 278,707
Accumulated depreciation, depletion and
amortization ....................................... 152,696 135,167
-------- --------
$173,297 $143,540
======== ========
</TABLE>
Refining and pipeline facilities at July 31, 1998 and 1997 include
$17,304,000 and $12,833,000, respectively, of construction in progress which was
not being depreciated at those dates, pending completion of the construction
projects.
6. DEBT
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
-------- --------
<S> <C> <C>
Senior Notes
Series A ........................................... $ -- $ 5,600
Series B ........................................... 15,500 20,667
Series C ........................................... 39,000 39,000
Series D ........................................... 21,000 21,000
Other ................................................. 16 24
-------- --------
75,516 86,291
Less current maturities of long-
term debt .......................................... 5,175 10,775
-------- --------
$ 70,341 $ 75,516
======== ========
</TABLE>
SENIOR NOTES
In June 1991, the Company sold $80 million of Senior Notes to a group of
insurance companies. The Series A Notes which were issued in the principal
amount of $28 million, and paid off in full in fiscal 1998, had a 7-year life,
required equal annual principal payments beginning June 15, 1994 and bore
interest at 9.72%. The Series B Notes which were issued in
-43-
<PAGE> 44
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
the principal amount of $52 million, have a 10-year life, require equal annual
principal payments beginning June 15, 1996 and bear interest at 10.16%. In
November 1995, the Company completed the funding from a group of insurance
companies of a new private placement of Senior Notes in the amount of $39
million and the extension of $21 million of previously outstanding Senior Notes.
The new $39 million Series C Notes have a 10-year life, require equal annual
principal payments beginning December 15, 1999, and bear interest at 7.62%. The
new $21 million Series D Notes, for which previously issued Series B Notes were
exchanged, have a 10-year life, require equal annual principal payments
beginning December 15, 1999, and bear interest at an initial rate of 10.16%,
with reductions to 7.82% for the periods subsequent to the original maturity
dates of the exchanged Series B Notes. The Senior Notes are unsecured and the
note agreements impose certain restrictive covenants, including limitations on
liens, additional indebtedness, sales of assets, investments, business
combinations and dividends, which collectively are less restrictive than the
terms of the bank Credit Agreement.
CREDIT AGREEMENT
In October 1997, the Company and its subsidiaries entered into a new
three-year credit agreement ("Credit Agreement") with a group of banks. The
Credit Agreement provides a $100 million facility for letters of credit, or for
direct borrowings of up to $50 million. Interest on borrowings is based upon, at
the Company's option, (i) the higher of the agent bank's prime rate and the
Federal funds rate plus .50% per annum; or (ii) various Euro-dollar related
rates. A fee ranging from 1% to 1.5% per annum is payable on the outstanding
balance of all letters of credit and a commitment fee ranging from .20% to .35%
per annum is payable on the unused portion of the facility. Such fees are
determined based on a quarterly calculation of the ratio of cash flow to debt of
the Company. The borrowing base, which secures the facility, consists of
accounts receivable and inventory. The Credit Agreement imposes certain
requirements, including: (i) a prohibition of other indebtedness in excess of $5
million with exceptions for, among other things, indebtedness under the
Company's Senior Notes; (ii) maintenance of certain levels of net worth, working
capital and a cash flow-to-debt ratio; (iii) limitations on investments, capital
expenditures and dividends; and (iv) a prohibition of changes in controlling
ownership and material changes in senior management.
At July 31, 1998, the Company had outstanding letters of credit totalling
$6,169,000, and borrowings of $11,600,000, which bore interest at 8.5%. The
unused commitment under the Credit Agreement at July 31, 1998 was $82,231,000,
of which up to $38,400,000 may be used for additional direct borrowings.
-44-
<PAGE> 45
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
The average and maximum amounts outstanding and the effective average
interest rate for borrowings under the Company's current and prior credit
agreements were as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998
----------------------------------------------
<S> <C>
Average amount outstanding $ 2,455
Maximum balance $23,700
Effective average interest rate 8.5%
</TABLE>
No borrowings under the Company's previous Credit Agreement were
outstanding during fiscal 1996-1997.
The Senior Notes and Credit Agreement restrict investments and
distributions, including dividends. Under the most restrictive of these
covenants, at July 31, 1998 approximately $11.9 million was available for the
payment of dividends, subject to a maximum of $6 million per fiscal year.
Maturities of long-term debt for the next five fiscal years are as
follows: 1999 -- $5,175,000; 2000 -- $13,746,000; 2001 -- $13,738,000; 2002 --
$8,571,000 and 2003 -- $8,571,000.
