<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2000
--------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 1-3876
------
HOLLY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1056913
--------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6927
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 871-3555
--------------
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
7,550,814 shares of Common Stock, par value $.01 per share, were outstanding on
December 11, 2000.
<PAGE> 2
HOLLY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited)
October 31, 2000 and July 31, 2000 3
Consolidated Statement of Income (Unaudited) -
Three Months Ended October 31, 2000 and 1999 4
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended October 31, 2000 and 1999 5
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months Ended October 31, 2000 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
This Quarterly Report on Form 10-Q (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 10.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
Unaudited
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
2000 2000
----------- --------
ASSETS (In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................................... $ 33,595 $ 3,628
Accounts receivable: Product........................................... 69,532 65,988
Crude oil resales................................. 134,449 123,978
--------- ---------
203,981 189,966
Inventories: Crude oil and refined products.................... 49,330 49,340
Materials and supplies............................ 10,008 10,193
Reserve for lower of cost or market............... (2,934) (2,934)
--------- ---------
56,404 56,599
Prepayments and other....................................................... 14,850 16,911
--------- ---------
TOTAL CURRENT ASSETS 308,830 267,104
Properties, plants and equipment, at cost...................................... 364,887 359,937
Less accumulated depreciation, depletion and amortization...................... (188,860) (184,628)
--------- ---------
176,027 175,309
Investments in and advances to joint ventures.................................. 13,865 11,749
Other assets................................................................... 8,012 10,200
--------- ---------
TOTAL ASSETS........................................................... $ 506,734 $ 464,362
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................ $ 237,326 $ 223,870
Accrued liabilities......................................................... 26,325 22,956
Income taxes payable........................................................ 14,124 6,177
Current maturities of long-term debt........................................ 13,738 13,738
--------- ---------
TOTAL CURRENT LIABILITIES.............................................. 291,513 266,741
Deferred income taxes.......................................................... 24,846 25,183
Long-term debt, less current maturities........................................ 42,857 42,857
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value - 1,000,000 shares authorized;
none issued............................................................. -- --
Common stock, $.01 par value - 20,000,000 shares authorized;
8,650,282 shares issued................................................. 87 87
Additional capital.......................................................... 6,132 6,132
Retained earnings........................................................... 149,346 130,293
--------- ---------
155,565 136,512
Common stock held in treasury, at cost - 1,099,468 shares................... (7,793) (7,793)
Other comprehensive income (loss)........................................... (254) 862
--------- ---------
TOTAL STOCKHOLDERS' EQUITY............................................. 147,518 129,581
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 506,734 $ 464,362
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
-------------------------------------
2000 1999
---------------- -----------------
(In thousands, except per share data)
<S> <C> <C>
SALES AND OTHER REVENUES ................................. $ 325,963 $ 200,631
OPERATING COSTS AND EXPENSES
Cost of products sold ................................. 254,235 159,830
Operating expenses .................................... 24,382 23,239
Selling, general and administrative expenses .......... 6,973 4,868
Depreciation, depletion and amortization .............. 6,552 6,416
Exploration expenses, including dry holes ............. 234 303
--------------- ---------------
TOTAL OPERATING COSTS AND EXPENSES ............... 292,376 194,656
--------------- ---------------
INCOME FROM OPERATIONS ................................... 33,587 5,975
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures .................. 1,067 631
Interest income ....................................... 576 264
Interest expense ...................................... (1,436) (1,561)
--------------- ---------------
207 (666)
--------------- ---------------
INCOME BEFORE INCOME TAXES ............................... 33,794 5,309
Income tax provision (benefit)
Current ............................................... 13,013 2,332
Deferred .............................................. 369 (249)
--------------- ---------------
13,382 2,083
--------------- ---------------
NET INCOME ............................................... $ 20,412 $ 3,226
=============== ===============
NET INCOME PER COMMON SHARE (basic and diluted) .......... $ 2.70 $ 0.39
=============== ===============
CASH DIVIDENDS PAID PER COMMON SHARE ..................... $ 0.18 $ 0.17
=============== ===============
AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ..... 7,551 8,254
=============== ===============
</TABLE>
See accompanying notes.
