ITEM 3. LEGAL PROCEEDINGS
In July 1993, the DOJ, acting on behalf of the EPA, filed a complaint in the United States District Court for the District of New Mexico alleging that Navajo, beginning in September 1990 and continuing until the present, had violated and continues to violate RCRA and implementing regulations of the EPA by treating, storing and disposing of certain hazardous wastes without necessary authorization and without compliance with regulatory requirements. The complaint seeks a court order directing Navajo to comply with these regulatory standards and civil penalties for the alleged non-compliance. The Company believes that the parties are in the final stages of negotiations that should resolve the litigation. Based on these negotiations, the Company would close the existing evaporation ponds of its wastewater management system and implement an alternative wastewater treatment system. Any settlement with DOJ and EPA also is expected to involve payment of a civil penalty. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 12 to the Consolidated Financial Statements.
The Company is a party to various other litigation and proceedings which it believes, based on advice of counsel, will not have a materially adverse impact on its financial condition or operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the Company's 1995 fiscal year.
Executive Officers of Registrant (per instruction 3 to Item 401(b) of Regulation S-K)
The executive officers of the Company as of October 20, 1995 are as follows:
In addition to the persons listed above, Kathryn Walker, age 45, was appointed Controller of Navajo Refining Company in August 1993; prior thereto she served from 1985 as Assistant Controller of Navajo.
All officers of the Company are elected annually to serve until their successors have been elected. Mr. Cella has occupied the additional office of Secretary since December 1994. Mr. Clifton previously served as Vice President, Economics, Engineering and Legal Affairs from 1988 to 1991. Mr. Knorr is also President of one of the partners of MRC and serves as the General Manager of MRC. Messrs. Blair, Knapp and White were elected to their respective positions in September 1994. Mr. Blair has served as Marketing Manager of Asphalt and LPG of Navajo since 1989 and previously held various marketing and supply positions. Mr. Knapp joined the Company in 1992 and served as Director of Corporate Development from 1992 to 1994. Mr. Knapp was Director of Corporate Planning for Northwest Airlines from 1991 to 1992, and prior to that was associated with the management consulting firm of Monitor Company from 1987 to 1991. Mr. White has served as Marketing Manager of Light Oils of Navajo since 1989 and previously held various marketing and supply positions.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's common stock is traded on the American Stock Exchange under the symbol "HOC". The following table sets forth the range of the daily high and low sales prices per share of common stock, dividends paid per share and the trading volume of common stock for the periods indicated:
As of July 31, 1995, the Company had approximately 2,000 stockholders of record.
On September 29, 1995, the Company's Board of Directors declared a regular quarterly dividend in the amount of $.10 per share payable on October 27, 1995. The Company intends to consider the declaration of a dividend on a quarterly basis, although there is no assurance as to future dividends since they are dependent upon future earnings, capital requirements and financial condition of the Company as well as other factors. The Senior Notes and Credit Agreement limit the payment of dividends. See Note 6 to the Consolidated Financial Statements.
ITEM 6.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1995 Versus 1994
Net income for the 1995 fiscal year was $18.1 million, including a $5.7 million accounting change in the first quarter of fiscal 1995, compared to $20.7 million in the prior year.
Refining margins for the year were weak as crude oil costs increased at a greater rate than product prices. Margins at the Montana refinery were particularly poor in the first nine-month period of fiscal 1995 as compared to the prior year's period. The 11% increase in the Company's revenues for the year ended July 31, 1995 is attributable to a 6% increase in sales volume and higher selling prices. The prior year's sale volumes were reduced by a major maintenance turnaround at Navajo Refining Company's New Mexico facilities.