The Company made interest payments of $8,239,000 in 1998, $9,209,000 in
1997 and $9,409,000 in 1996.
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 Company estimates fair value of long-term debt
including current maturities to be $79.0 million at July 31, 1998.
7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current
Federal .................... $ 2,589 $ 5,838 $ 10,941
State ...................... 532 1,413 2,424
Deferred
Federal .................... 5,268 1,244 (617)
State ...................... 1,310 237 (194)
-------- -------- --------
$ 9,699 $ 8,732 $ 12,554
======== ======== ========
</TABLE>
-45-
<PAGE> 46
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
The statutory federal income tax rate applied to pre-tax book income
reconciles to income tax expense as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Tax computed at
statutory rate ....................... $ 8,703 $ 7,637 $ 11,126
State income taxes, net of federal
tax benefit .......................... 1,212 1,064 1,550
Other .................................. (216) 31 (122)
-------- -------- --------
$ 9,699 $ 8,732 $ 12,554
======== ======== ========
</TABLE>
Operations of the corporation that was the sole limited partner of MRC
prior to the acquisition of such corporation by the Company resulted in unused
net operating loss carryforwards of approximately $9,000,000, 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, 1998, approximately $4,200,000
of these net operating loss carryforwards remain available to offset future
income. For financial reporting purposes, the benefit of these net operating
loss carryforwards is being offset against contingent future payments of up to
$95,000 per year through 2005 relating to the acquisition of such corporation.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. The Company's
deferred income tax assets and liabilities as of July 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
($ in thousands)
1998
--------
Assets Liabilities Total
-------- ----------- --------
<S> <C> <C> <C>
Deferred taxes
Accrued employee benefits ................ $ 1,836 $ -- $ 1,836
Inventory valuation reserve .............. 1,193 -- 1,193
Deferred turnaround costs ................ -- (2,594) (2,594)
Pipeline lease ........................... 470 -- 470
Prepayments and other .................... 1,886 (1,873) 13
-------- -------- --------
Total current .............................. 5,385 (4,467) 918
</TABLE>
-46-
<PAGE> 47
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998
--------
Assets Liabilities Total
-------- ----------- --------
<S> <C> <C> <C>
Properties, plants and equipment
(due primarily to tax in excess
of book depreciation) ......................... -- (20,784) (20,784)
Intangible drilling costs ...................... -- (720) (720)
Deferred oil and gas costs ..................... 1,590 -- 1,590
Deferred turnaround costs ...................... -- (5,509) (5,509)
Investments in equity securities ............... 654 -- 654
Earnings of joint ventures ..................... -- (559) (559)
Other .......................................... 151 (396) (245)
-------- -------- --------
Total noncurrent ................................. 2,395 (27,968) (25,573)
-------- -------- --------
7,780 (32,435) (24,655)
Valuation allowance .............................. -- -- --
-------- -------- --------
Total ............................................ $ 7,780 $(32,435) $(24,655)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997
--------
Assets Liabilities Total
-------- ----------- --------
<S> <C> <C> <C>
Deferred taxes
Accrued employee benefits ................ $ 1,844 $ -- $ 1,844
Inventory valuation reserve .............. 488 -- 488
Deferred turnaround costs ................ -- (436) (436)
Pipeline lease ........................... 37 -- 37
Prepayments and other .................... 848 (1,832) (984)
-------- -------- --------
Total current .............................. 3,217 (2,268) 949
Properties, plants and equipment
(due primarily to tax in excess
of book depreciation) ................... -- (19,569) (19,569)
Intangible drilling costs ................ -- (1,498) (1,498)
Deferred oil and gas costs ............... 2,040 -- 2,040
Deferred turnaround costs ................ -- (388) (388)
Earnings of joint ventures ............... -- (177) (177)
Other .................................... 150 (237) (87)
-------- -------- --------
Total noncurrent ........................... 2,190 (21,869) (19,679)
-------- -------- --------
5,407 (24,137) (18,730)
Valuation allowance ........................ -- -- --
-------- -------- --------
Total ...................................... $ 5,407 $(24,137) $(18,730)
======== ======== ========
</TABLE>
The Company made income tax payments of $646,000 in 1998, $9,679,000 in
1997 and $7,177,000 in 1996.
