<PAGE>
<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 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
Number)
10375 Richmond Avenue, Suite 900, Houston, TX 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class on which registered
------------------- -------------------
Common stock, par American Stock
value $1 per share Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(continued)
1
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on December 6, 1996 based on the
closing price on the American Stock Exchange of such stock on such date
was $37,971,277.
Registrant's Common Stock outstanding at December 6, 1996 was 13,776,194
shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement
for the annual shareholders meeting are incorporated by reference into
Part III.
2
HONDO OIL & GAS COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
Caption Page
PART I
Item 1. Business .............................................4
Item 2. Properties ...........................................14
Item 3. Legal Proceedings ....................................16
Item 4. Submission of Matters to a Vote of Security
Holders .............................................16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .........................17
Item 6. Selected Financial Data ..............................18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................20
Item 8. Financial Statements .................................31
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ..............60
PART III
Item 10. Directors and Executive Officers of
the Registrant ......................................60
Item 11. Executive Compensation ...............................60
Item 12. Security Ownership of Certain Beneficial
Owners and Management ...............................60
Item 13. Certain Relationships and Related Transactions .......60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .................................60
3
PART I
As used in this report, unless the context otherwise requires, the terms
"Registrant", "the Company" and "Hondo Oil" refer to Hondo Oil & Gas
Company and its consolidated subsidiaries.
Item 1. BUSINESS
(a) General Development of Business
The Company is an independent oil and gas company, presently focusing on
international oil and gas exploration and development. The Company was
incorporated as Pauley Petroleum Inc. ("Pauley") in 1958. In January
1988, The Hondo Company ("Hondo") acquired a controlling interest in
Pauley in exchange (the "Exchange") for all of the outstanding stock of
Hondo's subsidiary, Hondo Oil & Gas Company. In March 1988, the Company
acquired Fletcher Oil and Refining Company ("Fletcher" or the "Fletcher
refinery"). In January 1990, Pauley merged ("the Merger") with the
wholly-owned subsidiary acquired in the Exchange, Hondo Oil & Gas
Company. In conjunction with the Merger, Pauley Petroleum Inc., the
surviving corporation, changed its name to Hondo Oil & Gas Company.
In December 1989, the Company permanently suspended operations at its
wholly-owned subsidiary, Newhall Refining Co., Inc. ("Newhall
refinery"). During 1991, Hondo Oil adopted plans of disposal for both
its refining and marketing operations and its real estate operations
(primarily the land underlying the Newhall refinery). The Company
suspended operations at its Fletcher refinery in October 1992 and
completed a sale of substantially all of the refining and marketing
operations in October 1993.
In June 1992, the Company completed a sale of substantially all of its
domestic oil and gas assets and repaid a substantial portion of its
long-term debt with the proceeds.
The Company's principal asset is its exploration concession in Colombia.
(b) Financial Information About Industry Segments
See Note 11 to the Consolidated Financial Statements in Item 8. The
Company presently operates in one segment.
(c) Narrative Description of Business
INTERNATIONAL OPERATIONS
The Company's wholly-owned subsidiary, Hondo Magdalena Oil & Gas Limited
("Hondo Magdalena"), participates in the Opon Association Contract (the
"Opon Contract") with Empresa Colombiana de Petroleos ("Ecopetrol"),
Opon Development Company ("ODC") and Amoco Colombia Petroleum Company
("Amoco Colombia"). Ecopetrol is a quasi-governmental corporate
organization wholly-owned by the government of Colombia. The Opon
Contract was entered into between Ecopetrol and ODC in 1987, and
approved by the Ministry of Mines and Energy in 1988, to explore and
develop an area of approximately 190 square miles located in the Middle
Magdalena Basin about 125 miles north of Bogota, Colombia. The Opon
4
Contract is divided into an exploration period and an exploitation
period and expires in July 2015.
The Opon Contract provides for an exploration period of six years, which
commenced in July 1988 and was extended through September 30, 1995. The
Opon Contract required the associate parties (Amoco Colombia, Hondo
Magdalena and ODC) to perform certain minimum work obligations each year
of the exploration period. There are no minimum work obligations after
the completion of the exploration period.
