HOLLY CORPORATION
100 Crescent Court
Suite 1600
Dallas, Texas 75201-6915

 

April 7, 2008

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of Holly Corporation to be held on Thursday, May 8, 2008, at 10:00 a.m., local time, in Salons A & B, Hotel Crescent Court, 400 Crescent Court, Dallas, Texas. Please find enclosed a notice to stockholders, a Proxy Statement describing the business to be transacted at the meeting, a form of proxy for use in voting at the meeting and an Annual Report for Holly Corporation.

 

At the Annual Meeting, you will be asked (i) to elect 7 directors to the Board of Directors of the Company, (ii) to ratify the recommendation of the Company’s Audit Committee and endorsed by the Board of Directors, of the selection of Ernst & Young, LLP, an independent registered public accounting firm, as the Company’s auditor for the year 2008, and (iii) to act upon such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.

 

We hope that you will be able to attend the Annual Meeting, and we urge you to read the enclosed Proxy Statement before you vote. Whether or not you plan to attend, please complete, sign, date and return the enclosed proxy card or grant your proxy by Internet or telephone, as described on the enclosed proxy card, as promptly as possible. It is important that your shares be represented at the meeting.

 

Very truly yours,

 

 

MATTHEW P. CLIFTON

Chairman of the Board and Chief Executive Officer

 

 

 

HOLLY CORPORATION
100 Crescent Court

Suite 1600

Dallas, Texas 75201-6915

 

 

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

 

 

April 7, 2008

 

 

PLEASE TAKE NOTICE that the 2008 Annual Meeting of Stockholders (the “Annual Meeting”) of Holly Corporation (the “Company”) will be held on Thursday, May 8, 2008, at 10:00 a.m. local time in Salons A & B, Hotel Crescent Court, 400 Crescent Court, Dallas, Texas, to consider and vote on the following matters:

 

1. Election of 7 directors to serve on the Board of Directors (the “Board”) of the Company until the Company’s next annual meeting;

 

2. Ratification of the recommendation of the Company’s Audit Committee, endorsed by the Board of Directors, of the selection of Ernst & Young, LLP, an independent registered public accounting firm, as the Company’s auditor for the year 2008; and

 

3. Such other business as may properly come before the meeting, or any postponement or adjournment thereof.

 

The Company’s Annual Report for its year ended December 31, 2007 is being distributed with this Proxy Statement.

 

The close of business on March 26, 2008 (the “Record Date”), has been fixed as the record date for the determination of stockholders entitled to receive notice of, and to vote at, the Annual Meeting and any adjournment or postponement thereof. Only holders of record of the Company’s Common Stock at the close of business on the Record Date are entitled to notice of, and to vote at, the Annual Meeting. A list of stockholders entitled to vote at the Annual Meeting will be available for inspection by any stockholder for any purpose germane to the Annual Meeting during ordinary business hours for the ten days preceding the Annual Meeting at the Company’s offices at the address on this notice and will also be available at the Annual Meeting.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on May 8, 2008.

 

 

Whether or not you plan to attend the Annual Meeting, please complete, sign, date and return the enclosed proxy card or grant your proxy by the Internet or telephone, as described on the enclosed proxy card, as promptly as possible. When providing your proxy, please indicate whether you plan to attend the Annual Meeting in person. You may revoke your proxy before the Annual Meeting as described in the Proxy Statement under the heading “Solicitation and Revocability of Proxies.” The prompt return of proxies will save the expense involved in further communications.

 

By Order of the Board of Directors:

 

 

W. JOHN GLANCY

Secretary

 

PROXY STATEMENT

OF

HOLLY CORPORATION

100 Crescent Court

Suite 1600

Dallas, Texas 75201-6915

 

SOLICITATION AND REVOCABILITY OF PROXIES

 

The Board requests your proxy for use at the Annual Meeting of Stockholders to be held on Thursday, May 8, 2008, and at any adjournment or postponement thereof. By signing and returning the enclosed proxy card or granting your proxy by the Internet or by telephone, you authorize the persons named on the proxy card, or in your telephonically or electronically submitted proxy (collectively, the “Proxy”), to represent you and to vote your shares at the Annual Meeting. This Proxy Statement and the proxy card were first mailed to stockholders of the Company on or about April 7, 2008.

 

This solicitation of proxies is made by the Board and will be conducted primarily by mail. Officers, directors and employees of the Company may solicit proxies personally or by telephone, electronic mail, telegram or other forms of wire or facsimile communication. The Company may also request banking institutions, brokerage firms, custodians, nominees and fiduciaries to forward solicitation material to the beneficial owners of the Company’s common stock (the “Common Stock”) that those companies hold of record. The costs of the solicitation, including reimbursement of such forwarding expenses, will be paid by the Company.

 

If you attend the Annual Meeting, you may vote in person. If you are not present at the Annual Meeting, your shares can be voted only if you have returned a properly signed proxy card, are represented by another proxy, or have granted your proxy by the Internet or by telephone. You may revoke your proxy, whether granted by the Internet or by telephone or by returning the enclosed proxy card, at any time before it is exercised at the Annual Meeting by (a) signing and submitting a later-dated proxy to the Secretary of the Company, (b) delivering written notice of revocation of the proxy to the Secretary of the Company, or (c) voting in person at the Annual Meeting. In addition, if you granted your proxy by the Internet or by telephone, you may revoke such grant by resubmitting your proxy by the Internet or by telephone at any time prior to 11:59 p.m., Eastern Daylight Time, on May 7, 2008. In the absence of any such revocation, shares represented by the persons named in the Proxies will be voted at the Annual Meeting.

 

VOTING AND QUORUM

 

The only outstanding voting securities of the Company are shares of Common Stock. As of the close of business on the Record Date, there were 50,916,895 shares of Common Stock outstanding and entitled to be voted at the Annual Meeting.

 

Each outstanding share of Common Stock is entitled to one vote. The presence, in person or by proxy, of a majority of the shares of Common Stock issued and outstanding and entitled to vote as of the Record Date shall constitute a quorum at the Annual Meeting. The holders of a majority of the Common Stock entitled to vote who are present or represented by proxy at the Annual Meeting have the power to adjourn the Annual Meeting from time to time without notice, other than an announcement at the Annual Meeting of the time and place of the holding of the adjourned meeting, until a quorum is present. At any such adjourned meeting at which a quorum is present, any business may be transacted that could have been transacted at the Annual Meeting had a quorum originally been present. Proxies solicited by this Proxy Statement may be used to vote in favor of any motion to adjourn the Annual Meeting. The persons named in the Proxy intend to vote in favor of any motion to adjourn the Annual Meeting to a subsequent day if, prior to the Annual Meeting, such persons have not received sufficient proxies to approve the proposals described in this Proxy Statement. If such a motion is approved but sufficient proxies are not received by the time set for the resumption of the Annual Meeting, this process will be repeated until sufficient proxies to vote in favor of the proposals described in this Proxy Statement have been received or it appears that sufficient proxies will not be received. Abstentions and broker non-votes will count in determining if a quorum is present at the Annual Meeting. A broker non-vote occurs if a broker or other nominee attending the meeting in person or submitting a

proxy card does not have discretionary authority to vote on a particular item and has not received voting instructions with respect to that item.

 

PROPOSAL ONE — ELECTION OF DIRECTORS

 

The Board has designated Buford P. Berry, Matthew P. Clifton, Marcus R. Hickerson, Thomas K. Matthews, II, Robert G. McKenzie, Jack P. Reid and Paul T. Stoffel as nominees for election as directors of the Company at the Annual Meeting (each, a “Nominee”). All of the Nominees currently serve as directors of the Company. If elected, each Nominee will serve until the expiration of his term at the Annual Meeting of Stockholders in 2009 and until his successor is elected and qualified or until his earlier death, resignation or removal from office. For information about each Nominee, see “Directors.”

 

The Board has no reason to believe that any of the Nominees will be unable or unwilling to serve if elected. If a Nominee becomes unable or unwilling to serve prior to the election, your proxy will be voted for the election of a substitute nominee recommended by the current Board, or the number of the Company’s directors will be reduced.

 

Required Vote and Recommendation

 

The election of directors requires the affirmative vote of a plurality of the shares of Common Stock present or represented by proxy and entitled to vote at the Annual Meeting. Accordingly, under Delaware law and the Company’s Restated Certificate of Incorporation and Bylaws, abstentions and broker non-votes will not have any effect on the election of a particular director. Unless otherwise instructed in the Proxy or unless authority to vote is withheld, the Proxy will be voted for the election of each of the Nominees.

