-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FZidWHwlHjarXlqYpUuWdxyKNUVzf5Rot8L+TEbZL7ImdZV/g15Ji+Iy81Fb0qja kcZKdNWocCn482zSk5p/vQ== 0000950134-02-015497.txt : 20021212 0000950134-02-015497.hdr.sgml : 20021212 20021212141046 ACCESSION NUMBER: 0000950134-02-015497 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20021212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOLLY CORP CENTRAL INDEX KEY: 0000048039 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 751056913 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03876 FILM NUMBER: 02855590 BUSINESS ADDRESS: STREET 1: 100 CRESCENT COURT STREET 2: SUITE 1600 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2148713555 MAIL ADDRESS: STREET 1: 100 CRESCENT COURT STREET 2: SUITE 1600 CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL APPLIANCE CORP DATE OF NAME CHANGE: 19680508 10-Q 1 d01926e10vq.txt FORM 10-Q 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, 2002 ------------------------- 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 ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __ No [X] 15,513,828 shares of Common Stock, par value $.01 per share, were outstanding on December 6, 2002. HOLLY CORPORATION INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Forward-Looking Statements 3 Item 1. Financial Statements Consolidated Balance Sheet - (Unaudited) October 31, 2002 and July 31, 2002 4 Consolidated Statement of Income (Unaudited) - Three Months Ended October 31, 2002 and 2001 5 Consolidated Statement of Cash Flows (Unaudited) - Three Months Ended October 31, 2002 and 2001 6 Consolidated Statement of Comprehensive Income (Unaudited) - Three Months Ended October 31, 2002 and 2001 7 Notes to Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 6. Exhibits and Reports on Form 8-K 29 Signatures 30 Certifications 31
PART I 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") regarding the Company's financial position and results of operations in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I 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 market prices for 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 Company's efficiency in carrying out construction projects, the possibility of terrorist attacks and the consequences of any such attacks, 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. Cautionary statements identifying important factors that could cause actual results to differ materially from the Company's expectations are set forth in this Form 10-Q, including without limitation in conjunction with the forward-looking statements included in this Form 10-Q that are referred to above. 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, 2002 and in conjunction with the discussion in this Form 10-Q in "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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. The forward-looking statements speak only as of the date made, other than as required by law, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HOLLY CORPORATION CONSOLIDATED BALANCE SHEET Unaudited
OCTOBER 31, JULY 31, 2002 2002 ------------ ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents ............................................................. $ 66,995 $ 71,630 Accounts receivable: Product .......................................................... 52,733 46,929 Crude oil resales ................................................ 92,113 88,466 ------------ ------------ 144,846 135,395 Inventories: Crude oil and refined products ................................... 45,578 35,120 Materials and supplies ........................................... 10,081 10,188 ------------ ------------ 55,659 45,308 Income taxes receivable ............................................................... -- 8,699 Prepayments and other ................................................................. 17,403 17,812 ------------ ------------ TOTAL CURRENT ASSETS ............................................................. 284,903 278,844 Properties, plants and equipment, at cost ................................................ 420,093 410,987 Less accumulated depreciation, depletion and amortization ................................ (216,650) (211,526) ------------ ------------ 203,443 199,461 Investments in and advances to joint ventures ............................................ 17,227 15,732 Other assets: Prepaid transportation ........................................... 25,000 -- Other, net ....................................................... 6,662 8,269 ------------ ------------ 31,662 8,269 ------------ ------------ TOTAL ASSETS ..................................................................... $ 537,235 $ 502,306 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable ...................................................................... $ 192,414 $ 185,058 Accrued liabilities ................................................................... 23,945 25,342 Prepaid transportation liability ...................................................... 25,000 -- Income taxes payable .................................................................. 2,099 -- Current maturities of long-term debt .................................................. 8,571 8,571 ------------ ------------ TOTAL CURRENT LIABILITIES ........................................................ 252,029 218,971 Deferred income taxes .................................................................... 28,731 29,065 Long-term debt, less current maturities .................................................. 25,714 25,714 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; 16,806,396 and 16,759,396 shares issued as of October 31, 2002 and July 31, 2002 ... 168 168 Additional capital .................................................................... 14,623 14,013 Retained earnings ..................................................................... 227,310 223,770 ------------ ------------ 242,101 237,951 Common stock held in treasury, at cost - 1,313,968 and 1,197,968 shares as of October 31, 2002 and July 31, 2002 ............ (11,340) (9,395) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY ....................................................... 230,761 228,556 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................................... $ 537,235 $ 502,306 ============ ============
See accompanying notes. 4 HOLLY CORPORATION CONSOLIDATED STATEMENT OF INCOME Unaudited
THREE MONTHS ENDED OCTOBER 31, ---------------------------- 2002 2001 ------------ ------------ (In thousands, except per share data) SALES AND OTHER REVENUES .............................. $ 275,658 $ 257,947 OPERATING COSTS AND EXPENSES Cost of products sold .............................. 231,959 191,984 Operating expenses ................................. 24,140 24,746 Selling, general and administrative expenses ....... 5,203 5,430 Depreciation, depletion and amortization ........... 7,196 6,431 Exploration expenses, including dry holes .......... 217 299 ------------ ------------ TOTAL OPERATING COSTS AND EXPENSES ............ 268,715 228,890 ------------ ------------ INCOME FROM OPERATIONS ................................ 6,943 29,057 OTHER INCOME (EXPENSE) Equity in earnings of joint ventures ............... 1,983 2,748 Interest income .................................... 274 682 Interest expense ................................... (694) (940) Gain on sale of equity securities .................. -- 1,522 ------------ ------------ 1,563 4,012 ------------ ------------ INCOME BEFORE INCOME TAXES ............................ 8,506 33,069 Income tax provision (benefit) Current ............................................ 3,593 12,697 Deferred ........................................... (334) 150 ------------ ------------ 3,259 12,847 ------------ ------------ NET INCOME ............................................ $ 5,247 $ 20,222 ============ ============ NET INCOME PER COMMON SHARE - BASIC ................... $ 0.34 $ 1.30 ============ ============ NET INCOME PER COMMON SHARE - DILUTED ................. $ 0.33 $ 1.27 ============ ============ CASH DIVIDENDS PAID PER COMMON SHARE .................. $ 0.11 $ 0.10 ============ ============ AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic .............................................. 15,522 15,508 Diluted ............................................ 15,877 15,944
See accompanying notes. 5 HOLLY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited
THREE MONTHS ENDED OCTOBER 31, ---------------------------- 2002 2001 ------------ ------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income .............................................. $ 5,247 $ 20,222 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization ............ 7,196 6,431 Deferred income taxes ............................... (334) 150 Equity in earnings of joint ventures ................ (1,983) (2,748) (Increase) decrease in current assets Accounts receivable ............................... (9,451) 38,206 Inventories ....................................... (10,351) (9,868) Income taxes receivable ........................... 8,699 3,514 Prepayments and other ............................. 409 81 Increase (decrease) in current liabilities Accounts payable .................................. 7,356 (34,156) Accrued liabilities ............................... (1,923) (214) Income taxes payable .............................. 2,099 6,050 Turnaround expenditures ............................. (33) (1,840) Other, net .......................................... 202 (1,424) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES .......... 7,133 24,404 CASH FLOWS FROM FINANCING ACTIVITIES Debt issuance costs ..................................... (635) -- Issuance of common stock upon exercise of options ....... 610 659 Purchase of treasury stock .............................. (1,945) (92) Cash dividends .......................................... (1,708) (1,550) ------------ ------------ NET CASH USED FOR FINANCING ACTIVITIES ............. (3,678) (983) CASH FLOWS FROM INVESTING ACTIVITIES Additions to properties, plants and equipment ........... (8,577) (6,384) Distributions from joint ventures ....................... 487 1,150 Proceeds from sale of marketable equity securities ...... -- 4,500 ------------ ------------ NET CASH USED FOR INVESTING ACTIVITIES ............. (8,090) (734) ------------ ------------ CASH AND CASH EQUIVALENTS INCREASE (DECREASE) FOR THE PERIOD ...................... (4,635) 22,687 Beginning of year ....................................... 71,630 65,840 ------------ ------------ END OF PERIOD ........................................... $ 66,995 $ 88,527 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during period for Interest ........................................... $ 220 $ 242 Income taxes ....................................... $ 130 $ 2,958
See accompanying notes. 6 HOLLY CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Unaudited
THREE MONTHS ENDED OCTOBER 31, ----------------------------- 2002 2001 ------------ ------------ (In thousands) NET INCOME ..................................................................... $ 5,247 $ 20,222 Other comprehensive income (loss) 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) Income tax benefit .......................................................... -- (495) ------------ ------------ Other comprehensive loss ....................................................... -- (745) ------------ ------------ TOTAL COMPREHENSIVE INCOME ..................................................... $ 5,247 $ 19,477 ============ ============
See accompanying notes. 7 HOLLY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A - Presentation of Financial Statements In the opinion of the Company, the accompanying consolidated financial statements, which have not been audited by independent accountants, reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's consolidated financial position as of October 31, 2002, the consolidated results of operations and comprehensive income for the three months ended October 31, 2002 and 2001, and consolidated cash flows for the three months ended October 31, 2002 and 2001. 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, 2002. 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 2003 are not necessarily indicative of the results to be expected for the full year. Note B - New Accounting Pronouncements SFAS No. 142 "Goodwill and Other Intangible Assets" - In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("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, are immediately subject to the provisions of this statement. The Company adopted the standard effective August 1, 2002 and there was no material effect on its financial condition, results of operations, or cash flows. SFAS No. 143 "Accounting for Asset Retirement Obligations" - 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 adopted the standard effective August 1, 2002 and there was no material effect on the Company's financial condition, results of operations, or cash flows. SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" - 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 addresses significant implementation issues. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted. The Company adopted the standard effective August 1, 2002 and there was no material effect on its financial 8 HOLLY CORPORATION condition, results of operations, or cash flows. SFAS No. 146 "Accounting for Certain Costs Associated with Exit or Disposal Activities" - In June 2002, FASB issued SFAS No. 146, "Accounting for Certain Costs Associated with Exit or Disposal Activities" which nullifies Emerging Issues Task Force ("EITF") 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and establishes fair value as the objective for initial measurement of liabilities. This differs from EITF 94-3 which stated that liabilities for exit costs were to be recognized as of the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, though early adoption is permitted. The Company does not believe the adoption of this standard will have a material effect on its financial condition, results of operations, or cash flows upon adoption. The American Institute of Certified Public Accountants has issued an Exposure Draft for a Proposed Statement of Position, "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment" which would require major maintenance activities to be expensed as costs are incurred. As of October 31, 2002, the Company had approximately $11.6 million of deferred maintenance costs, all relating to refinery turnarounds in prior periods, which are being amortized at a rate of approximately $691,000 per month. If this proposed Statement of Position had been adopted in its current form, as of October 31, 2002, the Company would have been required to expense, as of October 31, 2002, $11.6 million of deferred maintenance costs and would be required to expense all future turnaround costs as incurred. 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. The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for net income:
THREE MONTHS ENDED OCTOBER 31, ----------------------------- 2002 2001 ------------ ------------ (In thousands, except per share data) Net income ............................................... $ 5,247 $ 20,222 Average number of shares of common stock outstanding ..... 15,522 15,508 Effect of dilutive stock options ......................... 355 436 ------------ ------------ Average number of shares of common stock outstanding assuming dilution .................... 15,877 15,944 ============ ============ Income per share - basic ................................. $ 0.34 $ 1.30 ============ ============ Income per share - diluted ............................... $ 0.33 $ 1.27 ============ ============
Note D - Investments in Joint Ventures 9 HOLLY CORPORATION The Company currently has a 49% interest in NK Partners, a joint venture that manufactures and markets asphalt products from various terminals in Arizona and New Mexico. The Company accounts for earnings using the equity method. The Company's Navajo Refinery sells at market prices all of its produced asphalt to the joint venture. Sales to the joint venture during the quarters ended October 31, 2002 and October 31, 2001 were $7.6 million and $7.4 million, respectively. NK Asphalt Partners Joint Venture (Unaudited):
THREE MONTHS ENDED OCTOBER 31, ----------------------------- 2002 2001 ------------ ------------ (In thousands) Sales (net) ........................................... $ 26,170 $ 31,436 ============ ============ Gross Profit .......................................... $ 6,222 $ 8,047 ============ ============ Income from operations ................................ $ 3,671 $ 5,513 ============ ============ Net income before taxes ............................... $ 3,229 $ 5,116 ============ ============
Note E - Debt In August 2002, the Company entered into an agreement with a group of banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit Agreement and reduce the commitment from $90 million to $75 million. Under the terms of the Agreement, now that the Longhorn Partners Pipeline L.P. lawsuit has been resolved, the expiration date of the Agreement is October 10, 2004, and interest rate margins for borrowings and fees for letters of credit and bank commitments have been reduced. Under the current agreement, the Company will have access to $75 million of commitments for both revolving credit loans and letters of credit. Up to $37.5 million of this facility may be used for revolving credit loans. At October 31, 2002 the Company had letters of credit outstanding under the facility of $20.4 million and had no borrowings outstanding. Note F - Stockholders' Equity On October 30, 2001, the Company announced plans to repurchase up to $20 million of the Company's common stock. Such repurchases have been made from time to time in open market purchases or privately negotiated transactions, subject to price and availability. The repurchases have been financed with currently available corporate funds. During the three months ended October 31, 2002, the Company repurchased 116,000 shares at a cost of approximately $1,945,000 or an average of $16.77 per share. During the month of November 2002, the Company repurchased an additional 14,900 shares at a cost of approximately $265,000 or an average of $17.78 per share. No shares were purchased from December 1 through December 11, 2002. From inception of the plan through December 11, 2002, the Company has repurchased 229,400 shares at a cost of approximately $3,812,000. 10 HOLLY CORPORATION Note G - Derivative Instruments and Hedging Activities In fiscal 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 through May 2002. These transactions were designated as cash flow hedges of forecasted purchases. During the quarter ended October 31, 2001, the Company marked the value of the outstanding hedges to fair value in accordance with SFAS No. 133 and included $282,000 of income in comprehensive income. During the quarter ended October 31, 2002, there were no commodity price swaps or collar options outstanding. Note H - Segment Information The Company has two major business segments: Refining and Pipeline Transportation. The Refining segment involves 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 49% 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 of the Pipeline Transportation segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations. Pipeline Transportation segment revenues do not include any amount relating to pipeline transportation services provided for the Company's refining 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, 2002. The Company's reportable segments are strategic business units that offer different products and services. 11 HOLLY CORPORATION
TOTAL FOR PIPELINE REPORTABLE CORPORATE CONSOLIDATED REFINING TRANSPORTATION SEGMENTS & OTHER TOTAL ------------ -------------- ------------ ------------ ------------ (In thousands) THREE MONTHS ENDED OCTOBER 31, 2002 Sales and other revenues ............... $ 270,553 $ 4,794 $ 275,347 $ 311 $ 275,658 Income (loss) from operations .......... $ 6,733 $ 2,806 $ 9,539 $ (2,596) $ 6,943 Income (loss) before income taxes ...... $ 8,015 $ 3,322 $ 11,337 $ (2,831) $ 8,506 EBITDA(1) .............................. $ 14,562 $ 3,678 $ 18,240 $ (2,118) $ 16,122 THREE MONTHS ENDED OCTOBER 31, 2001 Sales and other revenues ............... $ 252,812 $ 4,565 $ 257,377 $ 570 $ 257,947 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 EBITDA(1) .............................. $ 37,079 $ 3,116 $ 40,195 $ (437) $ 39,758
