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, 2001
-------------------------
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
--- ---
15,546,528 shares of Common Stock, par value $.01 per share, were outstanding on
December 11, 2001.
HOLLY CORPORATION
INDEX
<Table>
<Caption>
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited)
October 31, 2001 and July 31, 2001 3
Consolidated Statement of Income (Unaudited) -
Three Months Ended October 31, 2001 and 2000 4
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended October 31, 2001 and 2000 5
Consolidated Statement of Comprehensive Income (Unaudited) -
Three Months Ended October 31, 2001 and 2000 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
</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 11.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
Unaudited
<Table>
<Caption>
OCTOBER 31, JULY 31,
2001 2001
------------ ------------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................................... $ 88,527 $ 65,840
Accounts receivable: Product ............................................... 43,393 50,364
Crude oil resales ..................................... 64,346 95,710
------------ ------------
107,739 146,074
Inventories: Crude oil and refined products ........................ 52,512 42,390
Materials and supplies ................................ 9,838 10,092
Reserve for lower of cost or market ................... (2,346) (2,346)
------------ ------------
60,004 50,136
Income taxes receivable ............................................................ -- 3,514
Prepayments and other ............................................................... 15,009 18,566
------------ ------------
TOTAL CURRENT ASSETS ........................................................... 271,279 284,130
Properties, plants and equipment, at cost .............................................. 390,922 384,783
Less accumulated depreciation, depletion and amortization .............................. (204,963) (200,628)
------------ ------------
185,959 184,155
Investments in and advances to joint ventures .......................................... 18,063 16,303
Other assets ........................................................................... 5,421 5,841
------------ ------------
TOTAL ASSETS ................................................................... $ 480,722 $ 490,429
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .................................................................... $ 147,026 $ 181,182
Accrued liabilities ................................................................. 31,489 31,985
Income taxes payable ................................................................ 10,711 4,661
Current maturities of long-term debt ................................................ 8,571 8,571
------------ ------------
TOTAL CURRENT LIABILITIES ...................................................... 197,797 226,399
Deferred income taxes .................................................................. 28,411 28,010
Long-term debt, less current maturities ................................................ 34,286 34,286
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;
16,628,596 and 16,580,096 shares issued as of October 31, 2001 and July 31, 2001 .. 166 166
Additional capital .................................................................. 12,227 11,568
Retained earnings ................................................................... 216,790 198,118
------------ ------------
229,183 209,852
Common stock held in treasury, at cost -
1,104,468 and 1,099,468 shares as of October 31, 2001 and July 31, 2001 ........... (7,885) (7,793)
Accumulated other comprehensive income (loss) ....................................... (1,070) (325)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ..................................................... 220,228 201,734
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 480,722 $ 490,429
============ ============
</Table>
See accompanying notes.
3
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
-------------------------------
2001 2000
------------ ------------
(In thousands, except per share data)
SALES AND OTHER REVENUES ......................... $ 257,947 $ 325,963
OPERATING COSTS AND EXPENSES
Cost of products sold ......................... 191,984 254,235
Operating expenses ............................ 24,746 24,382
Selling, general and administrative expenses .. 5,430 6,973
Depreciation, depletion and amortization ...... 6,431 6,552
Exploration expenses, including dry holes ..... 299 234
------------ ------------
TOTAL OPERATING COSTS AND EXPENSES ....... 228,890 292,376
------------ ------------
INCOME FROM OPERATIONS ........................... 29,057 33,587
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures .......... 2,748 1,067
Interest income ............................... 682 576
Interest expense .............................. (940) (1,436)
Gain on sale of equity securities ............. 1,522 --
------------ ------------
4,012 207
------------ ------------
INCOME BEFORE INCOME TAXES ....................... 33,069 33,794
Income tax provision
Current ....................................... 12,697 13,013
Deferred ...................................... 150 369
------------ ------------
12,847 13,382
------------ ------------
NET INCOME ....................................... $ 20,222 $ 20,412
============ ============
NET INCOME PER COMMON SHARE - BASIC .............. $ 1.30 $ 1.35
============ ============
NET INCOME PER COMMON SHARE - DILUTED ............ $ 1.27 $ 1.35
============ ============
CASH DIVIDENDS PAID PER COMMON SHARE ............. $ 0.10 $ 0.09
============ ============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ......................................... 15,508 15,102
Diluted ....................................... 15,944 15,102
</Table>
See accompanying notes.