At the end of the exploration period, the associate parties may seek to
declare the field capable of producing hydrocarbons to be commercial
(capable of repaying investment and expenses and returning a profit) by
presenting an application to Ecopetrol. Ecopetrol has 90 days to
respond to the associate parties' application. If Ecopetrol agrees,
then the field is declared to be commercial and production may commence.
Upon the designation of an area or field as commercial, Ecopetrol
acquires a 50% interest in such area or field and will reimburse the
associate parties for 50% of the direct exploration costs for each
commercial discovery from its share of production. Thereafter,
Ecopetrol will pay 50% of costs and will receive 50% of production.
Revenue from the Opon Contract area is subject to a 20% royalty, which
is paid to the Colombian government.
The associate parties completed the minimum work obligations for each of
the six years of the exploration period, which ended with completion of
the Opon No. 4 well in September 1995. An application for commerciality
was submitted by Amoco Colombia in February 1996. On May 8, 1996,
Ecopetrol approved a commercial field of approximately 2,500 acres
around the Opon No. 3 and No. 4 wells (described below). The interests
in the commercial field are approximately: Ecopetrol, 50%, Amoco
Colombia, 30%, Hondo Magdalena, 15.4%, and ODC, 4.6%. Amoco Colombia,
Hondo Magdalena and ODC have interests in the remainder of the Opon
Contract area of approximately 60%, 30.9% and 9.1%, respectively. The
commercial field is substantially smaller than that requested by Amoco
Colombia. The commercial field may be enlarged by future drilling
and/or additional technical information. Ecopetrol will not pay for its
share of expenditures to enlarge the commercial field until the new
areas are proven and declared commercial. Ecopetrol will participate in
further development costs of the existing commercial field. As
described below, Ecopetrol has agreed to reimburse in cash certain costs
related to the construction of pipeline and wellhead facilities incurred
before commerciality was declared.
The Opon Contract provides that at the end of the exploration period, if
a field capable of producing hydrocarbons in commercial quantities has
been discovered, the Opon Contract area will be reduced by 50%. Two
years thereafter, the Opon Contract area will be further reduced to 25%
of the original area. Two years thereafter, the Opon Contract area will
be reduced to the area of the commercial field that is in production or
development, plus a reserve zone of five kilometers in width around the
productive limit of such field. The commercial field plus the zone
surrounding such field will become the area of exploitation. The
associate parties designate the acreage to be released. Additional
wells will be required to enlarge the commercial area and to increase
the size of the area of exploitation.
5
The first acreage relinquishment of 50% was completed during 1996. The
Opon Contract area now covers 25,021.5 hectares (61,828 acres). The
Company believes that the first relinquishment did not cause the loss of
significant exploration opportunities. Drilling of additional wells and
further assessment of geological and geophysical information will be
necessary to evaluate the effects of further acreage reductions.
Hondo Magdalena acquired its interest in the Opon Contract from ODC.
Prior to fiscal 1993, Hondo Magdalena and ODC drilled four wells to the
shallow Mugrosa formation. Following extended production and pressure
testing, one of these wells was declared a dry hole. In fiscal 1993,
Hondo Magdalena drilled the Lilia No. 10 well to the La Paz formation at
its sole cost. The well was drilled to a total depth of 10,003 feet.
The well encountered mechanical problems after the logs were run, and it
was temporarily plugged and suspended. The well may be re-entered at a
future date. By completing these operations, Hondo Magdalena acquired
an 80% interest in the Opon Contract from ODC.
Under a Farmout Agreement dated August 9, 1993, Amoco Colombia earned a
60% participating interest in the Opon Contract, 50% from Hondo
Magdalena and 10% from ODC. Hondo Magdalena retained a 30% interest.
Amoco Colombia paid $3.0 million in cash and paid Hondo Magdalena's
costs related to the Opon No. 3 well, a well drilled to the La Paz
formation. Under the Farmout Agreement, Amoco Colombia paid Hondo
Magdalena an additional $5.0 million in October 1994 and paid all but
$2.0 million of Hondo Magdalena's costs related to the Opon No. 4 well,
also drilled to the La Paz formation.