 

The Board recommends a vote “FOR” the election of each of the nominees.

 

PROPOSAL TWO — AUDITORS

 

In accordance with its charter, the Audit Committee has selected the firm of Ernst & Young LLP, an independent public accounting firm, to be the Company’s auditor for the year 2008 and, with the endorsement of the Board of Directors, recommends to the stockholders that they ratify that appointment. Ernst & Young LLP served in this capacity in 2007. Its representative will be present at the Annual Meeting and will have an opportunity to make a statement and will be available to respond to appropriate questions.

 

The Audit Committee reviewed and approved in advance the audit scope, the types of non-audit services, if any, and the estimated fees for each category for the coming year. For each category of proposed services, Ernst & Young LLP is required to confirm that the provision of such services does not impair their independence. Before selecting Ernst & Young LLP, the Audit Committee carefully considered the firm’s qualifications as an independent registered public accounting firm for the Company. This included a review of its performance in prior years, as well as its reputation for integrity and competence in the fields of accounting and auditing. The Audit Committee has expressed its satisfaction with Ernst & Young LLP in all of these respects. The Audit Committee’s review included inquiry concerning any litigation involving Ernst & Young LLP and any proceedings by the Securities and Exchange Commission against the firm. In this respect, the Audit Committee has concluded that the ability of Ernst & Young LLP to perform the services for the Company is in no way adversely affected by any such litigation or other proceedings.

 

The Board and the Audit Committee recommend a vote “FOR” the ratification of the Board’s selection of Ernst & Young LLP as the Company’s auditor for 2008.

 

OWNERSHIP OF SECURITIES

 

The following table and the notes thereto set forth certain information regarding the beneficial ownership of Common Stock as of the Record Date by (i) each current director of the Company, (ii) the named executive officers of the Company, (iii) all executive officers and directors of the Company as a group and (iv) each other person known to the Company to own beneficially more than five percent of Common Stock outstanding on the Record Date. Unless otherwise indicated, the address for each stockholder listed in the following table is c/o Holly Corporation, 100 Crescent Court, Suite 1600, Dallas, Texas 75201-6915.

 

The Company has determined beneficial ownership in accordance with regulations of the Securities and Exchange Commission (the “SEC”). The number of shares beneficially owned by a person includes shares of Common Stock that are subject to stock options that are either currently exercisable or exercisable within 60 days after the Record Date. These shares are also deemed outstanding for the purpose of computing the percentage of outstanding shares owned by such person. These shares are not deemed outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, to the Company’s knowledge, each stockholder has sole voting and dispositive power with respect to the securities beneficially owned by that stockholder. On the Record Date, there were 50,916,895 shares of Common Stock outstanding.

 

 

 

 

 

DIRECTORS

 

The following table sets forth certain information regarding the directors of the Company in 2007. Each director’s term of office expires at the Annual Meeting.

 

 

Buford P. Berry, a director since May 2004, has served as a manager and an Advisory Committee Member of Dorchester Minerals Management GP LLC since February 2003. He is currently of counsel to Thompson & Knight, L.L.P., a Texas based law firm. Mr. Berry has been an attorney with Thompson & Knight L.L.P., serving in various capacities since 1963, including as Managing Partner from 1986 to 1998.

 

    *Matthew P. Clifton, a director since 1995, has been with the Company for over twenty-five years and was elected as the Company’s Chairman of the Board and Chief Executive Officer in April 2007. Mr. Clifton served as Chief Executive Officer from January 1, 2006 until April 2007. Mr. Clifton served as President of the Company from 1995 to January 1, 2006, and since March 2004, has served as Chairman of the Board and Chief Executive Officer of Holly Logistic Services, L.L.C., the general partner of HEP Logistics Holdings, L.P., which is the general partner of Holly Energy Partners, L.P. (“HEP”), a Delaware limited partnership. The Company currently owns a 46% interest (including the general partner interest) in Holly Energy Partners, L.P.

 

W. John Glancy, a director from 1975 to 1995 and since September 1999, has been Senior Vice President and General Counsel of the Company since April 1999. He also held the office of Secretary from April 1999 through February 2005, and since May 2007. From December 1998 to September 1999, he was Senior Vice President, Legal of the Company. From 1997 through March 1999, he practiced law in the Law Offices of W. John Glancy in Dallas. Mr. Glancy currently also serves as Vice President, General Counsel and Secretary of Holly Logistic Services, L.L.C. Mr. Glancy has not been nominated as a director for election at the annual meeting.

 

William J. Gray, a director since September 1996, is a private consultant. He has served as a governmental affairs consultant for the Company since January 2003 and also served as a consultant to the Company from October 1999 through September 2001. Until October 1999, Mr. Gray was Senior Vice President, Marketing and Supply of the Company. In November 2006, Mr. Gray was elected to the New Mexico House of Representatives. Mr. Gray has not been nominated as a director for election at the annual meeting.

 

Marcus R. Hickerson, a director since 1960, was a consultant to Centex Development Company from 1987 to 1999 and has been President of Waxahachie Community Development Corporation since October 1999.

 

Thomas K. Matthews, II, a director since 1978, is a financial consultant.

 

Robert G. McKenzie, a director since 1992, is a financial consultant. From January 1990 to August 1999, he was Executive Vice President and Chief Operating Officer of Brown Brothers Harriman Trust Company of Texas.

 

  **Lamar Norsworthy, a director from 1967 to May 2007, served as the Company’s chief executive officer from 1971 to 2005, holding the title of President from 1971 to 1977 and the title of Chairman of the Board and Chief Executive Officer from 1977 through the end of 2005. From January 2006 until April 5, 2007, he held the office of Chairman of the Board. Mr. Norsworthy also served as a director of Cameron International Corporation from

May 2001 to May 2007 and served as a director of Holly Logistic Services, L.L.C. from March 2004 until April 2007. Effective April 3, 2007, in accord with normal Company practice, Mr. Norsworthy’s employment with the Company terminated based on his long-term disability following an illness that began in October 2006. By action of the Board, Mr. Norsworthy ceased to hold the office of Chairman of the Board on April 5, 2007.

 

Jack P. Reid, a director since 1977, was a consultant to the Company from August 1999 through July 2002. Until August 1999, Mr. Reid was Executive Vice President, Refining, of the Company.

 

Paul T. Stoffel, a director since 2001, is Chairman of Triple S Capital Corp. and of Paul Stoffel Investments, engaged in public and private equity investments.

 

Compensation of Directors

 

For the year ended December 31, 2007, directors who are not employees of the Company or its subsidiaries were compensated as follows:

 

 

 

During the year ended December 31, 2007, compensation was provided to the Company’s outside directors as set forth below:

 

 

 

 

 

 

 

 

 

Guidelines for Stock Ownership for Outside Directors

 

Under the Company’s stock ownership guidelines approved by the Board in 2006, each director is expected to retain fifty percent of his restricted shares until the market value of the Company shares held by the director is equal to $105,000.

 

MEETINGS AND COMMITTEES OF DIRECTORS

 

The Board is comprised of a majority of independent directors as defined in Section 303A.02 of the New York Stock Exchange listing standards. The directors determined by the Board to be independent under this standard are Buford P. Berry, William J. Gray, Thomas K. Matthews, II, Robert G. McKenzie, Paul T. Stoffel, Jack P. Reid and Marcus R. Hickerson.

 

In determining that Mr. Hickerson is an independent director, the Board considered the fact that Mr. Hickerson’s 54-year-old son, M. Neale Hickerson, is employed as a Vice President of the Company and certain subsidiaries, including Holly Logistic Services, L.L.C. From January 2004 to February 2005, M. Neale Hickerson’s title as an officer of the Company was Vice President, Treasury and Investor Relations, and his current title is Vice President, Investor Relations. The Board’s determination that the employment of M. Neale Hickerson would not interfere with Marcus R. Hickerson’s ability to act independently from the management of the Company was based particularly on the fact that Marcus R. Hickerson satisfies all of the independence requirements of Section 303A.02(b) of the New York Stock Exchange (“NYSE”) rules and of Rule 10A-3 under the Exchange Act. Additionally, the Board based its determination on the role played in the Company by M. Neale Hickerson and the fact that he is not an Executive Officer of the Company.