4
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
2001 2000
------------ ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................ $ 20,222 $ 20,412
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization .......... 6,431 6,552
Deferred income taxes ............................. 150 369
Equity in earnings of joint ventures .............. (2,748) (1,067)
(Increase) decrease in current assets
Accounts receivable ............................. 38,206 (14,015)
Inventories ..................................... (9,868) 195
Income taxes receivable ......................... 3,514 --
Prepayments and other ........................... 81 667
Increase (decrease) in current liabilities
Accounts payable ................................ (34,156) 13,456
Accrued liabilities ............................. (214) 3,369
Income taxes payable ............................ 6,050 7,947
Turnaround expenditures ........................... (1,840) (471)
Other, net ........................................ (1,424) 164
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 24,404 37,578
CASH FLOWS FROM FINANCING ACTIVITIES
Debt issuance costs ................................... -- (50)
Issuance of common stock upon exercise of options ..... 659 --
Purchase of treasury stock ............................ (92) --
Cash dividends ........................................ (1,550) (1,359)
------------ ------------
NET CASH USED FOR FINANCING ACTIVITIES ........... (983) (1,409)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties, plants and equipment ......... (6,384) (5,153)
Investments and advances to joint ventures ............ -- (1,049)
Distributions from joint ventures ..................... 1,150 --
Proceeds from sale of marketable equity securities .... 4,500 --
------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES ........... (734) (6,202)
------------ ------------
CASH AND CASH EQUIVALENTS
INCREASE FOR THE PERIOD ............................... 22,687 29,967
Beginning of year ..................................... 65,840 3,628
------------ ------------
END OF PERIOD ......................................... $ 88,527 $ 33,595
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest ......................................... $ 242 $ 363
Income taxes ..................................... $ 2,958 $ 5,023
</Table>
See accompanying notes.
5
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
2001 2000
------------ ------------
(In thousands)
NET INCOME ................................................................... $ 20,222 $ 20,412
Other comprehensive income (loss)
Unrealized loss on securities available for sale .......................... -- (1,856)
Reclassification adjustment to net income on sale of equity securities .... (1,522) --
Derivative instruments qualifying as cash flow
hedging instruments
Change in fair value of derivative instruments ......................... (802) --
Reclassification adjustment into net income ............................ 1,084 --
------------ ------------
Total income on cash flow hedges .......................................... 282 --
------------ ------------
Other comprehensive income before income taxes ............................. (1,240) (1,856)
Income tax benefit ........................................................ (495) (740)
------------ ------------
Other comprehensive loss ..................................................... (745) (1,116)
------------ ------------
TOTAL COMPREHENSIVE INCOME ................................................... $ 19,477 $ 19,296
============ ============
</Table>
See accompanying notes.
6
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Presentation of Financial Statements
In the opinion of the Company, the accompanying consolidated financial
statements, which have not been audited by independent accountants, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's consolidated financial position as of October 31,
2001, the consolidated results of operations and comprehensive income for the
three months ended October 31, 2001 and 2000, and consolidated cash flows for
the three months ended October 31, 2001 and 2000.
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, 2001.
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 2002 are not necessarily indicative of the results to be
expected for the full year.
Note B - New Accounting Pronouncements
In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement changes how goodwill and other intangible assets are
accounted for subsequent to their initial recognition. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, with early adoption
permitted, however, all goodwill and intangible assets acquired after June 30,
2001, will be subject immediately to the provisions of this statement. The
Company has not completed evaluating the effects this statement will have on its
financial reporting and disclosures.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that the fair value for an
asset retirement obligation be capitalized as part of the carrying amount of the
long-lived asset if a reasonable estimate of fair value can be made. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002, with early
adoption permitted. The Company has not completed evaluating the effects this
statement will have on its financial reporting and disclosures.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", but carries over the key guidance from SFAS No. 121,
in establishing the framework for the recognition and measurement of long-lived
7
HOLLY CORPORATION
assets to be disposed of by sale and in addressing significant implementation
issues. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, with early adoption permitted. The Company has not completed evaluating
the effects this statement will have on its financial reporting and disclosures.