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.
The Company has for the first time attributed proved reserves to the
discovery described above. See Note 3 to the Consolidated Financial
Statements in Item 8 and Supplementary Information About Oil and Gas
Producing Activities and Reserves (Unaudited) following the Consolidated
Financial Statements in Item 8. The rules concerning reporting of
proved reserves require that the hydrocarbons be recoverable under
existing economic and operating conditions. The quantum of proved
reserves reported is limited to the volumes that the Company has
reasonable certainty will be sold under existing and pending sales
arrangements.
The next well on the Opon Contract area, the Opon No. 6 well, commenced
drilling on October 24, 1996. This well is slightly more than 1
6
kilometer north of the Opon No. 3 well and is outside the presently
designated commercial area. Hondo Magdalena will pay 30.9% of the costs
of this well estimated at $23.7 million. This well is intended to
confirm the existence of the La Paz reservoir in this area. Contingent
upon the results of the Opon No. 6 well, the next well will be either
(i) the Opon No. 14 well, located south of the commercial area, to
confirm the existence of the La Paz reservoir in that area or (ii) the
Opon No. 5 well, located within the commercial area to support sales
commitments.
Prior to Hondo Magdalena's participation, eight wells had been drilled
to various depths in the Opon Contract area. All of these wells are the
property of Ecopetrol, and are not considered to be included in the Opon
Contract area. None of these wells are currently producing and none of
the former contract holders have any rights in the Opon Contract.
The principal objective at Opon is to confirm and commercially develop
hydrocarbons from the La Paz formation. However, geologic and
geophysical modeling indicates that, in addition to the potentially
significant hydrocarbons discovered in the Opon No. 3 and No. 4 wells,
other potential hydrocarbon-bearing traps may lie within the Opon
Contract area. Other traps and formations are possible objectives of
further exploration efforts.
Operations in the Opon Contract area are subject to the operating risks
normally associated with exploration for, and production of, oil and
gas, including blowouts, cratering, and fires, each of which could
result in damage to, or destruction of, the oil and gas wells,
formations or production facilities or properties. In addition, there
are greater than normal mechanical drilling risks at the Opon Contract
area associated with high pressures in the La Paz and other formations.
These pressures may: cause collapse of the well bore, impede the drill
string while drilling, or cause difficulty in completing a well with
casing and cement. These potential problems were substantially overcome
in the drilling of the Opon No. 3 and No. 4 wells by the use of a top-
drive drilling rig, heavy-weight drilling fluids and other technical
drilling enhancements. The Opon No. 6 well is utilizing oil-based
drilling mud in an attempt to further limit such problems.
Production is subject to political risks inherent in all foreign
operations, including: (i) loss of revenue, property, and equipment as a
result of unforeseen events such as expropriation, nationalization, war
and insurrection, (ii) risks of increases in taxes and governmental
royalties, (iii) renegotiation of contracts with governmental entities,
as well as, (iv) changes in laws and policies governing operations of
foreign-based companies in Colombia. Guerrilla activity in Colombia has
disrupted the operation of oil and gas projects, including those at the
Opon Contract area. Security in the area has been improved and the
associate parties have taken steps to enhance relations with the local
population through a community relations program. The government
continues its efforts through negotiation and legislation to reduce the
problems and effects of insurgent groups, including regulations
containing sanctions such as impairment or loss of contract rights on
companies and contractors if found to be giving aid to such groups. The
associate parties will continue to cooperate with the government, and do
not expect that future guerrilla activity will have a material impact on
the exploration and development of the Opon Project. However, there can
7
be no assurance that such activity will not occur or have such an impact
and no opinion can be given on what steps the government may take in
response to any such activity.