 

In determining that Mr. Gray is an independent director, the Board considered the fact that William J. Gray was elected to the New Mexico House of Representatives in November 2006 and that the Company has refining operations in New Mexico. The Board’s determination that Mr. Gray’s duties as a member of the New Mexico state legislature would not interfere with his ability to act as an independent fiduciary to the Company was based particularly on the fact that Mr. Gray satisfies all of the independence requirements of Section 303A.02(b) of the NYSE and of Rule 10A-3 under the Exchange Act. The Board also considered the conflicts of interest provisions of the Company’s Code of Business Conduct and Ethics, discussed such provisions with Mr. Gray and determined that Mr. Gray’s duties as a New Mexico state representative do not interfere with the interests of the Company as a whole.

 

In determining that Mr. Reid is an independent director, the Board considered the fact that Mr. Reid’s 47 year old son, Willie D. Reid, is employed as a Manager of Applications Infrastructure Support of the Company. From May 1986 to present, Willie D. Reid has maintained various IT positions, and his current title is Manager, Applications Infrastructure Support of the Company. The Board’s determination that the employment of Willie D. Reid would not interfere with Jack P. Reid’s ability to act independently from the management of the Company was based particularly on the fact that Jack P. Reid satisfies all of the independence requirements of Section 303A.02(b) of the New York Stock Exchange (“NYSE”) rules and of Rule 10A-3 under the Exchange Act. Additionally, the Board based its determination on the role played in the Company by Willie D. Reid and the fact that he is not an Executive Officer of the Company.

 

The Board held eight meetings during 2007. The Board has five principal standing committees: the Executive Committee, the Audit Committee, the Compensation Committee, the Nominating/Corporate Governance Committee, and the Public Policy Committee. Each of the committees is appointed by the Board. During 2007, each director, with the exception of Mr. Norsworthy, attended at least 75% of the total number of meetings of the Board. As a result of Mr. Norsworthy’s illness beginning in October 2006, he missed all of the 2007 Board meetings held prior to his ceasing to be a director on May 24, 2007. During 2007, each director except Mr. Norsworthy attended at least 75% of each of the meetings of the committees of the Board on which that director served. The Company does not have a policy requiring the Chairman of the Board or other directors to attend the Company’s Annual Meeting. All of the Company’s directors except Mr. Norsworthy attended the 2007 Annual Meeting of Stockholders.

 

The current members of the Executive Committee are Messrs. Clifton (Chairman), Glancy, Reid and McKenzie. Mr. Norsworthy ceased to be a member and Chairman of the Executive Committee in April 2007

at which time the Board appointed Mr. McKenzie as a member and Mr. Clifton as Chairman. The Executive Committee of the Board has the authority of the Board, to the extent permitted by law and subject to any limitations that may be specified from time to time by the Board, for the management of the business and affairs of the Company between meetings of the Board. During 2007, the committee met three times.

 

The current members of the Audit Committee are Messrs. McKenzie (Chairman), Berry, Matthews, and Stoffel. The Audit Committee of the Board is responsible for monitoring the Company’s internal accounting controls, selecting and engaging independent auditors, subject to ratification by the stockholders, reviewing quarterly and annual reports filed with the SEC, and reviewing certain activities of the independent auditors and their reports and conclusions. In addition, the committee selects persons to conduct internal audits of certain Company transactions and related financial controls and reviews the reports developed from such internal audits. During 2007, the committee met nine times. The Board has adopted a written charter for the Audit Committee, which is available on the Company’s website at www.hollycorp.com and is available in print to any stockholder who requests it. As described above, all members of the Audit Committee have been determined to be independent as independence is defined in Section 303A.02 of the New York Stock Exchange’s listing standards. The Board has determined that Mr. McKenzie satisfies the requirements of the SEC regulations for an “audit committee financial expert” and has designated Mr. McKenzie as the Company’s audit committee financial expert.

 

The current members of the Compensation Committee are Messrs. Berry (Chairman), Matthews and McKenzie. The Compensation Committee of the Board is responsible for the oversight of compensation programs and plans for the executive officers of the Company. The Compensation Committee determines the level of compensation, paid to the Company’s Chief Executive Officer and all other executive officers. The Compensation Committee is also responsible for establishing and overseeing the compensation program for non-employee directors who serve on the Board. As described above, all members of the Compensation Committee have been determined to be independent as independence is defined in Section 303A.02 of the New York Stock Exchange’s listing standards. During 2007, the Compensation Committee met eleven times. The Board has adopted a written charter for the Compensation Committee, which is available on the Company’s website at www.hollycorp.com and is available in print to any stockholder who requests it.

 

The current members of the Nominating/Corporate Governance Committee are Messrs. Matthews (Chairman), Berry, McKenzie and Stoffel. The Nominating/Corporate Governance Committee of the Board is responsible for advising the Board concerning the appropriate composition of the Board and its committees (including identifying individuals qualified to serve on the Board and its committees), the selection of director nominees for each annual meeting of the Company’s stockholders, the selection of Executive Officers and officers of the Company, and appropriate corporate governance practices. As described above, all members of the Nominating/Corporate Governance Committee have been determined to be independent as independence is defined in Section 303A.02 of the New York Stock Exchange’s listing standards. During 2007, the committee met five times. The Board has adopted a written charter for the Nominating/Corporate Governance Committee, which is available on the Company’s website at www.hollycorp.com and is available in print to any stockholder who requests it.

 

The current members of the Public Policy Committee are Messrs. Hickerson (Chairman), Gray, and Reid. The Public Policy Committee of the Board is responsible for reviewing the Company’s policies and procedures on matters of public and governmental concern that significantly affect the Company, including but not limited to environmental, occupational health and safety, and equal employment opportunity matters. The committee is also responsible for recommending to management and the Board the formulation or modification of policies and procedures concerning such matters. During 2007, the committee met four times. As described above, all members of the Public Policy Committee have been determined to be independent as independence is defined in Section 303A.02 of the New York Stock Exchange’s listing standards.

 

DIRECTOR NOMINATION PROCEDURES

 

All of the Company’s directors are elected each year by its stockholders at the annual meeting of stockholders. The Board has specified the number of directors to be seven as of May 8, 2008. The Board is responsible for filling vacancies on the Board at any time during the year, and for nominating director nominees to stand for election at the annual meeting of stockholders. The Nominating/Corporate Governance Committee reviews all potential director

candidates, and recommends potential director candidates to the full Board. Director candidates may be identified by current directors of the Company, employees of the Company or through other sources, including stockholders as described below under “Nomination of Directors by Stockholders.” The Nominating/Corporate Governance Committee occasionally utilizes the services of search firms or consultants to assist in identifying and screening potential candidates. The Nominating/Corporate Governance Committee has an extensive diligence process for reviewing potential candidates, including an assessment of each candidate’s independence under Section 303A.02 of the New York Stock Exchange’s listing standards and Rule 10A-3 under the Exchange Act, a candidate’s relevant educational, business and financial experience, ability to read and understand financial statements, and other relevant factors, as described under “Selection of Directors — Criteria” in the Company’s Corporate Governance Guidelines, which can be found on the Company’s web site at www.hollycorp.com. The full Board reviews and has final approval authority on all potential director candidates being recommended to the stockholders for election.

 

NOMINATION OF DIRECTORS BY STOCKHOLDERS

 

The Company does not have a formal policy by which its stockholders may recommend director candidates, but the Nominating/Corporate Governance Committee will consider candidates recommended by stockholders. A stockholder wishing to submit such a recommendation should send a letter to the Secretary of the Company at 100 Crescent Court, Suite 1600, Dallas, Texas 75201-6915. The mailing envelope must contain a clear notation indicating that the enclosed letter is a “Director Nominee Recommendation.” The letter must identify the author as a stockholder and provide a brief summary of the candidate’s qualifications based on the criteria described above under “Director Nomination Procedures” and in the Company’s Corporate Governance Guidelines, as well as contact information for both the candidate and the stockholder. Candidates recommended by stockholders will be evaluated by the Nominating/Corporate Governance Committee in the same manner as other candidates submitted by directors, employees or obtained through other sources, although the members of the Nominating/Corporate Governance Committee may prefer candidates who are personally known to the existing directors and whose reputations are highly regarded. In evaluating proposed candidates, the Nominating/Corporate Governance Committee will consider all relevant qualifications as well as the needs of the Company in terms of compliance with the New York Stock Exchange’s listing standards and SEC rules.