Note C - Earnings Per Share
Basic income per share is calculated as net income divided by average
number of shares of common stock outstanding. Diluted income per share assumes,
when dilutive, issuance of the net incremental shares from stock options. Income
per share amounts reflect the two-for one stock split in July 2001. The
following is a reconciliation of the numerators and denominators of the basic
and diluted per share computations for net income:
<Table>
<Caption>
THREE MONTHS ENDED
OCTOBER 31,
------------ ------------
2001 2000
------------ ------------
(In thousands, except share data)
Net income ............................................. $ 20,222 $ 20,412
Average number of shares of common stock outstanding ... 15,508 15,102
Effect of dilutive stock options ....................... 436 --
------------ ------------
Average number of shares of common stock
outstanding assuming dilution .................. 15,944 15,102
============ ============
Income per share - basic ............................... $ 1.30 $ 1.35
============ ============
Income per share - diluted ............................. $ 1.27 $ 1.35
============ ============
</Table>
Note D - Stockholders' Equity
On October 30, 2001, the Company announced plans to repurchase up to
$20 million of the Company's common stock. Such repurchases are expected to be
made from time to time in open market purchases or privately negotiated
transactions, subject to price and availability. The repurchases will be
financed with currently available corporate funds. An amendment to the Company's
Credit Agreement was made to allow for the repurchases.
Note E - Derivative Instruments and Hedging Activities
During the quarter ended April 30, 2001, the Company entered into
commodity price swaps and collar options to help manage the exposure to price
volatility relating to forecasted purchases of natural gas from May 2001 to May
2002. These transactions were designated as cash flow hedges of forecasted
purchases. The values of the outstanding hedges were marked to the current fair
value as
8
HOLLY CORPORATION
of October 31, 2001 and a resulting income of $282,000 is included in first
quarter of fiscal 2002 comprehensive income. The accumulated loss included in
comprehensive income is $1.78 million. Gains (losses) on the natural gas hedges
will be reclassified from comprehensive income to operating expenses through May
2002 when the forecasted transactions impact earnings.
Note F - 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 1,000 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, 2001. The Company's
reportable segments are strategic business units that offer different products
and services.
9
HOLLY CORPORATION
<Table>
<Caption>
TOTAL FOR
PIPELINE REPORTABLE CORPORATE CONSOLIDATED
REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL
------------ -------------- ------------ ------------ ------------
(In thousands)
THREE MONTHS ENDED OCTOBER 31, 2001
Sales and other revenues ............. $ 252,812 $ 4,565 $ 257,377 $ 570 $ 257,947
EBITDA(1) ............................ $ 37,079 $ 3,116 $ 40,195 $ (437) $ 39,758
Income (loss) from operations ........ $ 28,765 $ 2,482 $ 31,247 $ (2,190) $ 29,057
Income (loss) before income taxes .... $ 31,096 $ 2,767 $ 33,863 $ (794) $ 33,069
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
</Table>
(1) Earnings Before Interest, Taxes, Depreciation and Amortization.
Note G - 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. A hearing on the
Company's amended motion for summary judgment, which seeks a court ruling that
would terminate this litigation, was held January 3, 2001; as of the date of
this report, the court has not issued a ruling with respect to this motion. 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.
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 and those in Item 1
"Legal Proceedings" in Part II, 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, effects of governmental
regulations and policies, the availability and cost of financing to the Company,
the effectiveness of the Company's capital investments and marketing strategies,
the costs of defense and the risk of an adverse decision in the Longhorn
Pipeline litigation, and general economic conditions. Should one or more of
these risks or uncertainties, among others as set forth in this Form 10-Q,
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. 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, 2001 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.