Colombia is among several nations whose progress in stemming the
production and transit of illegal drugs is subject to annual
certification by the President of the United States. In March 1996, the
President of the United States announced that Colombia would neither be
certified nor granted a national interest waiver. The consequences of
the failure to receive certification generally include the following:
all bilateral aid, except anti-narcotics and humanitarian aid, has been
or will be suspended; the Export-Import Bank of the United States and
the Overseas Private Investment Corporation will not approve financing
for new projects in Colombia; U. S. representatives at multilateral
lending institutions will be required to vote against all loan requests
from Colombia, although such votes will not constitute vetoes; and the
President of the United States and Congress retain the right to apply
future trade sanctions. Each of these consequences of the failure to
receive such certification could result in adverse economic consequences
in Colombia and could further heighten the political and economic risks
associated with the Company's operations in Colombia.
The government of Colombia has established a natural gas policy and is
pursuing a program to maximize the utilization of natural gas throughout
the country, including the industrial cities of Medellin, Cali and
Bogota, where developed markets and infrastructure do not currently
exist. The Colombian government's policy on natural gas is intended to
increase the consumption of natural gas in order to provide a more
balanced use of energy resources. The policy includes the use of
natural gas in place of higher cost electricity and in place of wood to
reduce deforestation. The government intends to encourage the
development of markets for natural gas and is pursuing the development
of pipeline transportation systems for new markets. The proximity of
the Opon Contract area to these potential gas markets will be an
advantage for marketing the natural gas.
Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol executed a Memorandum
of Understanding ("MOU") in July 1995 for the construction of a pipeline
and wellhead facilities (which were not contemplated in the Opon
Contract) and the sale of natural gas from the Opon Contract area. The
MOU provided that the parties will construct a 16 inch pipeline
approximately 88 kilometers in length from the Opon Contract area north
to Ecopetrol's gas processing plant at El Centro, and from there to
Ecopetrol's refinery at Barrancabermeja. The pipeline will have a
capacity of 120 million cubic feet per day and is estimated to cost
$40.6 million. Under the MOU, Hondo Magdalena, ODC and Amoco Colombia
each pay their respective share of the costs incurred prior to July 1,
1995, up to a maximum of 10% of the total pipeline costs. Ecopetrol
will pay cash for its share of pipeline costs incurred after July 1,
1995; the remainder of Ecopetrol's share of costs (those incurred prior
to July 1, 1995) will be recovered out of production. The investment in
pipeline costs will be recovered through a pipeline tariff. In the MOU,
Ecopetrol agreed to construct improvements at its El Centro gas
processing plant to handle incremental production from the Opon Contract
area. Ecopetrol will recover its investment through a gas processing
fee. The parties agreed in the MOU to negotiate contracts necessary to
carry out the agreements made in the MOU. Ecopetrol agreed to fund 80%
8
of its share of wellhead facilities (total estimated cost of $23.5
million) in cash with 20% to be recovered subsequently from production.
After new regulations were adopted in late 1995 by 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 of the
Colombian government, the parties began to renegotiate certain terms of
the MOU. The 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, thus 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.
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. Management believes
that the new contracts achieve an arrangement that is an economic
equivalent to the terms of the MOU and comply with the new CREG
regulations. The three contracts 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. Amoco Colombia
has received a letter from Ecopetrol dated December 16, 1996, stating
that the three contracts previously signed are effective and enforceable
without the need for the completion and signing of a fourth contract.
Ecopetrol's letter confirmed that because the pipeline being built to
transport gas is owned by the parties who own the gas, a transportation
agreement will not be necessary. The Company had previously reported
that a fourth contract, covering the transportation of the gas and
liquids was required for all of the contracts to become effective.
Preliminary work for the pipeline began in late 1994 and construction
began in July 1996. Completion of the pipeline is estimated to occur in
March 1997. Construction of wellsite facilities began in August 1996;
completion is estimated to occur in March 1997. Ecopetrol has begun the
improvements to the El Centro gas plant; completion is estimated to
occur in the summer of 1997. Production will commence when all of these
construction projects are completed, estimated in the summer of 1997.
The estimates of the completion dates of the three projects are subject
to delays due to weather, labor interruptions, guerrilla activity,
unanticipated shortages of materials or equipment and other causes
beyond the control of the associate parties.
Development of the Opon Project will require significant future capital
expenditures for which the Company will need additional funds. See
Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources in Item 7.