Effective August 1, 1994, the Company changed its method of accounting for turnaround costs. Turnarounds consist of preventive maintenance on major processing units, as well as the shutdown and restart of units, and generally are scheduled at two to three year intervals. Previously, the Company estimated the costs of the next scheduled turnaround and ratably accrued the related expenses prior to the actual turnaround. To provide for a better matching of turnaround costs with revenues, the Company changed its accounting method for turnaround costs to one that results in the amortization of costs incurred over the period until the next scheduled turnaround. The amortization of turnaround costs is recorded in depreciation, depletion and amortization expense, whereas previously the expenses accrued prior to the turnaround were recorded in cost of sales as an operating expense. The increase in the current year in depreciation expense is primarily the result of this change in accounting. See Note 2 to the Consolidated Financial Statements for the effect of the accounting change.
1994 Versus 1993
Net income for the 1994 fiscal year ended July 31, 1994 was $20.7 million compared to $19.9 million before an accounting change in the prior fiscal year. A charge of $1.0 million relating to a change in the method to account for income taxes reduced net income to $19.0 million in fiscal 1993.
While refinery margins for the 1994 fiscal year as a whole improved over the levels of the prior year, the margins were adversely impacted by poor refined product margins experienced by Navajo Refining Company in the year's fourth quarter, as product prices did not increase commensurately with a rise in crude oil costs. Montana Refining Company had a third consecutive record year in fiscal 1994, as favorable margins were sustained for the entire year. Most of the increase in profitability resulting from the Company's higher refinery margins was offset by the effect of a 3% reduction in sales volumes and the net effect of the other items described below. Net sales for the 1994 fiscal year were down 13% as the result of lower prices on product sales and the decrease in volumes. The reduction in sales volume for the year was caused primarily by a planned major maintenance turnaround of Navajo Refining Company's New Mexico facilities which occurred in the first months of fiscal 1994. A charge
of $2.9 million was recorded in the fourth quarter of fiscal 1993 to reflect an increase in the estimate for the costs to be incurred in the turnaround, and an additional $1.5 million in excess of the revised accrual at July 31, 1993 was included as an expense in the second quarter of fiscal 1994. Further reducing income in fiscal 1994 were other operating expense increases and an increase in exploration expenses, including dry holes.
Income in fiscal 1993 was improved by $4 million relating to the settlement of litigation with a common carrier pipeline and was reduced by a $2 million charge relating to an action by the United States Department of Justice, acting on behalf of the Environmental Protection Agency (EPA). Both of these items are more fully discussed below.
1993 Versus 1992
Net income for the year ended July 31, 1993 was $19.9 million before an accounting change compared to $2.8 million in the prior year. The cumulative effect through the 1992 fiscal year of adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which amends the accounting for income taxes from the deferral method to the liability method, was to decrease net income by $1.0 million, to $19.0 million for the year ended July 31, 1993. Other than the cumulative effect of the adjustment, the effect of the change on income for the year ended July 31, 1993 was not significant.
Net income for the year ended July 31, 1993 improved substantially over the prior year due to improved refinery margins and higher sales volumes. Increased sales volumes of 23% and revenues of 24% over the prior year were the result of higher throughputs made possible by the refinery expansion completed in December 1991 and the alleviation of product pipeline distribution constraints in October 1992. Refinery margins and sales volumes for the 1993 fiscal year also may have been favorably affected by a temporary suspension of production during most of the year by a refinery in the Company's principal market area. Additionally contributing to 1993's performance was Montana Refining Company's second consecutive record year. Increases in fiscal 1993 in operating expenses, principally an increase made in the fourth quarter of $2.9 million in the estimate for a planned major maintenance turnaround scheduled for the fall of 1993, depreciation, depletion and amortization, primarily attributable to the refinery expansion, and general and administrative expense reduced profitability. Net income in the fourth quarter of the 1993 fiscal year was improved by pre-tax income of $4 million and reduced by a pre-tax charge of $2 million, both of which are described below.
The year ended July 31, 1993 included income of $4 million relating to a settlement of litigation with a common carrier pipeline company. As part of the settlement, trigger events were established which would require increases in the capacity of the pipeline the Company uses to access the Arizona markets.
