<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
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 1-8979
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Ave, Ste. 900, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
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
--- ---
The registrant has one class of common stock outstanding. As of August 9,
1996, 13,776,194 shares of registrant's $1 par value common stock were
outstanding.
1
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED JUNE 30, 1996
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 1996 and September 30, 1995 3
Consolidated Statements of Operations for the
three months ended June 30, 1996 and 1995 4
Consolidated Statements of Operations for the
nine months ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 20
SIGNATURES 20
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
June 30, September 30,
1996 1995
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $393 $1,771
Accounts receivable (Note 2) 3,338 440
Prepaid expenses and other 89 7
------------- -------------
Total current assets 3,820 2,218
Properties, net (Note 3) 18,784 12,777
Net assets of discontinued
operations (Note 8) 3,072 2,978
Other assets 330 425
------------- -------------
$26,006 $18,398
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $2,084 $355
Current portion of long-term debt 250 235
Accrued expenses and other (Note 4) 4,079 2,705
------------- -------------
Total current liabilities 6,413 3,295
Long-term debt, including $79,609 and
$78,284, respectively, payable to a
related party 83,313 82,213
Funding Agreement (Note 5) 11,013 1,148
Other liabilities, including $1,200 and
$2,367, respectively, payable to a
related party (Note 6) 2,661 5,106
------------- -------------
103,400 91,762
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000
shares authorized; shares issued and
outstanding: 13,776,194 and
13,423,378, respectively 13,776 13,423
Additional paid-in capital 53,581 48,804
Accumulated deficit (144,751) (135,591)
------------- -------------
(77,394) (73,364)
------------- -------------
$26,006 $18,398
============= =============
The accompanying notes are an integral part of these financial statements.
3
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
June 30,
-----------------------------
1996 1995
------------- -------------
REVENUES
Sales and operating revenue $1 $2
Other income 5 2
------------- -------------
6 4
------------- -------------
COSTS AND EXPENSES
Operating costs (recoveries) 74 (4)
Depreciation and amortization 40 42
General and administrative 863 375
Exploration costs 43 --
Interest on indebtedness including
$1,200 and $1,179, respectively,
to a related party 1,304 1,179
------------- -------------
2,324 1,592
------------- -------------
Loss from continuing operations
before income taxes (2,318) (1,588)
Income tax expense -- --
------------- -------------
Loss from continuing operations (2,318) (1,588)
Loss from discontinued operations (Note 8) -- --
------------- -------------
Net Loss ($2,318) ($1,588)
============= =============
Loss per share:
Continuing operations ($0.17) ($0.12)
Discontinued operations -- --
------------- -------------
Loss per share ($0.17) ($0.12)
============= =============
Weighted average common shares outstanding 13,776,194 13,229,256
The accompanying notes are an integral part of these financial statements.
4
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the nine months ended
June 30,
-----------------------------
1996 1995
------------- -------------
REVENUES
Sales and operating revenue $2 $6
Other income 98 8
------------- -------------
100 14
------------- -------------
COSTS AND EXPENSES
Operating costs 163 2
Depreciation and amortization 116 125
General and administrative 3,539 1,176
Exploration costs 1,760 --
Interest on indebtedness including
$3,575 and $3,471, respectively,
to a related party 3,682 3,471
------------- -------------
9,260 4,774
------------- -------------
Loss from continuing operations
before income taxes (9,160) (4,760)
Income tax expense -- --
------------- -------------
Loss from continuing operations (9,160) (4,760)
Loss from discontinued operations (Note 8) -- (300)
------------- -------------
Net Loss ($9,160) ($5,060)
============= =============
Loss per share:
Continuing operations ($0.67) ($0.37)
Discontinued operations -- (0.02)
------------- -------------
Loss per share ($0.67) ($0.39)
============= =============
Weighted average common shares outstanding 13,638,231 13,102,936
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the nine months ended
June 30,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations ($9,160) ($4,760)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation and amortization 116 125
Interest capitalized (150) --
Accrued interest added to long-term debt (Note 6) 25 2,377
Accrued interest paid with common stock (Note 6) 4,742 2,292
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 18 200
Prepaid expenses and other (82) (39)
Other assets 12 (209)
Increase (decrease) in:
Accounts payable 748 119
Accrued expenses and other 1,779 45
Funding Agreement (Note 5) 2,305 --
Other liabilities (2,186) (1,590)
------------- -------------
Net cash used by continuing operations (1,833) (1,440)
Net cash used by discontinued operations (172) (343)
------------- -------------
Net cash used by operating activities (2,005) (1,783)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets 1 4,804
Capital expenditures (715) (2,021)
------------- -------------
Net cash provided (used) by investing activities (714) 2,783
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 1,325 3,175
Principal payments on long-term debt (235) (5,220)
Issuance of common stock 251 59
------------- -------------
Net cash provided (used) by financing activities 1,341 (1,986)
------------- -------------
Net decrease in cash and cash equivalents (1,378) (986)
Cash and cash equivalents at the beginning of the period 1,771 1,141
------------- -------------
Cash and cash equivalents at the end of the period $393 $155
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil & Gas Company
(hereinafter referred to as "Hondo Oil" or "the Company") include the
accounts of all subsidiaries, all of which are wholly-owned. All
significant intercompany transactions have been eliminated. The
Hondo Company owns approximately 73% of Hondo Oil's common stock.
Lonrho Plc, a publicly-traded English company, owns 75% of The Hondo
Company. Lonrho Plc increased its ownership of The Hondo Company
from 50% to 75% on January 5, 1996 and has options to acquire the
remaining 25% over the next three years.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. There has
not been any change in the Company's significant accounting policies
for the periods presented. There have not been any significant
developments or changes in contingent liabilities and commitments
since September 30, 1995, other than the contingency described in
Note 8.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. The results for these interim periods are not
necessarily indicative of results for the entire year. These
statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1995.
(b) Earnings Per Share
------------------
Net income (loss) per share amounts are computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. The effect of common stock equivalents is not included
for periods with losses. Fully diluted per share amounts are the
same as primary per share amounts and, accordingly, are not presented.
(c) Income Taxes
------------
The Company uses the liability method to account for income taxes in
accordance with SFAS No. 109, "Accounting For Income Taxes." Deferred
tax assets and liabilities are determined based on reversals of
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted effective tax rates
and laws that will be in effect when the differences are expected to
reverse.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(c) Income Taxes (continued)
------------------------
The Company provides for income taxes in interim periods based on
estimated annual effective rates. The Company records current income
tax expense to the extent that federal, state or alternative minimum
tax is projected to be owed. The Company has investment tax credit
carryforwards of $1,299 which are accounted for by the flow-through
method.
2) Accounts Receivable
-------------------
As more fully described in the Company's 1995 Annual Report on Form
10-K (the "Form 10-K"), the Colombian national oil company,
Ecopetrol, is obligated to pay for 50% of direct exploration costs to
date when commerciality is declared. This obligation is recoverable
from Ecopetrol's share of production. As further described in the
Form 10-K, Ecopetrol agreed to pay cash for its share of certain
costs of constructing a pipeline and wellsite facilities when
commerciality was declared.
An application for commerciality was approved on May 8, 1996. The
Company has recorded a receivable of $2,916 for its share of the
estimated cash recovery from Ecopetrol. The Company estimates that
it will recover an additional $1,300 in revenue when production
commences (currently expected in the first half of 1997).
3) Properties
----------
Properties, at cost, consist of the following:
June 30, September 30,
1996 1995
------------- -------------
(Unaudited)
Drilling in progress (Colombia) (a) $15,137 $11,775
Pipelines in progress (Colombia) 3,486 873
Other fixed assets 333 279
Accumulated depreciation (172) (150)
------------- -------------
$18,784 $12,777
============= =============
(a) As of June 30, 1996, drilling in progress represents the
Company's investment in oil and gas properties in Colombia.
This investment will be classified as a proved oil and gas
property when transportation and marketing arrangements are
concluded.
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(All Dollar Amounts in Thousands)
4) Accrued Expenses
----------------
Accrued expenses consist of the following:
June 30, September 30,
1996 1995
------------- -------------
(Unaudited)
Refining and marketing costs (Note 8) $2,036 $2,114
City of Long Beach (Note 6) 1,533 --
Drilling costs (Colombia) 319 190
Other 191 401
------------- -------------
$4,079 $2,705
============= =============
5) Funding Agreement
-----------------
Effective July 26, 1995, the Company's wholly-owned subsidiary, Hondo
Magdalena Oil & Gas Limited ("Hondo Magdalena"), Amoco Colombia
Petroleum Company ("Amoco Colombia"), and Opon Development Company
entered into a Funding Agreement for Tier I Development Project costs
(the "Funding Agreement") for the interim financing of costs
associated with the construction of a pipeline from the Opon Contract
area, for an approved geological and geophysical work program, and
for related overheads. The Funding Agreement provides that Hondo
Magdalena may repay the amounts financed by Amoco Colombia from prior
to the date of first production until 365 days thereafter, along with
an equity premium computed using a 22% annualized interest rate. The
equity premium is computed monthly on Hondo Magdalena's share of
expenditures (including any amounts to be recouped from Ecopetrol
after commerciality). Alternatively, from the date of first
production until 90 days thereafter, Hondo Magdalena may elect to
repay 125% of its share (excluding any amounts to be recouped from
Ecopetrol after commerciality) of the total costs accumulated up to
the date of repayment. If the financed amounts are not repaid within
365 days after the date of first production, an additional penalty of
100% of the amount then due would be recovered out of Hondo
Magdalena's revenues. Hondo Magdalena's revenues from production of
the first 80 million cubic feet of natural gas and related condensate
and natural gas liquids are pledged to secure its obligations under
the Funding Agreement.
The Company has accrued equity premiums computed in accordance with
the 22% annualized interest rate option. Equity premiums of $781 and
$57 related to the financed pipeline costs have been capitalized for
the nine months ended June 30, 1996 and the year ended September 30,
1995, respectively. The remainder of the equity premiums accrued to
date, relating to financed geological and geophysical work and
overheads, have been expensed.
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(All Dollar Amounts in Thousands)
5) Funding Agreement (continued)
-----------------------------
The Funding Agreement liability consists of the following:
June 30, September 30,
1996 1995
------------- -------------
(Unaudited)
Outstanding principal $9,896 $1,071
Equity Premiums 1,117 77
------------- -------------
$11,013 $1,148
============= =============
6) Other Liabilities
-----------------
In accordance with the terms of the Company's debts to Lonrho Plc,
accrued interest is either added to the outstanding principal or paid
by issuance of the Company's common stock on the interest due date,
at the option of Lonrho Plc. Accrued interest of $2,367 for the
six-month period ended September 30, 1995 was paid by the issuance of
121,372 shares of the Company's common stock on October 1, 1995.