 

PRESIDING DIRECTOR AND COMMUNICATIONS WITH THE BOARD

 

William J. Gray was selected to preside at regularly scheduled meetings of non-management directors. Since Mr. Gray has not been nominated for reelection, a new Presiding Director will be selected at the May 8, 2008 board meeting following the Annual Meeting. Persons wishing to communicate with the non-management directors are invited to email the Presiding Director at presiding.director@hollycorp.com or write to: William J. Gray, Presiding Director, c/o Secretary, Holly Corporation, 100 Crescent Court, Dallas, Texas 75201-6915. Although the Company has not to date developed formal processes by which stockholders may otherwise communicate directly with directors, the Company believes that its process with regard to communicating with non-management directors, and its informal process under which any communication sent to the Board in care of the Chief Executive Officer or Secretary of the Company is forwarded to the Board for consideration, serves the Board’s and the stockholders’ needs. There is no screening process, and all stockholder communications that are received by officers for the Board’s attention are forwarded to the Board.

 

EXECUTIVE OFFICERS

 

The following table sets forth information regarding the Executive Officers of the Company and certain of its subsidiaries for 2007:

 

 

David L. Lamp, was appointed President of the Company in November, 2007. Mr. Lamp joined the Company in January of 2004 as Vice President, Refining Operations and was elected Executive Vice President, Refining and Marketing in November 2005. Prior to joining the Company, Mr. Lamp was Vice President of El Paso Energy Corporation (“El Paso”) and General Manager of El Paso’s 250,000 BPD Aruba refinery. Prior to his position with El Paso, Mr. Lamp was employed by Koch Industries, where he served as Refinery Manager and EVP-Refining and Chemicals Operations. In 1998, Mr. Lamp served as Director of Operations for a large international chemical and fiber joint venture owned partially by Koch (KOSA).

 

Stephen J. McDonnell, was appointed Vice President and Chief Financial Officer of the Company in September 2001. From August 2000 to September 2001, he was Vice President, Finance and Corporate Development. Prior to joining the Company, Mr. McDonnell was employed by Central and South West Corporation as a vice president in the mergers and acquisitions area from 1996 to June 2000. Mr. McDonnell also has served as Vice President and Chief Financial Officer for HEP since March 2004. Effective January 7, 2008, Mr. McDonnell was replaced by Bruce R. Shaw, who became Senior Vice President and Chief Financial Officer of the Company and of HEP and Mr. McDonnell became the Assistant to the Chairman of the Board of the Company and of HEP.

 

P. Dean Ridenour, was appointed Vice President and Chief Accounting Officer of the Company in December 2004. Beginning in October 2002, Mr. Ridenour began providing full-time consulting services to the Company, and in August 2004, Mr. Ridenour became a full-time employee and officer of the Company in the position of Vice President, Special Projects, serving in that position until December 2004. From April 2001 until October 2002, Mr. Ridenour was temporarily retired. From July 1999 through April 2001, Mr. Ridenour served as Chief Financial Officer and director of GeoUtilities, Inc., an internet-based superstore for energy, telecom and other utility services, which was purchased by AES Corporation in March 2000. He was employed for 34 years by Ernst & Young LLP, including 20 years as an audit partner, retiring in 1997. Mr. Ridenour also has served as a director of HEP since August 2004 and as Vice President and Chief Accounting Officer for HEP since January 2005. Effective January 7, 2008, Mr. Ridenour no longer serves as an officer of the Company or HEP and has agreed to serve as a consultant. Effective April 1, 2008, Mr. Ridenour ceased to be a Company employee but will continue as a non-employee consultant to the Company under a two-year consulting agreement.

 

The Executive Officers named above were elected by the Board to serve in such capacities until their respective successors have been duly elected and qualified, or until their earlier death, resignation or removal from office. Biographical information on Messrs. Clifton and Glancy is set forth previously in this Proxy Statement under “Directors.”

 

CODE OF BUSINESS CONDUCT AND ETHICS

 

The Company has adopted a code of business conduct and ethics (the “Code of Ethics”) that applies to all officers, directors and employees, including the Company’s principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions (the “Principal Financial Officers”). A copy of the Code of Ethics and a description of all amendments adopted thereto in the last twelve months are posted on the Company’s Internet website at www.hollycorp.com and a copy of the Code is available in print to any stockholder without charge upon written request to the Vice President, Investor Relations at: Holly Corporation, 100

Crescent Court, Suite 1600, Dallas, TX, 75201-6915. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its Code of Ethics with respect to its Principal Financial Officers by posting such information on the Company’s Internet website.

 

CORPORATE GOVERNANCE GUIDELINES

 

The Company has adopted Corporate Governance Guidelines (the “Governance Guidelines”) to promote the functioning of the Board and its committees and to set forth a common set of expectations as to how the Board should perform its functions. A copy of the Governance Guidelines is posted on the Company’s Internet website at www.hollycorp.com and is available in print to any stockholder without charge upon written request to the Vice President, Investor Relations at: Holly Corporation, 100 Crescent Court, Suite 1600, Dallas, TX, 75201-6915.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

This compensation discussion and analysis (“CD&A”) provides information about the Company’s compensation objectives and policies for its principal executive officer, principal financial officer and other most highly compensated executive officers and is intended to place in perspective the information contained in the executive compensation tables that follow this discussion. We provide a general description of the Company’s compensation program and specific information about its various components. Immediately following the CD&A is the Compensation Committee Report (the “Committee Report”). Following the Committee Report are compensation tables describing compensation paid in 2006 and 2007 and outstanding equity awards held by executives as of December 31, 2007. At the end of the CD&A is information concerning pension benefits and change in control agreements.

 

Throughout this discussion, the individuals included in the Summary Compensation Table below and referred to as our “Named Executive Officers” are:

 

 

Objectives of Compensation Program

 

The Company’s compensation program is designed to attract and retain talented and productive executives who are motivated to protect and enhance the long-term value of the Company for its stockholders. The Company’s objective is to tie compensation to business and individual performance and to provide competitive total compensation that encourages high levels of performance. The Company’s compensation levels are reviewed in light of publicly available information on compensation paid by comparable companies.

 

The Compensation Committee, comprised entirely of independent directors, administers the compensation program. The Compensation Committee determines and approves the compensation to be paid to the Named Executive Officers.

 

The Compensation Committee has not adopted any formal policies for allocating compensation among salaries, bonuses and equity compensation. The Compensation Committee, with the assistance of management, has sought to designate an appropriate mix of cash and long-term equity incentive compensation with the goal to provide sufficient current compensation to retain the Named Executive Officers, while at the same time providing incentives to the Named Executive Officers to exert their best efforts to maximize long-term value for the Company and its stockholders. The Compensation Committee considers recommendations by management and many other factors in deciding on the final compensation factors for which it has responsibility for each Named Executive Officer. Except with respect to his own compensation, the Committee solicited the recommendations of our Chairman of the Board and Chief Executive Officer, which the Committee considers in making its determinations.

The Compensation Committee reviewed the total compensation provided to each of the Named Executive Officers in the previous year in determining compensation to be paid in 2007. The Compensation Committee, with the assistance of management, annually reviews each of the Named Executive Officers’ proposed long-term incentive compensation to determine whether the executives are being provided with equity awards that are effective in motivating the Named Executive Officers to create long-term value for the Company. The Compensation Committee also takes into consideration the compensation of comparable executives in similarly situated businesses. The Compensation Committee has engaged Frederic W. Cook & Co., an outside consulting firm specializing in executive compensation, to advise the Compensation Committee on matters related to executive and non-employee director compensation. Frederic W. Cook & Co. provides the Committee with relevant market data, updates on related trends and developments, advice on program design, and input on compensation decisions for executive officers and non-employee directors. The consultant is independent, retained directly by the Committee, and provides no other services directly to the Company, however, Frederic W. Cook & Co. also provides independent compensation consulting services to HEP’s Compensation Committee.

 

After reviewing both the internal evaluations of the Named Executive Officers and the market data provided by Frederic W. Cook & Co., the Compensation Committee believes that the 2007 compensation for the Named Executive Officers reflects an appropriate allocation of compensation to salary, bonuses and equity compensation.