-47-
<PAGE> 48
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
8. STOCK OPTION PLAN
The Company has a stock option plan under which certain officers and
employees have been granted options. All of the options have been granted at
prices equal to the market value of the shares at the time of grant and expire
on the tenth anniversary of the grant date. The options are subject to
forfeiture with vesting for the options granted in fiscal 1998 of 20% at the
time of grant and 20% in each of the four years thereafter and vesting for the
options granted in fiscal 1997 of 33% annually beginning one year after the
grant date. At July 31, 1998 and 1997, 751,500 shares of common stock were
reserved for issuance under the stock option plan.
The following summarizes stock option transactions:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------------------------------------------------------------------------
<S> <C> <C>
Balance at July 31, 1996 -- $ --
Granted 25,000 25.50
-------- --------
Balance at July 31, 1997 25,000 25.50
Granted 340,000 26.75
-------- --------
Balance at July 31, 1998 365,000 $ 26.67
======== ========
Options exercisable at July 31:
1998 76,333 $ 26.61
1997 -- $ --
</TABLE>
-48-
<PAGE> 49
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
The following summarizes information about stock options outstanding at
July 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
----------- ----------- --------
<S> <C> <C>
340,000 9.6 $26.75
25,000 8.5 25.50
------- --- ------
365,000 9.5 $26.67
======= === ======
</TABLE>
As required by SFAS No. 123, the Company has determined the pro-forma
information as if it had accounted for stock options granted, under the fair
value method of SFAS No. 123. The Black-Scholes option pricing model was used
with the following weighted-average assumptions for fiscal 1998 and 1997;
risk-free interest rates of 5.7% and 6.4%; dividend yield of 2.2% and 1.9%;
expected common stock market price volatility factor of 17.2% and 18.9%; and a
weighted-average expected life of the options of 6 years. The weighted-average
fair value of options granted in fiscal 1998 and 1997 was $6.02 and $6.80 per
share, respectively. The pro-forma effect of these options on net income and
basic and diluted income per share are as follows:
<TABLE>
<CAPTION>
($ in thousands, except per share amounts) 1998 1997
-------- --------
<S> <C> <C>
Net income
As reported $ 15,167 $ 13,087
Pro forma $ 14,991 $ 13,069
Net income per share (basic and diluted)
As reported $ 1.84 $ 1.59
Pro forma $ 1.82 $ 1.58
</TABLE>
9. RETIREMENT PLANS
RETIREMENT PLAN
The Company has a non-contributory defined benefit retirement plan that
covers 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.
-49-
<PAGE> 50
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
Pension expense includes the following components:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned
during the year ................................ $ 1,257 $ 1,170 $ 1,125
Interest cost on projected benefit
obligations .................................... 2,267 2,087 1,993
Actual return on plan assets ..................... (2,186) (7,950) (2,710)
Net amortization and deferral .................... (1,313) 5,358 278
-------- -------- --------
Pension expense .................................. $ 25 $ 665 $ 686
======== ======== ========
</TABLE>
The following table sets forth the funded status of the retirement plan
and amounts recognized in the consolidated balance sheet:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
-------- --------
<S> <C> <C>
Plan assets at fair value ........................ $ 37,818 $ 35,807
Actuarial present value of projected
benefit obligations
Accumulated benefit obligations
Vested ....................................... 21,932 19,313
Unvested ..................................... 2,770 2,223
Provision for future salary
increases ................................... 9,165 7,819
-------- --------
Projected benefit obligations .................... 33,867 29,355
-------- --------
Plan assets greater than projected
benefit obligations ............................ 3,951 6,452
Unrecognized net gain ............................ (4,424) (8,225)
Unrecognized transition net
asset ........................................ (584) (797)
-------- --------
Accrued pension liability
recognized in the consolidated
balance sheet .................................. $ (1,057) $ (2,570)
======== ========
</TABLE>
-50-
<PAGE> 51
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
The principal actuarial assumptions were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate .................................... 7% 7.5% 7.5%
Rate of future compensation
increases ...................................... 5% 5% 5%
Expected long-term rate of return
on assets ...................................... 8.5% 8.5% 8.5%
</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 63% of plan assets is invested in equity securities and 37%
is invested in fixed income securities and other instruments at July 31, 1998.
RETIREMENT RESTORATION PLAN
The Company has adopted an unfunded retirement restoration plan that
provides for additional payments from the Company so that total retirement plan
benefits for executives will be maintained at the levels provided in the
retirement plan before the application of Internal Revenue Code limitations. The
Company accrued $297,000 in 1998, $265,000 in 1997 and $252,000 in 1996 in
connection with this plan. The accrued liability recognized in the consolidated
balance sheet was $1,330,000 at July 31, 1998 and $1,297,000 at July 31, 1997.