Accrued interest of $2,375 for the six-month period ended March 31,
1996 was paid by the issuance of 197,944 shares of the Company's
common stock on April 1, 1996.
Other liabilities consist of the following:
June 30, September 30,
1996 1995
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc $1,200 $2,367
City of Long Beach (Note 4) -- 1,533
Deferred compensation contracts 671 671
Accrued pipeline and seismic costs 640 --
Other 150 535
------------- -------------
$2,661 $5,106
============= =============
10
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(All Dollar Amounts in Thousands)
7) Cash Flow Information
---------------------
Cash interest expense paid, all of which arises from discontinued
operations, was $196 and $210 for the nine months ended June 30, 1996
and 1995, respectively.
Advances under the Funding Agreement for the nine months ended June
30, 1996 and 1995 have amounted $9,896 and $541, respectively. Of
these amounts, $6,520 and $541 have been capitalized for the
respective periods and $2,305 has been expensed for the nine months
ended June 30, 1996.
8) Discontinued Operations
-----------------------
Effective March 31 and September 4, 1991, respectively, the Company
adopted plans of disposal for its refining and marketing and real
estate segments. On September 15, 1993, the Company executed an
agreement for the sale of substantially all of its refining and
marketing segment. The transaction closed on October 1, 1993.
Further proceeds are to be received when certain components of the
refinery equipment are sold by the buyer.
Operating income (losses) of discontinued operations for the quarters
ended June 30, 1996 and 1995 were $135 and ($110), respectively.
Corresponding amounts for the nine-month periods were ($94) and
($318), respectively, and were charged against loss provisions
established in earlier periods. The Company recorded a loss
provision of $300 for discontinued operations for the quarter ended
March 31, 1995. No other loss provisions were recorded in the
subject periods.
In the agreement for the sale of the Fletcher refinery, the Company
indemnified the buyer as to liabilities in excess of $300 for certain
federal and state excise taxes arising from periods prior to the
sale. Fletcher notified the Company in July 1994 that an audit for
California Motor Vehicle Fuels Tax was underway and a preliminary
review by present Fletcher employees indicated that a significant
liability might exist. The Company retained a consultant to evaluate
the contingent liability. In September 1994, the Company accrued
$1,400 as a result of the consultant's evaluation. An additional
$650 was accrued in September 1995, primarily because of increases in
estimated amounts of penalties and interest which will be due. The
State of California issued a preliminary report in June 1996 which
concludes taxes and penalties of $10,820 are due as a result of the
audit. However, no final audit report or assessment has been issued
and Fletcher and the Company do not believe the preliminary report is
accurate. The buyer has notified the Company that it claims indemnity
in this matter. The Company is providing its consultant to Fletcher
to assist in disputing the preliminary report. The Company believes
the liability accrued is sufficient to provide for the amount that
will ultimately be paid based on the information available. However,
the State of California's audit is still in process and could result
in a liability different from that accrued when concluded.
11
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(All Dollar Amounts in Thousands)
8) Discontinued Operations (continued)
-----------------------------------
The balance of net assets of discontinued operations is comprised
solely of two parcels of land in the real estate segment. Changes in
this balance for the nine months ended June 30, 1996 are as follows:
Balance as of September 30, 1995 $2,978
Valuation provisions recorded --
Valuation provisions used 94
-------------
Balance at June 30, 1996 (Unaudited) $3,072
=============
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued
segments. The operating income (losses) from discontinued operations
for the quarters ended June 30, 1996 and 1995 include interest
expense of $65 and $68, respectively. Corresponding amounts for the
nine-month periods ended June 30, 1996 and 1995 were $196 and $205,
respectively.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
The Company's principal asset continues to be its interest in the Opon
Association Contract (the "Opon Contract"), an exploration concession
for an area in the Middle Magdalena Valley in Colombia, South America.
At the present time, the Company has no revenues from the Opon Contract
or other sources.
Opon Exploration
----------------
Hondo Magdalena Oil & Gas Limited ("Hondo Magdalena"), a wholly-owned
subsidiary, became involved in the Opon Contract through a farmout
agreement with Opon Development Company ("ODC") in 1991. In August
1993, Hondo Magdalena and ODC entered into a Farmout Agreement through
which Amoco Colombia Petroleum Company ("Amoco Colombia") earned a 60%
participating interest in the Opon Contract. To earn the interest,
Amoco Colombia paid $3.0 million in cash in 1993 and paid all of the
costs related to drilling the Opon No. 3 well in 1994. In addition,
Amoco Colombia paid Hondo Magdalena $5.0 million in October 1994 and
paid all but $2.0 million of Hondo Magdalena's costs for drilling the
Opon No. 4 well in 1995. Amoco Colombia, Hondo Magdalena and ODC have
interests in the Opon Contract (for other than the commercial area as
discussed below)of approximately 60%, 31% and 9%, respectively. Amoco
Colombia is the operator.
The Opon No. 3 well, completed in September 1994, was drilled to a depth
of 12,710 feet at a total cost of approximately $30.0 million. The well
tested at a daily rate of 45 million cubic feet of natural gas and 2,000
barrels of condensate. The hydrocarbons were tested from 1,118 feet of
perforations in the La Paz formation through a 42/64-inch opening at the
surface with 6,000 pounds-per-square-inch flowing tubing pressure.
Downhole restrictions prevented the well from testing at higher rates.
The Opon No. 4 well, completed in September 1995, was drilled to a depth
of 11,500 feet at a total cost of approximately $28.5 million. The well
tested at a daily rate of 58 million cubic feet of natural gas and 1,900
barrels of condensate. The hydrocarbons were tested from 1,022 feet of
perforations in the La Paz formation through a 40/64-inch opening at the
surface with 8,121 pounds-per-square-inch flowing tubing pressure.
These two wells have confirmed the existence of a significant natural
gas field.
As reported in the Company's 1995 Annual Report on Form 10-K, the Opon
Contract provides for the reduction of the Opon Contract area by 50% at
the end of the exploration period, September 30, 1995. Two more acreage
relinquishments are scheduled on September 30, 1997 and 1999. A
proposal relinquishing 50% of the area was accepted by Empresa
Colombiana de Petroleos ("Ecopetrol"), the Colombian national oil
company. The Opon Contract area now covers 25,021.5 hectares (61,828
acres). Management believes that the first relinquishment did not cause
13
the loss of significant exploration opportunities. Additional seismic
assessment of the Opon Contract area and the drilling of additional
wells will be necessary to evaluate the effects of further acreage
reductions.
As reported in the Company's 1995 Annual Report on Form 10-K, in July
1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol executed a
Memorandum of Understanding ("MOU") for the construction of a pipeline
and wellhead facilities and the sale of natural gas from the Opon
Contract area. Also as reported in the Company's 1995 Annual Report on
Form 10-K, the Colombian government formed the Comision de Regulacion de
Energia y Gas (Commission for the Regulation of Energy and Gas, "CREG"),
an agency of the Ministry of Mines and Energy, in 1995. CREG adopted
new regulations dealing with pricing and transportation of natural gas.
These regulations set a ceiling price for natural gas and a maximum rate
of return of 12.0% (after Colombian taxes, except for a 14% Remittance
Tax on foreign exchange returned to the United States) for pipeline
tariffs. The ceiling price has been interpreted to include costs or
fees for the processing of natural gas; therefore, processing costs
cannot be passed on to the buyer as contemplated in the MOU. Ecopetrol
was unwilling to provide the terms outlined in the MOU related to the
buyer's payment of gas processing fees and the 13.2% rate of return
(after Colombian taxes) included in the pipeline tariff because of these
new regulations.
The parties to the MOU are continuing to negotiate four contracts for
sale of natural gas, sale of liquid hydrocarbons, processing of natural
gas, and transportation through the planned pipeline to Barrancabermeja.
Management believes that the new contracts will achieve an arrangement
that is an economic equivalent to the terms of the MOU and comply with
the new CREG regulations. Three contracts, covering the sale of natural
gas, the sale of condensate and natural gas liquids, and the processing
of the gas stream are complete and have been signed by all parties.
These provide for: (i) the sale of 100 million cubic feet of natural gas
per day for the life of the Opon Contract at the regulated price
determined semi-annually by a formula based upon the average price
received by Ecopetrol for exported fuel oil during the prior two six-
month periods (currently US$1.20 per million British Thermal Units);
(ii) the sale of condensate and natural gas liquids at market-related
and market-indexed prices; and (iii) the processing of the gas stream at
Ecopetrol's El Centro gas processing plant for a fee of $0.20 per
thousand cubic feet of gas. The fourth contract, regarding
transportation, has not been completed. Remaining to be resolved is
which party will be operator of the pipeline. The three executed
contracts will not become effective until the fourth is completed and
signed.
As reported in the Company's 1995 Annual Report on Form 10-K, Ecopetrol
acquires a 50% interest in any commercial field after commerciality is
declared and reimburses the associate parties for 50% of the direct
exploration costs out of Ecopetrol's share of production. On May 8,
1996, Ecopetrol approved a commercial field of 2,500 acres that includes
the Opon No. 3 and No. 4 wells. Ecopetrol, Amoco Colombia, Hondo
Magdalena and ODC have interests in the commercial area of approximately
50%, 30%,15% and 5%, respectively. The commercial field is
14
substantially smaller than that requested by Amoco Colombia. The
commercial field may be enlarged by future drilling and/or additional
technical information, and additional fields may be established.
Ecopetrol will not pay for its share of expenditures to enlarge the
commercial field, or establish new fields, until the new fields are
proven successful and declared commercial. However, Ecopetrol will
participate in further development costs of the existing commercial
field. As described above and in the Company's 1995 Annual Report on
Form 10-K, Ecopetrol agreed in the MOU to reimburse in cash certain
costs related to the construction of the pipeline and wellhead
facilities.
Preliminary work for the pipeline began in late 1994. Engineering
design is complete and construction is now under way. Amoco Colombia
awarded the contract for the construction of the pipeline on July 10,
1996. Construction of the pipeline will require approximately five
months. However, completion of Ecopetrol's improvements to the El
Centro gas processing plant may delay commencement of full production
until the first half of calendar 1997.
The Opon No. 6 well will be the next well on the Opon Contract area and
is expected to commence October 1, 1996. This La Paz formation well
will be located to the north of Opon Nos. 3 and 4 wells, outside the
commercial area described above, and is intended to confirm the
existence of the natural gas reservoir in this area. If the Opon No. 6
well is successful, the well following the Opon No. 6 well is planned to
confirm the existence of the La Paz reservoir, and possibly commercial
quantities of oil, to the south of Opon Nos. 3 and 4 wells. The location
of this well and future wells will depend upon further analysis of
seismic information recently acquired over the subject area. If the
Opon No. 6 well is not successful, the next well is expected to be the
Opon No. 5 well, located within the commercial area, to support sales
commitments.