4
<PAGE> 5
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------------
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................. $ 20,412 $ 3,226
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization ............ 6,552 6,416
Deferred income taxes ............................... 369 (249)
Equity in earnings of joint ventures ................ (1,067) (631)
(Increase) decrease in current assets
Accounts receivable ............................... (14,015) (20,823)
Inventories ....................................... 195 4,945
Prepayments and other ............................. 667 (129)
Increase (decrease) in current liabilities
Accounts payable .................................. 13,456 23,787
Accrued liabilities ............................... 3,369 1,745
Income taxes payable .............................. 7,947 (4,897)
Turnaround expenditures ............................. (471) --
Other, net .......................................... 164 (181)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......... 37,578 13,209
CASH FLOWS FROM FINANCING ACTIVITIES
Debt issuance costs ..................................... (50) --
Cash dividends .......................................... (1,359) (1,403)
---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES ............. (1,409) (1,403)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment ........... (5,153) (5,994)
Investments and advances to joint ventures .............. (1,049) --
Distributions from joint venture ........................ -- 750
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES ............. (6,202) (5,244)
---------- ----------
CASH AND CASH EQUIVALENTS
INCREASE FOR THE PERIOD ................................. 29,967 6,562
Beginning of year ....................................... 3,628 4,194
---------- ----------
END OF PERIOD ........................................... $ 33,595 $ 10,756
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest ........................................... $ 363 $ 267
Income taxes ....................................... $ 5,023 $ 7,205
</TABLE>
See accompanying notes.
5
<PAGE> 6
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------------
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
NET INCOME ...................................................... $ 20,412 $ 3,226
Other comprehensive income
Unrealized income (loss) on securities available for sale .... (1,856) 525
Income tax provision (benefit) ............................... (740) 217
---------- ----------
(1,116) 308
---------- ----------
TOTAL COMPREHENSIVE INCOME ...................................... $ 19,296 $ 3,534
========== ==========
</TABLE>
See accompanying notes.
6
<PAGE> 7
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's consolidated financial position as of October 31,
2000, the consolidated results of operations and comprehensive income for the
three months ended October 31, 2000 and 1999, and consolidated cash flows for
the three months ended October 31, 2000 and 1999.
Certain notes and other information have been condensed or omitted.
Therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 2000.
References herein to the "Company" are for convenience of presentation
and may include obligations, commitments or contingencies that pertain solely to
one or more affiliates of the Company. Results of operations for the first three
months of fiscal 2001 are not necessarily indicative of the results to be
expected for the full year.
Note B - New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and that those instruments be
measured at fair value. SFAS No. 133 also prescribes the accounting treatment
for changes in the fair value of derivatives which depends on the intended use
of the derivative and the resulting designation. Designations include hedges of
the exposure to changes in the fair value of a recognized asset or liability,
hedges of the exposure to variable cash flows of a forecasted transaction,
hedges of the exposure to foreign currency translations, and derivatives not
designated as hedging instruments, SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 with early adoption
permitted. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an amendment of FASB
Statement No. 133," which amended certain accounting and reporting standards of
FASB 133. Effective as of August 1, 2000, the Company adopted SFAS No. 133.
During the three months ended October 31, 2000, the Company did not hold any
derivative instruments that would be covered under SFAS No. 133.
7
<PAGE> 8
HOLLY CORPORATION
Note C - Segment Information
The Company has two major business segments: Refining and Pipeline
Transportation. The Refining segment is engaged in the refining of crude oil and
wholesale marketing of refined products, such as gasoline, diesel fuel and jet
fuel, and includes the Company's Navajo Refinery and Montana Refinery. The
petroleum products produced by the Refining segment are marketed in the
southwestern United States, Montana and northern Mexico. Certain pipelines and
terminals operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Refining segment also includes
the equity earnings from the Company's 50% interest in NK Asphalt Partners,
which manufactures and markets asphalt and asphalt products in Arizona and New
Mexico. The Pipeline Transportation segment includes approximately 1,300 miles
of the Company's pipeline assets in Texas and New Mexico. Revenues from the
Pipeline Transportation segment are earned through transactions with
unaffiliated parties for pipeline transportation, rental and terminalling
operations. The Pipeline Transportation segment also includes the equity
earnings from the Company's 25% interest in Rio Grande Pipeline Company, which
provides petroleum products transportation. Operations of the Company that are
not included in the two reportable segments are included in Corporate and Other,
which includes costs of Holly Corporation, the parent company, consisting
primarily of general and administrative expenses and interest charges, as well
as a small-scale oil and gas exploration and production program, and a small
equity investment in retail gasoline stations and convenience stores.
The accounting policies for the segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K for the year ended July 31, 2000. The Company's
reportable segments are strategic business units that offer different products
and services.