DEFINED CONTRIBUTION PLANS
The Company has defined contribution ("401(k)") plans that cover
substantially all employees. Company contributions are based on employee's
compensation and partially match employee contributions. The Company has
expensed $1,058,000 in 1998, $1,058,000 in 1997 and $1,033,000 in 1996 in
connection with this plan.
10. LEASE COMMITMENTS
The Company leases certain facilities and equipment under operating
leases, most of which contain renewal options. In addition, the Company has
entered into an operating lease which began in fiscal 1997 and involves leasing
more than 300 miles of 8" pipeline. The lease has an initial term of ten years
with a renewal option for an additional ten years, and provides for future
escalation of lease payments. At July 31, 1998, the minimum future rental
commitments under operating leases having noncancellable lease terms in excess
of one year total in the aggregate $49,233,000, of which the following amounts
are payable over the next five years: 1999 -- $5,574,000; 2000 -- $5,687,000;
2001 -- $5,844,000; 2002 -- $5,815,000 and 2003 -- $5,541,000. Rental expense
charged to operations was $7,165,000 in fiscal 1998 and was not significant in
fiscal 1997 and 1996.
-51-
<PAGE> 52
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
11. CONTINGENCIES
In July 1993, the United States Department of Justice ("DOJ"), on behalf of
the United States Environmental Protection Agency ("EPA"), filed a suit against
the Company's subsidiary, Navajo Refining Company ("Navajo") alleging that,
beginning in September 1990 and continuing through the present, Navajo has
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 in the refinery's wastewater treatment
system without compliance with regulatory requirements. Navajo, the DOJ and the
State of New Mexico have settled this litigation, with the settlement
anticipated to be final in the next several months. Under the settlement
agreement, the Company will close the existing evaporation ponds of its
wastewater treatment system. The agreement also provides that the Company will
utilize an alternative to the existing wastewater treatment system at an
estimated total cost of approximately $5 million, of which $2 million has been
incurred. The costs to implement the alternative wastewater treatment system
will be capitalized and amortized over the future useful life of the resulting
asset in accordance with generally accepted accounting principles. Finally, the
agreement involves the payment of a civil penalty of less than $2 million. In
fiscal 1993, the Company recorded a $2 million reserve for this litigation.
On August 31, 1998, a lawsuit (the "Longhorn Suit") was filed in state
district court in El Paso, Texas against the Company, two of its subsidiaries
and an Austin, Texas law firm. The suit was filed by Longhorn Partners Pipeline,
L.P. ("Longhorn Partners"), a Delaware limited partnership composed of Longhorn
Partners GP, L.L.C. as general partner and affiliates of Exxon Pipeline Company,
Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy
Investment Fund, L.P. as well as Chisholm Holdings as limited partners. The suit
seeks damages against the Company and the law firm alleged to total up to
$1,050,000,000 and injunctive relief based on claims of violations of the Texas
Free Enterprise and Antitrust Act, unlawful interference with contractual
relations, and conspiracy to abuse process.
The Longhorn Suit appears to relate principally to the alleged
involvement of subsidiaries of the Company and the named law firm in a federal
lawsuit (the "Environmental Suit") in Austin, Texas filed by ranchers and joined
by the Barton Springs-Edwards Aquifer Conservation District, the City of Austin
and the Lower Colorado River Authority. The Environmental Suit resulted in a
preliminary injunction issued by the Federal Court on August 25, 1998 requiring
preparation of an environmental impact statement under the National
Environmental Policy Act before Longhorn Partners uses an existing crude oil
pipeline and a newly constructed pipeline to transport refined petroleum
products across Texas, including areas overlying the Edwards Aquifer in Central
Texas.
-52-
<PAGE> 53
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
The Company believes that the Longhorn Suit is wholly without merit and
plans to defend itself vigorously. The Company also plans to pursue at the
appropriate time any affirmative remedies that may be available to it with
respect to the filing of the Longhorn Suit.
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 or results of operations.