Amoco Colombia submitted a budget to Hondo Magdalena and ODC for
calendar 1996 on April 10, 1996. Hondo Magdalena approved capital
expenditures for wells and the pipeline projects, and certain other
expenditures, but did not approve the proposed overhead. As of this
date, no final budget has been approved for the current period. Hondo
Magdalena and ODC have each proposed compromise solutions to the
disputes over the amount of overhead and the allocation of overhead to
individual projects, but Amoco Colombia has not responded to these
proposals. Therefore, the disputes have not been resolved at this time.
The results of the Opon No. 3 and Opon No. 4 wells have confirmed the
existence of a significant natural gas field in the Opon Contract area.
The steps necessary to bring the discovered gas to market are
progressing. Amoco Colombia is negotiating a contract for the sale of
up to 60 million cubic feet of natural gas per day that will be used as
fuel to generate electricity in a power generation plant to be built
near the Opon field.
15
Corporate Activities
--------------------
The Company relocated its principal offices to Houston, Texas during
March 1996 to facilitate its relationships with Amoco Colombia, the
international oil and gas community in general, and travel to Colombia.
As reported in the Company's Current Report on Form 8-K dated January
18, 1996, and Proxy Statement dated January 29, 1996, Lonrho Plc,
together with certain of its subsidiaries completed a transaction on
January 5, 1996, through which Lonrho Plc and those subsidiaries now
control The Hondo Company, which, in turn, owns approximately 72.3% of
the issued and outstanding common stock of and controls the Company.
Prior to the transaction, control of the Company was effectively shared
by a Lonrho subsidiary with Robert O. Anderson and his sons.
In July 1996, the board of directors accepted, with deep regret, the
resignation of Robert O. Anderson for reasons of health. Mr. Anderson,
79, had been chairman of the board of the Company since 1988 and served
as president and chief executive officer of the Company from 1988 to
1993. He will hold the honorary title of Chairman Emeritus.
Discontinued Operations
-----------------------
Two of the Company's former business segments, refining and marketing
operations and real estate operations were discontinued in 1991.
In October 1995, the Company requested changes to an approved
remediation plan for the Newhall refinery site in Santa Clarita,
California. The staff of the Regional Water Quality Control Board, has
indicated that it will not recommend approval of those changes. The
Company plans to proceed with the standards of the original plan and has
requested bids from contractors to remove contaminated soil from
approximately 35 acres of the 105 acre tract.
An option to a developer on the Company's 11-acre Via Verde tract in
eastern Los Angeles county will expire on August 18, 1996 and management
does not expect it to be renewed. Management has discussed a potential
sale of the property to another interested party.
As reported in the Company's 1995 Annual Report on Form 10-K, in the
agreement for the sale of the Fletcher refinery, the Company indemnified
the buyer as to liabilities in excess of $0.3 million for certain
federal and state excise taxes arising from periods prior to the sale.
The Company has accrued a contingent liability of $2.1 million related
to an audit of California Motor Vehicle Fuels Taxes. Recently, the
auditor completed his work and supplied to Fletcher Oil and Refining
Company his preliminary report. The report indicates a tax liability,
with penalties and interest, of $10.8 million; however, no final audit
report or assessment has been issued and Fletcher and the Company do not
believe the preliminary report is accurate. The buyer has notified the
Company that it claims indemnity in this matter. The Company is
providing its consultant to Fletcher to assist in disputing the
preliminary report. The Company believes the liability accrued is
sufficient to provide for the amount that will ultimately be paid based
16
on the information available. However, the State of California's audit
is still in process and could result in a liability different from that
accrued when concluded.
Other
-----
As more fully described in Item 5 of the Company's 1995 Annual Report on
Form 10-K, because of continuing losses and decreases in shareholders'
equity, the Company does not fully meet all of the guidelines of the
American Stock Exchange for continued listing of its shares. Management
has kept the Exchange fully informed regarding the Company's present
status and future plans. Although the Company does not or may not meet
all of the guidelines, to date, the American Stock Exchange has chosen
to allow the Company's shares to remain listed. However, no assurances
can be given that the Company's shares will remain listed on the
Exchange in the future.
RESULTS OF OPERATIONS
Quarters ended June 30, 1996 and 1995
--------------------------------------
Results of continuing operations for the quarter ended June 30, 1996
amounted to a net loss of $2.3 million, or 17 cents per share. The
Company reported a net loss from continuing operations of $1.6 million,
or 12 cents per share, for the quarter ended June 30, 1995. No losses
from discontinued operations were reported in the subject periods.
The losses for the quarters ended June 30, 1996 and 1995 include $1.6
million and $1.5 million, respectively, for corporate general and
administrative expense and corporate interest expense. The loss for the
current period also includes the Company's share of operating, general
and administrative and exploration expenses of $0.1 million, $0.4
million and $0.1 million, respectively, related to the Opon Contract.
Similar expenses in the quarter ended June 30, 1995 were borne by Amoco
Colombia in accordance with the terms of the August 1993 Farmout
Agreement.
Nine months ended June 30, 1996 and 1995
----------------------------------------
Results of continuing operations for the nine months ended June 30, 1996
amounted to a net loss of $9.2 million, or 67 cents per share. The
Company reported a net loss from continuing operations of $4.8 million,
or 37 cents per share, for the nine months ended June 30, 1995. Results
for the nine months ended June 30, 1995 also included a discontinued
loss provision of $0.3 million, or 2 cents per share.
The losses for the nine months ended June 30, 1996 and 1995 include $4.9
million and $4.5 million, respectively, for corporate general and
administrative expense and corporate interest expense. The loss for the
current nine-month period also includes the Company's share of
operating, general and administrative and exploration expenses of $0.2
17
million, $2.2 million and $1.8 million, respectively, related to the
Opon Contract. Similar expenses for the nine months ended June 30, 1995
were borne by Amoco Colombia in accordance with the terms of the August
1993 Farmout Agreement.
Management expects losses from continuing operations to continue until
revenue generation in Colombia commences, which is expected to occur no
earlier than the first half of calendar 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 1996 cash inflows of $1.3 million
and $0.2 million arose from borrowings from Lonrho Plc under existing
loan agreements and the issuance of common stock as a result of the
exercise of stock options, respectively. The Company utilized cash of
$1.8 million and $0.2 million to finance continuing and discontinued
operations, respectively, and made scheduled debt repayments of $0.2
million. In addition, the Company contributed $0.7 million towards its
share of costs incurred in Colombia during the nine month period. At
June 30, 1996, the Company had cash balances of $0.4 million.
In December 1993, the Company restructured the terms of its debts to
Lonrho Plc. The revised terms included reduction of interest rates to a
fixed rate of 6% and provisions allowing the Company to offer payment of
future interest in shares of its common stock, and allowing Lonrho Plc
to either accept such payment in kind or add the amount of the interest
due to principal. The ability to pay interest in kind or capitalize
interest allows the Company to service its debt while cash resources are
scarce.
In October 1994, the Company received $4.8 million, net of withholding
taxes, from Amoco Colombia in accordance with the Farmout Agreement.
Also in October 1994, the Company paid $5.0 million to Lonrho Plc to
reduce the balance of outstanding loans from Lonrho Plc, and future
interest expense. At the same time, Lonrho Plc made available $5.0
million in the form of a facility loan that may be drawn as needed by
the Company. This facility loan was used in April 1995 to fund Hondo
Magdalena's $2.0 million contribution to the costs of drilling the Opon
No. 4 well and to finance other business activities. As of June 30,
1996, $0.5 million of the facility loan is available for future draws.
In December 1995, the Company obtained extensions of the maturity of its
debts to Lonrho Plc. The maturity of all loans from Lonrho Plc was
extended from not earlier than October 1, 1996 to not earlier than
October 1, 1997. Lonrho Plc transferred all of its interest in debts of
the Company to its wholly-owned subsidiary, Thamesedge, Ltd. by an
assignment dated March 29, 1996.
As reported in the Company's 1995 Annual Report on Form 10-K, on May 5,
1995, Hondo Magdalena, ODC and Amoco Colombia entered into a Funding
Agreement for Tier I Development Project costs (the "Funding Agreement")
for the interim financing of costs associated with the construction of a
pipeline from the Opon Contract area and certain other costs related to
the Opon Contract. The Funding Agreement became effective on July 26,
18
1995 with the execution of the MOU. Hondo Magdalena may finance its
share of the costs (including overhead) for the pipeline and a
geological and geophysical work program for up to 365 days after the
date that production from the Opon Contract area begins. The Funding
Agreement provides that Hondo Magdalena may repay the amounts financed
from prior to the date of first production until 365 days thereafter,
along with an equity premium computed on a 22% annualized interest rate.
The equity premium will be computed monthly on Hondo Magdalena's share
of expenditures (including any amounts to be later recouped from
Ecopetrol after commerciality). Alternatively, from the date of first
production until 90 days thereafter, Hondo Magdalena may elect to repay
125% of its share (excluding any amounts to be later recouped from
Ecopetrol after commerciality) of the total costs accumulated up to the
date of repayment. If the financed amounts are not repaid within 365
days after the date of first production, an additional penalty of 100%
of the amount then due would be recovered out of Hondo Magdalena's
revenues. Hondo Magdalena's revenues from production of the first 80
million cubic feet of natural gas and corresponding condensate and
natural gas liquids are pledged to secure its obligations under the
Funding Agreement.
The Company has obtained an additional facility loan of $13.5 million in
a Revolving Credit Agreement dated as of June 28, 1996, between the
Company and Thamesedge, Ltd. The facility is to be used for Hondo
Magdalena's requirements for the Opon project and for general corporate
expenses. The interest rate is 13%, due October 1, 1996 and April 1,
1997; as provided in other debts to Thamesedge and described above, the
Company may make payment of interest in shares of its common stock. The
loan matures on June 30, 1997.
Lonrho Plc has recently announced that it intends to make major
corporate changes in the near future. These include selling hotel
interests to the public and dividing the remaining assets into separate
companies for mining and non-mining assets. These changes, if and when
effected, may change the relationships the Company has with its
controlling shareholder and principal lender. Management cannot predict
what such changes, if any, will be.
Based upon the Company's present projections and other available
information, management believes existing cash, available facilities,
and the Funding Agreement will be sufficient to finance the Company's
known obligations (the pipeline and related facilities, wells to be
drilled in calendar 1996, overhead obligations unrelated to capital
projects and other business activities) through December 1996.
Management has not yet received a proposed budget for operations at the
Opon project in calendar 1997. However, management believes the Company
will need additional cash to participate in the continued development of
the Opon project beyond calendar 1996. If the Company becomes obligated
for the drilling of additional wells, or other capital projects that it
cannot fund, the Company has the option not to participate in some or
all of the capital projects. In management's view, use of this election
would be a last resort to preserve the Company's existing interest in
the Opon Contract area because substantial penalties would be incurred
by not participating.