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,
----------------------------------
2001 2000
-------------- --------------
(In thousands, except share data)
Sales and other revenues ............................. $ 257,947 $ 325,963
Operating costs and expenses
Cost of products sold ............................. 191,984 254,235
Operating expenses ................................ 24,746 24,382
Selling, general and administrative expenses ...... 5,430 6,973
Depreciation, depletion and amortization .......... 6,431 6,552
Exploration expenses, including dry holes ......... 299 234
-------------- --------------
Total operating costs and expenses ........... 228,890 292,376
-------------- --------------
Income from operations ............................... 29,057 33,587
Other income (expense)
Equity in earnings of joint ventures .............. 2,748 1,067
Interest expense, net ............................. (258) (860)
Gain on sale of equity securities ................. 1,522 --
-------------- --------------
4,012 207
-------------- --------------
Income before income taxes ........................... 33,069 33,794
Income tax provision ................................. 12,847 13,382
-------------- --------------
Net income ........................................... $ 20,222 $ 20,412
============== ==============
Net income per common share - basic(1) ............... $ 1.30 $ 1.35
Net income per common share - diluted(1) ............. $ 1.27 $ 1.35
Average number of common shares outstanding:(1)
Basic .............................................. 15,508 15,102
Diluted ............................................ 15,944 15,102
Sales and other revenues(2)
Refining .......................................... $ 252,812 $ 320,353
Pipeline Transportation ........................... 4,565 4,647
Corporate and Other ............................... 570 963
-------------- --------------
Consolidated ...................................... $ 257,947 $ 325,963
============== ==============
Income (loss) from operations(2)
Refining .......................................... $ 28,765 $ 33,154
Pipeline Transportation ........................... 2,482 2,820
Corporate and Other ............................... (2,190) (2,387)
-------------- --------------
Consolidated ...................................... $ 29,057 $ 33,587
============== ==============
</Table>
12
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
1) A two-for-one stock split was effected in July 2001. All references to
the number of shares and per share amounts have been adjusted to reflect
the split on a retroactive basis.
2) 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 1,000 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,
-----------------------------
2001 2000
------------ ------------
Crude charge (BPD)(1) .................. 60,200 68,100
Average per barrel(2)
Refinery margin ...................... $ 9.32 $ 9.73
Cash operating costs(3) .............. 4.22 3.92
------------ ------------
Net cash operating margin ............ $ 5.10 $ 5.81
============ ============
Sales of produced refined products
Gasolines ............................ 52.6% 53.3%
Diesel fuels ......................... 21.3 22.9
Jet fuels ............................ 10.2 10.7
Asphalt .............................. 12.4 9.8
LPG and other ........................ 3.5 3.3
------------ ------------
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.
13
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
FIRST QUARTER OF FISCAL 2002 COMPARED TO FIRST QUARTER OF FISCAL 2001
Net income for the first quarter ending October 31, 2001 was $20.2
million ($1.30 per share), as compared to $20.4 million ($1.35 per share) for
the first quarter of the prior fiscal year. Both revenues and cost of products
sold were lower for the first quarter of fiscal 2002 as compared to the first
quarter of fiscal 2001, due principally to lower refined product sales prices
and lower cost of purchased crude oil. Production was slightly lower due to a
planned maintenance of the Artesia crude distillation unit in August 2001.
Refinery margins in the first quarter of fiscal 2002 were only slightly lower
than the first quarter of fiscal 2001 remaining relatively high compared to
prior years and continuing the recent industry trend. Refinery margins since the
end of the first quarter of fiscal 2002, while not as high as for the quarter
ended October 31, 2001, have remained somewhat above historic levels, although
the production during the second quarter of fiscal 2002 will be reduced due to
an extended planned turnaround involving a number of process units at the
Artesia and Lovington facilities.
Operating costs remained relatively unchanged for the first quarter of
2002 compared to prior year's first quarter. Lower general and administrative
expenses in the first quarter of 2002 as compared to the prior year's first
quarter were due primarily to decreased costs associated with legal proceedings
and to a decrease in compensation costs.