As discussed in detail under Financial Condition below, the $2 million pre-tax charge relates to an enforcement action brought by the United States Department of Justice, acting on behalf of the EPA, which alleges that the Company's subsidiary, Navajo Refining Company, beginning in September 1990 and continuing until the present, violated and continues to violate the Resource Conservation and Recovery Act (RCRA) and implementing regulations of the EPA by treating, storing and disposing of certain hazardous wastes without required authorization and without compliance with regulatory requirements. The complaint seeks a court order directing Navajo to comply with these regulatory standards and civil penalties for the alleged non-compliance.
Net income in the fourth quarter of fiscal 1992 was improved by the elimination, as a consequence of the Company's acquisition of the remaining interest in Montana Refining Company, of a $2.6 million liability for deferred taxes that had been reflected on the Company's financial statements.
FINANCIAL CONDITION
Cash flows from operations during fiscal 1995 were greater than capital expenditures, debt payments and dividends paid, resulting in a net increase of cash and cash equivalents of $10.1 million. Working capital decreased during fiscal 1995 by $.5 million to $17.7 million at July 31, 1995. At July 31, 1995, the Company had $25 million of borrowing capacity under the Credit Agreement which can be used for short-term working capital needs. The Company believes that these sources of funds, together with future cash flows from operations and a new private placement and extension of debt currently being completed as described below, should provide sufficient resources, financial strength and flexibility for the Company to satisfy its liquidity needs, capital requirements, and debt service obligations and to permit the payment of dividends for the foreseeable future.
Net cash provided by operating activities amounted to $34.2 million in fiscal 1995, compared to $27.7 million in fiscal 1994 and $38.7 million in fiscal 1993. The primary reason for the differences in cash provided from operations during the three years ended July 31, 1995 was changes in working capital accounts. Significant amounts of funds were required in fiscal 1994 to maintain working capital levels as compared to both the 1995 and 1993 fiscal year.
Cash flows used for investing activities totalled $57.8 million over the last three years, $15.2 million in 1995, $22.5 million in 1994 and $20.1 million in 1993, all for capital expenditures. In fiscal 1993 and 1994, most of the funds expended were for refinery projects including diesel desulfurization units at the Artesia, New Mexico facility and the Montana refinery in order to meet the October 1993 requirements for lower sulphur content in diesel fuel. The New Mexico unit was completed in August 1993 and the Montana unit was completed in December 1993.
The Company has adopted capital budgets totalling $44 million for fiscal 1996. The major components of this budget are projects at the Company's 60,000 barrel per day Navajo Refinery in Artesia, New Mexico. The projects entail both refinery upgrades to improve product yields and a joint venture to ship liquid petroleum gas (LPGs) to Mexico.
The Company believes its presently scheduled capital projects will improve product yields and enhance refining profitability. The first of these projects, a UOP Isomerization unit, will increase the refinery's internal octane generating capabilities and will result in improved light product yields. This unit is expected to be operational during the fourth quarter of fiscal 1996. In addition, the Company has determined to make certain state-of-the-art upgrades to its fluid catalytic cracking unit (FCC), which will improve FCC high value product yields. Engineering and equipment procurement for this project will proceed during fiscal 1996, with completion and realization of benefits occurring during fiscal 1997. The total estimated cost of these two projects is $12.5 million.
The Company's previously announced joint venture with Amoco and Mapco to transport LPGs to Mexico is in the final stages of negotiation with Pemex. Assuming successful completion of negotiations, a new 12" pipeline would be constructed from the Navajo refinery in Artesia, New Mexico to El Paso, Texas, thereby allowing Navajo to realize reduced operating expenses at current throughput rates and position it, to expand capacity and ship greater volumes to its El Paso-origin markets, if such steps later prove advantageous. The new line would replace an 8" pipeline currently used by Navajo which, in turn, would be transferred to the joint venture. The Company's total net cash investment in the project, including a 25% interest in the joint venture, is estimated to be $22 million.