19
Cash from operations is not expected to be a source of funds until the
Opon project begins commercial production. Management has continued
discussions with financial institutions regarding financing of the
Company's future obligations for the Opon project. Management presently
believes that permanent financing may not be forthcoming until the
contingencies regarding the Company's ability to bring natural gas to
market are resolved. While the Company will continue to seek permanent
financing, there can be no assurance that the Opon Project will be
successfully developed or that additional debt or equity funds will
become available.
PART II
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-K are incorporated
by reference. Refer to Exhibit Index on page 21.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date: August 14, 1996 /s/ Stanton J. Urquhart
_______________ _______________________
Stanton J. Urquhart
Vice President and
Controller
The above officer of the registrant has signed this report as its duly
authorized representative and as its chief accounting officer.
20
EXHIBIT INDEX
Exhibit
Number Subject
_______ __________________________________
10.1 Revolving Credit Agreement dated as of June
28, 1996 between the Company and Thamesedge,
Ltd., excluding exhibits and schedules.
10.2 Note dated June 28, 1996, for $13,500,000
from the Company to Thamesedge, Ltd.
delivered pursuant to the Revolving Credit
Agreement (Exhibit 10.1, above).
10.3 Guaranty dated as of June 28, 1996 of Hondo
Magdalena Oil & Gas Limited guaranteeing the
obligations of the Company under the
Revolving Credit Agreement (Exhibit 10.1,
above).
27 Financial Data Schedule
21
REVOLVING CREDIT AGREEMENT
--------------------------
This Agreement is made as of June 28, 1996 between HONDO OIL & GAS
COMPANY, a Delaware corporation (the "Borrower"), and THAMESEDGE, LTD.,
a United Kingdom corporation (the "Lender").
RECITALS
The Borrower has requested that Lender advance to it monies to be
used exclusively as follows:
- $12,000,000 for Borrowers wholly owned subsidiary, Hondo
Magdalena Oil & Gas Limited ("Hondo Magdalena"), for its requirements
pursuant to the OPON Budget hereinafter defined; and
- $1,500,000 to meet Borrower's corporate general and
administrative expenses.
WHEREAS, the Lender has agreed to make revolving advances to the
Borrower from time to time in an aggregate amount not to exceed
$13,500,000 of principal at any time outstanding plus all accrued
interest.
ARTICLE I
INTERPRETATION AND DEFINITIONS
SECTION 1.01 Definitions. The following terms, as used herein,
shall have the following respective meanings:
"AMEX" means the American Stock Exchange.
"Advances" has the meaning set forth in Section 2.01.
"Business Day" means any day of the year on which banks are not
required or authorized to close in London or Houston, Texas.
"Closing Date" has the meaning set forth in Section 3.01.
"Code" means the Internal Revenue Code of 1986.
"Commitment" has the meaning set forth in Section 2.01.
"Credit Documents" means this Agreement, the Note, and the
Guaranty.
"Debt" means, as to any Person, all (a) indebtedness for borrowed
money, (b) obligations evidenced by bonds, debentures, notes or other
similar instruments, (c) obligations to pay the deferred purchase price
of property or services, (d) obligations as lessee under leases that
1
have been or should be, in accordance with generally accepted
accounting principles, recorded as capital leases, (d) obligations
under direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or
otherwise to assure a creditor against loss in respect of, indebtedness
or obligations of others of the kinds referred to in clauses (a)
through (d) above, and (f) liabilities in respect of unfunded vested
benefits under plans covered by Title IV or ERISA.
"Default" means any event or condition that would, with the giving
of any requisite notice and/or the passage of any requisite period of
time, constitute an Event of Default.
"Event of Default" has the meaning set forth in Section 6.01.
"Free Cash Flow" means that amount of Borrower's net income
attributable to Hondo Magdalena reported each year in accordance with
GAAP as applicable to the international petroleum industry, applied
consistently after deduction of all expenses incurred by Borrower or
Hondo Magdalena in each respective year which are directly related to
the operations of Hondo Magdalena in Colombia including, but not
limited to: (i) Hondo Magdalena's share of royalty and other financial
obligations due the government of Colombia; (ii) Hondo Magdalena's
share of operating expenses under operating agreements and the
Association Contract of 15th July 1987; (iii) overhead and general and
administrative expenses attributable to operating agreements and the
Association Contract of 15th July 1987; and (iv) remittance and income
taxes.
"GAAP" means generally accepted accounting principles for the
United States or Columbia, as applicable.
"Governmental Action" means any authorization, approval, consent,
waiver, exception, license, filing registration, permit, notarization,
special lease or other requirement of any Governmental Person.
"Governmental Person" means, whether domestic or foreign, any
national, federal, state or local government, any political subdivision
thereof or any governmental, quasi-governmental (including, without
limitation, AMEX or other markets in which Borrower's securities are
traded), judicial, public, statutory or regulator instrumentality,
authority, body, bureau or entity, including any central bank and any
comparable authority.
"Governmental Rule" means any treaty, law, rule, regulation,
ordinance, order, code, interpretation, judgment, writ, injunction,
decree, directive, guideline, policy or similar form of decision of any
Governmental Person.
"Guaranty" means the Guaranty of Hondo Magdalena substantially in
the form of Exhibit B.
2
"Guarantor" means Hondo Magdalena.
"Lien" means, with respect to any asset, (a) any lien, charge,
claims, mortgage, security interest, pledge, negative pledge or other
encumbrance of any kind in respect of such asset or (b) the interest of
a vendor or lessor under any conditional sale agreement, capital lease
or other title-retention agreement relating to such asset.
"Note" means the Promissory Note of the Borrower substantially in
the form of Exhibit A.
"OPON" means the Op n Association Contract dated July 15, 1987
between Empresa Colombiana de Petroleos ("Ecopetrol") and Opon
Development Company.
"OPON Budget" means the budget for the calendar year 1996 in
connection with OPON, prepared by Amoco Colombia Petroleum Company and
submitted at the operating committee meeting on April 10, 1996, a copy
of which has been previously supplied to Lender.
"Person" means any individual, partnership, corporation (including
a business trust), joint stock company, trust, unincorporated
association, joint venture or other entity, or any Governmental Person.
"PIK Shares" means the securities, assets or property issued as
payment in kind for interest on Advances pursuant to Section
2.05(b)(i).
"Termination Date" means June 30, 1997 or the earlier date of
termination of the Commitment pursuant to Section 6.01.
SECTION 1.02 Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP
on a basis consistent with that used in the preparation of the
financial statements referred to in Section 4.01(e).
SECTION 1.03 Interpretation. In the Agreement the singular
includes the plural and the plural the singular; words importing any
gender include the other genders; references to statutes are to be
construed as including all statutory provisions consolidating, amending
or replacing the statute referred to; references to "writing" include
printing, typing, lithography and other means of reproducing words in a
tangible visible form; the words "including," "includes" and "include"
shall be deemed to be followed by the words "without limitation";
references to articles, sections (or subdivisions of sections),
exhibits, annexes or schedules are to those of this Agreement unless
otherwise indicated; references to agreements and other contractual
instruments shall be deemed to include all subsequent amendments and
other modifications to such instruments, and references to Persons
include their respective permitted successors and assigns.
3
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01 The Advances. The Lender agrees, on the terms and
conditions hereinafter set forth, to make advances (the "Advances") to
the Borrower from time to time during the period from the date hereof
until the Termination Date in an aggregate amount not to exceed at any
time outstanding $13,500,000, as such amount is reduced from time to
time pursuant to Section 2.03 (the "Commitment"). Each Advance shall
be in an amount not less than $1,000,000 and, if greater shall be in
increments of $100,000. Within the limits of the Commitment, the
Borrower may borrow, prepay pursuant to Section 2.04(a) and reborrow
under this Section 2.01.
SECTION 2.02 Making the Advances. Each Advance shall be made on
at least three Business Days notice from the Borrower to the Lender
specifying the date and amount thereof. Not later than 10:00 a.m.,
London time, on the date of such Advance and upon fulfillment of the
applicable conditions set forth in Article III, the Lender will make
such Advance available to the Borrower in immediately available funds
at such account and location as Borrower may designate in writing.
SECTION 2.03 Optional and Mandatory Reductions of Commitment.
Without any notice to the Borrower or any other action by an Person,
the Commitment shall be automatically and permanently reduced (i) by an
amount equal to the aggregate principal amount of the Advances repaid
(or due but not repaid) pursuant to Section 2.04(c)(i); (ii) advances
repaid (or to be repaid) in kind pursuant to Section 2.05(b); and (iii)
in accordance with Section 6.01.
SECTION 2.04 Optional and Mandatory Prepayments of Advances.
(a) The Borrower may, upon at least three Business Day's notice
to the Lender stating the proposed date and amount of the prepayment,
prepay the Advances in whole or in part with accrued interest to the
date of such prepayment on the amount prepaid, provided that each
partial prepayment shall be in a principal amount not less than
$100,000.
(b) The Borrower shall immediately repay to the Lender, and there
shall become due and payable by the Borrower an amount equal to the
amount by which the aggregate amount of the Advances outstanding
exceeds the Commitment at any time.
(c) The Borrower shall immediately repay to the Lender, and there
shall become due and payable by the Borrower, an amount equal to 75% of
Free Cash Flow immediately upon receipt by OPON
(for avoidance of doubt said 75% being over and above the 5% net
profits interest agreed to be paid by Borrower to Lender pursuant to
agreement among Borrower, Lender and Lonrho Plc dated as of December
18, 1992, as amended.)
4
SECTION 2.05. Principal and Interest.
(a) The Borrower shall repay the unpaid principal amount of each
Advance, and shall pay interest on each Advance, in accordance with the
terms of the Note.
(b) Notwithstanding the foregoing:
(i) Payment in Kind. If, in the opinion of management, Borrower
does not have sufficient cash resources to pay interest on any of
the Advances when due, then Borrower may offer to Lender a payment
of the interest in shares of Borrower's common stock, valued at
(i) the last reported sales price regular way on the interest due
day or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way
on such day, in either case on AMEX or other principal national
securities exchange on which the Borrower's Common Stock is listed
or, if not listed on any national securities exchange, on The
Nasdaq Stock Market's National Market System or, (ii) if (i) is
not applicable, the average of the bid and asked prices at the end
of the interest due day in the over-the-counter market as
furnished by any New York Stock Exchange member firm selected by
the Lender in good faith for that purpose. In making this
determination, the Borrower's management will not, without the
consent of Lender allocate cash resources to new capital projects
not related to OPON. Lender will then notify Borrower whether it
will either accept the payment of interest in kind or add the
amount of interest due to the principal of the note. If Lender
accepts the payment of interest in kind, Borrower will issue the
requisite number of shares to Lender within ten business days
after Borrower receives notice of acceptance from Lender in the
same manner as provided in other loans between Borrower and
Lender.