12. SIGNIFICANT CUSTOMERS
All revenues were domestic revenues, except for sales of gasoline and
diesel fuel for export into Mexico. The export sales were to an affiliate of
PEMEX (the government-owned energy company of Mexico) and accounted for
approximately $53,000,000 (9%) of the Company's revenues for fiscal 1998,
$71,000,000 (10%) of revenues for fiscal 1997 and $40,000,000 (6%) of revenues
for fiscal 1996. Sales of military jet fuel to the United States Government
accounted for approximately $56,000,000 (10%) of the Company's revenues for
fiscal 1998, $74,000,000 (10%) of revenues for fiscal 1997 and $70,000,000 (10%)
of revenues for fiscal 1996. In addition to the United States Government and
PEMEX, another refiner, which is a purchaser of gasoline and diesel fuel for
resale to retail customers, accounted for approximately $102,000,000 (17%) of
the Company's revenues in fiscal 1998, $156,000,000 (22%) of the revenues for
fiscal 1997 and $131,000,000 (19%) of the revenues in fiscal 1996. 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 general retail demand in the
Company's primary markets than on sales to any specific customer.
13. TRANSACTION COSTS OF TERMINATED MERGER
On September 1, 1998, the Company and Giant Industries, Inc. mutually
agreed to terminate their proposed merger, which had been approved by the
stockholders of both companies in late June. The decision to terminate the
merger was made as a result of the filing of the Longhorn Suit, and as a result
of continuing delays and uncertainties in negotiations with the Federal Trade
Commission and the New Mexico Attorney General's Office concerning federal and
state clearance of the merger. Merger related transaction costs of $1,940,000
were charged to expense.
-53-
<PAGE> 54
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1998, 1997 and 1996
14. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Financial Data Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1998
Revenues...................... $ 168,922 $ 136,783 $ 134,208 $ 149,691 $ 589,604
Refining operating margin..... $ 16,225 $ 7,999 $ 17,018 $ 24,490 $ 65,732
Income (loss) before
income taxes............... $ 8,679 $ (1,634) $ 5,250 $ 12,571 $ 24,866
Net income (loss)............. $ 5,207 $ (980) $ 2,973 $ 7,967 $ 15,167
Net income (loss) per common
share (basic and diluted).. $ .63 $ (.12) $ .36 $ .97 $ 1.84
Dividends per common share....... $ .15 $ .15 $ .15 $ .15 $ .60
Average number of shares of
common stock outstanding
(in thousands)............. 8,254 8,254 8,254 8,254 8,254
1997
Revenues...................... $ 186,946 $ 183,901 $ 180,081 $ 170,418 $ 721,346
Refining operating margin..... $ 14,189 $ 5,582 $ 21,753 $ 14,564 $ 56,088
Income (loss) before
income taxes............... $ 5,358 $ (2,530) $ 13,122 $ 5,869 $ 21,819
Net income (loss)............. $ 3,208 $ (1,514) $ 7,855 $ 3,538 $ 13,087
Net income (loss) per common
share (basic and diluted).. $ .39 $ (.18) $ .95 $ .43 $ 1.59
Dividends per common share.... $ .12 $ .12 $ .12 $ .15 $ .51
Average number of shares of
common stock outstanding
(in thousands)............. 8,254 8,254 8,254 8,254 8,254
</TABLE>
-54-
<PAGE> 55
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
First Second Third Fourth
Operating Data Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(barrels-per-day)
<S> <C> <C> <C> <C> <C>
1998
Sales of
refined products ....... 65,000 59,000 70,100 76,700 67,700
Refinery production ...... 50,200 58,400 68,600 70,400 61,800
1997
Sales of
refined products ....... 70,900 66,800 68,200 71,200 69,300
Refinery production ...... 69,300 68,900 66,900 69,100 68,600
</TABLE>
-55-
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no change in, or disagreement with, its independent
certified public accountants on matters involving accounting and financial
disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding the directors of the Company is
incorporated herein by this reference to information set forth under the caption
"Election of Directors" in the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held in December 1998 which will be filed within 120 days
of July 31, 1998 (the "Proxy Statement").
The required information regarding the executive officers of the Company
is included herein in Part I, Item 4.
Required information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by this reference to
information set forth under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
this reference to information set forth under the captions "Executive
Compensation and Other Information" and "Compensation Committee Report on
Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is incorporated herein by this reference to information set forth
under the captions "Principal Stockholders" and "Election of Directors" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by this reference to information set forth under the caption
"Election of Directors" in the Proxy Statement.
-56-
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Report of Independent Auditors.......................... 32
Consolidated Balance Sheet at
July 31, 1998 and 1997............................... 33
Consolidated Statement of Income for
the years ended July 31, 1998,
1997, and 1996........................................ 34
Consolidated Statement of Cash Flows
for the years ended July 31, 1998,
1997, and 1996....................................... 35
Consolidated Statement of Stockholders'
Equity for the years ended July 31,
1998, 1997 and 1996.................................. 36
Notes to Consolidated Financial
Statements........................................... 37
</TABLE>
(2) Index to Consolidated Financial Statement Schedules
All schedules are omitted since the required information is not present
or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or notes thereto.