The remainder of the approved budget will be for various refinery improvements, environmental and safety enhancements and approximately $2 million for exploration and production activities.
Cash flows used for financing activities amounted to $8.9 million in fiscal 1995, $8.5 million in fiscal 1994 and $13.4 million in fiscal 1993. Financing activities over the last three years included the renewals of the Company's Credit Agreement in July 1993 and July 1995 with a group of banks, which provides for a total facility of $100 million, the full amount of which may be used to support letters of credit and $25 million of which may be used for direct borrowings for short-term working capital needs. The Company had $10.5 million of borrowings outstanding under its Credit Agreement as of July 31, 1992, the full amount of which was paid off during fiscal 1993. The Company made principal payments of $5.6 million on the Senior Notes in June 1994 and 1995.
In October 1995, the Company negotiated with a group of insurance companies a new private placement of senior notes in the amount of $39 million and the extension of $21 million of existing Senior Notes for capital expenditures and for general corporate purposes. Closing of this transaction is expected in November 1995. The $39 million of new senior notes have a 10 year maturity, with equal annual principal payments of $5.6 million beginning at the end of the fourth year and will have an interest rate of 7.62%. The extension of $21 million of Series B Notes extends the final maturity from June 2001 to December 2005, with the first principal payment due changed from June 1996 to December 1999 and with an interest rate subsequent to the original maturity date of 7.82%. Both the new notes and the extension have terms and conditions similar to the existing Senior Notes. Maturities of long-term debt for the next five fiscal years upon closing of this transaction are as follows: 1996 -- $10,775,000; 1997 -- $10,775,000; 1998 -- $10,775,000; 1999 -- $5,175,000 and 2000 -- $13,746,000.
See Note 6 to the Consolidated Financial Statements for a summary of the Senior Notes and Credit Agreement.
Diamond Shamrock, Inc., an independent refiner and marketer, is building a 420-mile, ten-inch refined products pipeline from its McKee refinery near Dumas, Texas to El Paso, the Company's largest market. Diamond Shamrock has announced that it expects to complete that pipeline, which will have an initial capacity of 25,000 BPD, in the fourth quarter of calendar 1995, and that it intends to use its pipeline to supply fuel to the El Paso, Arizona and northern Mexico markets. The Diamond Shamrock pipeline could substantially increase the supply of products in the Company's principal markets. In addition, in June 1995, an investor group announced that it is negotiating to purchase an existing crude oil pipeline running from West Texas to a refinery near Houston as part of the investor group's plan to reverse the line and extend it for use in transporting refined products from the Gulf Coast to El Paso.
At times in the past, the common carrier pipelines used by the Company to serve the Tucson and Phoenix markets have been operated at or near their capacity. In addition, the common carrier pipeline used by the Company to serve the Albuquerque market currently is operating at or near capacity. As a result, the volume of refined products that the Company and other shippers have been able to deliver to these markets at times has been limited. In general, there is no assurance that the Company will not experience future constraints on its ability to deliver its products through common carrier pipelines or that any existing constraints will not worsen. In particular, the flow of additional product into El Paso for shipment to Arizona, either as a result of the new Diamond Shamrock pipeline or otherwise, could result in the reoccurrence of such constraints.