<TABLE>
<CAPTION>
TOTAL FOR
PIPELINE REPORTABLE CORPORATE CONSOLIDATED
REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL
-------------- -------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 31, 2000
Sales and other revenues ........... $ 320,353 $ 4,647 $ 325,000 $ 963 $ 325,963
EBITDA(1) .......................... $ 40,005 $ 3,400 $ 43,405 $ (2,199) $ 41,206
Income (loss) from operations ...... $ 33,154 $ 2,820 $ 35,974 $ (2,387) $ 33,587
Income (loss) before income taxes .. $ 33,766 $ 3,029 $ 36,795 $ (3,001) $ 33,794
THREE MONTHS ENDED OCTOBER 31, 1999
Sales and other revenues ........... $ 195,849 $ 3,651 $ 199,500 $ 1,131 $ 200,631
EBITDA(1) .......................... $ 10,700 $ 2,947 $ 13,647 $ (625) $ 13,022
Income (loss) from operations ...... $ 5,122 $ 1,986 $ 7,108 $ (1,133) $ 5,975
Income (loss) before income taxes .. $ 5,056 $ 2,654 $ 7,710 $ (2,401) $ 5,309
</TABLE>
(1) Earnings Before Interest, Taxes, Depreciation and Amortization.
8
<PAGE> 9
HOLLY CORPORATION
Note D - Contingencies
In August 1998, a lawsuit (the "Longhorn Suit") was filed in state
district court in El Paso, Texas against the Company and two of its subsidiaries
(along with an Austin, Texas law firm which was subsequently dropped from the
case). 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, BP/Amoco
Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy
Investment Fund, L.P. and Chisholm Holdings as limited partners. The suit, as
most recently amended by Longhorn Partners in September 2000, seeks damages
alleged to total up to $1,050,000,000 (after trebling) based on claims of
violations of the Texas Free Enterprise and Antitrust Act, unlawful interference
with existing and prospective contractual relations, and conspiracy to abuse
process. The specific actions of the Company complained of in the Longhorn Suit,
as currently amended, are alleged solicitation of and support for allegedly
baseless lawsuits brought by Texas ranchers in federal and state courts to
challenge the proposed Longhorn Pipeline project, support of allegedly
fraudulent public relations activities against the proposed Longhorn Pipeline
project, entry into a contractual "alliance" with Fina Oil and Chemical Company,
threatening litigation against certain partners in Longhorn Partners, and
alleged interference with the federal court settlement agreement that provided
for an Environmental Assessment of the Longhorn Pipeline. In early October 2000,
the Company filed an amended motion for summary judgment, amending a motion for
summary judgment originally filed in February 2000, seeking a court ruling that
would terminate this litigation. A hearing on the Company's amended motion for
summary judgment is currently scheduled for early January 2001. The Company
believes that the Longhorn Suit is wholly without merit and plans to continue to
defend itself vigorously. The Company also plans to pursue at the appropriate
time any affirmative remedies that may be available to it relating to the
Longhorn Suit.
9
<PAGE> 10
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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-Q, including without limitation those under "Results of
Operations," "Liquidity and Capital Resources" and "Additional Factors that May
Affect Future Results" (including "Risk Management") under this Item 2 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 or pipelines,
governmental regulations and policies, the availability and cost of financing to
the Company, the effectiveness of the Company's capital investments and
marketing strategies, and the costs of defense and the risk of an adverse
outcome in the Longhorn Pipeline litigation. Because of these and other risks
and uncertainties, actual results may vary materially from those estimated,
anticipated or projected. Although the Company believes that the expectations
reflected by the forward-looking statements contained in this Quarterly Report
are reasonable based on information currently available to the Company, no
assurances can be given that such expectations will prove to be correct. This
summary discussion of risks and uncertainties that may cause actual results to
differ from those indicated in forward-looking statements should be read in
conjunction with the discussion under the heading "Additional Factors That May
Affect Future Results" included in Item 7 of the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 2000 and in conjunction with the
discussion below under the headings "Liquidity and Capital Resources" and
"Additional Factors That May Affect Future Results." All forward-looking
statements included in this Quarterly Report on Form 10-Q and all subsequent
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the cautionary
statements set forth above.