(1) Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA is calculated as net income plus (i) interest expense net of interest income, (ii) income tax provision, and (iii) depreciation, depletion, and amortization. EBITDA is presented not as an alternative measure of operating results or cash flow from operations as determined in accordance with accounting principles generally accepted in the United States, but because EBITDA is a widely accepted financial indicator of a company's ability to incur and service debt. Note I - Contingencies In November 2002, the Company settled by agreement litigation brought in August 1998 by Longhorn Partners Pipeline, L.P. ("Longhorn Partners") against the Company in a state court in El Paso, Texas and litigation brought in August 2002 by the Company against Longhorn Partners and related parties in a state court in Carlsbad, New Mexico. Under the settlement agreement, which was developed in voluntary mediation, on November 26, 2002 the Company paid $25 million to Longhorn Partners as a prepayment for the transportation of 7,000 barrels per day of refined products from the Gulf Coast to El Paso for a period of up to 6 years from the date of the Longhorn Pipeline's start-up. Longhorn Partners has also issued to the Company an unsecured $25 million promissory note, subordinated to certain other indebtedness, that would become payable with interest in the event that the Longhorn Pipeline does not begin operations by July 1, 2004 or to the extent Longhorn Partners is unable to provide the Company the full amount of the agreed transportation services. In the unaudited consolidated balance sheet at October 31, 2002, the $25,000,000 settlement is reflected in Assets as "Other assets - Prepaid transportation" and in Liabilities as "Current liabilities - Prepaid transportation liability." In September 2002, the Federal Energy Regulatory Commission ("FERC") issued an order (the "Order") in proceedings brought by the Company and other parties against Kinder Morgan's SFPP, L.P. ("SFPP") relating to tariffs of common carrier pipelines, which are owned and operated by SFPP, for shipments of refined products in the period from 1993 through July 2000 from El Paso, Texas to Tucson and Phoenix, Arizona and from points in California to points in Arizona. The Company is one of several refiners that regularly utilize an SFPP pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona. The Order appears to resolve most remaining issues relating to SFPP's tariffs on the pipelines to points in Arizona from 1993 through July 2000 and is expected to be followed by a final FERC ruling after completion of proceedings relating to computations based on the guidance provided by the Order. Based on the rulings made in the Order and SFPP's proposed computations, the Company expects that the final FERC ruling for the years at issue would result in a refund to the Company of approximately $15 million. The final FERC 12 HOLLY CORPORATION decision on this matter will be subject to judicial review by the Court of Appeals for the District of Columbia Circuit. At the date of this report, it is not possible to predict when amounts may be payable to the Company under the final FERC decision on this matter, whether a final settlement may be reached with SFPP based on the Order, or what may be the result of judicial review proceedings on this matter in the Court of Appeals for the District of Columbia Circuit. No amount relating to this matter has been included in the Company's financial statements for the quarter ended October 31, 2002. 13 HOLLY CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Item 2, including but not limited to the sections on "Liquidity and Capital Resources" and "Additional Factors that May Affect Future Results," contains "forward-looking" statements. See "Forward-Looking Statements" at the beginning of Part I. RESULTS OF OPERATIONS FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED OCTOBER 31, ------------------------------ 2002 2001 ------------ ------------ (In thousands, except per share and ratio data) Sales and other revenues ................................... $ 275,658 $ 257,947 Operating costs and expenses Cost of products sold ................................... 231,959 191,984 Operating expenses ...................................... 24,140 24,746 Selling, general and administrative expenses ............ 5,203 5,430 Depreciation, depletion and amortization ................ 7,196 6,431 Exploration expenses, including dry holes ............... 217 299 ------------ ------------ Total operating costs and expenses ................. 268,715 228,890 ------------ ------------ Income from operations ..................................... 6,943 29,057 Other income (expense) Equity in earnings of joint ventures .................... 1,983 2,748 Interest expense, net ................................... (420) (258) Gain on sale of equity securities ....................... -- 1,522 ------------ ------------ 1,563 4,012 ------------ ------------ Income before income taxes ................................. 8,506 33,069 Income tax provision ....................................... 3,259 12,847 ------------ ------------ Net income ................................................. $ 5,247 $ 20,222 ============ ============ Net income per common share - basic ........................ $ 0.34 $ 1.30 Net income per common share - diluted ...................... $ 0.33 $ 1.27 Weighted average number of common shares outstanding: Basic .................................................... 15,522 15,508 Diluted .................................................. 15,877 15,944
14 HOLLY CORPORATION BALANCE SHEET DATA (UNAUDITED)
OCTOBER 31, JULY 31, 2002 2002 ------------ ------------ (In thousands, except ratio data) Cash and cash equivalents .............................. $ 66,995 $ 71,630 Working capital ........................................ $ 32,874 $ 59,873 Total assets ........................................... $ 537,235 $ 502,306 Total long-term debt, including current maturities ..... $ 34,285 $ 34,285 Stockholders' equity ................................... $ 230,761 $ 228,556 Total debt to capitalization ratio (1) ................. 12.9% 13.0%
(1) The total long-term debt to capitalization ratio is calculated by dividing total long-term debt including current maturities by the sum of total long-term debt including current maturities and stockholders' equity. OTHER FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED OCTOBER 31, --------------------------- 2002 2001 ------------ ------------ (In thousands) Sales and other revenues (1) Refining ................................ $ 270,553 $ 252,812 Pipeline Transportation ................. 4,794 4,565 Corporate and Other ..................... 311 570 ------------ ------------ Consolidated ............................ $ 275,658 $ 257,947 ============ ============ Income (loss) from operations (1) Refining ................................ $ 6,733 $ 28,765 Pipeline Transportation ................. 2,806 2,482 Corporate and Other ..................... (2,596) (2,190) ------------ ------------ Consolidated ............................ $ 6,943 $ 29,057 ============ ============ Cash flow from operating activities ........ $ 7,133 $ 24,404 Capital expenditures ....................... $ 8,577 $ 6,384 EBITDA (2) ................................. $ 16,122 $ 39,758
(1) The Refining segment includes the Company's principal refinery in Artesia, New Mexico, which is operated in conjunction with refining facilities in Lovington, New Mexico (collectively, the Navajo Refinery) and the Company's refinery near Great Falls, Montana. Included in the Refining Segment are costs relating to pipelines and terminals that operate in conjunction with the Refining segment as part of the supply and distribution networks of the refineries. The Pipeline Transportation segment includes approximately 1,000 miles of the Company's pipeline assets in Texas and New Mexico. Revenues of the Pipeline Transportation segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations. (2) Earnings before interest, taxes, depreciation and amortization - EBITDA is calculated as net income plus (i) interest expense net of interest income, (ii) income tax provision, and (iii) depreciation, depletion and amortization. EBITDA is presented not as an alternative measure of operating results or cash flow from operations as determined in accordance with accounting principles generally accepted in the United States, but because EBITDA is a widely accepted financial indicator of a company's ability to incur and service debt. 15 HOLLY CORPORATION REFINING SEGMENT OPERATING DATA (Unaudited)
THREE MONTHS ENDED OCTOBER 31, ------------------------------ 2002 2001 ------------ ------------ Crude charge (BPD) (1) ..................... 61,800 60,200 Average per barrel (2) Refinery margin .......................... $ 5.79 $ 9.32 Cash operating costs (3) ................. 4.03 4.22 ------------ ------------ Net cash operating margin ................ $ 1.76 $ 5.10 ============ ============ Sales of produced refined products Gasolines ................................ 54.9% 52.6% Diesel fuels ............................. 20.6% 21.3% Jet fuels ................................ 11.2% 10.2% Asphalt .................................. 9.8% 12.4% LPG and other ............................ 3.5% 3.5% ------------ ------------ Total ............................... 100.0% 100.0% ============ ============
(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. THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED WITH THREE MONTHS ENDED OCTOBER 31, 2001 Net income for the three months ended October 31, 2002 was $5.2 million ($.34 per basic and $.33 per diluted share) compared to net income of $20.2 million ($1.30 per basic and $1.27 per diluted share) for the three months ended October 31, 2001. The $15 million reduction in income between the periods is principally a result of lower refined product margins. For the Company's first quarter ended October 31, 2002, refinery margins of $5.79 per barrel were well below the refinery margins of $9.32 per barrel for the quarter ended October 31, 2001. During the prior year's first quarter, the Company, along with the refining industry as a whole, was still experiencing very favorable refining margins, which have since declined. During much of the first quarter ended October 31, 2002, increases in crude oil and other feedstock costs were not matched by refined product increases. The Company's revenues and cost of products sold were higher in the first quarter of fiscal 2003, as compared to the fiscal 2002 first quarter, due to a 5% increase in sales volumes, higher refined product sales prices and higher costs of purchased crude oil. Operating expenses and selling, general and administrative expenses for the three months ended October 31, 2002 were slightly lower compared to the three months ended October 31, 2001 principally due to lower utility costs and decreased costs associated with legal proceedings. Interest expense was lower for the three months ended October 31, 2002 compared to the three months ended October 31, 2001 primarily due to reduced interest costs as the Company has 16 HOLLY CORPORATION made required principal payments on term debt. The reduction in interest expense was partially offset by a $400,000 decrease in interest income for the three months ended October 31, 2002 as compared to the three months ended October 31, 2001, primarily the result of lower interest rates on invested funds. The Company had income of $2 million in the three months ended October 31, 2002 as compared to $2.7 million in the three months ended October 31, 2001 from the Company's investments in joint ventures, principally NK Asphalt Partners, an asphalt joint venture. In the first three months ended October 31, 2001, the Company realized a $1.5 million gain from the sale of marketable securities. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $4.6 million to $67 million during the three months ended October 31, 2002. The cash flow generated from operations of $7.1 million was less than the cash required for investing activities, repurchases of Company stock and dividends paid. Working capital decreased during the three months ended October 31, 2002 by $27 million to $32.9 million primarily as a result of an increase in current liabilities of $25 million related to the settlement by agreement of the Longhorn Partners Pipeline, L.P. litigation. On October 30, 2001, the Company announced plans to repurchase up to $20 million of the Company's common stock. Such repurchases have been made from time to time in open market purchases or privately negotiated transactions, subject to price and availability. In the three months ended October 31, 2002, the Company repurchased 116,000 shares for approximately $1,945,000 or an average of $16.77 per share. During the month of November 2002, the Company repurchased an additional 14,900 shares for approximately $265,000 or an average of $17.78 per share. No shares were purchased from December 1 through December 11, 2002. From inception of the plan through December 11, 2002, the Company has repurchased 229,400 shares for approximately $3,812,000. In December 2001, an agreement was reached among the Company, the Environmental Protection Agency, the New Mexico Environment Department, and the Montana Department of Environmental Quality with respect to a global settlement of issues concerning the application of air quality requirements to past and future operations of the Company's refineries. The Consent Decree implementing this agreement requires investments by the Company expected to total between $15 million and $20 million over a number of years for the installation of certain state of the art pollution control equipment at the Company's New Mexico and Montana refineries. In August 2002, the Company entered into an agreement with a group of banks led by Canadian Imperial Bank of Commerce to extend its Revolving Credit Agreement and reduce the commitment from $90 million to $75 million. Under the terms of the Agreement, now that the Longhorn Partners Pipeline L.P. lawsuit has been resolved, the expiration date of the Agreement is October 10, 2004 and interest rate margins for borrowings and fees for letters of credit and bank commitments have been reduced. Under the current agreement, the Company will have access to $75 million of commitments for both revolving credit loans and letters of credit. Up to $37.5 million of this facility may be used for revolving credit loans. At October 31, 2002 the Company had letters of credit outstanding under the facility of $20.4 million and had no borrowings outstanding. 17 HOLLY CORPORATION The Company believes its internally generated cash flow together with its Credit Agreement provide sufficient resources to fund planned capital projects, scheduled repayments of the Senior Notes, planned stock repurchases, 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. Cash Flows from Operating Activities Cash flows provided by operating activities for the first three months of fiscal 2003 were $7.1 million. For the comparable three month period of fiscal 2002, cash provided by operating activities was $24.4 million. The $17.3 million decrease in cash provided by operations for the first three months of fiscal 2003 as compared to the first three months of fiscal 2002 was primarily the result of the $15 million decrease in net income and changes in working capital items. In the first three months of fiscal 2003, changes in working capital used $3.2 million as compared to fiscal 2002 when changes in working capital provided $3.6 million. Cash Flows from Financing Activities Cash flows used for financing activities were $3.7 million in the three months ended October 31, 2002, as compared to $1 million in the same period of the prior year. Cash flows used for financing activities in the first three months of fiscal 2003 and fiscal 2002 consisted principally of $1.7 million and $1.6 million respectively of dividends paid to shareholders and $1.9 million (for 116,000 shares) and $92,000 (for 5,000 shares) respectively for the repurchase of Company stock. In the first three months of fiscal 2003 and fiscal 2002, the Company received cash of $610,000 (for 47,000 shares) and $659,000 (for 48,500 shares) respectively 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 2002. Cash Flows Used for Investing Activities and Capital Projects Cash flows used for investing activities were $8.1 million for the first three months of fiscal 2003, as compared to $734,000 for the same period of the 2002 fiscal year. Cash expenditures on capital projects in the first three months of the current and prior fiscal years were $8.6 million and $6.4 million respectively. The Company's net cash flow used for investing activities was reduced during the first three months of fiscal 2003 by a $487,000 distribution from the Rio Grande Pipeline joint venture. During the first three months of fiscal 2002, net cash flow used for investing activities was reduced by a $1.2 million distribution from the Rio Grande Pipeline joint venture and $4.5 million of proceeds from the sale of marketable equity securities held for investment. The Company's capital budget adopted for fiscal year 2003 totals $14.8 million - $6.5 million for additional costs relating to the hydrotreater project and refinery expansion, $3.2 million for other refinery improvements, $3 million for pipeline transportation projects, $.6 million for oil and gas exploration and production, and $1.5 million for information technology and other. The 2003 capital budget includes authorizations for some expenditures that are expected to be made after the close of the 2003 fiscal year. The Company expects to expend approximately $40 million in fiscal 2003 for capital improvements, which includes amounts authorized in previous fiscal years. This amount is expected to be allocated approximately $30 million for the hydrotreater project and the refinery 18 HOLLY CORPORATION expansion to an estimated 70,000 barrels per day ("BPD") as described below, approximately $6 million for other refinery improvements, approximately $2 million for pipeline and transportation projects, and approximately $2 million for other projects, including information technology projects and oil and gas exploration and development. These expenditures include projects authorized in the Company's 2003 capital budget as well as expenditures authorized in prior capital budgets but expected to be carried out in fiscal 2003. In November 1997, the Company purchased a hydrotreater unit for $5.1 million from a closed refinery. This purchase gave 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 four years, the Company spent approximately $18.6 million on relocation, engineering and equipment fabrication related to the hydrotreater project. The remaining costs to complete the hydrotreater project and the expansion project are estimated to be approximately $32.3 million. The Company expects that the hydrotreater project will be completed by December 2003. The hydrotreater will enhance higher value light product yields and expand the Company's ability to produce additional quantities of gasolines meeting the present California Air Resources Board ("CARB") standards, which have been adopted in the Company's Phoenix market for winter months beginning in late 2000, and to meet the recently adopted EPA nationwide Low-Sulfur Gasoline requirements scheduled to begin in 2004. In fiscal 2001 the Company completed the construction of a new additional sulfur recovery unit, which is currently utilized to enhance sour crude processing capabilities and will provide sufficient capacity to recover the additional extracted sulfur that will result from operation of the hydrotreater. Contemporaneous with the hydrotreater project, the Navajo Refinery will be making necessary modifications to several of the Artesia processing units for the first phase of Navajo's expansion, which will increase crude oil refining capacity from 60,000 BPD to an estimated 70,000 BPD. The first phase of the expansion is expected to be completed by December 2003. Certain additional permits will be required to implement needed modifications at Navajo's Lovington, New Mexico refining facility which is operated in conjunction with the Artesia facility. It is envisioned that these necessary modifications to the Lovington facility would also be completed by December 2003. The permits received by Navajo to date for the Artesia facility, subject to possible minor modifications, should also permit a second phase expansion of Navajo's crude oil capacity from an estimated 70,000 BPD to an estimated 80,000 BPD, but a schedule for such additional expansion has not been determined. The total cost of the hydrotreater and expansion project to an estimated 70,000 BPD is expected to be approximately $56 million. The Company leases from Mid-America Pipeline Company more than 300 miles of 8" pipeline running from Chaves County to San Juan County, New Mexico (the "Leased Pipeline"). The Company owns and operates a 12" pipeline from the Navajo Refinery to the Leased Pipeline as well as terminalling facilities in Bloomfield, New Mexico, which is located in the northwest corner of New Mexico and in Moriarty, which is 40 miles east of Albuquerque. Transportation of petroleum products to markets in northwest New Mexico and diesel fuels to Moriarty began in the last months of calendar 1999. In December 2001, the Company completed its expansion of the Moriarty terminal and its pumping capacity on the Leased Pipeline. The terminal expansion included the addition of gasoline and jet fuel to the existing diesel fuel delivery capabilities, thus permitting the Company to provide a full slate of light products to the growing Albuquerque and Santa Fe, New Mexico areas. The enhanced pumping capabilities on the Company's leased pipeline extending from the Artesia refinery through Moriarty to Bloomfield will permit the Company to deliver a total of over 45,000 BPD of light products to these locations. If needed, additional pump stations could further increase the pipeline's capabilities. 19 HOLLY CORPORATION Contractual Obligations and Commitments The following table presents long-term contractual obligations of the Company in total and by period due. These items include the Company's long-term debt based on maturity dates and the Company's operating lease commitments. The Company's operating leases contain renewal options that are not reflected in the table below and that are likely to be exercised.