In July 1993, the United States Department of Justice (DOJ), on behalf of the United States Environmental Protection Agency (EPA), filed a suit against the Company's subsidiary, Navajo Refining Company (Navajo) alleging that, beginning in September 1990 and continuing through the present, Navajo has violated and continues to violate the Resource Conservation and Recovery Act (RCRA) and implementing regulations of the EPA by treating, storing and disposing of certain hazardous wastes without compliance with regulatory requirements. The Company believes that the parties are in the final stages of negotiating a resolution of the litigation. If settled as anticipated, the Company would close the existing evaporation ponds of its wastewater management system at a cost believed to be substantially less than $1 million. The settlement also contemplates that the Company would implement one of several alternatives to the existing wastewater treatment system. Depending upon which approach were utilized, the Company could incur total costs of approximately $3 million over the next several years. The costs to implement an alternative wastewater treatment system would be capitalized and amortized over the future useful life of the resulting asset in accordance with generally accepted accounting principles. The settlement with the DOJ also is expected to involve the payment of a civil penalty of less than $2 million. In fiscal 1993, the Company recorded a $2 million reserve for the litigation.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Holly Corporation
We have audited the accompanying consolidated balance sheet of Holly Corporation at July 31, 1995 and 1994, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended July 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Holly Corporation at July 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas September 26, 1995
HOLLY CORPORATION
CONSOLIDATED BALANCE SHEET
See accompanying notes.
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
See accompanying notes.
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes.
HOLLY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($ in thousands)
See accompanying notes.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company is principally engaged in the refining of petroleum products. Although the Company is also engaged in certain exploration and production activities, such activities do not represent a significant segment of the Company's assets or operations.
The consolidated financial statements include the accounts of the Company, its subsidiaries and Montana Refining Company, a Partnership (MRC).
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost, using the last-in, first-out (LIFO) method for crude oil and refined products and the average cost method for materials and supplies, or market.
REVENUE RECOGNITION
Sales and related cost of sales are recognized when products are shipped to customers and title passes. Sales are reported exclusive of excise taxes.
DEPRECIATION
Depreciation is provided by the straight-line method over the estimated useful lives of the assets, primarily 10 to 30 years for refining and pipeline facilities and 3 to 10 years for corporate and other assets.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
OIL AND GAS EXPLORATION AND DEVELOPMENT
The Company accounts for the acquisition, exploration, development and production costs of its oil and gas activities using the successful efforts method of accounting. Lease acquisition costs are capitalized; undeveloped leases are written down when determined to be impaired and written off upon expiration or surrender. Geological and geophysical costs and delay rentals are expensed as incurred. Exploratory well costs are initially capitalized, but if the effort is unsuccessful, the costs are charged against earnings. Development costs, whether or not successful, are capitalized. Productive properties are stated at the lower of amortized cost or estimated realizable value of underlying proved oil and gas reserves. Depreciation, depletion and amortization of such properties is computed by the unit-of-production method. At July 31, 1995, the Company had not discovered a material amount of proven reserves.
EARNINGS PER SHARE
Earnings per share amounts are based upon the weighted average number of common shares outstanding during each period.
FUTURES CONTRACTS
The Company enters into commodity futures contracts to hedge a portion of the price risk associated with crude oil and refined products. Gains or losses on contracts are recognized when the related inventory is sold or the hedged transaction is consummated.
2. ACCOUNTING CHANGE
Effective August 1, 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which amends the accounting for income taxes from the deferral method to the liability method. Under the liability method, deferred taxes are stated at the income tax rates currently in effect or scheduled to be implemented rather than at the tax rate in effect when the taxes were provided. The cumulative effect of this accounting change through the 1992 fiscal year was a $958,000 increase in the Company's deferred tax liability at August 1, 1992. This additional income tax expense was reflected as a reduction of $958,000 in net income in the first quarter of the 1993 fiscal year or $.12 per share. Excluding the provision for the cumulative effect upon adoption of the new standard, the effect of the change on net income was not material.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
Effective August 1, 1994, the Company changed its method of accounting for turnaround costs. Turnarounds consist of preventive maintenance on major processing units as well as the shutdown and restart of all units, and generally are scheduled at two to three year intervals. Previously, the Company estimated the costs of the next scheduled turnaround and ratably accrued the related expenses prior to the actual turnaround. To provide for a better matching of turnaround costs with revenues, the Company changed its accounting method for turnaround costs to one that results in the amortization of costs incurred over the period until the next scheduled turnaround. The cumulative effect of this accounting change through the 1994 fiscal year was an increase in net income in the first quarter of the 1995 fiscal year of $5,703,000 (net of deferred taxes of $3,865,000), or $.69 per common share. Excluding the cumulative effect, the change increased net income for fiscal 1995 by $886,000 or $.11 per common share. If the accounting change for turnaround costs had been retroactively applied, pro forma net income and net income per common share would have been as follows:
3. ACCOUNTS RECEIVABLE
Crude oil resales accounts receivable principally represent the sell side of reciprocal crude oil buy/sell exchange arrangements involved in supplying crude oil to the refineries, with an approximate like amount reflected in accounts payable. The net differential of these crude oil buy/sell exchanges is reflected in cost of sales. The exchange differentials result principally from crude oil type and location differences.