 

Overview of 2007 Executive Compensation Components

 

The components of compensation for the Named Executive Officers in 2007 were:

 

 

Base Salary

 

Base salary for the Named Executive Officers for 2007 was approved in February 2007 by the Compensation Committee based on each executive’s position, level of responsibility and individual performance, the Company’s salary range for individuals at such executive’s level, and market practices. The Compensation Committee also reviewed competitive market data relevant to each position provided by Frederic W. Cook & Co. This market data analysis is discussed in detail below under the paragraph titled “Review of Market Data.”

 

The 2007 salary amounts are set forth in the Summary Compensation Table.

 

Annual Incentive Cash Bonus Compensation

 

Payment with respect to annual cash bonuses to Named Executive Officers is contingent upon the satisfaction of pre-established objective and subjective performance criteria as they apply to each individual Named Executive Officer. The amounts are disclosed in the Summary Compensation Table and described in greater detail in the narrative following the 2007 Grants of Plan-Based Awards table. Generally, payment with respect to any cash bonus is contingent upon the satisfaction of the following criteria:

 

 

 

The total bonus pool for all executives and non-bargaining unit employees of the Company is typically determined by the Compensation Committee after the end of each year or designated performance period, calculated pursuant to the achievement of the objective pre-established criteria described above. In determining the total bonus pool, the Compensation Committee reviews the performance of the Company during the previous year and the recommendation of management. Awards for a given year are paid in cash in the first quarter of the following year. See the narrative following the Grants of Plan Based Awards Table below for a more detailed description of the bonuses awarded to the Named Executive Officers and earned in 2007.

 

Before the end of the first calendar quarter of each year, the Compensation Committee approves the individual awards, performance measures and targets to be used for the upcoming calendar year in determining the cash bonus amounts to be paid. Performance targets may be based on any factors as the Compensation Committee may determine. In setting performance targets, the Compensation Committee reviews recommendations from management. The 2008 performance goals are the same as those used in 2007 except that the PTNI goal is measured against the Company’s 2008 PTNI goal.

 

In addition to the pre-defined performance criteria, the Compensation Committee has discretion to approve a decrease in a Named Executive Officer’s bonus by using the same performance objectives for determining a bonus award, but noting that the objectives were not met or did not reach acceptable levels. In the case where the Compensation Committee believes that additional compensation is warranted to reward an executive for outstanding performance in a particular situation, the Compensation Committee may award additional bonuses in its discretion. In making the determination as to whether to exercise the discretion to either decrease an award or provide additional discretionary bonuses, the Compensation Committee reviews recommendations from management, except in the case of compensation for Mr. Clifton, for whom the Compensation Committee makes its determinations without management recommendations. For 2007, as in 2006, the Committee approved a discretionary increase in some bonuses as shown in the Summary Compensation Table. All bonuses were paid in March 2008.

 

The Compensation Committee also reviewed an analysis of competitive market data prepared by the Committee’s independent compensation consultant comparing compensation of our Named Executive Officers, including the bonus payments, to our peers and market practices (see the paragraph below titled “Review of Market Data” for further discussion). The annual incentive targets were assessed on the basis of total cash, including base salary and annual incentive payments.

 

The targets and actual annual incentive cash bonus compensation awarded, and subsequently earned and payable, for each of the Named Executive Officers is described in the narrative following the 2007 Grants of Plan-Based Awards table.

Long-Term Incentive Equity Compensation

 

Long-term equity compensation is the cornerstone of the total compensation program for our Named Executive Officers, and receives the heaviest weighting of all elements. It is intended to be a key element in driving the creation of value for investors and in attracting and retaining executives capable of effectively executing our business strategies. Equity awards are provided under the Long-Term Incentive Compensation Plan (the “Plan”) that was adopted by the Board in October 2002 and approved by the Company’s stockholders at the December 2002 Annual Meeting and as amended and restated and approved by the Company’s stockholders at the May 2007 Annual Meeting. The Plan is administered by the Compensation Committee.

 

While the Plan permits multiple types of awards, our long-term equity incentive program currently consists of restricted stock and performance share unit awards to the Company’s Named Executive Officers as described in more detail below. In 2007, the total long-term incentive award for our Named Executive Officers was equally split 50% in restricted stock and 50% in performance share units.

 

In determining the appropriate amount and type of long-term incentive awards to be made, the Compensation Committee considers the Named Executive Officer’s position, scope of responsibility, base salary, performance and market compensation information for executives in similar positions in similar companies, prior year awards, and recommendation of the Chief Executive Officer (except in regard to his own award). The awards are granted annually during the first quarter of the year. Our goal is to reward the creation of value and high performance with variable compensation dependent on that performance, thus the market data is used subjectively (and not as an objective factor) to confirm that our executives are paid appropriately relative to other similar companies. The peer data allows the Committee to verify that the compensation paid to executives is appropriate. The total compensation may be adjusted if the Committee observes material variation of the market data (no specific formula is used to benchmark this data).

 

Messrs. Clifton, McDonnell and Ridenour also receive long-term incentive compensation from HEP, in which the Company owns a 46% interest (including the general partner interest). Please refer to Item 11 of HEP’s Form 10-K for the fiscal year ended December 31, 2007 for further information concerning the compensation provided by HEP to Messrs. Clifton, McDonnell and Ridenour.

 

Restricted Stock Awards

 

A restricted stock award is an award of shares of Common Stock which is subject to forfeiture upon termination of employment prior to the vesting of the award. The Compensation Committee may approve grants on the terms that it determines, including the period during which the award will vest. Under the Plan, the Compensation Committee may condition vesting upon the achievement of specified financial objectives. The restricted stock will vest upon a change of control of the Company, unless provided otherwise by the Compensation Committee in the agreement granting the award. Named Executive Officers holding restricted stock have all the rights of a stockholder with respect to such restricted stock, including the right to receive all dividends paid with respect to such restricted stock and the right to vote with respect to the restricted stock, subject to limitations on transfer and disposition of the restricted stock during the restricted period. Restricted stock is subject to forfeiture in the event that the executive’s employment or service relationship terminates, unless and to the extent that the Compensation Committee provides otherwise.

 

In 2007, Messrs. Clifton, Glancy and Lamp were granted awards of restricted stock vesting in three equal annual installments. The awards for Messrs. Clifton, Glancy and Lamp also included performance requirements, one effect of which is to preserve the tax deductibility of the awards. Other specific terms for each Named Executive Officer are described in the narrative following the Grant of Plan Based Awards Table.

 

Performance Share Unit Awards

 

A performance share unit is a notional unit that entitles the executive to receive, as may be provided in the applicable agreement governing the award, Common Stock or a cash amount equal to the value of the stock upon the vesting of the performance share units. A performance share unit will be earned depending upon our performance versus that of the group of peer companies listed below in the section titled “Review of Market Data.” The terms of

an award are determined by the Compensation Committee at the time of the award, including the number of units in each grant, the performance targets, the method of determining the amounts payable for different levels of performance, and the nature and timing of payment. The specific goals for these awards are specified below in the footnotes to the tables titled “2007 Grants of Plan-Based Awards” and “Outstanding Equity Awards at Fiscal Year End.” As with restricted stock awards, performance share units will vest upon a change of control of the Company, unless provided otherwise by the Compensation Committee. Performance share units are also subject to forfeiture in the event that the executive’s employment or service relationship terminates, unless and to the extent that the Compensation Committee provides otherwise.

 

In 2007, all of our Named Executive Officers were granted awards of performance share units. The performance period for such awards will be from January 1, 2007 through September 30, 2009 with an additional service period ending on December 31, 2009. Other specific terms of the awards, including the performance criteria and goals, are described in the narrative following the 2007 Grants of Plan Based Awards table.

 

Review of Market Data

 

Market pay practices are one of many factors considered by the Compensation Committee in setting compensation for the Named Executive Officers. We regularly compare our compensation program with market information regarding salary and annual incentive levels, long-term incentive award levels, and short and long term incentive programs. The purpose of this analysis is to provide a frame of reference in evaluating the reasonableness and competitiveness of compensation with the energy industry and to ensure that our compensation is generally comparable to companies of similar size and scope of operations. Market pay levels are obtained from various sources including published compensation surveys and information taken from the SEC filings of a number of similarly situated companies as compiled by our independent consultant. The Compensation Committee reviews and discusses market data and recommendations provided by an established, independent consulting firm specializing in executive compensation issues. The benchmark group that the Compensation Committee reviewed in the fall of 2006 in order to set 2007 compensation was comprised of Cameron International Corporation, Crosstex Energy, El Paso Corporation, FMC Technologies, Frontier Oil Corporation, Giant Industries, Hanover Compressor Company, Maverick Tube Corporation, Murphy Oil Corporation, Tesoro Petroleum Corporation, Western Gas Resources and Williams Companies. The Company’s objective is to position pay levels at approximately the middle range of market compensation. As noted, however, market pay levels are only one factor considered, with pay decisions ultimately reflecting an evaluation of individual contribution and value to the Company.