PAYMENTS DUE BY PERIOD --------------------------------------------------------------- LESS THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS OVER 5 YEARS ------------ ------------ ------------ ------------ ------------ (In thousands) Long-term debt (stated maturities) .... $ 34,285 $ 8,571 $ 25,714 $ -- $ -- Operating leases ....................... $ 27,792 $ 6,091 $ 11,976 $ 9,438 $ 287
In July 2000, Navajo Western Asphalt Company ("Navajo Western"), a wholly-owned subsidiary of the Company, and a subsidiary of Koch Materials Company ("Koch") formed a joint venture, NK Asphalt Partners, to manufacture and market asphalt and asphalt products in Arizona and New Mexico under the name "Koch Asphalt Solutions - Southwest." Navajo Western contributed all of its assets to NK Asphalt Partners and Koch contributed its New Mexico and Arizona asphalt and manufacturing assets to NK Asphalt Partners. All asphalt produced at the Navajo Refinery is sold at market prices to the joint venture under a supply agreement. The Company is required to make additional contributions to the joint venture of up to $3,250,000 for each of the next eight years contingent on the earnings level of the joint venture. The Company expects to finance such contributions from its share of cash flows of the joint venture. As part of the Consent Decree filed December 2001 implementing an agreement reached among the Company, the Environmental Protection Agency, the New Mexico Environment Department, and the Montana Department of Environmental Quality, the Company is required to make investments at the Company's New Mexico and Montana refineries for the installation of certain state of the art pollution control equipment expected to total between $15 million and $20 million over a number of years. 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, 2002. The proposed Longhorn Pipeline, which is owned by Longhorn Partners Pipeline, L.P. ("Longhorn Partners"), is an additional potential source of pipeline transportation 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. 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. Although most construction has been completed, the Longhorn Pipeline will not begin operations until the completion of certain agreed improvements and pre-start-up steps. Published reports 20 HOLLY CORPORATION indicate that construction in preparation for start-up of the Longhorn Pipeline continued until late July 2002, when the construction activities were halted before completion of the project. The latest public statements from Longhorn Partners indicate that Longhorn Partners is seeking additional financing to complete the project and that the pipeline will not begin operations prior to May 2003. The proposed operation of the Longhorn Pipeline is also the subject of a pending appeal in the United States Court of Appeals for the Fifth Circuit of a decision by the federal district court in Austin, Texas that allows the Longhorn Pipeline to begin operations when agreed improvements have been completed. This appeal seeks a ruling that would reverse the federal district court's decision and require a full environmental impact study before the Longhorn Pipeline is allowed to operate. If the Longhorn Pipeline operates as currently proposed, the 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. However, any effects on the Company's markets in Tucson and Phoenix, Arizona and Albuquerque, New Mexico would be expected to be limited in the next few years because current common carrier pipelines from El Paso to these markets are now running at capacity and proration policies of these pipelines allocate only limited capacity to new shippers. Although the Company's results of operations might be adversely impacted and 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 enhancements to operational efficiency, the Company's position in El Paso and markets served from El Paso could withstand a period of lower prices and margins that might result from operation of the Longhorn Pipeline as currently proposed. As a result of the Company's settlement in November 2002 of litigation with Longhorn Partners as described in Part II, Item 1 "Legal Proceedings," on November 26, 2002 the Company prepaid $25,000,000 to Longhorn Partners for the shipment of 7,000 BPD of refined products from the Gulf Coast to El Paso in a period of up to 6 years from the date the Longhorn Pipeline begins operations if such operations begin by July 1, 2004. Under the agreement, the prepayment would cover shipments of 7,000 BPD by the Company for approximately 4 1/2 years assuming there were no curtailments of service once operations began. The Company plans to make use of the prepaid transportation services to ship purchased refined products on the Longhorn Pipeline to meet obligations of the Company to deliver refined products to customers in El Paso. These transportation services are expected to be of benefit to the Company because the Company believes that most or all of such refined products shipped by the Company on the Longhorn Pipeline would take the place of products that would otherwise have been purchased by the Company from other suppliers. At the date of this report, it is not possible to predict whether and, if so, under what conditions, the Longhorn Pipeline will ultimately be operated, nor is it possible to predict the overall impact on the Company if the Longhorn Pipeline does not ultimately begin operations or begins operations at different possible future dates. Under the terms of the November 2002 settlement agreement that terminated litigation between the Company and Longhorn Partners, the Company would have an unsecured claim for repayment of the Company's $25,000,000 prepayment to Longhorn Partners for transportation services in the event the Longhorn Pipeline did not begin operations by July 1, 2004 or announced that it would not begin operations by that date. 21 HOLLY CORPORATION In November 2002, the Company settled by agreement litigation brought in August 1998 by Longhorn Partners Pipeline, L.P. against the Company in a state court in El Paso, Texas and litigation brought in August 2002 by the Company against Longhorn Partners and related parties in a state court in Carlsbad, New Mexico. For additional information on this settlement, see Part II, Item 1 "Legal Proceedings." Other legal proceedings that could affect future results are described in Part II, Item 1 "Legal Proceedings." 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 the exposure relating to such risk would not be significant to the Company's future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit. The Company's profitability depends largely on the spread between market prices for refined products and market prices for crude oil. A substantial or prolonged reduction 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. No such future contracts have been entered into since fiscal 2001. During fiscal 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 in March 2001 and from May 2001 to May 2002. These transactions were designated as cash flow hedges related to the purchase of 1.2 million MMBtu, 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. At October 31, 2002, there were no commodity price swaps or collar options outstanding. At July 31, 2002, the Company had outstanding unsecured debt of $34.3 million and had no borrowings outstanding under its Credit Agreement. The Company does not have significant exposure to changing interest rates on its unsecured debt because the interest rates are fixed, the average maturity is less than two years and such debt represents less than 15% of the Company's total capitalization. As the interest rates on the Company's bank borrowings 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 2002 or fiscal 2001. 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 not materially impact the Company's earnings or cash flow since the interest rates on the Company's long-term debt are fixed and the Company's borrowings under the Credit Agreement, if any, 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 22 HOLLY CORPORATION would not materially impact the Company's financial condition since the average maturity of the Company's long-term debt is less than two years, such debt represents less than 15% of the Company's total capitalization, and the Company's borrowings 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. Shortly after the events of September 11, 2001, the Company completed a security assessment of its principal facilities. Several security measures identified in the assessment have been implemented and others are in the process of being implemented. Because of recent changes in insurance markets, insurance coverages available to the Company are becoming more costly and in some cases less available. So long as this current trend continues, the Company expects to incur higher insurance costs and anticipates that, in some cases, it will be necessary to reduce somewhat the extent of insurance coverages because of reduced insurance availability at acceptable premium costs. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 142 "Goodwill and Other Intangible Assets" - In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("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, are immediately subject to the provisions of this statement. The Company adopted the standard effective August 1, 2002 and there was no material effect on its financial condition, results of operations, or cash flows. SFAS No. 143 "Accounting for Asset Retirement Obligations" - 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 adopted the standard effective August 1, 2002 and there was no material effect on the Company's financial condition, results of operations, or cash flows. SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" - 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 addresses significant implementation issues. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted. The Company adopted the standard effective August 1, 2002 and there was no material effect on its financial condition, results of operations, or cash flows. 23 HOLLY CORPORATION SFAS No. 146 "Accounting for Certain Costs Associated with Exit or Disposal Activities" - In June 2002, FASB issued SFAS No. 146, "Accounting for Certain Costs Associated with Exit or Disposal Activities" which nullifies Emerging Issues Task Force ("EITF") 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and establishes fair value as the objective for initial measurement of liabilities. This differs from EITF 94-3 which stated that liabilities for exit costs were to be recognized as of the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, though early adoption is permitted. The Company does not believe the adoption of this standard will have a material effect on its financial condition, results of operations, or cash flows upon adoption. The American Institute of Certified Public Accountants has issued an Exposure Draft for a Proposed Statement of Position, "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment" which would require major maintenance activities to be expensed as costs are incurred. As of October 31, 2002, the Company had approximately $11.6 million of deferred maintenance costs, all relating to refinery turnarounds in prior periods, which are being amortized at a rate of approximately $691,000 per month. If this proposed Statement of Position had been adopted in its current form, as of October 31, 2002, the Company would have been required to expense, as of October 31, 2002, $11.6 million of deferred maintenance costs and would be required to expense all future turnaround costs as incurred. 24 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." Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this quarterly report on Form 10-Q. Based on that evaluation, these officers concluded that the design and operation of the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) Changes in internal controls. There have been no significant changes in the Company's internal controls, or in other factors that could significantly affect internal controls, subsequent to the date the principal executive officer and principal financial officer of the Company completed their evaluation. 25 HOLLY CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings In November 2002, the Company settled by agreement litigation brought in August 1998 by Longhorn Partners Pipeline, L.P. ("Longhorn Partners") against the Company in a state court in El Paso, Texas and litigation brought in August 2002 by the Company against Longhorn Partners and related parties in a state court in Carlsbad, New Mexico. A description of this litigation is included in Item 3 "Legal Proceedings" of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2002. Under the settlement agreement, which was developed in voluntary mediation, on November 26, 2002 the Company paid $25 million to Longhorn Partners as a prepayment for the transportation of 7,000 BPD of refined products from the Gulf Coast to El Paso in a period of up to 6 years from the date of the Longhorn Pipeline's start-up. Longhorn Partners has also issued to the Company an unsecured $25 million promissory note, subordinated to certain other indebtedness, that would become payable with interest in the event that the Longhorn Pipeline does not begin operations by July 1, 2004 or to the extent Longhorn Partners is unable to provide the Company the full amount of the agreed transportation services. This settlement has resulted in a termination of all litigation between the Company and Longhorn Partners and related parties. As part of the settlement, the Company has terminated all support for opposition to the Longhorn Pipeline except support for one family in two pending lawsuits where an existing contractual obligation requires a continuation of such support; the Company is seeking to enter into an agreement to terminate this contractual obligation. In November 2002, the Department of Defense issued final decisions rejecting claims under the Contract Disputes Act, which were filed by the Company in September 2002, asserting that additional amounts totaling approximately $88 million are due to the Company with respect to jet fuel sales to the Defense Fuel Supply Center in the years 1995 through 1999 (the "1995-99 Jet Fuel Claims"). Subsequent to these decisions, the Company in November 2002 filed an amended complaint in the United States Court of Appeals for the Federal Circuit to add the 1995-99 Jet Fuel Claims to the Company's pending suit which was filed in September 2002 and related originally to claims for the years 1982 through 1995. As a result of the amendment, the total amount sought in the Company's suit for all years from 1982 through 1999 is approximately $298 million. 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 this lawsuit. In September 2002, the Federal Energy Regulatory Commission ("FERC") issued an order (the "Order") in proceedings brought by the Company and other parties against Kinder Morgan's SFPP, L.P. ("SFPP") relating to tariffs of common carrier pipelines, which are owned and operated by SFPP, for shipments of refined products in the period from 1993 through July 2000 from El Paso, Texas to Tucson and Phoenix, Arizona and from points in California to points in Arizona. The Company is one of several refiners that regularly utilize an SFPP pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona. The Order appears to resolve most remaining issues relating to SFPP's tariffs on the pipelines to points in Arizona from 1993 through July 2000 and is expected to be followed by a final FERC ruling after completion of proceedings relating to computations based on the guidance provided by the Order. Based on the rulings made in the Order and SFPP's proposed computations, the Company expects that the final FERC ruling for the years at issue would result in a refund to the Company of approximately $15 million. The final FERC 26 HOLLY CORPORATION decision on this matter will be subject to judicial review by the Court of Appeals for the District of Columbia Circuit. At the date of this report, it is not possible to predict when amounts may be payable to the Company under the final FERC decision on this matter, whether a final settlement may be reached with SFPP based on the Order, or what may be the result of judicial review proceedings on this matter in the Court of Appeals for the District of Columbia Circuit. In October 2002, the Company filed a motion to intervene and protest with the FERC with respect to a September 2002 petition for declaratory order filed by SFPP. SFPP's filing concerns its proposal to expand the capacity of its common carrier pipelines running from El Paso to Tucson and Phoenix by approximately 54,000 BPD. The Company's protest asks the FERC to rule that the costs of the proposed expansion should be reflected in pipeline transportation rates for use of the proposed additional capacity rather than in rates for use of both the proposed additional capacity and the current capacity of these pipelines. At the date of this report, the FERC has not acted with respect to the issue raised by the Company's protest. 27 HOLLY CORPORATION Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders on December 12, 2002, all nine of the nominees for directors as listed in the proxy statement were elected. ELECTION OF DIRECTORS
Total Votes Total Votes "For" "Withheld" ----------- ----------- Matthew P. Clifton 11,767,466 3,045,200 W. John Glancy 12,389,690 2,422,976 William J. Gray 13,532,380 1,280,286 Marcus R. Hickerson 13,520,415 1,292,251 Thomas K. Matthews, II 13,525,395 1,287,271 Robert G. McKenzie 11,653,882 3,158,784 Lamar Norsworthy 12,238,838 2,573,828 Jack P. Reid 13,532,766 1,279,900 Paul T. Stoffel 11,666,738 3,145,928
At the annual meeting of stockholders on December 12, 2002, the stockholders approved amending and restating the Holly Corporation 2000 Stock Option Plan as the Holly Corporation Long-Term Incentive Compensation Plan to authorize additional forms of long-term incentive compensation without increasing the maximum number of shares of the Company's Common Stock that can be issued under the Plan. Votes For 11,357,158 Votes Against 3,428,193 Abstentions 27,315 Broker Non-Votes 0 28 HOLLY CORPORATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Mediation Settlement Agreement made and entered into as of November 15, 2002, by, between and among: Longhorn Partners Pipeline, L.P.; and Holly Corporation, Navajo Refining Company, L.P., and Black Eagle, Inc. 10.2 Holly Corporation Long-Term Incentive Compensation Plan, As Amended and Restated (Formerly designated the Holly Corporation 2000 Stock Option Plan) - As adopted at the Annual Meeting of Stockholders of Holly Corporation on December 12, 2002. 99.1 Certification of Chief Executive Officer. 99.2 Certification of Chief Financial Officer (b) Reports on Form 8-K: On August 13, 2002, a Current Report on Form 8-K was filed under Item 5 Other Events, concerning the extension of the Company's Credit and Reimbursement Agreement with a group of banks headed by the Canadian Imperial Bank of Commerce. On August 23, 2002, a Current Report on Form 8-K was filed under Item 5 Other Events, concerning the denial of the Company's motion for summary judgment by the state appeals court in El Paso, Texas in the pending lawsuit brought by Longhorn Partners Pipeline, L.P. against the Company. On August 26, 2002, a Current Report on Form 8-K was filed under Item 5 Other Events, concerning the filing of a lawsuit in New Mexico state court against Longhorn Partners Pipeline, L.P. and related parties. On September 25, 2002, a Current Report on Form 8-K was filed under Item 5 Other Events, concerning reported results for the Company's fiscal year ended July 31, 2002. On September 25, 2002, a Current Report on Form 8-K was filed under Item 5 Other Events, concerning the award to the Company's wholly owned subsidiary, Navajo Refining Company, of a contract to provide up to 8, 500 barrels per day of JP-8 jet fuel to the Department of Defense. On November 18, 2002, a Current Report on Form 8-K was filed under Item 5 Other Events, concerning to the settlement of litigation by Longhorn Partners Pipeline, L.P. against the Company brought in August 1998 and of litigation brought by the Company against Longhorn Partners Pipeline, L.P. and related parties in August 2002. 29 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 12, 2002 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) 30 CERTIFICATION I, Lamar Norsworthy, Chairman of the Board and Chief Executive Officer of Holly Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Holly Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 12, 2002 /s/ Lamar Norsworthy --------------------------------------------- Lamar Norsworthy Chairman of the Board and Chief Executive Officer 31 CERTIFICATION I, Stephen J. McDonnell, Vice President and Chief Financial Officer of Holly Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Holly Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 12, 2002 /s/ Stephen J. McDonnell -------------------------------------------- Stephen J. McDonnell Vice President and Chief Financial Officer 32 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 Mediation Settlement Agreement made and entered into as of November 15, 2002, by, between and among: Longhorn Partners Pipeline, L.P.; and Holly Corporation, Navajo Refining Company, L.P., and Black Eagle, Inc. 10.2 Holly Corporation Long-Term Incentive Compensation Plan, As Amended and Restated (Formerly designated the Holly Corporation 2000 Stock Option Plan) - As adopted at the Annual Meeting of Stockholders of Holly Corporation on December 12, 2002. 99.1 Certification of Chief Executive Officer. 99.2 Certification of Chief Financial Officer