(ii) Unregistered Shares. Lender recognizes that any PIK Shares
will not have been registered under the Securities Act of 1933 and
may not be sold in the absence of an effective registration under
said Act or an exemption from the registration requirements of
said Act.
(iii) Registration Rights. If Lender so requests at any time and
from time to time, Borrower will use its best efforts to promptly
effect registration under the Securities Act of 1933 of the PIK
shares so issued.
SECTION 2.06 Payments and Computations.
(a) The Borrower shall make each payment under the Note and any
Credit Document not later than 12:00 noon, London time, on the day when
due in lawful money of the United States of America to the Lender at
such account and location as it may designate, in immediately available
funds. All computations of interest under the Note shall be made by
5
the Lender on the basis of a year of 360 days and the actual number of
days (including the first day but excluding the last day) occurring in
the period for which such interest is payable.
(b) Any amount payable under the Note or any Credit Document not
paid when due shall bear interest until paid at the rate specified in
the Note for late payments.
SECTION 2.07 Payment on Non-Business Days. Whenever any payment
to be made under the Note or any Credit Document shall be due on a day
other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case
be included in the computation of payment of interest.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01 Conditions Precedent to Effectiveness. The
Agreement shall become effective on the day (the "Closing Date") that
is the later of June 28, 1996 or when the Lender shall have received
all of the following, each dated the Closing Date and otherwise in form
and substance satisfactory to the Lender shall have been delivered to
Lender; provided, however, that this Agreement shall be null and void
(including as to the Commitment) unless all the following shall have
occurred or been delivered to Lender on or prior to July 29, 1996:
(a) the Note executed by the Borrower;
(b) copies of the resolutions of the Board of Directors of the
Borrower unanimously authorizing this Agreement and the Note and the
transactions contemplated hereby and thereby, certified by the
Secretary of the Borrower to be in full force and effect, and all
documents evidencing other necessary corporate action and governmental
approvals, if any, with respect to this Agreement and the Note;
(c) a certificate of the Secretary of the Borrower certifying the
names and true signatures of the officers of the Borrower authorized to
sign this Agreement and the Note and the other documents to be
delivered by the Borrower hereunder;
(d) the Guaranty executed by the Guarantor;
(e) copies of resolutions of the board of directors of Guarantor
authorizing the Guaranty, certified by the Secretary or Assistant
Secretary of such Guarantor to be in full force and effect together
with all other documents evidencing other necessary corporate action
and governmental approvals, if any, with respect to the Guaranty;
(f) a certificate of the Secretary or Assistant Secretary of
Guarantor certifying the names and true signatures of the officers of
the Guarantor authorized to sign the Guaranty and the other documents
6
to be delivered by Guarantor hereunder;
(g) certificates of good standing of each of the Borrower and the
Guarantor, dated as of a recent date, from appropriate officials of the
state of incorporation of such company;
(h) a favorable opinion of Charles B. McDaniel, Esq. as counsel
for the Borrower and as counsel for Guarantor covering such matters as
may be required by Lender; and
(i) a letter from Charles B. McDaniel, Esq. as the "Process
Agent" pursuant to which the Process Agent agrees to act as process
agent for Borrower and Guarantor and to forward forthwith to Borrower
and Guarantor all process received by the Process Agent.
SECTION 3.02 Conditions Precedent to All Advances. The
obligation of the Lender to make each Advance shall be subject to the
further conditions precedent that on the date of such Advance:
(a) the representations and warranties contained in Section 4.01
are correct on and as of the date of such Advance as though made on and
as of such date;
(b) no event has occurred and is continuing, or would result from
such Advance, that constitutes a Default or an Event of Default; and
(c) The Lender shall have received such other approvals, opinions
and documents as the Lender may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01 Representations and Warranties of the Borrower. The
Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of Delaware and is duly
qualified, in good standing and authorized to do business in all other
jurisdictions within the United States wherein the character of the
properties owned or held by it or the nature of the business transacted
by it makes such qualification necessary. The Borrower has taken all
actions and procedures customarily taken in order to enter, for the
purpose of conducting business or owning property, each jurisdiction
outside the United States wherein the character of the properties owned
or held by it or the nature of the business transacted by it makes such
actions and procedures desirable.
(b) The execution, delivery and performance by the Borrower of
the Credit Documents to which it is a party and the consummation of the
transactions contemplated hereby and thereby, are within the Borrower's
7
corporate powers, have been duly authorized by all necessary corporate
action and do not contravene (i) the Borrower's charter documents or
bylaws or (ii) any applicable Governmental Rule, (including, without
limitation, AMEX or other markets in which Borrower's securities are
traded) or any contractual restriction binding on or affecting the
Borrower.
(c) No Governmental Action is required for the due execution,
delivery and performance by the Borrower of this Agreement, or any
Credit Documents or the consummation of the transactions contemplated
hereby and thereby.
(d) The Credit Documents to which the Borrower is a party when
delivered hereunder will be, legal, valid and binding obligations of
the Borrower enforceable against the Borrower in accordance with their
respective terms.
(e) The consolidated balance sheet of the Borrower and its
subsidiaries as of September 30, 1995 and 1994 and the related
statements of operations, changes in stockholders' equity and cash
flows of the Borrower and its subsidiaries for the years then ended,
audited by Ernst & Young and copies of which have been delivered to the
Lender, fairly present in conformity with generally accepted accounting
principles the financial position of the Borrower and its subsidiaries
as of such dates and the results of the operations and cash flows for
such periods. No material adverse change has occurred in the financial
position, results of operations or business or prospects of the
Borrower since September 30, 1995 except as described in documents on
file by Borrower with the Securities and Exchange Commission, copies of
which have been delivered to Lender, or of which Lender has actual
knowledge..
(f) There is no fact that the Borrower has not disclosed in
writing to the Lender, or of which Lender has actual knowledge, that
has or will have a material adverse effect on the financial condition
of the Borrower or the ability of the Borrower to perform any of its
obligations under any Credit Documents or the Guarantor under any
Credit Documents.
(g) There are no actions, suits or proceedings pending against
or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any subsidiary of the Borrower that could materially
and adversely affect the financial condition or operations of the
Borrower or any such subsidiary of the Borrower or the ability of the
Borrower or the Guarantor to perform its obligations under any Credit
Documents, except as described in the financial statements referred to
in Section 4.01(e).
(h) The obligations of the Borrower under this Agreement and the
Guarantor under the Guarantee will rank at least pari passu with all
claims of other senior creditors of the Borrower and the Guarantor, as
the case may be.
8
(i) The Borrower, the Guarantor and each of their subsidiaries
have good title to their respective assets, and the same are not
subject to any Liens.
The only permitted exceptions to the Representations and
Warranties set forth above are set forth in Schedule 1 attached hereto.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01 Covenants of the Borrower. So long as any amount due
hereunder or under the Note or any other Credit Document shall remain
unpaid or the Lender shall have any Commitment hereunder, the Borrower
will, unless the Lender shall otherwise consent in writing, comply in
all respects with the following:
(a) The Borrower and its subsidiaries will at all time maintain
full and accurate books of account and records in conformity with GAAP.
The Borrower and its subsidiaries will maintain a standard system of
accounting and will furnish the following statements and reports to the
Lender at the Borrower's expense:
(i) as soon as available and in any event within 120 days after
the end of each fiscal year of the Borrower, complete consolidated
financial statements of the Borrower and its subsidiaries,
together with all notes thereto, prepared in reasonable detail in
accordance with GAAP, together with an opinion, based on an audit
using generally accepted auditing standards by Ernst & Young or
other independent certified public accountants selected by the
Borrower and acceptable to the Lender, stating without exception
or qualification that such financial statements have been prepared
in accordance with GAAP consistently applied and present fairly,
in all material respects, the consolidated financial position,
result of operations and cash flows presented, such financial
statements to contain a balance sheet as of the end of such fiscal
year and statements of earnings, stockholders' equity and cash
flows for such fiscal year, each setting forth in comparative form
the corresponding figures for the preceding fiscal year;
(ii) as soon as available and in any event within 120 days after
the end of each fiscal year of Guarantor complete consolidated
financial statements of Guarantor together with all notes thereto,
prepared in reasonable detail in accordance with GAAP
internationally recognized in the industry, together with an
opinion, based on an audit using generally accepted auditing
standards by Ernst & Young or other independent certified public
accountants acceptable to the Lender, stating without exception
or qualification that such financial statements have been prepared
in accordance with GAAP consistently applied and present fairly,
in all material respects, the consolidated financial position, and
9
result of operations and cash flows presented, such financial
statements to contain a balance sheet as of the end of such fiscal
year, a consolidated profit and loss statement for such fiscal
year and a statement of cash flows for such fiscal year, each
setting forth in comparative form the corresponding figures for
the preceding fiscal year;
(iii) as soon as available, and in any event within 60 days after
the end of each fiscal quarter of the Borrower, the Borrower's
consolidated balance sheet as of the end of such fiscal quarter
and statements of the Borrower's consolidated earnings, and cash
flows for such quarter and for the period from the beginning of
the then current fiscal year to the end of such fiscal quarter all
in reasonable detail and prepared in accordance with GAAP, subject
to changes resulting from normal year-end adjustments; and,
together with each such set of financial statements and each set
of financial statements furnished under subsection (i) of this
section, a certificate signed by the chief financial officer of
the Borrower stating that financial statements are accurate and
complete and present fairly, in all material respects, the
consolidated financial position and result of operations
presented, stating that the chief financial officer of the
Borrower has reviewed this Agreement and that no Default or Event
of Default exists at the time of such certificate or, if he
concludes that a Default or Event of Default exists, specifying
its nature and the action being taken or proposed to be taken with
respect thereto;
(iv) forthwith upon the occurrence of any Default or Event of
Default, a certificate of the chief financial officer of the
Borrower setting forth the details thereof and the action that the
Borrower is taking or proposes to take with respect thereto;
(v) promptly upon the mailing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy
statements so mailed:
(vi) promptly after the Borrower has become aware of the same,
notice of all pending or threatened litigation or arbitration
proceedings and proceedings before any Governmental Person that
could materially and adversely affect the financial condition or
operations of the Borrower or the Guarantor;
(vii) promptly upon any such occurrence, written notice to the
Lender of any sale of assets by the Borrower in excess of $150,000
in any one transaction; and
(viii) from time to time such additional information regarding
the financial position, results of operations, cash flows or
business or prospects of the Borrower or the Guarantor as the
Lender may reasonably request.