 

The consultant does not have approval authority for the ultimate compensation that is provided to employees. Instead, the consultant provides information and recommendations to the Committee and identifies the areas that do not appear to be consistent with the general practice of our peer group of companies (without setting specific benchmarks and using a discretionary standard). The consultant provided information and recommendations regarding compensation to management and to the Compensation Committee prior to the meetings when salaries were approved, bonuses were awarded and equity compensation was established.

 

Role of Named Executive Officers in Determining Executive Compensation

 

In making executive compensation decisions, the Compensation Committee solicits the recommendations of the Company’s Chief Executive Officer (except with respect to his own compensation) and various other members of management. Management facilitates the Compensation Committee’s consideration of compensation for Named Executive Officers by providing data for the Compensation Committee’s review. This data includes, but is not limited to the Company’s annual budget as approved by the Board, the Company’s financial performance over the course of the year versus that of the Company’s peers, performance evaluations of the Named Executive Officers (other than for the Chief Executive Officer and Chairman of the Board, who is evaluated by the Compensation Committee), compensation provided to the Named Executive Officers in previous years, and tax and accounting related considerations. Management provides the Compensation Committee with guidance as to how such data impacts pre-determined performance goals set by the Compensation Committee. When management considers a discretionary bonus to be appropriate for a Named Executive Officer (other than for the Chief Executive Officer and Chairman of the Board), it will suggest an amount and provide the Compensation Committee with management’s rationale for such bonus. Given the day-to-day familiarity that management has with the work performed by the

Named Executive Officers, the Compensation Committee values management’s recommendations. However, the Compensation Committee makes all final decisions as to the compensation of the Named Executive Officers. For 2007, after consideration of management’s recommendations regarding discretionary increases in the bonuses, and discussion regarding such increases, the Compensation Committee approved discretionary increases in some bonuses as shown in footnote 2 to the Summary Compensation Table.

 

Guidelines for Stock Ownership for Executives

 

Under the Company’s stock ownership guidelines approved by the Board in 2006, each Named Executive Officer is expected to retain fifty percent of the after-tax shares received from restricted share and performance share units awards made in 2006 and subsequent years until his ownership equals the following levels:

 

 

Shares owned from any source count toward meeting the guideline, but shares relating to unexercised stock options and unvested restricted shares and/or performance share units do not count.

 

Tax and Accounting Implications

 

We account for the equity compensation expense for our employees and executive officers, including our Named Executive Officers, under the rules of SFAS 123(R) which require the Company to estimate and record an expense for each award of long-term incentive compensation over the vesting period of the award.

 

With respect to Section 162(m) of the Internal Revenue Code (“Tax Code”) and underlying regulations pertaining to the deductibility of compensation to named executive officers, the Company has adopted a policy to comply with such limitations to the extent practicable. The Plan has been approved by the Company’s stockholders. As a result, certain elements of the Plan are designed to provide performance-based incentive compensation which would be fully deductible under Section 162(m). Restricted stock and performance share unit grants made to Named Executive Officers in 2007 are intended to be fully deductible under Section 162(m). Prior to 2007, some Named Executive Officers received restricted stock awards prior to becoming Named Executive Officers that do not contain performance-based incentives and may not comply with Section 162(m). Annual incentives are also generally intended to be compliant with Section 162(m). However, the Compensation Committee has determined that some flexibility is required, notwithstanding the statutory and regulatory provisions, in negotiating and implementing the Company’s incentive compensation programs. It has, therefore, retained the discretion to award some bonus payments based on non-quantitative performance measurements and other criteria that it may determine, in its discretion, from time to time.

 

In addition, Section 280G of the Tax Code prohibits the deduction of any “excess parachute payment.” Benefits payable under the Change in Control Agreements entered into with certain of our executives as well as accelerated vesting under restricted stock and performance share awards could result in “excess parachute payments” that are not deductible by the Company. Amounts payable and benefits available upon the occurrence of certain change in control transactions are described below in the section title “Potential Payments Upon Termination or Change in Control.”

 

Retirement and Benefit Plans

 

The Holly Retirement Plan

 

The Company’s tax-qualified defined benefit retirement plan is described below in the narrative accompanying the Pension Benefits Table. As of January 1, 2007, this plan was no longer made available to newly hired employees who were not represented under a collective bargaining agreement. Instead, as of January 1, 2007, new employees who were not represented under a collective bargaining agreement were automatically enrolled in the Thrift Plan to

which the Company makes an automatic contribution of 5% of the employee’s base compensation on an annual basis, in addition to making matching contributions as described below. Most employees who are not represented by a collective bargaining agreement and were hired prior to January 1, 2007, were provided with a one-time choice to either continue earning benefits in the Holly Retirement Plan or to freeze benefits in the Holly Retirement Plan and begin receiving a 5% Automatic Thrift Plan Contribution. Regardless of their choice, these employees are eligible for matching contributions under the Thrift Plan.

 

Retirement Restoration Plan

 

We have an unfunded Retirement Restoration Plan that provides for additional payments from us so that total retirement plan benefits for certain executives are not limited to the maximums set in the Tax Codes. This Plan is more particularly described below in the section titled “Pension Benefits.”

 

Thrift Plan for Employees of Holly Corporation, its Affiliates and Subsidiaries

 

The Company’s Thrift Plan, which is a tax-qualified defined contribution plan, is offered to all employees of the Company. In 2006, employees had the option to participate in both the Company’s Retirement Plan and the Thrift Plan. Employees were permitted to make contributions to the Thrift Plan of 0% up to a maximum of 50% of their compensation. In 2007, for employees not covered by a collective bargaining agreement with labor unions, the Company matched employee contributions to the Thrift Plan up to 6% of their compensation (increased from 4% in 2006). These employees were also allowed to participate in the Automatic Thrift Plan Contribution feature, where up to 5% of base pay, subject to the applicable IRS limits, is contributed in addition to the employee deferrals and employer matching contributions for that employee. Employee contributions that were made on a tax-deferred basis were generally limited to $15,500 per year, with employees over 50 years of age able to make additional tax-deferred contributions of $5,000. Employees may direct Company contributions to be invested in Common Stock. Prior to 2007, the Company’s contributions in the Thrift Plan did not vest until the earlier of three years of credited service or termination of employment due to retirement, disability or death. Beginning in 2007, matching contributions to noncollective bargaining unit employees vest immediately. The Automatic Thrift Plan Contribution vests after three years of credited service.

 

In 2007, each of the Named Executive Officers participated in the Thrift Plan and received matching contributions from us. These amounts are further described in the Summary Compensation Table.

 

Employee Stock Ownership Plan

 

Many employees of the Company and eligible affiliates with at least one year of service, other than employees covered by collective bargaining agreements, participated in an Employee Stock Ownership Plan (“ESOP”) established in 1985. For the 1987 through the 1996 fiscal years, shares of Common Stock held by the ESOP were allocated to the accounts of participants for each fiscal year on the basis of payments of principal on the ESOP’s ten-year installment note issued to the Company in connection with the ESOP’s purchase of Common Stock from the Company. Shares were allocated to participants based on their eligible compensation. Participants’ shares vested upon the earlier of five years’ credited service or termination of employment due to retirement, disability or death. Effective August 1, 1999, the ESOP was merged into the Thrift Plan and each participant’s ESOP account became a Company Stock ESOP Account in the Thrift Plan. Over the twelve months ending October 2002, shares in the Company Stock ESOP Account for each participant were gradually shifted to each participant’s regular Thrift Plan account and consequently became subject to the participant’s directions as to holding or selling such shares.

 

ESOP Restoration Plan

 

The Company adopted an ESOP restoration plan to provide additional benefits to executives whose allocations of shares of Common Stock from the ESOP for the 1995 and 1996 fiscal years were reduced because of the application of limitations of the Tax Code. The Plan provides for the grant to participants after the end of the 1995 and 1996 fiscal years of “phantom shares” equal in number to the number of shares not allocated to participants because of the limitations of the Tax Code. The phantom shares under the plan are unsecured rights to cash payments based on dividends paid on shares of Common Stock and on the market value of such shares at future

dates. Payments based on market value of Common Stock are generally due 40 days after termination of employment or the date of final distribution to the officer under the ESOP unless the officer elects to defer payments to future dates that may not be later than 60 days after the officer’s death or permanent disability.