Credit losses are provided for in the financial statements and consistently have been minimal.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
4. INVENTORIES
The excess of current cost over the LIFO value of inventory was $7,840,000 and $12,228,000 at July 31, 1995 and 1994, respectively.
5. PROPERTIES, PLANTS AND EQUIPMENT
Refining and pipeline facilities at July 31, 1995 and 1994 include $1,578,000 and $4,452,000, respectively, of construction in progress which was not being depreciated at those dates, pending completion of the construction projects.
6. DEBT
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
SENIOR NOTES
In June 1991, the Company sold $80 million of Senior Notes to a group of insurance companies. The Senior Notes were issued in two Series and are unsecured. The Series A Notes are in the principal amount of $28 million, have a 7- year life, require equal annual principal payments of $5,600,000 beginning June 15, 1994 and bear interest at 9.72%. The Series B Notes are in the principal amount of $52 million, have a 10-year life, require equal annual principal payments of $8,667,000 beginning June 15, 1996 and bear interest at 10.16%. The note agreement imposes certain restrictive covenants, including limitations on liens, additional indebtedness, sale of assets, investments, business combinations and dividends, which collectively are less restrictive than the terms of the bank Credit Agreement.
CREDIT AGREEMENT
In June 1995, the Company and certain of its subsidiaries amended its current bank Credit Agreement (Credit Agreement) extending the term for two additional years. The Credit Agreement provides a $100 million facility for letters of credit, or for direct borrowings of up to $25 million, with such borrowings being subject to an annual 20-day cleanup period. Interest on borrowings is based upon, at the Company's option, (i) the agent bank's prime rate plus 1/2% per annum; (ii) various Eurodollar related rates; and (iii) various certificate of deposit related rates. A fee of 1% per annum is payable quarterly on the outstanding balance of all letters of credit, and a commitment fee of 3/8 of 1% per annum is payable on the unused portion of the facility. The borrowing base for the facility consists of cash, cash equivalents, accounts receivable and inventory, all of which secure the facility. The Credit Agreement imposes certain restrictions, including: (i) a prohibition of other indebtedness in excess of $3 million with exceptions for, among other things, indebtedness under the Company's Senior Notes and certain nonrecourse debt; (ii) maintenance of certain levels of net worth, working capital and interest coverage; (iii) limitations on investments and dividends; and (iv) a prohibition of incursions on controlling ownership, material changes in senior management and business combinations with unaffiliated entities.
At July 31, 1995, the Company had outstanding letters of credit totalling $24,776,000 and no borrowings. The unused commitment under the Credit Agreement at July 31, 1995 was $75,224,000, of which up to $25,000,000 may be used for additional direct borrowings.
The average and maximum amounts outstanding and the effective average interest rate for borrowings under the Company's current and prior credit agreements were as follows:
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
The Senior Notes and Credit Agreement restrict investments and distributions, including dividends, to an amount in the aggregate not to exceed 75% of cumulative consolidated net income (as defined). Under the most restrictive of these covenants, at July 31, 1995 approximately $26.6 million was available for the payment of dividends.