EX-10.1 3 d01926exv10w1.txt MEDIATION SETTLEMENT AGREEMENT EXHIBIT 10.1 MEDIATION SETTLEMENT AGREEMENT This Mediation Settlement Agreement (this "Agreement") is made and entered into as of November 15, 2002, by, between and among: A. Longhorn Partners Pipeline, L.P. ("Longhorn"); and B. Holly Corporation, Navajo Refining Company, L.P., and Black Eagle, Inc. ("the Holly Entities"). Longhorn and the Holly Entities are referred to herein collectively as the "Parties." This Agreement is a binding contract, the terms of which are delineated below. Reference to "the El Paso lawsuit" refers to the lawsuit brought by Longhorn in the 120th State District Court in El Paso County, Texas and assigned cause number 98-2991. Reference to "the New Mexico lawsuit" refers to the lawsuit brought by Navajo Refining Company, L.P. and Holly Corporation assigned cause number CV-2002-417 in the 5th Judicial District Court in Eddy County, New Mexico. 1. Legal Actions. The Parties have or may have claims against the other and, without admitting any validity to those claims, the Parties wish to settle their disputes and hereby enter into this Agreement for that purpose. 2. Settlement. The Parties intend hereby to fully and finally settle all disputes, claims, and causes of action which have been asserted in the El Paso lawsuit and the New Mexico lawsuit, or which could have been asserted in either lawsuit. The provisions of this Agreement set forth the terms of their settlement. 3. Closing. On or before November 26, 2002 ("Closing"), the parties who are signatories to each of the following will execute: MEDIATION SETTLEMENT AGREEMENT - PAGE 1 A. A Throughput and Deficiency Agreement ("T&D Agreement") containing the terms specified in Exhibit A hereto (the "T&D Terms") and other terms and provisions customarily found in similar agreements of this type which are not inconsistent with the T&D Terms; B. A Promissory Note (the "Note") in the form attached hereto at Exhibit B; C. Mutual Releases of the El Paso and New Mexico lawsuits in the forms attached hereto at Exhibits C-1 and C-2, provided, however, that if an agreement is reached on or before November 25, 2002, to resolve the lawsuit styled and numbered Collins v. Longhorn Partners Pipeline, L.P., et al., Cause No. 98-2089, now pending in the 198th Judicial District Court of Kimble County, Texas, then the forms of release attached hereto at Exhibits C-1 and C-2 will be revised to include Marian Collins, the Estate of Lucien Collins, Max Renea Hicks, Ben J. Cunningham, and the George Donaldson law firm and its predecessors and its present and former partners, officers, and employees among the "Holly Released Parties," and the signatories (including Marian Collins, the Estate of Lucien Collins, Max Renea Hicks, Ben J. Cunningham, and R. James George, Jr., for the George Donaldson law firm) will execute the forms of Mutual Release as so revised, which shall contain an appropriate exclusion for (i) claims now pending or that could be brought in the case styled and numbered Spiller, et al. v. Walker, et al., No. A CA 255 SS in the United States District Court for the Western District of Texas, among those who are now parties to that case, and (ii) for any proposed signatories who do not sign the revised Mutual Releases; and D. An Arbitration Agreement in the form attached hereto at Exhibit D. The documents referenced in subparagraphs A through D above are hereinafter referred to as the "Closing Documents." MEDIATION SETTLEMENT AGREEMENT - PAGE 2 4. Dismissal of Lawsuits. Within five (5) days of Closing and the execution of the Closing Documents by all signatory parties thereto: (a) Longhorn and the Holly Entities will file a joint motion with the El Paso Court seeking dismissal of the El Paso lawsuit with prejudice (including all claims that could have been brought by those parties therein), and will thereafter attempt to obtain an Order of Dismissal at the earliest practical date in accordance with said motion; (b) the Holly Entities, Longhorn and those other parties who have signed the Release in the form of Exhibit C-2, will file a joint motion with the New Mexico Court seeking dismissal of the New Mexico lawsuit with prejudice with respect to claims between and among those parties (including all claims that could have been brought among those parties therein), and will thereafter attempt to obtain an Order of Dismissal at the earliest practical date in accordance with said motion; and (c) the Holly Entities will file a withdrawal of their petition for review in their appeal from the El Paso lawsuit to the Texas Supreme Court. 5. Press Release. The Parties agree to issue a joint press release relating to this Agreement in the form of Exhibit E hereto, as soon as practical after execution of this Agreement by all Parties. 6. Covenant Not To Sue. Longhorn covenants not to institute any litigation or other legal proceedings relating to the facts, events or occurrences that form the basis of the disputes which are the subject of the El Paso litigation or the New Mexico litigation against (a) the George Donaldson law firm or any of its present or former partners, officers or employees, or (b) Marian Collins or the Lucien Collins Estate. However, notwithstanding the foregoing, Longhorn reserves the right to respond in any manner it deems to be necessary or appropriate, in its sole discretion, including the assertion and prosecution of counterclaims, in any existing litigation or future litigation brought by or on behalf of any of said parties (unless brought solely in the capacity as counsel for others, and in accordance with pertinent procedural and disciplinary rules governing the conduct of attorneys) MEDIATION SETTLEMENT AGREEMENT - PAGE 3 against Longhorn; any such counterclaims in any currently pending litigation, however, shall be limited to (i) counterclaims previously asserted, (ii) counterclaims in response to claims not asserted against Longhorn as of the date of this Agreement, and (iii) counterclaims based on evidence discovered after the date of this Agreement. 7. Opposition Efforts. The Holly Entities and their affiliates will immediately discontinue all direct and indirect opposition, and support of any opposition (financial or otherwise), to the Longhorn Pipeline Project (including, but not limited to, litigation, lobbying and public relations), except to the extent, and only to the extent, Holly is contractually obligated to provide such support. Holly will use its reasonable best efforts to negotiate a termination of its (and any of its affiliates') existing contractual obligations to provide such support at the earliest practical date and the Holly Entities and Longhorn will use their reasonable best efforts to arrange for the easement litigation (including all claims and counterclaims that have been or could have been brought by any party in that action) currently pending against Longhorn in Kimble County, Texas to be dismissed with prejudice at the earliest practical date. 8. Representations of Authority and Approval. Each of Longhorn and the Holly Entities warrants and represents that it has the authority and has obtained all approvals necessary to execute this Agreement and the Closing Documents, and to perform its obligations thereunder. 9. Consideration Acknowledged. The Parties acknowledge that the covenants contained in this Agreement provide good and sufficient consideration for every promise, duty, release, obligation, and right contained in this Agreement. 10. Notices. Any notice or other communication required or permitted under the terms of this Agreement shall be in writing and shall be considered as properly given or served if delivered MEDIATION SETTLEMENT AGREEMENT - PAGE 4 to or sent by certified mail, return receipt requested, postage and charges prepaid and addressed to the address of record, which unless changed by appropriate notice is as follows: (a) if to Longhorn: Jenkens & Gilchrist, P.C., 1445 Ross Avenue, Suite 3200, Dallas, Texas 75202; ATTN: Mr. Barry F. Cannaday. (b) if to the Holly Entities: Carrington, Coleman, Sloman & Blumenthal, L.L.P., 200 Crescent Court, Suite 1500, Dallas, Texas 75201; ATTN: Mr. Ken Carroll. 11. Independent Judgment. In consideration of the above promises, the undersigned represent and warrant that each has consulted counsel and has acted on his own judgment as to all matters addressed herein, including the value of any property or interest required to be transferred hereby, and has not been induced to enter into this Agreement by any statement, act, or representation of any kind or character on the part of any other entity or person. 12. Denial of Liability. It is understood by the Parties that each of them has denied and still denies the claims and allegations made against them by the other and that this Agreement is being entered into purely as a compromise of disputed matters for the purpose of avoiding the uncertainty of litigation, costs of litigation, and the uncertainty of collection of any judgment which might be obtained therein. The settlement of such claims and counterclaims which might be asserted and the obligations created by this Agreement are not and shall not be construed as an admission of liability by any of the Parties on any claim or counterclaim. 13. Entirety and Amendments. This Agreement and attached exhibits embody the entire agreement among the Parties, and supersede all prior agreements and understandings, if any, relating to the subject matter hereof, except for agreed court orders. Any amendment hereto must be in writing and signed by the Parties in order to be effective. MEDIATION SETTLEMENT AGREEMENT - PAGE 5 14. Multiple Counterparts. This Agreement may be executed in a number of identical counterparts, all of which collectively constitute one agreement. However, in making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart containing the signature of any Party against which enforcement is sought. 15. Dispute Resolution. All disputes relating to or arising out of this Agreement and the documents to be executed in connection herewith at Closing shall be first submitted to mediation in Dallas, Dallas County, Texas to the Honorable Robert M. Parker or, if he is not available, to another mediator mutually acceptable to the parties. In the event that any disputes cannot be settled through mediation, those disputes will be resolved through arbitration pursuant to the terms set forth in the form of arbitration agreement attached hereto at Exhibit D. Nothing herein, however, shall prevent any party from taking such measures as are necessary and appropriate to preserve the status quo pending such mediation and/or arbitration. 16. Non-Waiver. Failure of any party to exercise any right or option arising out of a breach of this Agreement shall not be deemed a waiver of any right or option with respect to any subsequent or different breach or the continuance of any existing breach. 17. Law Governing. This Agreement is to be performed in Dallas County, Texas, and the substantive laws of such state shall govern the validity, construction, enforcement, and interpretation of this Agreement. 18. Parties Bound. This Agreement shall be binding upon and inure to the benefit of the Parties, their respective heirs, successors, assigns, employees, officers, directors, agents and affiliates. 19. Binding Agreement. The Parties agree to proceed promptly toward the negotiation and execution of a definitive T&D Agreement containing the T&D Terms set forth in Exhibit A and to consummate the Closing of this Settlement on or before November 26, 2002. The Parties agree that MEDIATION SETTLEMENT AGREEMENT - PAGE 6 this Agreement is intended to be a binding contract between the Parties. In the event that for any reason any Party hereto attempts to withdraw from this Agreement or refuses to acknowledge or comply with any material term hereof prior to the execution and delivery of the Closing Documents, the other Party may elect to either (a) enforce this Agreement or (b) terminate this Agreement in its entirety. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written. LONGHORN PARTNERS PIPELINE, L.P. HOLLY CORPORATION By: Longhorn Partners GP, L.L.C. Its: General Partner By: /s/ LAMAR NORSWORTHY -------------------------- Its: Chairman of the Board and Chief Executive Officer -------------------------- By: /s/ CARTER R. MONTGOMERY ------------------------------ Carter R. Montgomery President and Chief Executive Officer NAVAJO REFINING COMPANY, L.P. By: /s/ MATTHEW P. CLIFTON -------------------------- Its: President -------------------------- BLACK EAGLE, INC. By: /s/ MATTHEW P. CLIFTON -------------------------- Its: President -------------------------- MEDIATION SETTLEMENT AGREEMENT - PAGE 7 EXHIBIT A PROPOSED TERMS AND CONDITIONS OF THROUGHPUT AND DEFICIENCY AGREEMENT 1. The T&D Agreement to be executed by Navajo will cover the shipment of petroleum products from the origination of the Longhorn Pipeline at GATX Terminals Corporation's terminal at Galena Park, Texas to a point of destination in El Paso, Texas. 2. The principal terms of the T&D Agreement are as follows: a. The term of the T&D Agreement will be six (6) years and will commence upon Startup of the Longhorn Pipeline Project (as "Startup" is defined in the Promissory Note from Longhorn to Navajo in the form attached as Exhibit B to the Settlement Agreement (the "Note")). b. Navajo Refining Company, L.P. will prepay Longhorn $25 million at Closing in immediately available funds (the "Prepayment Amount"). c. The tariff rate for shipments from the point of origin to El Paso will be $.05 per gallon. Instead of billing Navajo for volumes shipped through the pipeline, the amounts due from Navajo for shipments from the point of origin to El Paso will be deducted from the Prepayment Amount. Additionally, terminalling charges due from Navajo at Longhorn's El Paso terminal (21 cents per barrel) will be deducted from the Prepayment Amount. d. If during any 6 month (semi-annual)(1) time period, Navajo does not ship at least an average of 7,000 barrels per day (subject to adjustment for material curtailments and prorationing), then the "deficiency" shall be deducted from the Prepayment Amount at a rate of $2.10 per barrel. e. If Navajo ships in excess of an average of 7,000 barrels per day over a 6-month (semi-annual) period ("Excess Shipments"), such Excess Shipments shall not be subject to the T&D Agreement and shall not be deducted from the Prepayment Amount, but shall instead be paid for at the spot price or other mutually agreed price in effect on the date of shipment. Notwithstanding the foregoing, if during prior periods Navajo was prevented from shipping nominated volumes as a result of material curtailments or prorationing ("Curtailed Nominated Volumes"), then such Excess Shipments may used to recoup prior Curtailed Nominated Volumes that have not been previously recouped. Such recouped volumes shall be subject to the T&D Agreement and shall be deducted from the Prepayment Amount. - ---------- (1) The first such semi-annual period will commence on the first day of the month following the date of the startup of the Longhorn Pipeline Project. MEDIATION SETTLEMENT AGREEMENT - PAGE 8 f. The T&D Agreement shall terminate upon the earliest to occur of (i) the last day of the calendar month in which Navajo has exhausted its Prepayment Amount; (ii) Longhorn's exercise of its "buy out" option specified in Paragraph 5 below; or (iii) if Navajo so elects, upon any event that triggers the obligation by Longhorn to pay the Contingent Payment Amount under the Note. 3. If the T&D Agreement terminates at the end of six years and at that time Navajo has not recouped all of its Prepayment Amount as a result of Curtailed Nominated Volumes, then Longhorn will be obligated to pay to Navajo the remaining balance of the Prepayment Amount plus interest on that amount at the rate of 5.5% per annum (from the date of the Closing of the Settlement to the date of payment). 4. Navajo is not required to ship any barrels on the Longhorn Pipeline. However, in the event that Navajo does not ship an average of 7,000 barrels per day, barrels not shipped will be credited against its Prepayment Amount, as provided in Paragraph 2(d) above. Additionally, Navajo has no obligation to furnish linefill for the startup of the pipeline. 5. Longhorn shall have the right at any time, upon 60 days prior written notice, to "buy out" Navajo's prepaid T&D Agreement at a price equal to the unrecouped balance of the Prepayment Amount plus interest on the unrecouped balance of the Prepayment Amount at a rate of 5.5% per annum from the date of the Closing of the Settlement to the date of payment. 6. The T&D Agreement shall contain such other terms and provisions as are customarily found in similar agreements of this type and which are not inconsistent with the terms described above. 7. If Longhorn is obligated by law to offer third parties the opportunity to enter into a throughput and deficiency agreement with terms and conditions comparable to those being made available to Navajo ("Comparable T&D Agreements"), and in the further event that third party companies elect to enter into Comparable T&D Agreements, Navajo acknowledges that its 7,000 barrel per day shipping volume could be reduced. In the event of such reduction, the provisions of the T&D Agreement will be modified to reflect such reduction and Longhorn will promptly refund any portion of the Prepayment Amount attributable to such reduction, with interest on that amount at the rate of 5.5% per annum from the date of the Closing of the Settlement to the date of Payment. 