10
(b) The Borrower will preserve and maintain its, and cause its
subsidiaries to preserve and maintain their corporate existence and all
of its right, privileges and franchises necessary or desirable in the
normal conduct of its business and will conduct its business in a
regular manner. The Borrower will notify the Lender 30 days in advance
of any change in the location of its or any of its subsidiary's
principal place of business, of the establishment or discontinuance of
its principal place of business or of a change in the corporate name,
trade names or articles of incorporation or bylaws of the Borrower or
any subsidiary of the Borrower.
(c) The Borrower will keep, and will cause each of its
subsidiaries to keep, all of its properties necessary, in the
reasonable judgment of its Board of Directors, in its business in good
working order and condition, ordinary wear and tear excepted, and will
permit representatives of the Lender to inspect such properties and to
examine and make extracts from the books and records of the Borrower
and its subsidiaries during normal business hours.
(d) The Borrower will comply with the requirements of all
applicable Governmental Rules, a breach of which could have a material
adverse effect on the consolidated financial condition or the business
taken as a whole of the Borrower and its subsidiaries, except where
contested in good faith and by proper proceedings.
(e) The Borrower will, and will cause its subsidiaries to, keep
proper books of records and accounts in which full, true and correct
entries in conformity with GAAP shall be made of all dealings and
transactions in relation to the Borrower's and its subsidiaries'
business and activities. The Borrower will, and will cause its
subsidiaries to, permit representatives of the Lender to visit and
inspect all of its and its subsidiaries' properties to the extent
permitted by applicable law and applicable safety and security policies
of the Borrower and its subsidiaries (and to the extent such visitation
and inspection shall not interfere with the normal operations of the
Borrower and its subsidiaries) and to examine, subject to proprietary
and confidentiality policies and agreements of or binding upon the
Borrower and its subsidiaries, any or all of their books and records
and to discuss their affairs, finances and accounts with their officers
and employees, subject to proprietary and confidentiality policies and
agreements of or binding upon the Borrower and its subsidiaries, all at
such reasonable times and as often as may reasonably be desired.
(f) The Borrower will pay and discharge all taxes, assessments,
governmental charges and levies imposed on it, on its income or profits
or on any of its property prior to the date on which interest and
penalties attach thereto, except that the Borrower will not be required
hereby to pay any such tax, assessment, charge or levy the payment of
which is being contested in good faith and by proper proceedings and
against which it is maintaining adequate reserves.
(g) The Borrower will, and will cause its subsidiaries to,
11
maintain insurance with responsible companies in such amounts and
against such risks as is usually carried by owners of similar
businesses and properties in the same general areas in which they
operate.
(h) The Borrower will not create or suffer to exist any Lien upon
or with respect to any of its properties, whether now owned or
hereafter acquired, or assign any right to receive income, except as
set forth on Schedule 1.
(i) The Borrower will not (A) consolidate with or merge into any
other Person or (B) sell, lease or otherwise transfer all or any
substantial part of its assets to any other person.
(j) The Borrower will not take any action that would result in
the Borrower's obligations to the Lender under this Agreement and the
Note not ranking at least pari passu in right of payment with all
senior obligations of the Borrower to other creditors unless approved
by Lender.
(k) The Borrower will use the proceeds of this loan in the manner
specified in the recitals first above written.
(l) The Borrower will undertake no new capital projects not
related to OPON of any type for so long as any monies remain due under
any of the Credit Documents.
(m) The Borrower will not sell, pledge, encumber transfer or in
any way adversely affect the shares of or the assets held by Hondo
Magdalena and it will similarly cause Hondo Magdalena to do likewise.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01 Events of Default. If any of the following events
(each an "Event of Default") shall occur and be continuing:
(a) the Borrower shall fail to pay any installment of principal
of, or interest on, the Advances and/or other amounts payable under
this Agreement, the Note or any Credit Document when due and such
failure shall remain unremedied for 3 days;
(b) the Borrower or Guarantor shall fail to perform or observe
any other term, covenant or agreement contained in any Credit Document
on its part to be performed or observed and any such failure shall
remain unremedied for 10 days after written notice thereof shall have
been given to the Borrower or Guarantor (as the case may be) by the
Lender;
(c) any representation or warranty made by the Borrower or
12
Guarantor (or any of their officers) in or in connection with any
Credit Document or Advance shall prove to have been incorrect in any
material respect when made;
(d) the Borrower, Guarantor and any of their respective
subsidiaries shall (i) fail to pay any Debt (but excluding indebtedness
evidenced by the Note) of the Borrower, Guarantor or such subsidiary
(as the case may be), or any interest or premium thereon, when due
(whether upon scheduled maturity, required prepayment, acceleration,
demand or other notice or formality of any kind) and such failure shall
continue after the applicable grace period, if any, specified in the
agreement or instrument relating to such Debt or (ii) fail to perform
or observe any term, covenant or condition on its part to be performed
or observed under any agreement or instrument relating to any such
Debt, when required to be performed or observed, and such failure shall
continue after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such failure to perform or
observe is to accelerate, or to permit the acceleration of, the
maturity of such Debt; or any such Debt shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof;
(e) the Borrower, Guarantor or any of their respective
subsidiaries shall generally not pay its debts as they become due,
shall admit in writing its inability to pay its debts or shall make a
general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against the Borrower, the Guarantor or any of
their respective subsidiaries seeking to adjudicate it a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or
its Debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order
for relief or the appointment of a receiver, trustee, or other similar
official for it or for any substantial part of its property; or the
Borrower, Guarantor or any of their respective subsidiaries shall take
any corporate or other action to authorize any of the actions set forth
above in this paragraph (e);
(f) a final judgment or order for the payment of money in excess
of $75,000 shall be rendered against the Borrower, the Guarantor or any
of their subsidiaries, and any such judgment or order shall continue
unsatisfied and in effect for a period of 60 consecutive days;
(g) any of the Credit Documents shall be terminated, repudiated
or contested in any respect, any material provision of any of the
Credit Documents shall for any reason cease to be valid and binding on
the Borrower or Guarantor, Guarantor shall breach any obligation set
forth in its Guaranty or there shall be a material adverse change in
the financial condition of the Borrower or Guarantor affecting the
ability of the Borrower or Guarantor to perform their respective
obligations under the Note or the Guaranty; then, and in any such
event, the Lender may, by notice to the Borrower, (i) declare the
13
Commitment to make Advances to be terminated, whereupon the same shall
forthwith terminate, and/or (ii) declare all Advances, all interest
thereon and all other amounts payable under this Agreement the Note and
all Credit Documents to be forthwith due and payable, whereupon the
Advances, all such interest and all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01 Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Note, or consent to any departure by
the Borrower therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Lender, and then such waiver or
consent shall be effective only in the specific instance and for the
specific purpose for which given.
SECTION 7.02 Notices, Etc. Except as otherwise specifically
provided in this Agreement all notices and other communications
provided for hereunder shall be in writing and shall be delivered to
the addressees at the applicable addresses set forth below by mail,
telecopy, Federal Express or other equivalent overnight carrier or by
telephone (confirmed in writing within 24 hours) or telecopy or hand-
delivered, if to the Borrower, to it at Hondo Oil & Gas Company, 10375
Richmond Avenue, Suite 900, Houston, TX 77042, telephone (713) 954-
4600, telecopier (713) 954-4601, Attention: Charles B. McDaniel, Esq.;
if to the Lender, to it at Thamesedge, Ltd., 4 Grosvenor Place, London,
SW1X 7DL England, telephone 011-44-171-201-6000, telecopier 011-44-171-
201-6100, Attention Robin Whitten with a copy to Rudolph H. Funke, Esq.
at 805 Third Avenue, 18th Floor, New York, NY 10022, telephone 212-715-
7001, telecopy 212-838-8141; or, as to each party, to it at such other
address as shall be designated by such party in a written notice to the
other party. All such notices and communications shall, except that
notices to the Lender pursuant to the provisions of Article II shall
not be effective until received by the Lender.
SECTION 7.03 No Waiver; Remedies. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder or
under the Note shall operate as a waiver thereof, nor shall any single
or partial exercise of any right hereunder or under the Note preclude
any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law.
SECTION 7.04. Costs, Expenses and Taxes. The Borrower agrees to
pay on demand all out-of-pocket costs and expenses in connection with
the preparation, execution, delivery, administration and amendment of
this Agreement, the Note, the Guaranty and the other Credit Documents
14
to be delivered hereunder, including the reasonable fees and out-of-
pocket expenses of counsel for the Lender with respect thereto and with
respect to advising the Lender as to its rights and responsibilities
under this Agreement, and all costs and expenses, if any (including
reasonable fees and expenses of counsel), in connection with the
enforcement of this Agreement, the Note, the Guaranty and the other
Credit Documents to be delivered hereunder. In addition, the Borrower
shall pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this
Agreement, the Note and the other Credit Documents to be delivered
hereunder, and agrees to save the Lender harmless from and against any
and all liabilities with respect to or resulting from any delay in
paying or omission to pay such taxes.
SECTION 7.05 Right of Setoff. Upon the occurrence and during the
continuance of any Event of Default, the Lender is hereby authorized at
any time and from time to time, without notice to the Borrower (any
such notice being expressly waived by the Borrower), to set off and
apply any indebtedness at any time owing by the Lender to or for the
credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under this
Agreement and the Note, irrespective of whether or not the Lender shall
have made any demand under this Agreement or the Note and although such
obligations may be unmatured. The Lender agrees to notify the Borrower
promptly after any such set off and application, provided that the
failure to give such notice shall not affect the availability of such
set off and application. The rights of the Lender under this Section
are in addition to other rights and remedies (including other rights of
setoff) that the Lender may have.
SECTION 7.06 Binding Effect: Governing Law. This Agreement shall
be binding upon and inure to the benefit of the Borrower and the Lender
and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights hereunder or any interest
herein without the prior written consent of the Lender. This Agreement
and the Note shall be governed by, and construed in accordance with,
the laws of the State of New York (without giving effect to New York's
principles of conflicts of law, other than title 14 of Article 5 of New
York's General Obligations Law).
SECTION 7.07 Counterparts. This Agreement may be executed in any
number of counterparts, and all such counterparts taken together shall
be deemed to constitute one and the same instrument.
SECTION 7.08 Entirety of Agreement. The Credit Documents
represent the complete understanding between the parties with respect
to the subject matter of this transaction.
SECTION 7.09 Jurisdiction.