Maturities of long-term debt for the next five fiscal years are as follows: 1996 -- $14,275,000; 1997 -- $14,275,000; 1998 -- $14,275,000; 1999 - -- $8,675,000 and 2000 -- $8,675,000.
The Company made interest payments of $8,183,000 in 1995, $8,744,000 in 1994 and $9,058,000 in 1993.
Based on the borrowing rates that the Company believes would be available for replacement loans with similar terms and maturities of the debt of the Company now outstanding, the fair value of long-term debt including current maturities would be $73.2 million at July 31, 1995.
7. INCOME TAXES
Effective August 1, 1992, the Company adopted SFAS No. 109 to account for income taxes (see Note 2).
The statutory federal income tax rate applied to pre-tax book income reconciles to income tax expense as follows:
(1) Blended rate, as federal income tax rate changed effective January 1, 1993.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
Operations of the corporation that was the sole limited partner of MRC prior to the acquisition of such corporation by the Company (see Note 10) resulted in unused net operating loss carryforwards of approximately $7,000,000, which are expected to be available to the Company to a limited extent each year through 2006 based on the income of such corporation. As of July 31, 1995, approximately $6,000,000 of these net operating loss carryforwards remain available to offset future income. For financial reporting purposes, any benefit of these net operating loss carryforwards is being offset against any contingent future payments relating to the acquisition of such corporation.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The Company's deferred income tax assets and liabilities as of July 31, 1995 and 1994 are as follows:
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
The Company made income tax payments of $7,144,000 in 1995, $18,893,000 in 1994 and $5,138,000 in 1993.
The Company's federal income tax returns have been examined by the Internal Revenue Service through 1990.
8. STOCKHOLDERS' EQUITY
At July 31, 1995 and 1994, no stock options were outstanding and 751,500 shares of common stock were reserved for issuance under the Company's stock option plan.
9. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a non-contributory defined benefit retirement plan that covers substantially all employees. The Company's policy is to make contributions annually of not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Benefits are based on the employee's years of service and compensation.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
Pension expense includes the following components:
The following table sets forth the funded status of the plan and amounts recognized in the consolidated balance sheet:
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
The principal actuarial assumptions were:
Pension costs are determined using the assumptions as of the beginning of the year. The funded status is determined using the assumptions as of the end of the year.
Approximately 57% of plan assets is invested in equity securities and 43% is invested in fixed income securities and other instruments at July 31, 1995.
The Company has adopted a retirement restoration plan that provides for additional payments from the Company so that total retirement plan benefits for executives will be maintained at the levels provided in the Retirement Plan before the application of Internal Revenue Code limitations. During 1995, the Company accrued $237,000 in connection with this plan.
EMPLOYEE STOCK OWNERSHIP PLAN
In December 1985, the Company established an Employee Stock Ownership Plan (ESOP). The ESOP is non-contributory and includes substantially all employees of the Company and its subsidiaries who meet certain length of service requirements and are not covered by a collective bargaining agreement.
In 1985, the ESOP borrowed from the Company the $4,102,000 needed to purchase 1,500,000 shares of the Company's common stock. The loan is repayable in ten annual installments of $410,000 (subject to certain adjustments) commencing August 1, 1986 and bears interest at 12% per annum. The Company is obligated to make annual contributions sufficient to enable the ESOP to repay the loan with interest. The unearned compensation of $4,102,000 was recorded as a reduction of stockholders' equity and is being reduced as payments are made. Interest income earned on the note due from the ESOP is offset against an equal amount contributed to the ESOP by the Company.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
10. MONTANA REFINING COMPANY, A PARTNERSHIP
The Company acquired on July 31, 1992, the corporation that was the limited partner in MRC in connection with a settlement of litigation. The acquisition involved among other items contingent future payments of up to $189,000 per year over the period 1993 through 2005.
11. OTHER INCOME
The 1993 fiscal year included income of $4,000,000 relating to a settlement with a common carrier pipeline concerning product pipeline distribution constraints.