8. Prior to or contemporaneously with the execution of the definitive T&D Agreement, Navajo will enter into a Terminal Use and Access Agreement with Longhorn for Longhorn's El Paso Terminal in Longhorn's standard form of terminal use and access agreement generally used by Longhorn with shippers unrelated to Longhorn. MEDIATION SETTLEMENT AGREEMENT - PAGE 9 EXHIBIT B PROMISSORY NOTE $25,000,000 Dallas, Texas November ___, 2002 This Promissory Note, dated as of November ____, 2002, is from LONGHORN PARTNERS PIPELINE, L.P., a Delaware limited partnership ("Maker"), to NAVAJO REFINING COMPANY, L.P. ("Payee"). Recitals: A. Pursuant to a Mediation Settlement Agreement dated November ___, 2002 (the "Settlement Agreement") by and between Maker, Payee, Holly Corporation, and Black Eagle, Inc., Maker and Payee entered into a Throughput and Deficiency Agreement dated November ___, 2002 (the "T&D Agreement"), pursuant to which Payee prepaid the amount of $25,000,000 (the "Prepayment Amount") in return for certain shipping entitlements for Navajo through Maker's petroleum products pipeline. B. Under the terms of Paragraph 3(B) of the Settlement Agreement, Maker agreed to execute and deliver this Note to Payee to provide for Payee's contingent repayment rights in the event that (1) Maker has not commenced regular and ongoing transportation of refined petroleum products through its pipeline to El Paso, Texas, on or before July 1, 2004, or prior thereto has given unequivocal indication (by announcement or circumstance) that it will not or cannot commence such operations, or if (2) Maker commences transporting refined petroleum products through its pipeline on or before July 1, 2004, but thereafter ceases transporting refined petroleum products through its pipeline (i) for reasons other than Force Majeure, for a continuous period in excess of 180 days, or (ii) for a continuous period of more than one year for any reason (regardless of Force Majeure), prior to the time the entire Prepayment Amount has been recouped through transportation services under the terms of the T&D Agreement, or if(3) an Event of Default occurs. C. Capitalized terms used in this Note which are not defined in Paragraph 1 below shall have the meanings assigned to those terms in the Settlement Agreement. NOW, THEREFORE, in consideration of the premises above and the mutual covenants in the Settlement Agreement, Maker hereby agrees as follows: 1. Defined Terms. As used in this Note, the following terms have the following meanings: Applicable Rate means five and one-half percent (5.5%) per annum. Buyout means an exercise of Maker's rights provided for in the T&D Agreement as described in Paragraph 5 of Exhibit A of the Settlement Agreement to "buy out" the T&D Agreement by repaying the remaining balance of the Prepayment Amount plus interest thereon at the Applicable Rate. MEDIATION SETTLEMENT AGREEMENT - PAGE 10 Contingent Payment Amount means (a) in the event of a Failure to Commence Operations, $25,000,000 plus interest thereon at the Applicable Rate from the date of this Promissory Note, and (b) in the event of a Permanent Cessation of Operations or an Event of Default, the Remaining Balance plus interest thereon at the Applicable Rate from the date of this Promissory Note. Contingent Payment Date means (a) July 1, 2004, if there has been a Failure to Commence Operations, and (b) five (5) business days after any Permanent Cessation of Operations or Event of Default. Event of Default means (i) any repudiation or rejection by Maker or any successor of its obligations under the Note or of its obligation to provide the services to Payee specified in the T&D Agreement, including the announcement by Maker that it will not Startup transporting refined products through its pipeline on or before July 1, 2004 (or the functional equivalent), or the announcement by Maker that it will have a Permanent Cessation of Operations (or the functional equivalent); (ii) Maker has had entered against it a judgment, decree, or order for relief in an involuntary proceeding commenced under any bankruptcy, insolvency, or similar law, or has any such proceeding commenced against it which remains undismissed for a period of sixty (60) days; (iii) Maker or any related entity has commenced a case regarding Maker under any bankruptcy, insolvency, or similar law, or makes a general assignment for the benefit of creditors; or (iv) Maker suffers the appointment of or taking possession or control by a receiver, liquidator, custodian, trustee, or similar official, of all or any substantial part of its assets. Failure to Commence Operations means a failure by Maker to Startup on or before July 1, 2004. Force Majeure means an event or events beyond the reasonable control of the party unable to perform hereunder, and includes without limitation, acts of God; storm, flood, extreme weather, fire, explosion, war, invasion, hostilities, rebellion, terrorism, insurrection, riots, strikes, picketing or other labor stoppages, whether of carrier's or shipper's employees, agents, or otherwise; electrical or electronic failure or malfunction; communications failure or malfunction; computer hardware and or software failure, malfunction, or inaccuracy; breakage or accident to machinery or equipment; temporary restraining orders, injunctions, or compliance orders issued by courts or governmental agencies; seizure or destruction under quarantine or customs regulations, or confiscation by order of any government or public authority, or risks of contraband or illegal transportation or trade; or any cause not due to fault or negligence or any cause reasonably beyond the control of the parties; provided however, it shall not include economic or financial events or circumstances of Maker or its affiliates (including, without limitation, the circumstances described as Events of Default, above). Nothing herein shall be construed to require settlement of labor disputes against the better judgment of the party having the dispute. MEDIATION SETTLEMENT AGREEMENT - PAGE 11 Permanent Cessation of Operations means a cessation of the provision of transportation services for refined petroleum products through Maker's pipeline for delivery to El Paso, Texas, (i) for reasons other than Force Majeure, for a continuous period in excess of 180 days, or (ii) for a continuous period of more than one year for any reason (regardless of Force Majeure), prior to the time the entire Prepayment Amount has been recouped through transportation services under the T&D Agreement, or the announcement by Maker or any successor that such cessation will or is expected to occur. Remaining Balance means the amount of the Prepayment Amount that still remains to be recovered by Payee under the T&D Agreement at the time of a Permanent Cessation of Operations or an Event of Default. Senior Debt means all principal of, and any accrued and unpaid interest, and all other amounts owing by Maker under the terms of any financing obtained hereafter by Maker for the startup of its Galena Park, Texas to El Paso, Texas petroleum products pipeline project from any commercial banks, financial institutions or other lenders, in an aggregate principal amount not to exceed $150,000,000; provided, however, that no person or entity holding any direct or indirect equity interest in Maker ("Affiliated Parties") may provide financing as part of the Senior Debt, except that (i) J. P. Morgan Chase may provide financing of all or part of the Senior Debt, and (ii) Affiliated Parties may provide up to 30% of the Senior Debt financing if a party or parties other than an Affiliated Party provides at least 70% of the Senior Debt financing. Startup means for Maker to commence regular and ongoing transportation of refined petroleum products through its pipeline for delivery to El Paso, at a rate and on a basis sufficient to ensure that Maker has the ability to perform under the T&D Agreement. 2. Payment. In the event of a Failure to Commence Operations or a Permanent Cessation of Operations or an Event of Default, Maker hereby promises to pay to the order of Payee the Contingent Payment Amount on or before the applicable Contingent Payment Date. All payments on this Note shall be due and payable in lawful money of the United States of America at Payee's address located at 1600 Crescent Court, Suite 1600, Dallas Texas 75201-6927, or such other address as the holder hereof may indicate in writing to Maker. 3. Termination of This Note. This Note shall terminate and have no further force or effect in the event of Buyout, or on the date that the entire Prepayment Amount has been recouped by Payee under the T&D Agreement. 4. Default Interest. In the event that a Failure to Commence Operations or a Permanent Cessation of Operations occurs and Maker fails to pay the Contingent Payment amount due on or before the Contingent Payment Date, then all outstanding amounts due and payable under this Promissory Note shall thereafter bear interest at a rate often percent (10%) per annum. 5. Subordination. All payments of principal and interest under this Note shall be fully subordinated to the prior payment in full of all Senior Debt. Payee, by its acceptance hereof, agrees MEDIATION SETTLEMENT AGREEMENT - PAGE 12 to execute, at the request of Maker, a separate agreement with any holder of Senior Debt setting out Payee's agreement to subordinate all payments of principal and interest hereunder to such holder's Senior Debt and to take all such other action as such holder of Senior Debt may reasonably request to enable such holder of Senior Debt to enforce all claims relating to such Senior Debt in a manner which is prior to and in preference to Payee's claims under this Note. Maker's obligations and Payee's rights under this Note shall not be subordinated to any debt of Maker other than the Senior Debt. Payee's rights under this Note shall be pari passu with the rights of the Lenders who have advanced funds prior to November 15, 2002 (and with respect to such advances) under that certain Credit Agreement dated as of August 29, 2001, as amended as of November 15, 2002, by and among Longhorn Partners Pipeline, L.P., Chisholm Holdings, L.P., LPP Holdings, L.P., ELPP Holdings, Inc., Amoco Longhorn Pipeline Company and Longhorn Enterprises of Texas, Inc. 6. Governing Law. THIS NOTE SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF SUCH STATE AND THE UNITED STATES OF AMERICA SHALL GOVERN THE RIGHTS AND DUTIES OF THE PARTIES HERETO AND THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS NOTE. 7. Successors and Assigns. This Note shall bind Maker and its successors and assigns and shall inure to the benefit of the holder and its successors and assigns. EXECUTED as of the day and year first written above. MAKER: LONGHORN PARTNERS PIPELINE, L.P. By: Longhorn Partners GP, L.L.C. By: ------------------------------------- Carter R. Montgomery President and Chief Executive Officer MEDIATION SETTLEMENT AGREEMENT - PAGE 13 EXHIBIT C-1 MUTUAL RELEASE For and in consideration of the terms of the Mediation Settlement Agreement (the "Settlement Agreement") entered into on the _________ day of November, 2002, by and between Holly Corporation, Navajo Refining Company, L.P., Black Eagle, Inc. (collectively, the "Holly Entities") and Longhorn Partners Pipeline, L.P. ("Longhorn"), as well as the covenants and/or promises contained herein, the receipt and sufficiency of which are hereby acknowledged, the Holly Entities, on behalf of themselves and all who may claim by, through, or under them, hereby fully, finally and forever RELEASE, ACQUIT and FOREVER DISCHARGE Longhorn Partners Pipeline, L.P., its assigns, representatives, agents, and/or heirs, if any, along with any successor companies, as well as its officers, administrators, directors, employees and/or attorneys (collectively, the "Longhorn Released Parties"), jointly and severally, from all claims, demands, actions, causes of action, other liabilities, and/or damages, if any, known or unknown, whether arising at law, by statute, or in equity, which the Holly Entities, or any other person or entity claiming by, through or under them, may have or claim to have, jointly or severally, against the Longhorn Released Parties that in any way arise out of or are connected with acts, omissions, conduct, relationships, occurrences, dealings, communications, events, and/or transactions relating in any way to the Longhorn pipeline, or the litigation filed by Longhorn in the 120th Judicial District Court, El Paso County, Texas and given cause number 98-2991 in that court, or the litigation filed by Holly Corporation and Navajo Refining Company, L.P. in the 5th Judicial District Court, Eddy County, New Mexico, and given cause number CV-2002-417 in that court, that have occurred on or before the date upon which the Holly Entities execute this Agreement; provided, however, this release does not include any claims the Holly Entities may have against the Longhorn Released Parties for any failure to comply with or breach of any provision in this Mutual Release or the Settlement Agreement or any documents executed in connection with the Settlement Agreement. For and in consideration of the terms of the Settlement Agreement, as well as the covenants and/or promises contained herein, the receipt and sufficiency of which are hereby acknowledged, Longhorn, on behalf of itself and all who may claim by, through, or under it, hereby fully, finally and forever RELEASES, ACQUITS and FOREVER DISCHARGES the Holly Entities, and their assigns, representatives, agents, and/or heirs along with any successor companies, as well as their officers, administrators, directors, employees and/or attorneys (collectively, the "Holly Released Parties"), jointly and severally, from all claims, demands, actions, causes of action, other liabilities, and/or damages, if any, known or unknown, whether arising at law, by statute, or in equity, which Longhorn, or any other person or entity claiming by, through or under it, may have or claim to have, jointly or severally, against the Holly Released Parties that in any way arise out of or are connected with acts, omissions, conduct, relationships, occurrences, dealings, communications, events, and/or transactions relating in any way to the Longhorn pipeline, or the litigation filed by Longhorn in the 120th Judicial District Court, El Paso County, Texas and given cause number 98-2991 in that court, or the litigation filed by Holly Corporation and Navajo Refining Company, L.P. in the 5th Judicial District Court, Eddy County, New Mexico, and given cause number CV-2002-417 in that court, that have occurred on or before the date upon which Longhorn executes this Agreement; provided, however, this release does not include any claims Longhorn may have against the Holly Released Parties for any failure to comply MEDIATION SETTLEMENT AGREEMENT - PAGE 14 with or breach of any provision in this Mutual Release or the Settlement Agreement or any documents executed in connection with the Settlement Agreement; nor does it include a release of any of the parties identified in Paragraph 6 of the Settlement Agreement. Longhorn Partners Pipeline, L.P. By: ----------------------------- Its: ----------------------------- Holly Corporation By: ----------------------------- Its: ----------------------------- Navajo Refining Company, L.P. By: ----------------------------- Its: ----------------------------- Black Eagle, Inc. By: ----------------------------- Its: ----------------------------- MEDIATION SETTLEMENT AGREEMENT - PAGE 15 EXHIBIT C-2 MUTUAL RELEASE For and in consideration of the terms of the Mediation Settlement Agreement (the "Settlement Agreement") entered into on the _____ day of November, 2002 by and between Holly Corporation, Navajo Refining Company, L.P., and Black Eagle, Inc. (collectively, the "Holly Entities") and Longhorn Partners Pipeline, L.P., as well as the covenants and/or promises contained herein, the receipt and sufficiency of which are hereby acknowledged, the Holly Entities, on behalf of themselves and all who may claim by, through or under them, hereby fully, finally and forever RELEASE, ACQUIT and FOREVER DISCHARGE each of Longhorn Partners Pipeline GP, L.L.C., Exxon Mobil Pipeline Company, ELPP Holdings, Inc., ELPP GP, Inc., Williams Pipeline Company, L.L.C., Longhorn Enterprises of Texas, Inc., BP Pipeline (North America) Inc., Amoco Longhorn Pipeline Company, Amoco Longhorn GP Pipeline Company, The Beacon Group Energy Investment Fund L.P., and LPP Holdings, L.P., that signs this Mutual Release and transmits such signed copy to Holly Corporation by 5:00 p.m. November 26, 2002, and any of their assigns, representatives, agents, and/or heirs, if any, along with any successor companies, as well as their officers, administrators, directors, employees and/or attorneys (collectively, the "Longhorn Released Parties"), jointly and severally, from all claims, demands, actions, causes of action, other liabilities, and/or damages, if any, known or unknown, whether arising at law, by statute, or in equity, which the Holly Entities, or any other person or entity claiming by, through or under them, may have or claim to have, jointly or severally, against the Longhorn Released Parties that in any way arise out of or are connected with acts, omissions, conduct, relationships, occurrences, dealings, communications, events, and/or transactions relating in any way to the Longhorn pipeline, or the litigation filed by Longhorn Partners Pipeline, L.P., in the 120th Judicial District Court, El Paso County, Texas, and given cause number 98-2991 in that court, or the litigation filed by Holly Corporation and Navajo Refining Company, L.P. in the 5th Judicial District Court, Eddy County, New Mexico and given cause number CV-2002-417 in that court, that have occurred on or before the date upon which the Holly Entities execute this Agreement; provided, however, this release does not include any claims the Holly Entities may have against the Longhorn Released Parties for any failure to comply with or breach of any provision in this Mutual Release; provided further, however that the "Longhorn Released Parties" excludes and does not include any of Longhorn Partners Pipeline, G.P., L.L.C., Exxon Mobil Pipeline Company, ELPP Holdings, Inc., ELPP G.P., Inc., Williams Pipeline Company, L.L.C., Longhorn Enterprises of Texas, Inc., BP Pipeline (North America), Inc., Amoco Longhorn Pipeline Company, Amoco Longhorn GP Pipeline Company, The Beacon Group Energy Investment Fund, L.P., and/or LPP Holdings, L.P., that does not sign and transmit to Holly Corporation a signed copy of this Mutual Release on or before 5:00 p.m. November 26, 2002, or their assigns, representatives, agents, and/or heirs, if any, or any successor companies, officers, administrators, directors, employees, and/or attorneys, and the benefits and obligations of this Mutual Release and of the Mutual Release signed November ____, 2002, by and between the Holly Entities and Longhorn Partners Pipeline, L.P., do not extend to them, or any of them. For and in consideration of the terms of the Settlement Agreement, as well as the covenants and/or promises contained herein, the receipt and sufficiency of which are hereby acknowledged, the MEDIATION SETTLEMENT AGREEMENT - PAGE 16 Longhorn Released Parties, on behalf of themselves and all who may claim by, through or under any of them, hereby fully, finally and forever RELEASE, ACQUIT and FOREVER DISCHARGE the Holly Entities, and their members, assigns, general or limited partners, representatives, agents, and/or heirs along with any affiliate and/or successor companies, as well as their officers, administrators, directors, employees and/or attorneys (collectively, the "Holly Released Parties"), jointly and severally, from all claims, demands, actions, causes of action, other liabilities, and/or damages, if any, known or unknown, whether arising at law, by statute, or in equity, which the Longhorn Released Parties, or any other person or entity claiming by, through or under them, may have or claim to have, jointly or severally, against the Holly Released Parties that in any way arise out of or are connected with acts, omissions, conduct, relationships, occurrences, dealings, communications, events, and/or transactions relating in any way to the Longhorn pipeline or the litigation filed by Longhorn Partners Pipeline, L.P., in the 120th Judicial District Court, El Paso County, Texas, and given cause number 98-2991 in that court, or the litigation filed by Holly Corporation and Navajo Refining Company, L.P. in the 5th Judicial District Court, Eddy County, New Mexico and given cause number CV-2002-417 in that court, that have occurred on or before the date upon which the Longhorn Released Parties execute this Mutual Release, provided, however, this Mutual Release does not include any claims the Longhorn Released Parties may have against the Holly Released Parties for any failure to comply with or breach of any provision in this Mutual Release. This Mutual Release does not include a release of any of the parties identified in Paragraph 6 of the Settlement Agreement but, not withstanding the foregoing, the Longhorn Released Parties covenant not to institute any litigation or other legal proceedings relating to the facts, events, or occurrences that form the basis of the disputes which are the subject of the El Paso litigation or the New Mexico litigation (referenced above) against (a) the George Donaldson law firm or any of its present or former partners, officers, or employees or (b) Marian Collins or the Estate of Lucien Collins; provided further that each of the Longhorn Released Parties reserves the right to respond in any manner it deems to be necessary or appropriate, in its sole discretion, including the assertion and prosecution of counterclaims, in any existing litigation or future litigation brought by or on behalf of any of said parties (unless brought solely in the capacity as counsel for others, and in accordance with pertinent procedural and disciplinary rules governing the conduct of attorneys) against said Longhorn Released Party; any