10
<PAGE> 11
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
RESULTS OF OPERATIONS
FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------------------
2000 1999
-------------- --------------
(In thousands, except share data)
<S> <C> <C>
Sales and other revenues ............................... $ 325,963 $ 200,631
Operating costs and expenses
Cost of products sold ............................... 254,235 159,830
Operating expenses .................................. 24,382 23,239
Selling, general and administrative expenses ........ 6,973 4,868
Depreciation, depletion and amortization ............ 6,552 6,416
Exploration expenses, including dry holes ........... 234 303
-------------- --------------
Total operating costs and expenses ............. 292,376 194,656
-------------- --------------
Income from operations ................................. 33,587 5,975
Other income (expense)
Equity in earnings of joint ventures ................ 1,067 631
Interest expense, net ............................... (860) (1,297)
-------------- --------------
207 (666)
-------------- --------------
Income before income taxes ............................. 33,794 5,309
Income tax provision ................................... 13,382 2,083
-------------- --------------
Net income ............................................. $ 20,412 $ 3,226
============== ==============
Net income per common share (basic and diluted) ........ $ 2.70 $ 0.39
============== ==============
Average number of shares of common stock outstanding ... 7,551 8,254
============== ==============
Sales and other revenues(1)
Refining ............................................ $ 320,353 $ 195,849
Pipeline Transportation ............................. 4,647 3,651
Corporate and Other ................................. 963 1,131
-------------- --------------
Consolidated ........................................ $ 325,963 $ 200,631
============== ==============
Income (loss) from operations(1)
Refining ............................................ $ 33,154 $ 5,122
Pipeline Transportation ............................. 2,820 1,986
Corporate and Other ................................. (2,387) (1,133)
-------------- --------------
Consolidated ........................................ $ 33,587 $ 5,975
============== ==============
</TABLE>
11
<PAGE> 12
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
1) The Refining segment includes the Company's principal refinery in
Artesia, New Mexico, which is operated in conjunction with refining
facilities in Lovington, New Mexico (collectively, the Navajo Refinery)
and the Company's refinery near Great Falls, Montana. Included in the
Refining Segment are costs relating to pipelines and terminals that
operate in conjunction with the Refining segment as part of the supply
and distribution networks of the refineries. The Pipeline
Transportation segment includes approximately 1,300 miles of the
Company's pipeline assets in Texas and New Mexico. Revenues from the
Pipeline Transportation segment are earned through transactions with
unaffiliated parties for pipeline transportation, rental and
terminalling operations.
REFINING SEGMENT OPERATING DATA (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Crude charge (BPD)(1) .................. 68,100 61,400
Average per barrel(2)
Refinery margin ...................... $ 9.73 $ 5.71
Cash operating costs(3) .............. 3.92 4.03
--------------- ---------------
Net cash operating margin ............ $ 5.81 $ 1.68
=============== ===============
Sales of produced refined products
Gasolines ............................ 53.3% 56.5%
Diesel fuels ......................... 22.9 20.3
Jet fuels ............................ 10.7 9.8
Asphalt .............................. 9.8 9.5
LPG and other ........................ 3.3 3.9
--------------- ---------------
Total ........................... 100.0% 100.0%
=============== ===============
</TABLE>
----------
(1) Barrels per day of crude oil processed.
(2) Represents average per barrel amounts for produced refined products sold.
(3) Includes operating costs and selling, general and administrative
expenses of refineries, as well as pipeline expenses that are part of
refinery operations.
12
<PAGE> 13
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
FIRST QUARTER OF FISCAL 2001 COMPARED TO FIRST QUARTER OF FISCAL 2000
Net income for the first quarter ended October 31, 2000 was $20.4
million ($2.70 per share), a record quarterly level, as compared to $3.2 million
($.39 per share) for the first quarter of the prior year. The increase in income
for the first quarter of fiscal 2001 was principally due to significantly higher
refinery margins, which were 70% above margins in the first quarter of the prior
year. Beginning in July 2000 and continuing throughout the first quarter of
fiscal 2001, refinery margins were very strong in the refined product markets
served by the Company's Navajo Refinery. The Company's increased production
capabilities for cleaner-burning gasolines required in its Phoenix market
enabled the Company to more fully participate in the particularly strong margins
for this product during the quarter. In addition, refining income was favorably
affected by an 8.4% increase in sales volume in the three months ended October
31, 2000, as compared to the prior year's first quarter. Both revenues and cost
of products sold were higher in the first quarter of 2001 due principally to the
increased cost of purchased crude oil. Current refinery margins, while not as
high as for the quarter just ended, are running substantially above historic
levels for this time period.
The Company experienced an increase in operating expenses in the first
quarter of fiscal 2001, as compared to the prior year's first quarter; this
increase in expenses was principally attributable to increased utility costs,
offset by lower maintenance and consulting service costs. General and
administrative expenses increased in the three months ended October 31, 2000 due
primarily to costs associated with legal proceedings. Additionally in the first
quarter of the current year, the Company began to realize part of the benefits
from the cost reduction and production efficiency program announced in May 2000,
which is currently being implemented.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $30.0 million to $33.6 million
during the three months ended October 31, 2000 as cash flows generated from
operations were significantly greater than cash flows required for investing
activities and dividends paid. Working capital increased during the quarter
ended October 31, 2000 by $17.0 million to $17.3 million. In April 2000, the
Company entered into an agreement with a group of banks led by Canadian Imperial
Bank of Commerce to extend its Revolving Credit Agreement until October 10,
2001. Under the extension agreement, as subsequently amended, the Company will
have access to $90 million of commitments for both revolving credit loans and
letters of credit. Up to $45 million of this facility may be used for revolving
credit loans. At October 31, 2000 the Company had letters of credit outstanding
under the facility of $36.5 million and had no borrowings outstanding. The
Company believes its internally generated cash flow, along with its Credit
Agreement, provides sufficient resources through October 2001 to fund capital
projects, scheduled repayments of the Senior Notes, continued payment of
dividends (although dividend payments must be approved by the Board of Directors
and cannot be guaranteed) and the Company's liquidity needs.