(3) Exhibits
See Index to Exhibits on pages 60 to 63.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Company's fourth
quarter that ended July 31, 1998.
A Form 8-K report for the date September 1, 1998, was filed with
respect to the mutually agreed termination of the proposed merger
with Giant Industries, Inc.
-57-
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOLLY CORPORATION
(Registrant)
/s/ LAMAR NORSWORTHY
-------------------------
Lamar Norsworthy
Chairman of the Board
and Chief Executive Officer
Date: October 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Lamar Norsworthy Chairman of Board of Directors October 28, 1998
- - -------------------------- and Chief Executive Officer
Lamar Norsworthy of the Company
/s/ Matthew P. Clifton President and Director October 28, 1998
- - ----------------------------
Matthew P. Clifton
/s/ Jack P. Reid Executive Vice President, October 28, 1998
- - ---------------------------- Refining and Director
Jack P. Reid
/s/ Henry A. Teichholz Vice President, Treasurer and October 28, 1998
- - ---------------------------- Controller (Principal Financial
Henry A. Teichholz and Accounting Officer)
</TABLE>
-58-
<PAGE> 59
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ William J. Gray Senior Vice President, Marketing October 28, 1998
- - --------------------------- and Supply and Director
William J. Gray
/s/ Marcus R. Hickerson Director October 28, 1998
- - ---------------------------
Marcus R. Hickerson
/s/ A. J. Losee Director October 28, 1998
- - --------------------------
A. J. Losee
/s/ Robert G. McKenzie Director October 28, 1998
- - --------------------------
Robert G. McKenzie
/s/ Thomas K. Matthews, II Director October 28, 1998
- - --------------------------
Thomas K. Matthews, II
</TABLE>
-59-
<PAGE> 60
HOLLY CORPORATION
INDEX TO EXHIBITS
(Exhibits are numbered to correspond to the exhibit table in Item 601 of
Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 - Restated Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3(a), of Amendment No. 1
dated December 13, 1988 to Registrant's Annual Report on Form
10-K for its fiscal year ended July 31, 1988, File No. 1-3876).
3.2 - Bylaws of the Registrant, as amended (incorporated by reference to
Exhibit 3(b) of Registrant's Annual Report on Form 10-K for its
fiscal year ended July 31, 1993, File No. 1-3876).
4.1 - 9.72% Series A Senior Note of Holly Corporation, dated as of June
26, 1991, to Hartnat & Co. with schedule attached thereto of four
other substantially identical Notes which differ only in the respects
set forth in such schedule (incorporated by reference to Exhibit 4.1
of Registrant's Form 8-K dated June 26, 1991, File No. 1-3876).
4.2 - 10.16% Series B Senior Note of Holly Corporation, dated as of June
26, 1991, to New York Life Insurance Company with schedule
attached thereto of seven other substantially identical Notes which
differ only in the respects set forth in such schedule (incorporated by
reference to Exhibit 4.2 of Registrant's Form 8-K dated June 26,
1991, File No. 1-3876).
4.3 - 7.62% Series C Senior Note of Holly Corporation, dated as of
November 21, 1995, to John Hancock Mutual Life Insurance
Company, with schedule attached thereto of five other substantially
identical Notes which differ only in the respects set forth in such
schedule (incorporated by reference to Exhibit 4.4 of Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1995, File No. 1-3876).
4.4 - Series D Senior Note of Holly Corporation, dated as of November
21, 1995, to John Hancock Mutual Life Insurance Company, with
schedule attached thereto of three other substantially identical Notes
which differ only in the respects set forth in such schedule
(incorporated by reference to Exhibit 4.5 of Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended October 31,
1995, File No. 1-3876).
</TABLE>
-60-
<PAGE> 61
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
4.5 - Note Agreement of Holly Corporation, dated as of June 15, 1991, to
John Hancock Mutual Life Insurance Company, with schedule
attached thereto of eleven other substantially identical Note
Agreements which differ only in the respects set forth in such
schedule (incorporated by reference to Exhibit 4.8 of Registrant's
Form 8-K dated June 26, 1991, File No. 1-3876).