Other income improved in the first quarter, as compared to the prior
year's first quarter, as the Company realized additional revenues from the
Company's share of earnings in an asphalt joint venture formed in July 2000 with
a subsidiary of Koch Industries, Inc. In the first quarter of 2002, the Company
also realized a $1.5 million gain on the sale of equity securities.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $22.7 million to $88.5 million
during the three months ended October 31, 2001 as cash flows generated from
operations were significantly greater than cash flows required for investing
activities and dividends paid. Working capital increased during the three months
ended October 31, 2001 by $15.8 million to $73.5 million. In April 2001, the
Company entered into an agreement with a group of banks led by Canadian Imperial
Bank of Commerce to extend its Revolving Credit Agreement. The expiration date
of the Credit Agreement will be October 10, 2003 if there is a satisfactory
resolution in the Longhorn Partners Pipeline lawsuit prior to October 10, 2002
and will be October 10, 2002 if there is not such a satisfactory resolution by
October 10, 2002. Under the current agreement, the Company has 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, 2001 the Company had letters of credit outstanding under the
facility of $22.4 million and had no borrowings outstanding under the facility.
On October 30, 2001, the Company announced plans to repurchase up to $20 million
of the Company's common stock. Such repurchases are expected to be made from
time to time in open market purchases or privately negotiated transactions,
subject to price and availability. An
14
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
amendment to the Company's Credit Agreement was made to allow for the
repurchases. At the end of the first quarter of fiscal 2002, 5,000 shares had
been repurchased for $92,000. The Company believes its internally generated cash
flow, along with its Credit Agreement, provides sufficient resources to fund
planned 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.
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 retired in fiscal 2001. 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. Estimated capital expenditures of
approximately $9 million were included in the capital budgets for fiscal 2001
and 2002 to effectuate some of the production improvements.
Net cash provided by operating activities amounted to $24.4 million for
the first three months of fiscal 2002, as compared to $37.6 million for the same
period of the prior year. The decrease was due to a buildup of inventory in
preparation for the second quarter of fiscal 2001 turnaround and other working
capital items.
Cash flows used for financing activities amounted to $1.0 million in
the first three months of fiscal 2002, as compared to $1.4 million in the same
period of the prior year. Cash flows used for financing activities in the first
three months of both fiscal years consisted principally of $1.5 million and $1.4
million respectively of dividends paid to shareholders. In the first quarter of
fiscal 2002, the Company received cash of $0.7 million from the issuance of
common stock upon exercise of options. The Company has not made any bank
borrowings during the current fiscal year. The next principal payment of $8.6
million on the Company's Senior Notes is due in December 2001.
Cash flows used for investing activities were $0.7 million for the
first three months of fiscal 2002, as compared to $6.2 million for the same
period of the 2001 fiscal year. Cash expended on capital projects in the first
three months of the current and prior fiscal years were $6.4 million and $5.2
million respectively. The Company's net cash flow used for investing activities
was reduced during the first three months of fiscal 2002 by a $1.1 million
distribution to the Company from the Rio Grande Pipeline joint venture and by
$4.5 million of proceeds from the sale of equity securities.
The Company has invested significant amounts in capital expenditures in
recent years to enhance the Navajo Refinery and expand its supply and
distributions network. For the 2002 fiscal year, the capital budget of Navajo
Refinery, including its supply and distribution network, totals approximately
$34 million. The components of this budget are $10 million for refinery
improvements, $20 million for costs to complete the hydrotreater project
described below, and $4
15
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
million for refinery related pipeline and transportation projects. In addition
to these projects, the Company plans to expend in the 2002 fiscal year
approximately $10 million on projects, principally for refinery improvements,
that were approved in previous capital budgets. In November 1997, the Company
purchased a hydrotreater unit for $5 million from a closed refinery. This
purchase will 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.
During the last two years, the Company spent approximately $8 million on
relocation, engineering and equipment fabrication related to the hydrotreater
project. The remaining costs to complete the hydrotreater project, estimated to
be approximately $20 million, have been included in the capital budget for 2002.