(a) The Borrower hereby irrevocably submits to the jurisdiction
15
of any New York State or United States Federal court sitting in New
York City over any action or proceeding arising out of or relating to
this Agreement or the Note, and hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and
determined in such New York State or Federal court. The Borrower
irrevocably consents to the service of any and all process in any such
action or proceeding by sending copies of such process to it at its
address and in the manner determined under Section 7.02 hereof. The
Borrower agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit
on the judgment or in any other manner provided by law. The Borrower
further waives any objections to venue in such State and any objection
to an action or proceeding in such State on the basis of forum non
conveniens. The Borrower further agrees that any action or proceeding
brought by it against the Lender shall be brought only in New York
State or United States Federal court sitting in New York County, New
York. The Borrower and the Lender waive any right it may have to jury
trial.
(b) Nothing in this Section 7.09 shall affect the right of the
Lender to serve legal process in any other manner permitted by law or
affect the right of the Lender to bring any action or proceeding
against the Borrower or any of its properties in the courts of any
other jurisdictions.
(c) To the extent that the Borrower has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process
(whether from service or notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise) with respect to
itself or its property, the Borrower hereby irrevocable waives such
immunity in respect of its obligations under the Credit Documents.
16
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
________________________________
John J. Hoey
President
THAMESEDGE, LTD.
By: /s/ Dieter Bock
_________________________________
Name: Dieter Bock
_________________________________
Title: Director
_________________________________
By: /s/ R. E. Whitten
_________________________________
Name: Robin Whitten
_________________________________
Title: Director
_________________________________
17
PROMISSORY NOTE
---------------
FOR VALUE RECEIVED, the undersigned, HONDO OIL & GAS COMPANY, a
Delaware corporation (the "Borrower"), hereby promises to pay to the
order of THAMESEDGE, LTD., a United Kingdom corporation (the "Lender")
on June 30, 1997 the principal sum of $13,500,000 or, if less than
$13,500,000, the aggregate unpaid principal amount of all Advances (as
defined below), made by the Lender to the Borrower pursuant to the
Agreement (as defined below together with all accrued but unpaid
interest and all interest added to the principal of this Note.
The Borrower promises to pay interest on the unpaid principal
amount of each Advance from the date of such Advance until such
principal amount is paid in full, at the rate per annum equal at all
times to 13% (or the maximum interest rate permitted by law, whichever
is less) on October 1, 1996 and April 1, 1997; provided, however, that
any amount of principal on Advances that are not paid when due (whether
at stated maturity, by acceleration or otherwise) shall bear interest
from the date on which such amount is due until such amount is paid in
full, payable on demand, at a rate per annum equal at all time to 18%
(or the maximum interest rate permitted by law, whichever is less).
As used herein, "Business Day" means any day of the year on which
banks are not required or authorized to close in London or Houston,
Texas. All computations of interest shall be made by the Lender on the
basis of a year of 360 days and the actual number of days occurring in
the period from which such interest is payable. Whenever any payment
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of payment of
interest.
Both principal and interest are payable not later than 12:00 noon
London time on the day when due in lawful money of the United States of
America to the Lender at such account and place as Lender shall
designate in immediately available funds. Each Advance made by the
Lender to the Borrower pursuant to the Agreement, and all payments made
on account of principal thereof, may, but need not be recorded by the
Lender on its books and records on the grid attached hereto and such
books and records shall be conclusive as to the existence and amounts
thereof absent manifest error. Failure to make any such entry or
endorsement shall not effect the actual principal amount outstanding or
the enforceability of this Note.
This Note is the "Note" referred to in, and is entitled to the
benefits of, the Revolving Credit Agreement between the Borrower and the
Lender dated as of July 5, 1996 (the "Agreement"). The Agreement, among
other things: (1) provides for the making of advances (the "Advances")
by the Lender to the Borrower and (2) contains provisions for
acceleration of the maturity hereof upon the happening of certain stated
events and also for prepayments on account of principal hereof prior to
the maturity hereof upon the terms and conditions specified therein.
1
This Note is guaranteed by the Guaranty of Hondo Magdelena Oil &
Gas Limited dated as of July 5, 1996.
This Note shall be governed by, and construed in accordance with,
the laws of the State of New York (without giving effect to New York's
principles of conflicts of law, other than Title 14 of Article 5 of
New York's General Obligations Law).
The Borrower hereby irrevocably submits to the jurisdiction of any
New York State or United States Federal court sitting in New York City
over any action or proceeding arising out of or relating to this Note or
the Agreement, and hereby irrevocably agrees that all claims in respect
of such action or proceeding may be heard and determined in such New
York State or Federal court. The Borrower irrevocably consents to the
service of any and all process in any such action or proceeding by
sending copies of such process to it at its address and in the manner
determined under Section 7.02 of the Agreement. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. The Borrower further
waives any objections to venue in such State and any objection to an
action or proceeding in such State on the basis of forum non conveniens.
The Borrower further agrees that any action or proceeding brought by it
against the Lender shall be brought only in New York State or United
States Federal court sitting in New York County, New York. The Borrower
and the Lender waive any right it may have to jury trial.
Nothing herein shall affect the right of the Lender to serve legal
process in any other manner permitted by law or affect the right of the
Lender to bring any action or proceeding against the Borrower or any of
its properties in the courts of any other jurisdictions.
To the extent that the Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process
(whether from service or notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise) with respect to
itself or its property, the Borrower hereby irrevocable waives such
immunity in respect of its obligations under the Credit Documents.
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
______________________________
John J. Hoey
President
2
GUARANTY OF
HONDO MAGDALENA OIL & GAS LIMITED
---------------------------------
This Guaranty, dated as of June 28, 1996 is made by Hondo Magdalena
Oil & Gas Limited, a Jersey, Channel Islands corporation (the
"Guarantor") and THAMESEDGE, LTD. and English corporation (the
"Lender").
Recital
The Lender has entered into an Agreement dated as of June 28, 1996
("Agreement"), as it may hereafter be amended or otherwise modified from
time to time, being called the Agreement with HONDO OIL & GAS COMPANY, a
corporation organized and existing under the laws of Delaware (the
"Borrower"). It is a condition precedent to the effectiveness of the
Agreement that this company, a wholly owned subsidiary of the Borrower,
shall have executed and delivered this Guaranty. Terms defined in the
Agreement and not otherwise defined herein have the same respective
meanings when used herein, and the rules of interpretation set forth in
Section 1.03 of the Agreement are incorporated herein by reference.
SECTION 1. Guaranty. The Guarantor hereby unconditionally
guarantees the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all obligations of the Borrower now or
hereafter existing under the Credit Documents, whether for principal,
interest, fees, expenses or otherwise (the "Obligations"), and agree to
pay any and all expenses incurred by the Lender in enforcing any rights
under this Guaranty.
SECTION 2. Guaranty Absolute. The Guarantor guarantees that
the Obligations will be paid strictly in accordance with the terms of
the Credit Document, regardless of any law, regulation or order now or
hereafter in effect in any jurisdiction affecting any of such terms or
the rights of the Lender with respect thereto. The liability of the
Guarantor under this Guaranty shall be absolute and unconditional,
irrespective of the following:
(a) any lack of validity or enforceability of, or any release or
discharge of the Borrower from liability under, the Credit Documents;
(b) any change in the time, manner or place of payment of, or in
any other term of, all or any of the Obligations or any other amendment
or waiver of, or any consent to departure from the Credit Documents;
(c) any subordination, compromise, exchange, release,
nonperfection or liquidation of any collateral, or any unenforceability,
release, amendment or waiver of, or consent to departure from, any other
guaranty, for any or all of the Obligations;
(d) any express or implied amendment, modification, renewal,
1
supplement, extension or acceleration of the Obligations or any of the
Credit Documents;
(e) any exercise or nonexercise by the Lender of any right or
privilege under this Guaranty or any of the other Credit Documents;
(f) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceeding relating
to either Guarantor, The Borrower or any other guarantor of the
Obligations or any action taken with respect to this Guaranty by any
trustee, receiver or court in any such proceeding, whether or not the
Guarantors shall have had notice or knowledge of any of the foregoing;
(g) any assignment or other transfer, in whole or in part, of this
Guaranty or of any of the other Credit Documents;
(h) any acceptance of partial performance of the Obligations;
(i) any consent to the transfer of, or any bid or purchase at sale
of, any collateral for the Obligations; or
(j) any other circumstance that might otherwise constitute a
defense available to, or a discharge of, the Borrower or any guarantor.
This Guaranty shall continue to be effective or be reinstated, as
the case may be, if at any time any payment of any of the Obligations is
rescinded or must otherwise be returned by the Lender upon the
insolvency, bankruptcy or reorganization of the Borrower or otherwise,
all as though such payment had not been made.
SECTION 3. Waivers. Guarantor unconditionally waives any
defense to the enforcement of this Guaranty, including the following:
(a) all presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor and
notices of acceptance of this Guaranty;
(b) any right to require the lender to proceed against the
Borrower or any other guarantor at any time, to proceed against or
exhaust any security held by the Lender at any time or to pursue any
other remedy whatsoever at any time;
(c) the defense of any statute of limitations affecting the
liability of Guarantor hereunder, the liability of the Borrower or the
enforcement hereof, to the extent permitted by law;
(d) any defense arising by reason of any invalidity or
unenforceability of any of the Credit Documents, any disability of the
Borrower or any other guarantor, any manner in which the Lender has
exercised its rights and remedies under the Credit Documents or any
cessation from any cause whatsoever of the liability of the Borrower;
(e) any defense based upon an election of remedies by the Lender,
including any election to proceed by judicial or nonjudicial foreclosure
of any lien, whether on real property or personal property, or by deed
in lieu thereof, whether or not every aspect of any foreclosure sale is
2
commercially reasonable, or any election of remedies, including remedies
relating to real-property or personal-property security, that destroys
or otherwise impairs any subrogation rights of Guarantor or any rights
of Guarantor to proceed against the Borrower for reimbursement, or both;
(f) any duty of the Lender to advise Guarantor of any information
known to the Lender regarding the financial condition of the Borrower or
any other circumstance affecting the Borrower's ability to perform its
obligations to the Lender, it being agreed that such Guarantor assumes
responsibility for being and keeping informed regarding such condition
or any such circumstance;
(g) any right of subrogation, contribution, indemnity or otherwise
against the Borrower that may arise out of or be caused by this
Guaranty, any right to enforce any remedy that the Lender now has or may
hereafter have against the Borrower and any benefit of, and any right to
participate in, any security now or hereafter held by the Lender; and
(h) without limiting the generality of the foregoing or any other
provision hereof, any rights and benefits that might otherwise by
available to such Guarantor under applicable English Law.
SECTION 4. Payments in Trust. If any amount shall be paid to
either Guarantor contrary to the provisions of Section 3(g), such amount
shall be held in trust for the benefit of the Lender and shall forthwith
be paid to the Lender to be credited and applied to the Obligations,
whether matured or unmatured, in accordance with the terms of the Credit
Agreement.
SECTION 5. Payments Free and Clear of Taxes, Etc.