such counterclaims in any currently pending litigation, however, shall be limited to (i) counterclaims previously asserted as of November 15, 2002, (ii) counterclaims in response to claims not asserted against such Longhorn Released Party as of the date of this Mutual Release, and (iii) counterclaims based on evidence discovered after the date of this Mutual Release. All disputes relating to or arising out of this Mutual Release and any related documents shall be first submitted to mediation in Dallas, Dallas County, Texas, to the Honorable Robert M. Parker, or, if he is not available, to another mediator mutually acceptable to the Parties. In the event that any disputes cannot be settled through mediation, those disputes will be resolved through arbitration pursuant to the terms set forth in the form of Arbitration Agreement attached hereto and Exhibit D to the Settlement Agreement. LONGHORN PARTNERS PIPELINE GP, L.L.C. By: --------------------------------- Its: -------------------------------- MEDIATION SETTLEMENT AGREEMENT - PAGE 17 EXXON MOBIL PIPELINE COMPANY By: ----------------------------- Its: ----------------------------- ELPP HOLDINGS, INC. By: ----------------------------- Its: ----------------------------- ELPP GP, INC. By: ----------------------------- Its: ----------------------------- WILLIAMS PIPE LINE COMPANY, L.L.C. By: ----------------------------- Its: ----------------------------- LONGHORN ENTERPRISES OF TEXAS, INC. By: ----------------------------- Its: ----------------------------- BP PIPELINE (NORTH AMERICA) INC. By: ----------------------------- Its: ----------------------------- MEDIATION SETTLEMENT AGREEMENT - PAGE 18 AMOCO LONGHORN PIPELINE COMPANY By: ----------------------------- Its: ----------------------------- AMOCO LONGHORN GP PIPELINE COMPANY By: ----------------------------- Its: ----------------------------- THE BEACON GROUP ENERGY INVESTMENT FUND, L.P. By: ----------------------------- Its: ----------------------------- LPP HOLDINGS, L.P. By: ----------------------------- Its: ----------------------------- HOLLY CORPORATION By: ----------------------------- Its: ----------------------------- NAVAJO REFINING COMPANY, L.P. By: ----------------------------- Its: ----------------------------- MEDIATION SETTLEMENT AGREEMENT - PAGE 19 BLACK EAGLE, INC. By: ----------------------------- Its: ----------------------------- MEDIATION SETTLEMENT AGREEMENT - PAGE 20 EXHIBIT D ARBITRATION AGREEMENT (a) Binding Arbitration. This Arbitration Agreement is attached to that certain Mediation Settlement Agreement by and between Longhorn Partners Pipeline, L.P. and Holly Corporation, Navajo Refining Company, L.P. and Black Eagle, Inc. dated November ___, 2002 (the "Settlement Agreement"). Capitalized terms used herein that are not otherwise defined shall have the meanings assigned to those terms in the Settlement Agreement. Upon the demand of any Party, any Dispute (as defined below) shall be resolved by binding arbitration in accordance with the terms of this Arbitration Agreement. A "Dispute" shall include any action, dispute, claim or controversy of any kind (e.g., whether in contract or in tort, statutory or common law, legal or equitable or otherwise) now existing or hereafter arising between the Parties in any way arising out of, pertaining to or in connection with the Settlement Agreement or any agreement, document or instrument executed in connection therewith or pursuant thereto (the "Settlement Documents"). Any Party to this Arbitration Agreement, by summary proceedings (e.g., a plea in abatement or motion to stay further proceedings), may bring any action in court to compel arbitration of any Disputes. Any Party who fails or refuses to submit to binding arbitration following a lawful demand by the opposing Party shall bear all costs and expenses incurred by the opposing party in compelling arbitration of any Dispute. The Parties agree that by engaging in activities with or involving each other as described above, they are participating in transactions involving interstate commerce. (b) Governing Rules. All Disputes between the Parties submitted to arbitration shall be resolved by binding arbitration administered by the American Arbitration Association (the "AAA") in accordance with, and in the following order or priority: (1) the terms of this Arbitration Agreement, (2) the Commercial Arbitration Rules of the AAA, (3) the Federal Arbitration Act (Title 9 of the United States Code), and (4) to the extent the foregoing are inapplicable, unenforceable or invalid, the laws of the State of Texas. The validity and enforceability of this Arbitration Agreement shall be determined in accordance with this same order of priority. In the event of any inconsistency between this Arbitration Agreement and such rules and statutes, this Arbitration Agreement shall control. Judgment upon any award rendered hereunder may be entered in any court having jurisdiction. (c) Arbitrator Powers and Qualifications; Modification or Vacation of Award. Arbitrators are empowered to resolve Disputes by summary rulings substantially similar to summary judgments and motions to dismiss. Arbitrators shall resolve all Disputes in accordance with the applicable substantive law. Any arbitrator selected shall be required to be (i) neutral, (ii) a practicing attorney licensed to practice law in the State of Texas, and (iii) experienced and knowledgeable in the substantive laws applicable to the subject matter of the Dispute. With respect to a Dispute in which the claims or amounts in controversy do not exceed $250,000, a single arbitrator shall be chosen and shall resolve the Dispute. In such case, the arbitrator shall be required to make specific, written findings of fact and conclusions of law, and shall have authority to render an award up to but not to exceed $250,000, including all damages of any kind, including costs, fees and expenses. A Dispute involving claims or amounts in controversy exceeding $250,000 or involving claims or amounts in controversy where the parties cannot agree that the amount in controversy is less than $250,000, shall MEDIATION SETTLEMENT AGREEMENT - PAGE 21 be decided by a majority vote of a panel of three arbitrators (an "Arbitration Panel"), the determination of any two of the three arbitrators constituting the determination of the Arbitration Panel, provided, however, that all three Arbitrators on the Arbitration Panel must actively participate in all hearings and deliberations. Arbitrators, including any Arbitration Panel, may grant any remedy or relief deemed just and equitable and within the scope of this Arbitration Agreement and may also grant such ancillary relief as is necessary to make effective any award. Arbitration Panels shall be required to make specific, written findings of fact and conclusions of law and shall be required to render awards within 30 days after the conclusion of hearings, or within 30 days following the submission of final briefs of the Parties if a briefing schedule is established following the hearings. (d) Consequential or Punitive Damages. The Parties agree that in no event shall any Party be liable to another Party for consequential, incidental or indirect damages or punitive damages of any kind and that the Arbitrator (or the Arbitration Panel as appropriate) shall have no power to award any such damages hereunder. (e) Timing and Discovery. To the maximum extent practicable, the AAA, the Arbitrator (or the Arbitration Panel, as appropriate) and the Parties shall take any action necessary to require that an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with the AAA. Hearings shall be limited to no more than 10 business days, which the Parties shall endeavor to conduct consecutively. Arbitration proceedings hereunder shall be conducted in Dallas, Texas. Arbitrators shall be empowered to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure and applicable law. With respect to any Dispute, each Party agrees that all discovery activities shall be expressly limited to matters directly relevant to the Dispute and any Arbitrator, Arbitration Panel and the AAA shall be required to fully enforce this requirement. Document requests shall be limited to no more than 15 items or categories of documents. The Parties shall be allowed no more than five depositions per side in connection with any Dispute with durations of not more than four hours each. Additional document requests, depositions or extensions of time for depositions shall only be allowed if (i) agreed to by the Parties, or (ii) permitted by the Arbitrator (or the Arbitration Panel, as appropriate) upon an express finding that such additional discovery is required as a result of a party's failure to participate in the discovery process in good faith. (f) Other Matters and Miscellaneous. This Arbitration Agreement constitutes the entire agreement of the Parties with respect to its subject matter and supersedes all prior discussions, arrangements, negotiations and other communications on dispute resolution. To the extent permitted by applicable law, Arbitrators, including any Arbitration Panel, shall have the power to award recovery of all costs and fees (including attorneys' fees, administrative fees and arbitrators' fees) to the prevailing party. This Arbitration Agreement may be amended, changed or modified only by the express provisions of a writing which specifically refers to this Arbitration Agreement and which is signed by all the Parties hereto. If any term, covenant, condition or provision of this Arbitration Agreement is found to be unlawful, invalid or unenforceable, such illegality, or invalidity or unenforceability shall not affect the legality, validity or enforceability of the remaining parts of this Arbitration Agreement, and all such remaining parts hereof shall be valid and enforceable and have full force and effect as if the illegal, invalid or unenforceable part had not been included. Each Party agrees to keep all Disputes and arbitration proceedings strictly confidential, except for disclosure of MEDIATION SETTLEMENT AGREEMENT - PAGE 22 information required in the ordinary course of business of the parties or by applicable law or regulation. Longhorn Partners Pipeline, L.P. By: Longhorn Partners GP, L.L.C. Its: General Partner By: --------------------------------- Carter R. Montgomery President and Chief Executive Officer Holly Corporation By: ---------------------------- Its: ---------------------------- Navajo Refining Company, L.P. By: ---------------------------- Its: ---------------------------- Black Eagle, Inc. By: ---------------------------- Its: ---------------------------- MEDIATION SETTLEMENT AGREEMENT - PAGE 23 EXHIBIT E FORM OF JOINT PRESS RELEASE HOLLY CORPORATION AND LONGHORN PARTNERS PIPELINE, L.P. ANNOUNCE SETTLEMENT OF LITIGATION Dallas, Texas, November 15, 2002 -- Holly Corporation (AMEX "HOC") and Longhorn Partners Pipeline, L.P. today jointly announced an agreement, developed in voluntary mediation, to settle pending litigation. Holly and Longhorn Partners have entered into a binding agreement to terminate litigation brought in August 1998 by Longhorn Partners against Holly and certain subsidiaries in a state court in El Paso, Texas and to terminate litigation brought in August 2002 by Holly and a subsidiary against Longhorn Partners and related parties in a state court in Carlsbad, New Mexico. Under the agreement, Holly will pay $25 million to Longhorn Partners as a prepayment for the transportation of 7,000 barrels per day of refined products from the Gulf Coast to El Paso in a period of up to 6 years from the date of the Longhorn Pipeline's start-up. The agreement provides that Longhorn Partners will issue to Holly an unsecured promissory note, subordinated to certain other indebtedness, that would become payable with interest in the event that the Longhorn Pipeline does not begin operations by July 1, 2004 or to the extent Longhorn Partners is unable to provide Holly the full amount of the agreed transportation services. Final documentation to implement the settlement is expected to be completed by late November, at which time the $25 million payment will be made by Holly to Longhorn Partners. Holly Corporation, through its affiliates, Navajo Refining Company and Montana Refining Company, is engaged in the refining, transportation, terminalling and marketing of petroleum products. Longhorn Partners Pipeline, L.P., a limited partnership based in Dallas, is developing the 700-mile Longhorn Pipeline to transport gasoline, diesel and aviation fuel from the Texas Gulf Coast to Odessa and El Paso, Texas. MEDIATION SETTLEMENT AGREEMENT - PAGE 24 EX-10.2 4 d01926exv10w2.txt LONG-TERM INCENTIVE COMPENSATION PLAN EXHIBIT 10.2 HOLLY CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN AS AMENDED AND RESTATED (FORMERLY DESIGNATED THE HOLLY CORPORATION 2000 STOCK OPTION PLAN) 1. Purpose. The purpose of the Holly Corporation Long-Term Incentive Compensation Plan as amended and restated (formerly designated the Holly Corporation 2000 Stock Option Plan) (the "Plan") is to advance the interests of Holly Corporation (the "Company") by strengthening the ability of the Company and its subsidiaries to attract, retain and motivate able people of high caliber as employees, directors and consultants through arrangements that relate the compensation for such persons to the long-term performance of the Company. Accordingly, the Plan provides for granting Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock Awards, Bonus Stock Awards, Stock Appreciation Rights, Phantom Stock Awards, Performance Awards or any combination of the foregoing, as the Committee shall determine. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below, in addition to such terms defined in Section 1 hereof: (a) "Amendment Effective Date" means December 12, 2002. The Plan prior to amendment was effective January 1, 2001. (b) "Award" means any Option, Restricted Stock Award, Bonus Stock Award, Stock Appreciation Right, Phantom Stock Award, or Performance Award, together with any other right or interest granted to a Participant under the Plan. (c) "Beneficiary" means one or more persons, trusts or other entities that have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant's death or to which Awards or other rights are transferred if and to the extent permitted under Section 10(d) hereof. If, upon a Participant's death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means the persons, trusts or other entities entitled by will or the laws of descent and distribution to receive such benefits. (d) "Board" means the Company's board of directors. (e) "Bonus Stock Award" means Shares granted to a Participant under Section 6(c) hereof. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto. (g) "Committee" means a committee of two or more directors designated by the Board to administer the Plan; provided, however, that, unless otherwise determined by the Board, the Committee shall consist solely of two or more directors, each of whom shall be (i) a "nonemployee director" within the meaning of Rule 16b-3 under the Exchange Act, and (ii) an "outside director" as defined under Section 162(m) of the Code, unless administration of the Plan by "outside directors" is not then required in order to qualify for tax deductibility under Section 162(m) of the Code. (h) "Covered Employee" means an Eligible Person who is a Covered Employee as specified in Section 8(b)(vi) of the Plan. (i) "Disability" means, as determined by the Board in the sole discretion exercised in good faith of the Board, a physical or mental impairment of sufficient severity that either the Participant is unable to continue performing the duties he performed before such impairment or the Participant's condition entitles him to disability benefits under any insurance or employee benefit plan of the Company or its Subsidiaries and that impairment or condition is cited by the Company as the reason for termination of the Participant's employment or participation as a member of the Board. 1 (j) "Eligible Person" means any current or proposed officer, director, or key employee or consultant whose services are deemed to be of potential benefit to the Company or any of its Subsidiaries. An employee on leave of absence may be considered as still in the employ of the Company or a Subsidiary for purposes of eligibility for participation in the Plan. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules relating thereto. (l) "Fair Market Value" means the fair market value as determined by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of a Share shall be the closing price of a Share, on the date on which the determination of Fair Market Value is being made or if no Shares were traded on such date then the last trading date prior thereto, as quoted on the composite transactions table for the American Stock Exchange or, if the Shares are not then subject to trading on the American Stock Exchange, then as quoted in a comparable manner on any other national stock exchange or, if not so quoted, then as reported for the over-the-counter market on which the largest volume of trading of Shares has occurred in the 30 trading days prior to the date for which a determination is made. (m) "Incentive Stock Option" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code or any successor provision thereto. (n) "Non-Qualified Stock Option" means any Option that does not constitute an Incentive Stock Option. (o) "Option" means a right granted to a Participant under Section 6(a) hereof to purchase Shares or other Awards at a specified price during specified time periods. (p) "Participant" means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person. (q) "Performance Award" means a right granted to a Participant under Section 8 hereof to receive cash based on performance conditions, as provided in Section 8, measured over a period of not less than one year nor more than ten years. (r) "Phantom Stock Award" means a right granted to a Participant under Section 7(b) hereof. (s) "Qualified Member" means a member of the Committee who is a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and an "outside director" within the meaning of regulation 1.162-27 under Section 162(m) of the Code. (t) "Restricted Stock Award" means Shares granted to a Participant under Section 6(b) hereof that are subject to certain restrictions and to a risk of forfeiture. (u) "Rule 16b-3" means Rule 16b-3, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, as from time to time in effect and applicable to the Plan and Participants. (v) "Securities Act" means the Securities Act of 1933 and the rules and regulations promulgated thereunder, or any successor law, as it may be amended from time to time. (w) "Shares" means shares of the Company's common stock, par value $.01 per share, and such other securities as may be substituted (or resubstituted) for shares of the Company's common stock, par value $.01 per share, pursuant to Section 10 hereof. (x) "Stock Appreciation Right" means a right granted to a Participant under Section 7(a) hereof. (y) "Subsidiary" means with respect to the Company, any corporation or other entity of which at least 50% of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by the Company or any other entity determined by the Committee to constitute a Subsidiary due to its relationship to the Company. 