13
<PAGE> 14
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
In May 2000, the Company announced a cost reduction and production
efficiency program that is expected to yield annual pre-tax improvements
totaling approximately $20 million. The program is currently being implemented
and should be completed by July 2002. The cost reduction and production
efficiency program includes productivity enhancements and a reduction in
workforce. As part of the implementation of cost reductions, the Company offered
a voluntary early retirement program to eligible employees, under which 55
employees are scheduled to retire in fiscal 2001, most of whom will retire by
December 31, 2000. The pre-tax cost of the voluntary early retirement program
was $6.8 million and was reflected in the Company's earnings for the quarter
ended July 31, 2000. It is estimated that capital expenditures of approximately
$9 million will be required to effectuate some of the production improvements
included in the program, of which expenditures totaling approximately $5 million
are included in the fiscal 2001 capital budget.
Net cash provided by operating activities amounted to $37.6 million for the
first three months of fiscal 2001, as compared to $13.2 million for the same
period of the prior year. The increase was primarily due to strong cash flows
from the refining operations of the Company in the first quarter of the current
fiscal year, and was also favorably affected by the deferral of payment of
related current income taxes due.
Cash flows used for financing activities amounted to $1.4 million in the
first three months of fiscal 2001, as compared to $1.4 million in the same
period of the prior year. Cash flows used for financing activities in the first
quarter of both fiscal years consisted solely of dividends paid to shareholders.
Currently, the Company has no outstanding bank borrowings. During the 2001
fiscal year, the Company's Senior Notes require principal payments of $8.6
million in December 2000 and $5.2 million in June 2001 respectively.
Cash flows used for investing activities were $6.2 million for the first
three months of fiscal 2001, as compared to $5.2 million for the same period of
the 2000 fiscal year. All amounts expended were on capital projects except for
$1.0 million invested in a joint venture created in July 2000 to manufacture and
market asphalt products. The Company's net cash flow used for investing
activities in the first quarter of the 2000 fiscal year was reduced by a
distribution in that quarter to the Company from the Rio Grande Pipeline Company
joint venture of $0.8 million.
14
<PAGE> 15
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company has adopted a capital budget of $20 million for fiscal
2001. The components of this budget are $12 million for refinery improvements,
$1 million for engineering costs relating to a purchased hydrotreater, as
described below, $6 million for pipeline and transportation projects and less
than $1 million for oil and gas exploration and production activities. In
addition to these projects, the Company plans to expend in the 2001 fiscal year
approximately $10 million on capital projects that were approved in previous
capital budgets, including a sulfur recovery unit at the Navajo Refinery and a
product terminal to be used in conjunction with the leased pipeline to northwest
New Mexico described below.
In November 1997, the Company purchased a hydrotreater unit for $5
million from a closed refinery. This purchase should give the Company the
ability to reconstruct the unit at the Navajo Refinery at a substantial savings
relative to the purchase cost of a new unit. The hydrotreater would enhance
higher value, light product yields and expand the Company's ability to meet the
present California Air Resources Board ("CARB") standards, which have been
adopted in the Company's Phoenix market for winter months beginning in the
latter part of 2000, and to meet the recently proposed EPA nationwide Low-Sulfur
Gasoline requirements scheduled to begin in 2004. During fiscal 2000, the
Company relocated the purchased hydrotreater equipment to the Navajo Refinery
and purchased certain long-lead-time pieces of equipment for the hydrotreater.
Included in the fiscal 2001 capital budget are commitments of approximately $1
million for engineering costs related to the hydrotreater project. Additionally,
the Company is in the process of constructing a sulfur recovery unit, scheduled
for completion early in calendar 2001, which will be immediately utilized to
enhance sour crude processing capabilities and would recover additional
extracted sulfur when the hydrotreater is completed. The sulfur recovery unit
was approved as part of the fiscal 2000 capital budget and remaining costs of
the unit are expected to be approximately $5 million. The Company, subject to
obtaining necessary permitting in a timely manner, currently expects that the
hydrotreater project could be completed by the end of the 2002 fiscal year.
Remaining costs to complete the hydrotreater project are estimated to be
approximately $20 million, in addition to the engineering. Based on the current
configuration of the Navajo Refinery, the Company is able to supply current
sales volumes into the Phoenix market under the CARB standards prior to
completion of the hydrotreater.