4.6 - Note Agreement of Holly Corporation, dated as of November 15,
1995, to John Hancock Mutual Life Insurance Company, with
schedule attached thereto of five other substantially identical Note
Agreements which differ only in the respects set forth in such
schedule (incorporated by reference to Exhibit 4.6 of Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1995, File No. 1-3876).
4.7 - Guaranty, dated as of June 15, 1991, of Navajo Refining Company,
Navajo Pipeline Co., Midland-Lea, Inc., and Lea Refining Company
in favor of Kentucky Central Life Insurance Company, Pan-
American Life Insurance Company, American International Life
Assurance Company of New York, Safeco Life Insurance Company,
The Manhattan Life Insurance Company, The Union Central Life
Insurance Company, The Penn Insurance and Annuity Company, The
Penn Mutual Life Insurance Company, Confederation Life Insurance
Company, John Hancock Mutual Life Insurance Company, John
Hancock Variable Life Insurance Company, and New York Life
Insurance Company (incorporated by reference to Exhibit 4.3 of
Registrant's Form 8-K dated June 26, 1991, File No. 1-3876).
4.8 - Guaranty, dated as of November 1, 1995, of Navajo Crude Oil
Marketing and Navajo Western Asphalt Company in favor of New
York Life Insurance, John Hancock Mutual Life Insurance Company,
John Hancock Variable Life Insurance Company, Confederation Life
Insurance Company, The Penn Insurance and Annuity Company, The
Penn Mutual Life Insurance Company, The Manhattan Life Insurance
Company, The Union Central Life Insurance Company, Safeco Life
Insurance Company, American International Life Assurance
Company of New York, Pan-American Life Insurance Company and
Jefferson-Pilot Life Insurance Company (incorporated by reference to
Exhibit 4.2 of Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended October 31, 1995, File No. 1-3876).
</TABLE>
-61-
<PAGE> 62
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
4.9 - Guaranty, dated as of November 15, 1995, of Navajo Refining
Company, Navajo Pipeline Company, Lea Refining Company,
Navajo Holdings, Inc., Navajo Western Asphalt Company and
Navajo Crude Oil Marketing Company in favor of John Hancock
Mutual Life Insurance Company, John Hancock Variable Life
Insurance Company, Alexander Hamilton Life Insurance Company of
America, The Penn Mutual Life Insurance Company, AIG Life
Insurance Company and Pan-American Life Insurance Company
(incorporated by reference to Exhibit 4.7 of Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended October 31,
1995, File No. 1-3876).
4.10 - Guaranty, dated as of October 10, 1997, of Navajo Corp., Navajo
Southern, Inc., Navajo Crude Oil Purchasing, Inc. and Lorefco, Inc
in favor of the Holders to the Note Agreements dated as of June 15,
1991 (incorporated by reference to Exhibit 4.28 of Registrant's
Annual Report on Form 10-K for its fiscal year ended July 31, 1997,
File No. 1-3876).
4.11 - Guaranty, dated as of October 10, 1997, of Navajo Corp., Navajo
Southern, Inc., Navajo Crude Oil Purchasing, Inc. and Lorefco, Inc
in favor of the Holders to the Note Agreements dated as of
November 15, 1995 (incorporated by reference to Exhibit 4.29 of
Registrant's Annual Report on Form 10-K for its fiscal year ended
July 31, 1997, File No. 1-3876).
4.12 - Letter of Consent, Waiver and Amendment, dated as of November
15, 1995, among Holly Corporation, and New York Life Insurance
Company, John Hancock Mutual Life Insurance Company, John
Hancock Variable Life Insurance Company, Confederation Life
Insurance Company, The Penn Insurance and Annuity Company, The
Penn Mutual Life Insurance Company, The Manhattan Life Insurance
Company, The Union Central Life Insurance Company, Safeco Life
Insurance Company, American International Life Assurance
Company of New York, Pan-American Life Insurance Company and
Jefferson-Pilot Life Insurance Company (incorporated by reference to
Exhibit 4.3 of Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended October 31, 1995, File No. 1-3876).
</TABLE>
-62-
<PAGE> 63
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
4.13 - $100,000,000 Credit and Reimbursement Agreement, dated as of
October 14, 1997, among Holly Corporation, Navajo Refining
Company, Black Eagle, Inc., Navajo Corp., Navajo Southern, Inc.,
Navajo Northern, Inc., Lorefco, Inc., Navajo Crude Oil Purchasing,
Inc., Navajo Holdings, Inc., Holly Petroleum, Inc., Navajo Pipeline
Co., Lea Refining Company, Navajo Western Asphalt Company and
Montana Refining Company, A Partnership, as Borrowers and
Guarantors, the Banks listed herein, Canadian Imperial Bank of
Commerce, as Administrative Agent, CIBC Inc., as Collateral Agent
and Morgan Guaranty Trust Company of New York, as
Documentation Agent, with schedules and exhibits (incorporated by
reference to Exhibit 4.27 of Registrant's Annual Report on Form
10-K for its fiscal year ended July 31, 1997, File No. 1-3876).