 

A total of 61,880 phantom shares were granted to participants for the 1995 and 1996 fiscal years. As of December 31, 2007, Mr. Clifton was the only Named Executive Officer to hold phantom shares, and he held 10,720 phantom shares.

 

Change in Control Agreements

 

The Company has entered into Change in Control Agreements with our Named Executive Officers to provide for management continuity in the event of a change in control, and to assist in the recruitment and retention of executives. The material terms and a quantification of the potential amount payable under the Change in Control Agreements with the Named Executive Officers are set forth below in the section titled “Potential Payments Upon Termination or Change in Control.” The Company has not entered into any employment agreements with any of the Named Executive Officers, other than these Change in Control agreements and other than the Consulting Agreement with Mr. Ridenour described below in footnote 12 to the Outstanding Equity Awards at Fiscal Year End Table.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee of the Holly Corporation Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Members of the Compensation Committee:

 

Buford P. Berry,

Chairman

Thomas K. Matthews, II

Robert G. McKenzie

 

SUMMARY COMPENSATION TABLE

 

The table below summarizes the total compensation paid or earned by each of the Named Executive Officers in 2006 and 2007.

 

																											Change in
																											Pension
																											Value and
																											Nonqualified
																						Non-Equity					Deferred
																						Incentive Plan					Compensation					All Other
							Salary					Bonus					Stock Awards					Compensation					Earnings					Compensation					Total
Name and Principal Position		Year					($)(1)					($)(2)					($)(3)					($)(4)					($)(5)					($)(6)					($)
Matthew P. Clifton,			2007				$	727,833	(7)			$	0				$	2,991,000				$	2,008,000				$	375,390				$	13,500				$	6,115,723
Chairman of the Board and			2006				$	647,000				$	0				$	3,496,000				$	1,746,900				$	234,820				$	8,400				$	6,133,120
Chief Executive Officer
W. John Glancy,			2007				$	306,587	(8)			$	0				$	452,000				$	311,000				$	79,465				$	13,500				$	1,162,552
Senior Vice President,			2006				$	283,670				$	0				$	327,000				$	269,000				$	37,997				$	8,400				$	926,067
General Counsel and Secretary
David L. Lamp,			2007				$	373,644	(9)			$	0				$	639,000				$	653,877				$	41,546				$	13,500				$	1,727,690
President			2006				$	312,000				$	0				$	360,000				$	546,000				$	25,107				$	8,400				$	1,251,507
Stephen J. McDonnell,			2007				$	258,240	(10)			$	300				$	282,000				$	260,700				$	40,680				$	13,500				$	855,420
Vice President and			2006				$	245,136				$	0				$	169,000				$	234,000				$	29,901				$	8,400				$	686,437
Chief Financial Officer
P. Dean Ridenour,			2007				$	301,886	(11)			$	70,488				$	215,000				$	310,512				$	54,799				$	13,500				$	966,185
Vice President and			2006				$	257,298				$	14,000				$	108,000				$	246,000				$	38,139				$	8,400				$	671,837
Chief Accounting Officer

 

 

 

 

 

 

2007 Grants of Plan-Based Awards

 

The following table reflects possible payouts under the Company’s equity and non-equity incentive plans to the Named Executive Officers from grants made to them during the calendar year ending December 31, 2007.

 

 

 

Performance Share Unit Agreement Terms

 

Under the terms of the Performance Share Unit Agreements, dated February 28, 2007, that each of the named executive officers executed pursuant to the Plan, recipients of performance share units may earn from 0% to 200% of the number awarded. The performance share units represent an award for a designated performance and related service period. At the end of the required periods, recipients are entitled to a number of shares of Common Stock equal to a percentage of the awarded units as determined by reference to the Company’s performance on three performance measures compared to the performance by the Company’s defined peer group on the same three measures.

 

The three measures are earnings per share (“EPS”) growth, return on assets, and return on investment. The Company’s performance comparison group consists of Alon USA Energy, Inc., Cooper Cameron Corporation, Crosstex Energy, Inc., El Paso Corp., FMC Technologies, Inc., Frontier Oil Corporation, Giant Industries, Inc., Hanover Compressor, Marathon Oil Corporation, Maverick Tube Corporation, Murphy Oil Corporation, Sunoco Inc., Tesoro Corporation, Valero Energy Corporation, Western Gas Resources, and Williams Companies Inc. If a member of the peer group ceases to be a public company during the performance period (whether by merger, consolidation, liquidation or otherwise) or it fails to file financial statements with the Securities and Exchange Commission in a timely manner, it shall be treated as if it had not been a peer group member for the entire performance period.

 

“EPS growth” means the compound annual growth rate in earnings per share before extraordinary items and discontinued operations, and after the effect of conversion of convertible preferred stock, convertible debentures, and options and warrants that have been identified as common stock equivalents. “Return on assets” means the net income before extraordinary items, divided by total assets (i.e., the sum of current assets, net plant, and other non-current assets). “Return on investment” means the net income before extraordinary items, divided by the sum of long-term debt, preferred stock and total common equity.

 

The number of shares of Common Stock payable is equal to the result of multiplying the number of performance share units granted by the average of the percentile ranking of the Company’s performance on the performance measures over the performance period as compared to the performance comparison group’s performance on such measures over the performance period, multiplied by two. The average is determined by adding the Company’s percentile ranking on each performance measure and dividing the sum by three.

 

If any of the award recipients’ employment terminates prior to December 31, 2009 other than due to a change in control event, death, disability or retirement, as those terms are defined and described in the applicable award agreements, he will forfeit his award. The change in control provisions of performance share units are described below under the section titled “Potential Payments Upon Termination or Change in Control.” In the event of an award recipient’s death, total and permanent disability (as determined by the Compensation Committee in its sole discretion) or retirement after attaining age 62 (or retirement after attaining an earlier retirement age approved by the Compensation Committee in its sole discretion), the recipient shall forfeit a number of units equal to the percentage that the number of full months following the date of separation, death, disability or retirement to the end of the performance period bears to 36. Any remaining units that are not vested will become vested. In its sole discretion, the Compensation Committee may make a payment assuming a performance percentage of up to 200% instead of the prorated number. The amounts shown generally in the table above in column (f) reflect the minimum payment amount of 0%, the amounts shown in column (g) reflect the target amount of 100% and the amounts shown in column (h) reflect the maximum payment level of 200%.

Restricted Stock Agreement Terms

 

Under the terms of the 2007 restricted stock grant agreements for the named executive officers, one third of the restricted shares vested in February, 2008 when the satisfaction of the performance standard was confirmed by the Compensation Committee. Except in the case of certain early terminations of employment, one-third of these awards will become fully vested and nonforfeitable after December 31, 2008 and the final one-third will become fully vested and nonforfeitable after December 31, 2009 in each case if the performance standard is achieved. For purposes of the 2007 restricted stock awards for the Named Executive Officers, the performance standard for any quarter is the average Quarterly Adjusted Net Income (as defined below) per diluted share of not less than $0.68 for the period that began on October 1, 2007 and ends at the end of the quarter considered, computed as a simple average of the Quarterly Adjusted Net Income per diluted share for each quarter in such period. Quarterly Adjusted Net Income means net income for a quarter, as reported by the Company in its filings with the Securities and Exchange Commission, adjusted to exclude the effects of recoveries or liabilities resulting from litigation and administrative proceedings involving the Company and its subsidiaries. The performance standard referenced in this section applies only to Messrs. Clifton, Glancy and Lamp. Restricted stock awards granted to Messrs. McDonnell and Ridenour are not subject to performance conditions and vest in three annual installments. The first one-third of the award vested in January 2008, and the remaining two-thirds will vest on January 1, 2009 and January 1, 2010 provided the executives continue employment with (or provide services for, in the case of Mr. Ridenour) the Company.