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 as well as terminalling facilities in
Bloomfield and a diesel fuel terminal 40 miles east of Albuquerque in Moriarty.
Transportation of petroleum products to markets in northwest New Mexico and
diesel fuels to Moriarty began in the latter part of calendar 1999. The Company
is expanding its terminal in Moriarty to include gasoline and jet fuel, and the
expanded terminal is expected to be operational by the spring of 2001. When the
Moriarty terminal expansion is completed, the Company will be
15
<PAGE> 16
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
positioned to expand the transport of petroleum products from the Navajo
Refinery to the Albuquerque area.
In July 2000, Navajo Western Asphalt Company ("Navajo Western"), a
wholly-owned subsidiary of the Company, and a subsidiary of Koch Materials
Company ("Koch") formed a joint venture, NK Asphalt Partners, to manufacture and
market asphalt and asphalt products in Arizona and New Mexico under the name
"Koch Asphalt Solutions - Southwest." Navajo Western contributed all of its
assets to NK Asphalt Partners and Koch contributed its New Mexico and Arizona
asphalt and manufacturing assets to NK Asphalt Partners. Each Company owns a 50%
interest in the joint venture. All asphalt produced at the Navajo Refinery will
be sold to the joint venture under a supply agreement. The Company is required
to make additional contributions to the joint venture for each of the next ten
years of up to $3,250,000 per year, contingent on the earnings level of the
joint venture. The Company expects to finance such contributions from its share
of cash flows of the joint venture.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
This discussion should be read in conjunction with the discussion under
the heading "Additional Factors That May Affect Future Results" included in Item
7 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
2000.
The proposed Longhorn Pipeline is an additional potential source of
pipeline transportation of refined products from Gulf Coast refineries to El
Paso. This pipeline is proposed to run approximately 700 miles from the Houston
area of the Gulf Coast to El Paso, utilizing a direct route. The owner of the
Longhorn Pipeline, Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), is a
Delaware limited partnership that includes affiliates of Exxon Pipeline Company,
BP/Amoco Pipeline Company, Williams Pipeline Company, and the Beacon Group
Energy Investment Fund, L.P. and Chisholm Holdings as limited partners. Longhorn
Partners has proposed to use the pipeline initially to transport approximately
72,000 BPD of refined products from the Gulf Coast to El Paso and markets served
from El Paso, with an ultimate maximum capacity of 225,000 BPD. A critical
feature of this proposed petroleum products pipeline is that it would utilize,
for approximately 450 miles (including areas overlying the environmentally
sensitive Edwards Aquifer and Edwards-Trinity Aquifer and heavily populated
areas in the southern part of Austin, Texas) an existing pipeline (previously
owned by Exxon Pipeline Company) that was constructed in about 1950 for the
shipment of crude oil from West Texas to the Houston area.
16
<PAGE> 17
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Longhorn Pipeline is not currently operating because of a federal
court injunction in August 1998 and a settlement agreement in March 1999 entered
into by Longhorn Partners, the United States Environmental Protection Agency
("EPA") and Department of Transportation ("DOT"), and the other parties to the
federal lawsuit that had resulted in the injunction and settlement.
Additionally, the Longhorn Pipeline is not operating because it lacks valid
easements from the Texas General Land Office for crossing certain state-owned
stream and river beds; the Texas Land Commissioner has indicated that these
easements will not be granted until he is satisfied that the pipeline meets
federal safety and other standards.
The March 1999 settlement agreement in the federal lawsuit that
resulted in the injunction against operation of the Longhorn Pipeline required
the preparation of an Environmental Assessment under the authority of the EPA
and the DOT while the federal court retained jurisdiction. A final Environmental
Assessment (the "Final EA") on the Longhorn Pipeline was released in November
2000. The Final EA is accompanied by a Finding of No Significant Impact that is
conditioned on the implementation by Longhorn Partners of a proposed mitigation
plan developed by Longhorn Partners which contains 40 mitigation measures,
including the replacement of approximately 19 miles of pipe in the Austin area
with new thick-walled pipe protected by a concrete barrier. Some elements of the
proposed mitigation plan are required to be completed before the Longhorn
Pipeline is allowed to operate, with the remainder required to be completed
later or to be implemented for as long as operations continue. The plaintiffs in
the federal court lawsuit that resulted in the Environmental Assessment of the
Longhorn Pipeline have indicated that they will challenge the Final EA in
further federal court proceedings that are expected to begin in January 2001.
Longhorn Partners has recently indicated that construction relating to certain
mitigation measures included in the Final EA may not begin until conclusion of
legal challenges to the Final EA. At the date of this report, it is not possible
to predict the outcome of legal challenges to the Longhorn Pipeline.