Subject to obtaining necessary permitting in a timely manner, the Company
currently expects that the hydrotreater project could be completed by the fall
of 2003. The hydrotreater will enhance higher value light products yields and
expand the Company's ability to meet 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 become effective in
2004. Based on the current configuration of the Navajo Refinery, the Company can
supply current sales volumes for the Phoenix market under the CARB standards
prior to completion of the hydrotreater. Additionally, in fiscal 2001, the
Company completed the construction of a new sulfur recovery unit, which is
currently utilized to enhance sour crude processing capabilities and will
recover additional extracted sulfur when the hydrotreater is completed.
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 last months of calendar 1999. The Company
is expanding its pumping capacity on the Leased Pipeline and its terminal in
Moriarty to include gasoline and jet fuel. The increase in pipeline capacity and
the expanded terminal are expected to be operational by the end of calendar
2001. When these initiatives are completed, the Company will be positioned to
expand the transportation of petroleum products from the Navajo Refinery to the
Albuquerque area.
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,
2001.
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
16
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
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 stream and
river beds and state-owned lands; the Texas Land Commissioner has indicated that
these easements will not be granted until he is satisfied that the pipeline
meets 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 challenged the Final EA in further federal court
proceedings that began in January 2001. In May 2001, one of the intervenor
plaintiffs in the federal court lawsuit, the Lower Colorado River Authority
("LCRA"), entered into a settlement agreement with Longhorn Partners under the
terms of which Longhorn Partners has agreed to implement specified additional
mitigation measures relating to water supplies in certain areas of Central Texas
and the LCRA has agreed to dismiss with prejudice its participation as an
intervenor in the federal court lawsuit; this settlement agreement has not yet
received final approval from the federal court. Longhorn Partners has recently
announced that it has begun construction on certain pipeline improvements in the
Austin, Texas area prior to a ruling by the federal court on the pending legal
challenges to the Final EA. Longhorn Partners had previously indicated that
construction relating to certain mitigation measures included in the Final EA
might 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
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 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 and availability 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."
Other legal proceedings that could affect future results are described
in Part II "Other Information", Item 1, "Legal Proceedings."
18
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 reducing or 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.
During the quarter ended April 30, 2001, the Company entered into
commodity price swaps and collar options to help manage the exposure to price
volatility relating to forecasted purchases of natural gas from May 2001 to May
2002. At October 31, 2001, the Company has contracts outstanding for natural gas
hedges of approximately .8 million MMBtu, relating to approximately 50% of the
forecasted natural gas purchases for the Navajo Refinery. The price swaps and
collar options effectively established minimum and maximum prices to be paid for
the portion of natural gas hedged of $5.29 and $5.63 per MMBtu, respectively.
The values of the outstanding hedges were marked to the current fair value as of
October 31, 2001 and a resulting income of $282,000 is included in the first
quarter of fiscal 2002. The accumulated loss included in comprehensive income is
$1.78 million. Gains (losses) on the natural gas hedges will be reclassified
from comprehensive income to operating expenses through May 2002 when the
forecasted transactions impact earnings.
At October 31, 2001, the Company had outstanding unsecured debt of
$42.9 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
approximately two years and such debt represent less than 20% of the Company's
total capitalization. As the interest rates on the Company's bank borrowings, if
any, 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. There were no bank borrowings during fiscal 2001 or for the first quarter
of fiscal 2002. Additionally, the Company invests any available cash only in
investment grade, highly liquid investments with maturities of three months or
less and hence the interest rate market risk implicit in these cash investments
is low. 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 approximately two
19
HOLLY CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
years and such debt represents less than 20% of the Company's total
capitalization, and since the Company's borrowings, if any, under the Credit
Agreement and cash investments are at short-term market rates.