 

In the event of a recipient’s death, total and permanent disability (as determined by the Compensation Committee in its sole discretion) or retirement after attaining age 62 (or retirement after attaining an earlier retirement age approved by the Compensation Committee in its sole discretion), a recipient shall forfeit a number of shares equal to (i) the total award times (ii) the percentage that the period of full months beginning on the first calendar month following the date of death, disability or retirement and ending on December 31, 2009 bears to 36. Any remaining shares that are not vested will become vested. In its sole discretion, the Compensation Committee may decide to vest all of the shares in lieu of the prorated number. Recipients are stockholders with respect to all of the restricted shares and have the right to receive all distributions paid with respect to such restricted shares. The change in control provisions of this award are described below under the section titled “Potential Payments Upon Termination or Change in Control.” Assuming the quarterly adjusted net income standard is met as set forth in each case above, the awards, subject to performance conditions will become vested on the date that the Compensation Committee certifies that the Company has met the applicable standards.

 

Annual Incentive Cash Bonus Compensation

 

The bonuses that are available to the Named Executive Officers as annual incentive bonuses are based upon pre-set percentages of salary, achieved by reaching certain target performance levels. A description of the pre-established performance criteria utilized in 2007 can be found above in the CD&A under the section titled “Annual Incentive Cash Bonus Compensation.” The following chart reflects the target percentages that were set for the Named Executive Officers and the actual percentages awarded to each individual.

 

 

Outstanding Equity Awards at Fiscal Year End

 

The following table reflects outstanding stock options, performance share units and restricted stock held by our Named Executive Officers as of December 31, 2007.

 

 

 

 

 

                                          Restricted Stock and Performance Share Unit Grants

 

 

 

Performance Schedule

 

 

 

 

 

 

Option Exercises and Stock Vested

 

The following table provides information about our Named Executive Officers related to stock options exercised and restricted share and/or performance share unit awards that became vested during the 2007 fiscal year.

 

		Option Awards								Stock Awards
		Number of Shares				Value Realized				Number of Shares				Value Realized
		Acquired on Exercise				Upon Exercise				Acquired on Vesting				Upon Vesting
Name		(#)				($)(1)				(#)				($)(2)
Matthew P. Clifton,			n/a				n/a
Chief Executive Officer and Chairman of the Board*
Cash Payments(3)											132,200			$	7,010,566
Stock Vestings(4)											27,266			$	1,481,907
W. John Glancy,			51,000	(5)		$	2,761,152				23,976	(6)		$	1,246,096
Senior Vice President and General Counsel
David L. Lamp, President,			n/a				n/a				5,530	(7)		$	293,083
Stephen J. McDonnell,			n/a				n/a				3,708	(8)		$	190,591
Vice President and Chief Financial Officer
P. Dean Ridenour,			n/a				n/a				905	(9)		$	46,517
Vice President and Chief Accounting Officer

 

 

Pension Benefits

 

Our Named Executive Officers participate in our Retirement Plan (the “Qualified Retirement Plan”), which generally provides a defined benefit to participants following their retirement. In addition, since the 1995 fiscal year, we have also sponsored and maintained our Retirement Restoration Plan (the “Retirement Restoration Plan”) that provides additional benefits such that the total pension benefits for specified executives will be maintained at the levels contemplated in the Qualified Retirement Plan before application of the Tax Code limitations. The table below sets forth an estimate of the pension benefits payable to our Named Executive Officers at normal retirement age under the Qualified Retirement Plan and the Retirement Restoration Plan (collectively, the “Plans”).

Pension Benefits Table

 

				Number of Years				Present Value of				Payments During
Name		Plan Name		Credited Service				Accumulated Benefit				Last Fiscal Year
(a)		(b)		(#) (c)				($) (d)				($) (e)
Matthew P. Clifton,		Qualified Retirement Plan			27.17				694,974				0
Chief Executive Officer and Chairman of the Board*(1)		Retirement Restoration Plan			27.17				1,461,014				0
W. John Glancy,		Qualified Retirement Plan			8.75				314,785				0
Senior Vice President and General Counsel(2)		Retirement Restoration Plan			8.75				110,697				0
David L. Lamp, President(3)		Qualified Retirement Plan			4.0				71,095				0
		Retirement Restoration Plan			4.0				33,404				0
Stephen J. McDonnell,		Qualified Retirement Plan			7.42				195,745				0
Vice President and Chief Financial Officer(4)		Retirement Restoration Plan			7.42				29,847				0
P. Dean Ridenour,		Qualified Retirement Plan			3.33				117,990				0
Vice President and Chief Accounting Officer(5)		Retirement Restoration Plan			3.33				24,449				0

 

 

In quantifying the present value of the current accrued benefit under the Plans for our Named Executive Officers indicated above, the valuation method and assumptions discussed in Note 15 to our Consolidated Financial Statements for the fiscal year ended December 31, 2007, included in our annual report on Form 10-K were utilized. The material assumptions used include the following:

 

 

Employees hired before 2007 generally became eligible to participate in our Qualified Retirement Plan after completing one year of service with us or any of our affiliates. The amount of benefits accrued under the Qualified Retirement Plan is based upon a participant’s compensation, age and length of service. The compensation taken

into account under our Qualified Retirement Plan is a participant’s average monthly compensation, which includes base salary or base pay and any quarterly bonuses, during the highest consecutive 36-month period of employment for each employee (“Plan Compensation”). No quarterly bonuses were provided to our Named Executive Officers in 2007, but quarterly bonuses were paid to some non-executive union employees.

 

Our Qualified Retirement Plan provides for benefits upon normal retirement, early retirement, and late retirement, as well as providing accelerated deferred vested benefits, disability benefits and death benefits. Upon normal retirement following a participant’s attainment of age 65, a participant is entitled to a life annuity with monthly pension payments equal to (a) 1.6% of the participant’s average monthly Plan Compensation multiplied by the participant’s total years of credited benefit service, minus (b) 1.5% of the participant’s primary Social Security benefit multiplied by the participant’s total years of credited service (but not to exceed 45% of such Social Security benefits). In addition, a participant who (i) has attained age 50 and completed at least 10 years of service, or (ii) has attained age 55 and completed at least 3 years of service may elect to terminate employment and begin receiving benefits under our Qualified Retirement Plan. If such a participant begins receiving benefits under our Qualified Retirement Plan on or after the date the participant attains age 60 but before he reaches age 62, such benefits will be reduced by 1/12th of 21/2% for each full month that such benefits begin before age 62. If benefits begin before age 60, the participant’s Qualified Retirement Plan benefits will be reduced by 1/12th of 5% for each full month that such benefits begin before age 60.

 

The normal form of benefits under our Qualified Retirement Plan is a life annuity or, if a participant is married, a qualified joint and survivor annuity (unless properly waived). Our Qualified Retirement Plan also permits participants to elect to receive their benefits in the form of a single life annuity for a 5- or 10-year term certain, a reduced pension for the joint lives of the participant and a co-annuitant (with a 100%, 66.66%, or 50% survivor percentage) or a lump sum. If the participant dies before his Qualified Retirement Plan benefits have commenced, his surviving spouse will be entitled to a benefit for life equal to the amount that would have been paid as a survivor benefit under the 100% joint and survivor annuity option. If the participant is not married on the date of his death or waived the surviving spouse benefit, such benefit will be paid to his beneficiary in the form of monthly payments for life or a term certain or in the form of a lump sum, as elected by the beneficiary.

 

Benefits up to limits set by the Tax Code are funded by our contributions to the Qualified Retirement Plan, with the annual contribution amounts determined on an actuarial basis. In 2007, the Tax Code limited the annual benefit that could be paid from our Qualified Retirement Plan to $180,000 per year (subject to increases for future years based on price level changes) and limited the compensation that could be taken into account in computing such benefit to $225,000 per year (subject to certain upward adjustments for future years).

 

For certain executives including our Named Executive Officers whose benefits under our Qualified Retirement Plan are limited as a result of the limitations described in the preceding paragraph, we have granted participation in our Retirement Restoration Plan, which provides additional pension benefits so that the total retirement benefits for specified executives will be maintained at the levels contemplated in our Qualified Retirement Plan before application of the Tax Code limitations. Specifically, the amount of benefits payable under our Retirement Restoration Plan is equal to a participant’s benefit payable in the form of a life annuity calculated under the Qualified Retirement Plan without regard to the Tax Code limitations less the amount of the Qualified Retirement Plan benefit that can be paid under the Qualified Retirement Plan after application of the Tax Code limits. Benefits under our Retirement Restoration Plan are generally payable at the same time as the participant’s benefits under the Qualified Retirement Plan for benefits earned through 2004 and as a lump sum for benefits earned after 2004.

Nonqualified Deferred Compensation