(a) Any and all payments made by Guarantor hereunder shall be made
free and clear of and without deduction for any and all present or
future taxes, levies, imposts, deductions, charges or withholdings, and
all liabilities with respect thereto, excluding taxes imposed on the
income of the Lender, and franchise taxes imposed on it, by the
jurisdiction under the laws of which the Lender is organized and any
political subdivision thereof (all such nonexcluded taxes, levies,
imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If Guarantor shall be required by
law to deduct any Taxes from or in respect of any sum payable hereunder
to the Lender, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section) the
Lender receives an amount equal to the sum it would have received had no
such deductions been made, (ii) Guarantor shall make such deductions and
(iii) Guarantor shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law.
(b) In addition, the Guarantor agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes,
charges or similar levies that arise from any payment made hereunder or
from the execution, delivery or registration of, or other with respect
to, this Guaranty (hereinafter referred to as "Other Taxes").
3
(c) The Guarantor will indemnify the Lender for the full amount of
Taxes and Other Taxes (including any Taxes or Other Taxes imposed by any
jurisdiction on amounts payable under this Section) paid by the Lender
and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other
Taxes were correctly or legally asserted. This indemnification shall be
made within 30 days from the date the Lender makes written demand
therefor.
(d) Within 30 days after the date of any payment of Taxes,
Guarantor will furnish to the Lender, at its address referred to in
Section 12, the original or a certified copy of a receipt evidencing
payment thereof. If no Taxes are payable in respect of any payment
hereunder to the Lender, Guarantor will furnish to the Lender a
certificate from each appropriate taxing authority or an opinion of
counsel acceptable to the Lender, in either case stating that such
payment is exempt from or not subject to Taxes.
(e) Without prejudice to the survival of any other agreement of
the Guarantor hereunder, the agreements and obligations of the Guarantor
contained in this Section 5 shall survive the payment in full of the
principal of and interest on the Advances.
SECTION 6. Judgment.
(a) If, for the purposes of obtaining judgment in any court, it is
necessary to convert a sum due hereunder in United States dollars into
another currency, the parties hereto agree, to the fullest extent
permitted by law, that the rate of exchange used shall be that at which
in accordance with normal banking procedures the Lender could purchase
United States dollars with such other currency on the Business Day
preceding that on which final judgment is given.
(b) The obligations of the Guarantor in respect of any sum due
from them to the Lender hereunder shall, notwithstanding any judgment in
a currency other than United States dollars, be discharged only to the
extent that, on the Business Day following receipt by the Lender of any
sum adjudged to be so due in such other currency, the Lender may in
accordance with such other currency; if the United States dollars so
purchased are less than the sum originally due to the Lender in United
States dollars, the Guarantor agree, as a separate obligation and
notwithstanding any such judgment, to indemnify the Lender against such
loss, and, if the United States dollars so purchased exceed the sum
originally due to the Lender in United States dollars, the Lender agrees
to remit such excess to Guarantor.
SECTION 7. Consent to Jurisdiction; Waiver of Immunities.
(a) Guarantor hereby irrevocable submit to the jurisdiction of any
New York or federal court sitting in New York in any action or
proceeding arising out of or relating to this Guaranty, and the
Guarantor hereby irrevocably agree that all claims in respect of such
action or proceeding may be heard and determined in such New York or
federal court. The Guarantor hereby irrevocable waive, to the fullest
extent they may effectively do so, the defense of an inconvenient forum
4
to the maintenance of such action or proceeding. The Guarantor hereby
irrevocably appoints Charles B. McDaniel, Esq., with an office on the
date hereof at Hondo Oil & Gas Company, 10375 Richmond Avenue, Suite
900, Houston, TX 77042, telephone (713) 954-4600, telecopier (713) 954-
4601, as their agent to receive on behalf of the Guarantors and their
property service of copies of the summons and complaint and any other
process that may be served in any such action or proceeding. Such
service may be made by mailing or delivering a copy of such process to
the Guarantor in care of the Process Agent at the Process Agent's
address above, and the Guarantors hereby irrevocable authorize and
direct the Process Agent to accept such service on their behalf. As an
alternative method of service, Guarantor also irrevocably consent to the
service of any and all process in any such action or proceeding by the
mailing of copies of such process to Guarantor at their respective
addresses specified in Section 12. Guarantor agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.
(b) Nothing in this Section shall affect the right of the Lender
to serve legal process in any other manner permitted by law or affect
the right of the Lender to bring any action or proceeding against
Guarantor or their property in the courts of any other jurisdictions.
(c) To the extent that Guarantor has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process
(whether through service of notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise) with respect to
Guarantor or its property, such Guarantor hereby irrevocably waives such
immunity in respect of its obligations under this Guaranty.
SECTION 8. Representations and Warranties. Except as to items
disclosed in the Credit Documents, the Guarantor hereby represents and
warrants as follows:
(a) Organization. Guarantor is a corporation duly incorporated,
validly existing and in good standing under the laws of the applicable
jurisdiction set forth in the first paragraph of this Guaranty and is
duly licensed or qualified and in good standing as a foreign corporation
in each other jurisdiction in which failure to qualify would materially
and adversely affect the conduct of its business or the enforceability
of contractual rights of such Guarantor.
(b) Due Authorization. The execution, delivery and performance of
this Guaranty are within Guarantor's corporate powers, have been duly
authorized by all necessary corporate action, and do not contravene (i)
Guarantor's charter documents or by laws or (ii) any applicable
Governmental Rule or any contractual restriction binding on or affecting
Guarantor.
(c) Governmental Action. No Governmental Action is required for
the due execution, delivery or performance by Guarantor of this
Guaranty.
(d) Binding Effect. This Guaranty is the legal, valid and binding
5
obligation of Guarantor enforceable against such Guarantor in accordance
with the terms hereof.
(e) Financial Information. The audited balance sheet of Guarantor
and its subsidiaries as of December 31, 1994 and the related audited
statements of income and retained earnings of Guarantor and its
subsidiaries for the fiscal year then ended, copies of which have been
furnished to the Lender, fairly present the financial condition of
Guarantor and its subsidiaries as of such date and the results of the
operations of Guarantor and its subsidiaries for the year ended on such
date, all in accordance with GAAP, and since December 31, 1994 there has
been no material adverse change in such condition or operations.
(f) Litigation. There is no pending or (to the knowledge of
Guarantor) threatened action or proceeding affecting Guarantor or any of
its subsidiaries before any Governmental Person that may materially and
adversely affect the financial condition or operations of Guarantor or
any subsidiary thereof or the ability of Guarantor to perform its
obligations under this Guaranty, except as disclosed to the Lender in
the financial statements referred to in Section 8(e).
(g) Ownership of Guarantor and Borrower. Borrower owns 100% of
the outstanding capital stock of Guarantor.
SECTION 9. Affirmative Covenants. Guarantor covenants and
agrees that, so long as any part of the Obligations shall remain unpaid
or the Lender shall have any Commitment, Guarantor will, unless the
Lender shall otherwise consent in writing, comply with the following
covenants:
(a) Compliance with Laws, Etc. Guarantor will comply and cause
each of its subsidiaries to comply in all material respects with all
applicable Governmental Rules, such compliance to include paying before
the same become delinquent all taxes, assessments and governmental
charges imposed upon it or upon its property, except to the extent
contested in good faith and by appropriate proceedings.
(b) Maintenance of Existence. Guarantor will preserve and
maintain its corporate existence and all of its rights, privileges and
franchises necessary and desirable in the normal conduct of its business
in a regular manner.
(c) Reporting Requirements. Guarantor will furnish to the Lender
a copy of the annual accounts of Guarantor containing financial
statements for each fiscal year, certified by its auditors in accordance
with GAAP practice, and such other
information respecting the condition of operations, financial or
otherwise, of such Guarantor or any of its subsidiaries as the Lender
may from time to time reasonably request.
(d) Notice of Proceedings. Guarantor will promptly give notice in
writing to the Lender of all litigation, arbitration proceedings and
regulatory proceedings affecting such Guarantor, except litigation or
proceedings that, if adversely determined, could not materially and
6
adversely affect the financial condition of such Guarantor.
SECTION 10. Amendments, Etc. No amendment or waiver of any
provision of this Guaranty or consent to any departure by the Guarantor
therefrom shall in any event be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose
for which given.
SECTION 11. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing and mailed
(certified mail, return-receipt requested), telecopied or delivered
personally, if to Guarantor, c/o Hondo Oil & Gas Company, 10375 Richmond
Avenue, Suite 900, Houston, TX 77042, telephone (713) 954-4600,
telecopier (713) 954-4601, Attention: Charles B. McDaniel, Esq.; if to
Lender at Thamesedge, Ltd., 4 Grosvenor Place, London, SW1X 7DL
England, telephone 011-44-171-201-6000, telecopier 011-44-171-201-6100,
Attention: Robin Whitten with a copy to Rudolph H. Funke, Esq. at 805
Third Avenue, 18th Floor, New York, NY 10022, telephone 212-715-7001,
telecopier 212-838-8141; or, as to each party, to it at such other
address as shall be designated by such party in a written notice to the
other parties. All such notices and other communications shall be
effective, if mailed, 72 hours after being deposited in the mails, or if
telecopied or delivered personally, when received.
SECTION 12. No Waiver; Remedies. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof, and no single or partial exercise of
any right hereunder shall preclude any other or further exercise thereof
or the exercise of any other right. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
SECTION 13. Continuing Guaranty; Transfer of Note. This
Guaranty is a continuing guaranty and shall (a) remain in full force and
effect until payment in full of the Obligations and all other amounts
payable under this Guaranty and expiration of the Commitment, (b) be
binding upon the Guarantor and their respective successors and assigns
and (c) inure to the benefit of and be enforceable by the Lender and its
successors, transferees and assigns. Without limited the generality of
the foregoing clause (c), the Lender may assign or otherwise transfer
the Note and the Advances to any other person or entity, and such other
person or entity shall thereupon become vested with all the rights in
respect thereof granted to the Lender herein or otherwise.
HONDO MAGDELENA OIL & GAS LIMITED
By: /s/ John J. Hoey
________________________________
Name: John J. Hoey
________________________________
Title: Managing Director
________________________________
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Hondo Oil & Gas
Company's Form 10-Q for the period identified
below. This information is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 393
<SECURITIES> 0
<RECEIVABLES> 3,338
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,820
<PP&E> 18,784
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,006
<CURRENT-LIABILITIES> 6,413
<BONDS> 83,313
0
0
<COMMON> 13,776
<OTHER-SE> (91,170)
<TOTAL-LIABILITY-AND-EQUITY> 26,006
<SALES> 2
<TOTAL-REVENUES> 100
<CGS> 0
<TOTAL-COSTS> 163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,682
<INCOME-PRETAX> (9,160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,160)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