17
<PAGE> 18
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
If the Longhorn Pipeline is allowed to operate as currently proposed,
the substantially lower requirement for capital investment permitted by the
direct route through Austin, Texas and over the Edwards Aquifers would permit
Longhorn Partners to give its shippers a cost advantage through lower tariffs
that could, at least for a period, result in significant downward pressure on
wholesale refined products prices and refined products margins in El Paso and
related markets. Although some current suppliers in the market might not compete
in such a climate, the Company's analyses indicate that, because of location,
recent capital improvements, and on-going enhancements to operational
efficiency, the Company's position in El Paso and markets served from El Paso
could withstand such a period of lower prices and margins. However, the
Company's results of operations could be adversely impacted if the Longhorn
Pipeline were allowed to operate as currently proposed. It is not possible to
predict whether and, if so, under what conditions, the Longhorn Pipeline
ultimately will be allowed to operate, nor is it possible to predict the
consequences for the Company of Longhorn Pipeline's operations if they occur.
In August 1998, a lawsuit (the "Longhorn Suit") was filed by Longhorn
Partners in state district court in El Paso, Texas against the Company and two
of its subsidiaries (along with an Austin, Texas law firm which was subsequently
dropped from the case). The suit, as most recently amended by Longhorn Partners
in September 2000, seeks damages alleged to total up to $1,050,000,000 (after
trebling) based on claims of violations of the Texas Free Enterprise and
Antitrust Act, unlawful interference with existing and prospective contractual
relations, and conspiracy to abuse process. The specific actions of the Company
complained of in the Longhorn Suit, as currently amended, are alleged
solicitation of and support for allegedly baseless lawsuits brought by Texas
ranchers in federal and state courts to challenge the proposed Longhorn Pipeline
project, support of allegedly fraudulent public relations activities against the
proposed Longhorn Pipeline project, entry into a contractual "alliance" with
Fina Oil and Chemical Company, threatening litigation against certain partners
in Longhorn Partners, and alleged interference with the federal court settlement
agreement that provided for the Environmental Assessment of the Longhorn
Pipeline. The Company believes that the Longhorn Suit is wholly without merit
and plans to continue to defend itself vigorously. However, because of the size
of the damages claimed and in spite of the apparent lack of merit in the claims
asserted, the Longhorn Suit has created increasing problems for the Company,
including the exclusion of the Company from the possibility of certain types of
major corporate transactions, an adverse impact on the cost of debt financing
for Company operations, and what appears to be a continuing adverse effect on
the market price of the Company's common stock. The Company plans to pursue at
the appropriate time any affirmative remedies that may be available to it
relating to the Longhorn Suit. For additional information on the Longhorn Suit,
see Part II "Other Information," Item 1, "Legal Proceedings."
18
<PAGE> 19
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 or that the cost of eliminating the exposure
would outweigh the benefit.
The Company's profitability depends largely on the spread between
market prices for refined products and crude oil. 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 futures contracts to minimize a portion of its
exposure to price fluctuations associated with crude oil and refined products.
Such contracts 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 and do not increase the market
risks to which the Company is exposed. No such contracts were outstanding during
the three months ended October 31, 2000.
At October 31, 2000, the Company had outstanding unsecured debt of
$56.6 million and had no borrowings outstanding under its Credit Agreement. The
Company does not have significant exposure to changing interest rates on its
unsecured debt because the interest rates are fixed, the average maturity is
less than three years and such debt represents less than 30% of the Company's
total capitalization. As the interest rates on the Company's bank borrowings
under its Credit Agreement are reset frequently based on either the bank's daily
effective prime rate or the LIBOR rate, 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 also 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 at short-term market rates and such interest has historically
not been significant as compared to the total operations of the Company. A ten
percent change in the market interest rate over the next year would also not
materially impact the Company's financial condition, since the average maturity
of the Company's long-term debt is less than three years and such debt
represents less than 30% of the Company's total capitalization, and since the
Company's borrowings under the Credit Agreement and cash investments are at
short-term market rates.
19
<PAGE> 20
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and that those instruments be
measured at fair value. SFAS No. 133 also prescribes the accounting treatment
for changes in the fair value of derivatives which depends on the intended use
of the derivative and the resulting designation. Designations include hedges of
the exposure to changes in the fair value of a recognized asset or liability,
hedges of the exposure to variable cash flows of a forecasted transaction,
hedges of the exposure to foreign currency translations, and derivatives not
designated as hedging instruments, SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 with early adoption
permitted. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an amendment of FASB
Statement No. 133," which amended certain accounting and reporting standards of
FASB 133. Effective as of August 1, 2000, the Company adopted SFAS No. 133.