2 3. Administration. (a) Authority of the Committee. The Plan shall be administered by the Committee except to the extent the Board elects to administer all or part of the Plan or except to the extent the Board appoints a separate committee other than the Committee to administer all or part of the Plan, in which case references herein to the "Committee" shall be deemed to include references to the "Board" and/or such additional committee, as applicable. To the extent a portion of the Plan is administered by the Committee, and another portion of the Plan is administered by the Board and/or a separate committee, references herein to "Committee" shall be deemed to be references to the "Board" or such additional committee, as applicable, but only to the extent the Board or additional committee administers a portion of the Plan and only with respect to those portions of the Plan that the Board has elected to administer or over which the separate committee has been delegated authority. Subject to the express provisions of the Plan and Rule 16b-3, the Committee shall have the authority, in its sole and absolute discretion, to (i) adopt, amend, and rescind administrative and interpretive rules and regulations relating to the Plan; (ii) determine the Eligible Persons to whom, and the time or times at which, Awards shall be granted; (iii) determine the amount of cash and the number of Options, Restricted Stock Awards, Bonus Stock Awards, Stock Appreciation Rights, Phantom Stock Awards, or Performance Awards, or any combination thereof, that shall be the subject of each Award; (iv) determine the terms and provisions of each Award agreement (which need not be identical), including provisions defining or otherwise relating to (A) the term and the period or periods and extent of exercisability of Options, (B) the extent to which the transferability of Shares and Awards is restricted, (C) the effect of termination of employment of a Participant on the Award, and (D) the effect of approved leaves of absence (consistent with any applicable regulations of the Internal Revenue Service); (v) accelerate the time of exercisability of any Option that has been granted; (vi) construe the respective Award agreements and the Plan; (vii) make determinations of the Fair Market Value of the Shares pursuant to the Plan; (viii) delegate its duties under the Plan to such agents as it may appoint from time to time, provided that the Committee may not delegate its duties with respect to making Awards to, or otherwise with respect to Awards granted to, Eligible Persons who are subject to Section 16(b) of the Exchange Act or Section 162(m) of the Code; (ix) subject to ratification by the Board, terminate, modify, or amend the Plan; and (x) make all other determinations, perform all other acts, and exercise all other powers and authority necessary or advisable for administering the Plan, including the delegation of those ministerial acts and responsibilities as the Committee deems appropriate. Subject to Rule 16b-3 and Section 162(m) of the Code, the Committee may correct any defect, supply any omission, or reconcile any inconsistency in the Plan, in any Award, or in any Award agreement in the manner and to the extent it deems necessary or desirable to carry the Plan into effect, and the Committee shall be the sole and final judge of that necessity or desirability. The determinations of the Committee on the matters referred to in this Section 3(a) shall be final and conclusive. (b) Manner of Exercise of Committee Authority. At any time that a member of the Committee is not a Qualified Member, any action of the Committee relating to an Award granted or to be granted to a Participant who is then subject to Section 16 of the Exchange Act in respect of the Company, or relating to an Award intended by the Committee to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code and regulations thereunder, may be taken either (i) by a subcommittee, designated by the Committee, composed solely of two or more Qualified Members, or (ii) by the Committee but with each such member who is not a Qualified Member abstaining or recusing himself or herself from such action; provided, however, that, upon such abstention or recusal, the Committee remains composed solely of two or more Qualified Members. Such action, authorized by such a subcommittee or by the Committee upon the abstention or recusal of such non-Qualified Member(s), shall be the action of the Committee for purposes of the Plan. Any action of the Committee shall be final, conclusive and binding on all persons, including the Company, its Subsidiaries, stockholders, Participants, Beneficiaries, and transferees under Section 10(d) hereof or other persons claiming rights from or through a Participant. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any Subsidiary, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the extent that such delegation will not result in the loss of an exemption under 3 Rule 16b-3(d)(1) for Awards granted to Participants subject to Section 16 of the Exchange Act in respect of the Company and will not cause Awards intended to qualify as "performance-based compensation" under Section 162(m) of the Code to fail to so qualify. The Committee may appoint agents to assist it in administering the Plan. (c) Limitation of Liability. The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or employee of the Company or a Subsidiary, the Company's legal counsel, independent auditors, consultants or any other agents assisting in the administration of the Plan. Members of the Committee and any officer or employee of the Company or a Subsidiary acting at the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the fullest extent permitted by law, be indemnified and held harmless by the Company with respect to any such action or determination. 4. Shares Subject to Plan. (a) Overall Number of Shares Available for Delivery. Subject to adjustment in a manner consistent with any adjustment made pursuant to Section 10 of the Plan, the total number of Shares that may be delivered in connection with Awards under the Plan shall not exceed 1,500,000, including all Shares delivered with respect to Options granted under the Plan prior to the Amendment Effective Date. (b) Application of Limitation to Grants of Awards. No Award may be granted if (i) the number of Shares to be delivered in connection with such Award exceeds (ii) the number of Shares remaining available under the Plan minus the number of Shares issuable in settlement of or relating to then-outstanding Awards. The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of Shares actually delivered differs from the number of Shares previously counted in connection with an Award. (c) Availability of Shares Not Delivered under Awards. Shares subject to an Award under the Plan that expires or is canceled, forfeited, settled in cash or otherwise terminated without a delivery of Shares to the Participant, including (i) the number of Shares withheld in payment of any exercise price of an Award or taxes relating to Awards, and (ii) the number of Shares surrendered in payment of any exercise price of an Award or taxes relating to any Award, will again be available for Awards under the Plan, except that if any such Shares could not again be available for Awards to a particular Participant under any applicable law or regulation, such Shares shall be available exclusively for Awards to Participants who are not subject to such limitation. (d) Shares Offered. The Shares to be delivered under the Plan shall be made available from (i) authorized but unissued Shares, or (ii) previously issued Shares reacquired by the Company. 5. Eligibility; Per Person Award Limitations. Awards may be granted under the Plan only to Eligible Persons. In each fiscal year or 12-month period, as applicable, during any part of which the Plan is in effect, an Eligible Person may not be granted (a) Awards, provided for in Sections 6 and 7 of the Plan, relating to more than 150,000 Shares, subject to adjustment in a manner consistent with any adjustment made pursuant to Section 10 of the Plan, or (b) Awards, provided for in Section 8 of the Plan, with a value at the time of payment which exceeds the Fair Market Value of 150,000 Shares as of the date of the grant of the Award. 6. Options, Restricted Stock and Bonus Stock. (a) Options. The Committee is authorized to grant Options to Participants on the following terms and conditions: (i) Exercise Price. The exercise price or prices for Shares under each Option shall be determined by the Committee at the time the Option is granted, and may be less than, equal to or greater than, the Fair Market Value of the Shares at the time of the granting of the Option, provided that the exercise price per Share for any Option that is intended to be performance-based compensation under Section 162(m)(4)(C) of the Code or an Incentive Stock Option under Section 422 of the Code shall not be less than the Fair Market Value of a Share as of the effective date of grant of the Option; provided, 4 however, that in the case of an individual who owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or any Subsidiary, the exercise price per Share of any Incentive Stock Option under Section 422 of the Code shall not be less than 110% of the Fair Market Value of a Share as of the effective date of grant of the Incentive Stock Option. (ii) Time and Method of Exercise. The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including, without limitation, cash, Shares, other Awards or awards granted under other plans of the Company or any Subsidiary, or other property (including notes, to the extent permitted under applicable law, or other contractual obligations of Participants to make payment on a deferred basis), and the methods by or forms in which Shares will be delivered or deemed to be delivered to Participants, including, but not limited to, the delivery of Restricted Stock Awards subject to Section 6(b) hereof. In the case of an exercise whereby the exercise price is paid with Shares, the value of such Shares for purposes of calculating the exercise price paid shall be the Fair Market Value. Notwithstanding anything to the contrary herein, unless otherwise provided in any agreement evidencing an Option, in the event of the death of a Participant while in the employ of the Company or one of its Subsidiaries, an Option theretofore granted to the Participant shall be exercisable within the year succeeding such death (even if the Option would otherwise expire prior to one year from the date of death) but only to the extent that the optionee was entitled to exercise the Option as of the date of death. (iii) Incentive Stock Options. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options (including any Stock Appreciation Right in tandem therewith) shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code, unless the Participant has first requested the change that will result in such disqualification. Incentive Stock Options shall not be granted more than ten years after the earlier of the adoption of the Plan or the approval of the Plan by the Company's stockholders. Notwithstanding the foregoing, the Fair Market Value of Shares subject to an Incentive Stock Option and the aggregate Fair Market Value of shares of stock of any parent or Subsidiary corporation (within the meaning of Sections 424(e) and (f) of the Code) subject to any other incentive stock option (within the meaning of Section 422 of the Code) of the Company or a parent or Subsidiary corporation (within the meaning of Sections 424(e) and (f) of the Code) that first becomes purchasable by a Participant in any calendar year may not (with respect to that Participant) exceed $100,000, or such other amount as may be prescribed under Section 422 of the Code or applicable regulations or rulings from time to time. As used in the previous sentence, Fair Market Value shall be determined as of the date the Incentive Stock Options are granted. Failure to comply with this provision shall not impair the enforceability or exercisability of any Option, but shall cause the excess amount of Shares to be reclassified in accordance with the Code. No Incentive Stock Option may be granted after December 13, 2010. (b) Restricted Stock Awards. The Committee is authorized to grant Restricted Stock Awards to Participants on the following terms and conditions: (i) Grant and Restrictions. Restricted Stock Awards shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the Plan and any Award agreement relating to the Restricted Stock Award, a Participant granted a Restricted Stock Award shall have all of the rights of a stockholder, including the right to vote the Restricted Stock Award and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee). During the restricted period 5 applicable to the Restricted Stock Award, the Restricted Stock Award may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the Participant. (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment during the applicable restriction period, Restricted Stock Awards that are at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock Awards shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Stock Awards. (iii) Certificates for Shares. Restricted Stock Awards granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates for Shares relating to Restricted Stock Awards are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock Awards, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to such Shares. (iv) Dividends and Splits. As a condition to the grant of a Restricted Stock Award, the Committee may require or permit a Participant to elect that any cash dividends paid on a Share related to the Restricted Stock Award be automatically reinvested in additional Shares related to the Restricted Stock Award or applied to the purchase of additional Awards under the Plan. Unless otherwise determined by the Committee, Shares distributed in connection with a stock split or stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock Award with respect to which such Shares or other property has been distributed. (c) Bonus Stock Awards. The Committee is authorized to grant Awards of Shares as bonuses, provided that, in the case of Participants subject to Section 16 of the Exchange Act, the amount of such grants remains within the discretion of the Committee to the extent necessary to ensure that such Awards are exempt from liability under Section 16(b) of the Exchange Act. Bonus Stock Awards shall be subject to such other terms as shall be determined by the Committee. (d) Performance Goals. To the extent the Committee determines that any Award granted pursuant to this Section 6 shall constitute performance-based compensation for purposes of Section 162(m) of the Code, the grant or settlement of the Award shall, in the Committee's discretion, be subject to the achievement of performance goals determined and applied in a manner consistent with Section 8(b). 7. Stock Appreciation Rights and Phantom Stock. (a) Stock Appreciation Rights. The Committee is authorized to grant Stock Appreciation Rights to Participants on the following terms and conditions: (i) Right to Payment. A Stock Appreciation Right shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one Share on the date of exercise over (B) the grant price of the Stock Appreciation Right as determined by the Committee. (ii) Rights Related to Options. A Stock Appreciation Right granted in connection with an Option shall entitle a Participant, upon exercise thereof, to surrender that Option or any portion thereof, to the extent unexercised, and to receive payment of an amount computed pursuant to Subsection 7(a)(i) hereof. That Option shall then cease to be exercisable to the extent surrendered. A Stock Appreciation Right granted in connection with an Option shall be exercisable only at such time or times and only to the extent that the related Option is exercisable and shall not be transferable except to the extent that the related Option is transferable. 6 (iii) Right Without Option. A Stock Appreciation Right granted independent of an Option shall be exercisable as determined by the Committee and set forth in the Award agreement governing the Stock Appreciation Right. (iv) Terms. The Committee shall determine at the date of grant the time or times at which and the circumstances under which a Stock Appreciation Right may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, whether or not a Stock Appreciation Right shall be in tandem or in combination with any other Award, and any other terms and conditions of any Stock Appreciation Right. (b) Phantom Stock Awards. The Committee is authorized to grant Phantom Stock Awards to Participants, which are rights to receive cash at the end of a specified deferral period, subject to the following terms and conditions: (i) Award and Restrictions. Satisfaction of a Phantom Stock Award shall occur upon expiration of the deferral period specified for such Phantom Stock Award by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Phantom Stock Awards shall be subject to such restrictions (which may include a risk of forfeiture), if any, as the Committee may impose, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee may determine. (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in any Award agreement evidencing the Phantom Stock Awards), all Phantom Stock Awards that are at that time subject to deferral (other than a deferral at the election of the Participant) shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Phantom Stock Awards shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Phantom Stock Awards. (c) Performance Goals. To the extent the Committee determines that any Award granted pursuant to this Section 7 shall constitute performance-based compensation for purposes of Section 162(m) of the Code, the grant or settlement of the Award shall, in the Committee's discretion, be subject to the achievement of performance goals determined and applied in a manner consistent with Section 8(b). 8. Performance Awards. (a) Performance Awards. The Committee may grant Performance Awards based on performance criteria measured over a period of not less than one year and not more than ten years. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to increase the amounts payable under any Award subject to performance conditions except as limited under Section 8(b) in the case of a Performance Award granted to a Covered Employee. (b) Performance Goals. The grant and/or settlement of a Performance Award shall be contingent upon terms set forth in this Section 8(b). (i) General. The performance goals for Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee. In the case of any Award granted to a Covered Employee, performance goals shall be designed to be objective and shall otherwise meet the requirements of Section 162(m) of the Code and regulations thereunder (including Treasury Regulation sec. 1.162-27 and successor regulations thereto), including the requirement that the level or levels of performance targeted by the Committee are such that the achievement of performance goals is "substantially uncertain" at the time of grant. The Committee may determine that such Performance Awards shall be granted and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to the 7 grant and/or settlement of such Performance Awards. Performance goals may differ among Performance Awards granted to any one Participant or for Performance Awards granted to different Participants. (ii) Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified Subsidiaries, divisions or business or geographical units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used by the Committee in establishing performance goals for Performance Awards granted to a Covered Employee: (A) earnings per share; (B) increase in revenues; (C)increase in cash flow; (D) increase in cash flow return; (E) return on net assets; (F) return on assets; (G) return on investment; (H) return on capital; (I) return on equity; (J) economic value added; (K) gross margin; (L) net income; (M) pretax earnings; (N) pretax earnings before interest, depreciation and amortization; (O) pretax operating earnings after interest expense and before incentives, service fees, and extraordinary or special items; (P) operating income; (Q) total stockholder return; (R) debt reduction; and (S) any of the above goals determined on an absolute or relative basis or as compared to the performance of a published or special index deemed applicable by the Committee including, but not limited to, the Standard & Poor's 500 Stock Index or a group of comparable companies. (iii) Performance Period; Timing for Establishing Performance Goals. Achievement of performance goals in respect of Performance Awards shall be measured over a performance period of not less than one year and not more than ten years, as specified by the Committee. Performance goals in the case of any Award granted to a Covered Employee shall be established not later than 90 days after the beginning of any performance period applicable to such Performance Awards, or at such other date as may be required or permitted for "performance-based compensation" under Section 162(m) of the Code. (iv) Settlement of Performance Awards; Other Terms. After the end of each performance period, the Committee shall determine the amount, if any, of Performance Awards payable to each Participant based upon achievement of business criteria over a performance period. The Committee may not exercise discretion to increase any such amount payable in respect of a Performance Award designed to comply with Section 162(m) of the Code. The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant prior to the end of a performance period or settlement of Performance Awards. (v) Written Determinations. All determinations by the Committee as to the establishment of performance goals, the amount of any Performance Award, and the achievement of performance goals relating to Performance Awards shall be made in writing in the case of any Award granted to a Covered Employee. The Committee may not delegate any responsibility relating to such Performance Awards. (vi) Status of Performance Awards under Section 162(m) of the Code. It is the intent of the Company that Performance Awards granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Section 162(m) of the Code and regulations thereunder (including Treasury Regulation sec. 1.162-27 and successor regulations thereto) shall, if so designated by the Committee, constitute "performance-based compensation" within the meaning of Section 162(m) of the Code and regulations thereunder. Accordingly, the terms of this Section 8(b) shall be interpreted in a manner consistent with Section 162(m) of the Code and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of a Performance Award, who is likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan as in effect on the date of adoption or any agreements relating to Performance Awards that are designated as intended to comply with Section 162(m) of the Code does not comply or is inconsistent with the requirements of Section 162(m) of the Code or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. 