12. CONTINGENCIES
In July 1993, the United States Department of Justice (DOJ), on behalf of the United States Environmental Protection Agency (EPA), filed a suit against the Company's subsidiary, Navajo Refining Company (Navajo) alleging that, beginning in September 1990 and continuing through the present, Navajo has violated and continues to violate the Resource Conservation and Recovery Act (RCRA) and implementing regulations of the EPA by treating, storing and disposing of certain hazardous wastes without compliance with regulatory requirements. The Company believes that the parties are in the final stage of negotiating a resolution of the litigation. If settled as anticipated, the Company would close the existing evaporation ponds of its wastewater management system at a cost believed to be substantially less than $1 million. The settlement also contemplates that the Company would implement one of several alternatives to the existing wastewater treatment system. Depending upon which approach is utilized, the Company could incur total costs of approximately $3 million over the next several years. The costs to implement an alternative wastewater treatment system would be capitalized and amortized over the future useful life of the resulting asset in accordance with generally accepted accounting principles. The settlement with the DOJ also is expected to involve the payment of civil penalty of less than $2 million. In fiscal 1993, the Company recorded a $2 million reserve for the litigation.
The Company is a party to various other litigation and proceedings which it believes, based on advice of counsel, will not have a materially adverse impact on its financial condition or operations.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1995, 1994 and 1993
13. SIGNIFICANT CUSTOMERS
Virtually all revenues were domestic revenues (including domestic sales for export to Mexico). Approximately $74,000,000 (12%) of the Company's revenues for fiscal 1995, $67,000,000 (12%) of revenues for fiscal 1994 and $65,000,000 (10%) for fiscal 1993 were from the sale of military jet fuel to the United States Government. Approximately $41,000,000 (7%) of the Company's revenues for fiscal 1995 and $58,000,000 (11%) of revenues for fiscal 1994 were from the sale of gasoline to an affiliate of PEMEX (the government-owned energy company of Mexico). In addition to the United States Government and PEMEX, another refiner, which is a purchaser of gasoline and diesel for resale to retail customers, accounted for approximately $75,000,000 (12%) of the Company's revenues in fiscal 1993. While a loss of, or reduction in amounts purchased by, major purchasers that resell to retail customers could have an adverse effect on the Company, the Company believes that the impact of such a loss on the Company's results of operations should be limited because the Company's sales volume with respect to products whose end-users are retail customers is more dependent on the general retail demand in the Company's primary markets than on sales to any specific customer.
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 1995, 1994 and 1993
14. QUARTERLY INFORMATION (UNAUDITED)
HOLLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 1995, 1994 and 1993
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding the directors of the Company is incorporated herein by this reference to information set forth under the caption "Election of Directors" in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held in December 1995 which will be filed within 120 days of July 31, 1995 (the "Proxy Statement").
The required information regarding the executive officers of the Company is included herein in Part I, Item 4.
Required information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by this reference to information set forth under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by this reference to information set forth under the captions "Executive Compensation and Other Information" and "Compensation Committee Report on Executive Compensation" in the Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management is incorporated herein by this reference to information set forth under the captions "Principal Stockholders" and "Election of Directors" in the Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is incorporated herein by this reference to information set forth under the caption "Election of Directors" in the Proxy Statement.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Index to Consolidated Financial Statements
(2) Index to Consolidated Financial Statement Schedules
All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.
(3) Exhibits
See Index to Exhibits on pages 44 to 48.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Company's fourth quarter that ended July 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HOLLY CORPORATION (Registrant)
/s/ Lamar Norsworthy --------------------- Lamar Norsworthy Chairman of the Board, President and Chief Executive Officer
Date: October 26, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
HOLLY CORPORATION
INDEX TO EXHIBITS
(Exhibits are numbered to correspond to the exhibit table in Item 601 of Regulation S-K)