4.14 - Holly Corporation Stock Option Plan - As adopted at the Annual
Meeting of Stockholders of Holly Corporation on December 13,
1990 (incorporated by reference to Exhibit 4(i) of Registrant's
Annual Report on Form 10-K for its fiscal year ended July 31, 1991,
File No. 1-3876).
10.1 - Supplemental Payment Agreement, dated as of July 8, 1993, between
Lamar Norsworthy and Holly Corporation (incorporated by reference
to Exhibit 10(a) of Registrant's Annual Report on Form 10-K for its
fiscal year ended July 31, 1993, File No. 1-3876).
10.2 - Supplemental Payment Agreement, dated as of July 8, 1993, between
Jack P. Reid and Holly Corporation (incorporated by reference to
Exhibit 10(b) of Registrant's Annual Report on Form 10-K for its
fiscal year ended July 31, 1993, File No. 1-3876).
21 - Subsidiaries of Registrant
23 - Consent of Independent Auditors
27 - Financial Data Schedule
99 - Copy of civil action against the Company's subsidiary, Navajo
Refining Company, filed on July 16, 1993 by the United States, in
the United States District Court for the District of New Mexico,
seeking civil penalties and other compliance measures under the
Resource Conservation and Recovery Act and implementing
regulations of the Environmental Protection Agency (incorporated by
reference to Exhibit 28 of Registrant's Form 8-K dated July 16,
1993, File No. 1-3876).
</TABLE>
-63-
<PAGE> 1
EXHIBIT 21
HOLLY CORPORATION
SUBSIDIARIES OF REGISTRANT
Holly Corporation owns 100% of the capital stock of the following
subsidiaries (state of respective incorporation shown in parentheses):
<TABLE>
<S> <C>
Navajo Corp. (Del.)
Navajo Holdings, Inc. (N.M.)
Holly Petroleum, Inc. (Del.)
Black Eagle, Inc. (Del.)
</TABLE>
Holly Corporation owns 57.5% and Navajo Corp. owns 42.5% of the capital
stock of Navajo Refining Company (Del.).
Navajo Refining Company owns 100% of the stock of Navajo Northern, Inc.
(Nev.), Lorefco, Inc. (Del.), and Navajo Western Asphalt Company (N.M.).
Navajo Holdings, Inc. owns 100% of the stock of Navajo Pipeline Co.
(Del.).
Navajo Pipeline Co. owns 100% of the stock of Navajo Southern, Inc.
(Del.).
Lorefco, Inc. owns 100% of the stock of Lea Refining Company (Del.).
Navajo Northern, Inc. owns 100% of the stock of Montana Retail
Corporation (Del.).
Black Eagle, Inc. and Navajo Northern, Inc. are the general partners of
Montana Refining Company, a Partnership.
-64-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 2-74856) pertaining to the Holly Corporation Incentive
Stock Option Plan, Holly Corporation Stock Option Plan, and Holly Corporation
Stock Appreciation Rights Plan and in the related Prospectus of our report dated
September 24, 1998 with respect to the consolidated financial statements of
Holly Corporation included in this Annual Report (Form 10-K) for the year ended
July 31, 1998.
ERNST & YOUNG LLP
Dallas, Texas
October 27, 1998
-65-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 2,602
<SECURITIES> 0
<RECEIVABLES> 82,379
<ALLOWANCES> 0
<INVENTORY> 55,842
<CURRENT-ASSETS> 154,387
<PP&E> 325,993
<DEPRECIATION> 152,696
<TOTAL-ASSETS> 349,857
<CURRENT-LIABILITIES> 139,594
<BONDS> 70,341
0
0
<COMMON> 87
<OTHER-SE> 114,262
<TOTAL-LIABILITY-AND-EQUITY> 349,857
<SALES> 588,867
<TOTAL-REVENUES> 589,604
<CGS> 515,767
<TOTAL-COSTS> 543,125
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,371
<INCOME-PRETAX> 24,866
<INCOME-TAX> 9,699
<INCOME-CONTINUING> 15,167
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,167
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
</TABLE>