8 9. Certain Provisions Applicable to All Awards. (a) General. Awards may be granted on the terms and conditions set forth in Sections 6, 7 and 8 hereof and this Section 9. In addition, the Committee may impose on any Award or the exercise thereof, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment by the Participant and terms permitting a Participant to make elections relating to his or her Award. The Committee shall retain full power and discretion to accelerate or waive, at any time, any term or condition of an Award that is not mandatory under the Plan; provided, however, that the Committee shall not have any discretion to accelerate or waive any term or condition of an Award that is intended to qualify as "performance-based compensation" for purposes of Section 162(m) of the Code if such discretion would cause the Award not to so qualify. Except in cases in which the Committee is authorized to require other forms of consideration under the Plan, or to the extent other forms of consideration must be paid to satisfy the requirements of the Delaware General Corporation Law, no consideration other than services may be required for the grant of any Award. (b) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any Subsidiary, or any business entity to be acquired by the Company or a Subsidiary, or any other right of a Participant to receive payment from the Company or any Subsidiary. Such additional, tandem and substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award, the Committee shall require the surrender of such other Award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any Subsidiary. (c) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee; provided that in no event shall the term of any Option or Stock Appreciation Right exceed a period of ten years (or such shorter term as may be required in respect of an Incentive Stock Option under Section 422 of the Code). (d) Form and Timing of Payment under Awards; Deferrals. Subject to the terms of the Plan and any applicable Award agreement, payments to be made by the Company or a Subsidiary upon the exercise of an Option or other Award or settlement of an Award may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may, subject to any limitations set forth in the Award agreement, be accelerated and cash paid in lieu of Shares in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events. In the discretion of the Committee, Awards granted pursuant to Sections 7 or 8 of the Plan may be payable in Shares to the extent permitted by the terms of the applicable Award agreement. Installment or deferred payments may be required by the Committee (subject to Section 10(f) of the Plan, including the consent provisions thereof in the case of any deferral of an outstanding Award not provided for in the original Award agreement) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of amounts in respect of installment or deferred payments denominated in Shares. Any deferral shall only be allowed as is provided in a separate deferred compensation plan adopted by the Company. The Plan shall not constitute an "employee benefit plan" for purposes of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. (e) Exemptions from Section 16(b) Liability. It is the intent of the Company that the grant of any Awards to or other transaction by a Participant who is subject to Section 16 of the Exchange Act shall be exempt from Section 16(b) of the Exchange Act pursuant to an applicable exemption (except for transactions acknowledged by the Participant in writing to be non-exempt). Accordingly, if any provision of this Plan or any Award agreement does not comply with the requirements of Rule 16b-3 as then applicable to any such transaction, such provision shall be construed or deemed amended to the extent necessary to conform to the 9 applicable requirements of Rule 16b-3 so that such Participant shall avoid liability under Section 16(b) of the Exchange Act. 10. General Provisions. (a) Company's Right to Terminate or Modify Awards in Certain Circumstances. Except to the extent that an Award agreement provides otherwise with specific reference to this Section 10(a), in the event of (i) an acquisition of substantially all of the assets of the Company or of a greater than 80% stock interest in the Company by an entity in which the Company does not have a 50% or greater interest prior to such acquisition, or (ii) a merger, consolidation, or recapitalization involving a fundamental change in the capital structure of the Company, the Company shall have the right to terminate any Award upon the payment of an amount equal to the then value of the Award, without regard to vesting or forfeiture provisions of the Award, as determined by the Committee, taking into account to the extent determined by the Committee to be appropriate the Fair Market Value of Shares at the time of termination and the performance of the Company up to the time of termination. Upon tender of payment by the Company to a holder of the amount determined by the Committee pursuant to this provision, the Award held by such holder shall automatically terminate. Alternatively, in such circumstances, the Company, in the discretion of the Board, may make arrangements for the acquiring or surviving corporation to assume any or all outstanding Awards and substitute on equitable terms Awards relating to the stock or performance of such acquiring or surviving corporation. The determinations of the Board and/or the Committee pursuant to this Section 10(a) shall be final, binding and conclusive. (b) No Limitation on Other Company Transactions. The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities affecting Shares or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (c) Dilution or Other Adjustments. In the event that there is any change in the Shares through merger, consolidation, reorganization or recapitalization or in the event of any stock split or dividend to holders of Shares payable in Shares or the issuance to such holders of rights to subscribe to Shares, or in the event of any change in the capital structure of the Company, the Board shall, subject to any requirements of applicable law, regulations and rules, make such adjustments with respect to any provision or provisions of the Plan, including but not limited to the limitations on Awards that may be granted under the Plan as set forth in Sections 4 and 5, and with respect to Awards theretofore granted under the Plan as the Board deems appropriate to prevent dilution or enlargement of Award rights. The determinations of the Board pursuant to this Section 10(b) shall be final, binding and conclusive. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares relating to Awards theretofore granted or the exercise price per Share in the case of Options. (d) Transferability. (i) Permitted Transferees. The Committee may, in its discretion, permit a Participant to transfer all or any portion of an Award or authorize all or a portion of an Award to be granted to an Eligible Person on terms which permit transfer by such Participant; provided that, in either case a transferee may only be a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, in each case with respect to the Participant, a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the Participant) control the management of assets, and any other entity in which these persons (or the 10 Participant) own more than fifty percent of the voting interests (collectively, "Permitted Transferees"); provided further that, (A) there may be no consideration for any such transfer and (B) subsequent transfers of Awards transferred as provided above shall be prohibited except subsequent transfers back to the original holder of the Award and transfers to other Permitted Transferees of the original holder. Agreements evidencing Awards with respect to which such transferability is authorized at the time of grant must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Subsection 10(d)(i). (ii) Qualified Domestic Relations Orders. An Award may be transferred, to a Permitted Transferee, pursuant to a domestic relations order entered or approved by a court of competent jurisdiction upon delivery to the Company of written notice of such transfer and a certified copy of such order. (iii) Other Transfers. Except as expressly permitted by Subsections 10(d)(i) and 10(d)(ii) above, Awards shall not be transferable other than by will or the laws of descent and distribution. Notwithstanding anything to the contrary in this Section 10, an Incentive Stock Option shall not be transferable other than by will or the laws of descent and distribution. (iv) Effect of Transfer. Following the transfer of any Award as contemplated by Subsections 10(d)(i), 10(d)(ii) and 10(d)(iii) above, (A) such Award shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that the term "Participant" shall be deemed to refer to the Permitted Transferee, the recipient under a qualified domestic relations order, the estate or heirs of a deceased Participant, or other transferee, as applicable, to the extent appropriate to enable the Permitted Transferee to exercise the transferred Award in accordance with the terms of the Plan and applicable law and (B) the provisions of the Award relating to exercisability thereof shall continue to be applied with respect to the original Participant and, following the occurrence of any such events described therein, the Awards shall be exercisable by the Permitted Transferee, the recipient under a qualified domestic relations order, the estate or heirs of a deceased Participant, or other transferee, as applicable, only to the extent and for the periods that would have been applicable in the absence of the transfer. (v) Procedures and Restrictions. Any Participant desiring to transfer an Award as permitted under Subsections 10(d)(i), 10(d)(ii) or 10(d)(iii) above shall make application therefor in the manner and time specified by the Committee and shall comply with such other requirements as the Committee may require to assure compliance with all applicable securities laws. The Committee shall not give permission for such a transfer if (A) it would give rise to short-swing liability under Section 16(b) of the Exchange Act or (B) it may not be made in compliance with all applicable federal, state and foreign securities laws. (vi) Registration. To the extent the issuance to any Permitted Transferee of any Shares issuable pursuant to Awards transferred as permitted in this Section 10(d) is not registered pursuant to the effective registration statement of the Company generally covering the Shares to be issued pursuant to the Plan to initial holders of Awards, the Company shall not have any obligation to register the issuance of any such Shares to any such transferee. (e) Taxes. The Company and any Subsidiary are authorized to withhold from any Award granted, or any payment relating to an Award under the Plan, including from a distribution of Shares, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations, either on a mandatory or elective basis in the discretion of the Committee. (f) Changes to the Plan and Awards. The Board may amend, alter, suspend, discontinue or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of stockholders or Participants, except that any amendment or alteration to the Plan, including any increase in any Share limitation, shall be subject to the approval of the Company's stockholders not later than the annual meeting 11 next following such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes in this Plan to stockholders for approval; provided that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any previously granted and outstanding Award. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any Award theretofore granted and any Award agreement relating thereto, except as otherwise provided in the Plan; provided that, without the consent of an affected Participant, no such Committee action may materially and adversely affect the rights of such Participant under such Award. (g) Limitation on Rights Conferred under Plan. Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or a Subsidiary, (ii) interfering in any way with the right of the Company or a Subsidiary to terminate any Eligible Person's or Participant's employment or service at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees, or (iv) conferring on a Participant any of the rights of a stockholder of the Company unless and until the Participant is duly issued or transferred Shares in accordance with the terms of an Award. (h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements as it may deem desirable, including incentive arrangements and awards which do not qualify under Section 162(m) of the Code. Nothing contained in the Plan shall be construed to prevent the Company or any Subsidiary from taking any corporate action which is deemed by the Company or such Subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No employee, beneficiary or other person shall have any claim against the Company or any Subsidiary as a result of any such action. (i) Payments in the Event of Forfeitures; Fractional Shares; Share Allotments. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash or other consideration to the Company in exchange for such Award, the Participant shall be repaid the amount of such cash or other consideration. Unless otherwise determined by the Committee, no fractional Shares, or Shares in lots of less than 100 Shares, shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional Shares, or lots of less than 100 Shares, and whether fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. (j) Severability. If any provision of the Plan is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included herein. If any of the terms or provisions of the Plan or any Award agreement conflict with the requirements of Rule 16b-3 (as those terms or provisions are applied to Eligible Persons who are subject to Section 16(b) of the Exchange Act) or Section 422 of the Code (with respect to Incentive Stock Options), then those conflicting terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of Rule 16b-3 (unless the Board or the Committee, as appropriate, has expressly determined that the Plan or such Award should not comply with Rule 16b-3) or Section 422 of the Code. With respect to Incentive Stock Options, if the Plan does not contain any provision required to be included herein under Section 422 of the Code, that provision shall be deemed to be incorporated herein with the same force and effect as if that provision had been set out at length herein; provided, further, that, to the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, such Option (to that extent) shall be deemed a Non-Qualified Stock Option for all purposes of the Plan. (k) Governing Law. All questions arising with respect to the provisions of the Plan and Awards shall be determined by application of the laws of the State of Texas, without giving effect to any conflict of law 12 provisions thereof, except to the extent Texas law is preempted by federal law or where the law of the state of incorporation of the Company shall be mandatorily applied. The obligation of the Company to sell and deliver Shares hereunder is subject to applicable federal and state laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Shares. (l) Conditions to Delivery of Shares. Nothing herein or in any Award granted hereunder or any Award agreement shall require the Company to issue any Shares with respect to any Award if that issuance would, in the opinion of counsel for the Company, constitute a violation of the Securities Act or any similar or superseding statute or statutes, any other applicable statute or regulation, or the rules of any applicable securities exchange or securities association, as then in effect. At the time of any exercise of an Option or Stock Appreciation Right, or at the time of any grant of a Restricted Stock Award, Bonus Stock Award or Phantom Stock Award, the Company may, as a condition precedent to the exercise of such Option or Stock Appreciation Right, vesting of any Restricted Stock Award or Phantom Stock Award, or grant of any Bonus Stock Award, require from the Participant (or in the event of his death, his legal representatives, heirs, legatees, or distributees) such written representations, if any, concerning the holder's intentions with regard to the retention or disposition of the Shares being acquired pursuant to the Award and such written covenants and agreements, if any, as to the manner of disposal of such Shares as, in the opinion of counsel to the Company, may be necessary to ensure that any disposition by that holder (or in the event of the holder's death, his legal representatives, heirs, legatees, or distributees) will not involve a violation of the Securities Act or any similar or superseding statute or statutes, any other applicable state or federal statute or regulation, or any rule of any applicable securities exchange or securities association, as then in effect. (m) Plan Effective Date, Stockholder Approval and Plan Duration. The Plan has been adopted by the Board originally effective as of January 1, 2001 and as amended and restated effective as of December 12, 2002 contingent upon the approval of the stockholders of the Company. If the stockholders of the Company do not approve the Plan as amended and restated, the Plan shall continue in effect as originally adopted effective January 1, 2001. No Award, other than an Incentive Stock Option, shall be granted under the Plan after December 31, 2010 and no Incentive Stock Option shall be granted under the Plan after December 13, 2010. 13 EX-99.1 5 d01926exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Lamar Norsworthy, Chairman of the Board and Chief Executive Officer of Holly Corporation (the "Company") hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the "Act"), that based on my knowledge: 1. The Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2002 (the "Report") to which this statement is attached fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: December 12, 2002 /s/ Lamar Norsworthy -------------------------------------------- Lamar Norsworthy Chairman of the Board and Chief Executive Officer The foregoing Certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise. EX-99.2 6 d01926exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Stephen J. McDonnell, Vice President and Chief Financial Officer of Holly Corporation (the "Company") hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the "Act"), that based on my knowledge: 1. The Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2002 (the "Report") to which this statement is attached fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: December 12, 2002 /s/ Stephen J. McDonnell -------------------------------------------- Stephen J. McDonnell Vice President and Chief Financial Officer The foregoing Certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise. -----END PRIVACY-ENHANCED MESSAGE-----