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 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement changes how goodwill and other intangible assets are
accounted for subsequent to their initial recognition. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, with early adoption
permitted, however, all goodwill and intangible assets acquired after June 30,
2001, will be subject immediately to the provisions of this statement. The
Company has not completed evaluating the effects this statement will have on its
financial reporting and disclosures.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that the fair value for an
asset retirement obligation be capitalized as part of the carrying amount of the
long-lived asset if a reasonable estimate of fair value can be made. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002, with early
adoption permitted. The Company has not completed evaluating the effects this
statement will have on its financial reporting and disclosures.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", but carries over the key guidance from SFAS No. 121,
in establishing the framework for the recognition and measurement of long-lived
assets to be disposed of by sale and to address significant implementation
issues. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, with early adoption permitted. The Company has not completed evaluating
the effects this statement will have on its financial reporting and disclosures.
20
HOLLY CORPORATION
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."
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. A hearing on the
Company's amended motion for summary judgment, which was filed in October 2000
and seeks a court ruling that would terminate this litigation, was held January
3, 2001; as of the date of this report, the court has not issued a ruling with
respect to this motion. 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.
On May 10, 2001, the Environmental Protection Division of the New
Mexico Environment Department ("NMED") issued a Compliance Order Requiring
Compliance and Assessing a Civil Penalty (the "Compliance Order") which alleges
that the fluid catalytic cracking unit ("FCCU") at the Company's Navajo Refinery
has operated in excess of allegedly applicable air emissions limits for certain
pollutants in substantial portions or all of the period from 1992 to the
present. The Compliance Order seeks immediate compliance with the emission
limits alleged to be applicable or a settlement agreement with the Company
establishing a binding schedule for installing equipment to achieve compliance
with the specified limits. The Compliance Order states that a civil penalty will
be calculated by the NMED during the penalty phase of proceedings under the
Compliance Order and asserts the applicability of provisions of New Mexico law
authorizing penalties of up to $15,000 per day or per hour for violations of air
emissions permit limits. The Company filed in June 2001 a Request for Hearing
and Answer challenging the Compliance Order. Proceedings with respect to the
Compliance Order are currently stayed to permit settlement discussions involving
the NMED and other parties as described in the next paragraph.
22
HOLLY CORPORATION
In July 2001, the Company initiated discussions among the Company, the
EPA, the NMED, and the Montana Department of Environmental Quality with respect
to a possible global settlement of issues concerning the application of air
quality requirements to past and future operations of the Company's refineries.
A tentative agreement on these issues has been negotiated and the Company
believes that it is likely that a final agreement on these issues based on the
tentative agreement can be entered into. If a final agreement is entered into,
it is expected that such agreement would involve capital investments by the
Company, some of them substantial, and the payment of a monetary penalty. At the
date of this report no assurance is possible that such a final agreement will be
entered into.
In May and June 2001, the Company filed claims with the Department of
Defense under the Contract Disputes Act asserting that additional amounts are
due to the Company with respect to jet fuel sales to the Defense Fuel Supply
Center in the years 1982 through 1995. The total of all claims filed by the
Company is approximately $210 million. In November 2001, the Department of
Defense issued final decisions rejecting the Company's claims and asserting
counterclaims totaling approximately $8,000,000 if part or all of the Company's
claims are allowed. Any recovery by the Company with respect to the claims would
require further proceedings. It is not possible at the date of this report to
predict what amount, if any, will ultimately be payable to the Company with
respect to these claims.
23
HOLLY CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders on December 13, 2001, 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"
------------ -------------
Matthew P. Clifton 12,973,050 347,517
W. John Glancy 12,970,650 349,917
William J. Gray 13,186,548 134,019
Marcus R. Hickerson 13,179,576 140,991
Thomas K. Matthews, II 13,181,701 138,866
Robert G. McKenzie 13,186,848 133,719
Lamar Norsworthy 12,897,134 423,433
Jack P. Reid 12,530,224 790,343
Paul T. Stoffel 13,184,915 135,652
</Table>
24
HOLLY CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
25
HOLLY CORPORATION
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 13, 2001 By /s/ Kathryn H. Walker
----------------- -----------------------------------------
Kathryn H. Walker
Vice President, Accounting
(Principal Accounting Officer)
By /s/ Stephen J. McDonnell
-----------------------------------------
Stephen J. McDonnell
Vice President and Chief Financial
Officer
(Principal Financial Officer)
26