During the three months ended October 31, 2000, the Company did not hold any
derivative instruments that would be covered under SFAS No. 133.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
See "Risk Management" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
20
<PAGE> 21
HOLLY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1998, a lawsuit (the "Longhorn Suit") was filed in state
district court in El Paso, Texas against the Company and two of its subsidiaries
(along with an Austin, Texas law firm which was subsequently dropped from the
case). 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, BP/Amoco
Pipeline Company, Williams Pipeline Company, and the Beacon Group Energy
Investment Fund, L.P. and Chisholm Holdings as limited partners. The suit, as
most recently amended by Longhorn Partners in September 2000, seeks damages
alleged to total up to $1,050,000,000 (after trebling) based on claims of
violations of the Texas Free Enterprise and Antitrust Act, unlawful interference
with existing and prospective contractual relations, and conspiracy to abuse
process. The specific actions of the Company complained of in the Longhorn Suit,
as currently amended, are alleged solicitation of and support for allegedly
baseless lawsuits brought by Texas ranchers in federal and state courts to
challenge the proposed Longhorn Pipeline project, support of allegedly
fraudulent public relations activities against the proposed Longhorn Pipeline
project, entry into a contractual "alliance" with Fina Oil and Chemical Company,
threatening litigation against certain partners in Longhorn Partners, and
alleged interference with the federal court settlement agreement that provided
for an Environmental Assessment of the Longhorn Pipeline. In early October 2000,
the Company filed an amended motion for summary judgment, amending a motion for
summary judgment originally filed in February 2000, seeking a court ruling that
would terminate this litigation. A hearing on the Company's amended motion for
summary judgment is currently scheduled for early January 2001. A motion filed
by the Company to transfer the venue for trial of the case from the El Paso
court to another Texas court has been pending since May 2000, and no hearing on
this motion is currently scheduled. The Company believes that the Longhorn Suit
is wholly without merit and plans to continue to defend itself vigorously. The
Company also plans to pursue at the appropriate time any affirmative remedies
that may be available to it relating to the Longhorn Suit.
21
<PAGE> 22
HOLLY CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders on December 14, 2000, all nine of
the management's nominees for directors as listed in the proxy statement were
elected.
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
Total Votes Total Votes
"For" "Withheld"
----------- -----------
<S> <C> <C>
Matthew P. Clifton 6,642,247 94,987
W. John Glancy 6,642,141 95,093
William J. Gray 6,648,764 88,470
Marcus R. Hickerson 6,647,010 90,224
A.J. Losee 6,654,502 82,732
Thomas K. Matthews, II 6,650,502 86,732
Robert G. McKenzie 6,657,576 79,658
Lamar Norsworthy 6,656,471 80,763
Jack P. Reid 6,653,666 83,568
</TABLE>
Additionally, at the annual meeting of stockholders on December 14,
2000, the following matters were voted upon.
The Board of Directors recommended, subject to stockholders' approval,
adoption of the 2000 Stock Option Plan to take the place of the current Stock
Option Plan, which was adopted in 1990 and under which no options may be granted
after December 31, 2000. Adoption of the 2000 Stock Option Plan was approved.
<TABLE>
<CAPTION>
ADOPTION OF 2000 STOCK OPTION PLAN
----------------------------------
<S> <C>
Votes For 3,441,354
Votes Against 1,343,502
Abstentions 33,345
Broker Non-Votes 1,919,033
</TABLE>
22
<PAGE> 23
HOLLY CORPORATION
A stockholder submitted a proposal regarding the sale of the Company.
The purpose of the proposal was to give all Holly Corporation shareholders the
opportunity to send a message to the Holly Corporation Board that they support
the prompt sale of Holly Corporation to the highest bidder. The proposal was
defeated.
<TABLE>
<CAPTION>
STOCKHOLDER PROPOSAL REGARDING THE SALE OF THE COMPANY
------------------------------------------------------
<S> <C>
Votes For 1,026,250
Votes Against 3,759,349
Abstentions 38,902
Broker Non-Votes 1,912,733
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits on page 25.
(b) Reports on Form 8-K: None.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HOLLY CORPORATION
-------------------------------------
(Registrant)
Date: December 15, 2000 By /s/ Kathryn H. Walker
----------------------------------
Kathryn H. Walker
Vice President, Accounting
(Principal Accounting Officer)
By /s/ Scott C. Surplus
----------------------------------
Scott C. Surplus
Vice President, Treasury and Tax
<PAGE> 25
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>
10 Holly Corporation 2000 Stock Option Plan - As
adopted at the Annual Meeting of Stockholders of
Holly Corporation on December 14, 2000.
27 Financial Data Schedule
</TABLE>