9
U.S OIL AND GAS OPERATIONS
The Company explored for, developed and produced oil and gas in
approximately 13 states from 1987 until 1992. In June 1992, the Company
completed a sale of substantially all of its domestic oil and gas
assets. The Company's departure from the domestic oil and gas business
was in part driven by management's belief that more profitable
exploration and production opportunities exist abroad.
DISCONTINUED OPERATIONS
Refining and Marketing Operations
On October 1, 1993, the Company completed the sale of the common stock
of its Fletcher refinery and the assets of the Hilo, Hawaii asphalt
terminal. The Company's 41,000 bbl asphalt barge was sold in May 1993.
An asphalt terminal in Honolulu, Hawaii and two gasoline stations
acquired through bankruptcy proceedings against a former customer of
Fletcher were disposed of in 1994. There are no remaining assets of the
refining and marketing operations. See Note 12 to the Consolidated
Financial Statements in Item 8.
Real Estate Operations
On December 15, 1989, the Company suspended operations at its Newhall
refinery. Subsequently, the Company adopted a plan of disposition which
included dismantling the refinery, effecting environmental remediation
of the land and further developing the land to a condition where it may
be sold. Execution of the plan was suspended in September 1993 and the
Company is now marketing the site in its current condition and with
existing land-use entitlements. The Newhall refinery site consists of
approximately 105 acres located adjacent to a major freeway intersection
in northern Los Angeles County. See Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 and
Note 12 to the Consolidated Financial Statements in Item 8.
The Company owns in fee simple approximately 11 acres of undeveloped
land located in eastern Los Angeles County. An option to a developer on
the Company's Via Verde tract expired on August 18, 1996 and will be
extended until December 1997 at an option price of $3.1 million. The
renegotiated option agreement will allow the Company the right to be
released from the current agreement should there be a potential sale of
the parcel to a ready and willing buyer.
Each of the above real properties is subject to a mortgage in favor of
Lonrho Plc. See Note 5 to the Consolidated Financial Statements in Item
8.
COMPETITIVE FACTORS
Because of the sale of substantially all of the Company's domestic oil
and gas properties in 1992 and the sale of substantially all of its
discontinued refining and marketing assets in 1993, management believes
that the only competition the Company currently faces domestically is
from other parties offering undeveloped raw land for sale in Los Angeles
County.
10
Other parties have developed or announced discoveries of natural gas in
Colombia. These reserves and potential reserves exist on the north
coast of Colombia and in the Llanos Basin, east of the Company's
interest at the Opon Contract area. In the developing gas market of
Colombia, these gas supplies will compete for existing and new markets,
and for access to transportation facilities for natural gas. Such
competition may adversely affect the Company's ability to market its
natural gas and/or the price of natural gas. No prediction can be made
at this time as to the effect such competition will ultimately have upon
the Company.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
Environmental matters
The Company's operations are subject to certain federal, state and local
laws, including those of Colombia, and regulations governing the
management of hazardous materials, the discharge of pollutants into the
environment and the handling and disposal of solid and hazardous waste.
(1) General
Minor spillage or discharge of petroleum and related substances are
a common occurrence at oil refineries and at oil and gas production
and drilling facilities. Such spills and discharges could create
liability under various federal, state and local environmental laws
and regulations. As is the case with other companies engaged in
oil and gas exploration, production and refining, the Company faces
exposure from potential claims and lawsuits involving environmental
matters. These matters may involve alleged soil and water
contamination and air pollution. The Company's policy is to accrue
environmental and clean-up costs when it is probable that a
liability has been incurred and the amount of the liability is
reasonably estimable. However, future environmental related
expenditures cannot be reasonably quantified in many circumstances
due to the conjectural nature of remediation and clean-up cost
estimates and methods, the imprecise and conflicting data regarding
the characteristics of various types of waste, the number of other
potentially responsible parties involved and changing environmental
laws and interpretations. Management believes the reduced scope of
the Company's operations following the sale of the Company's
domestic oil and gas properties and the Fletcher refinery has
significantly reduced the Company's potential exposure to
environmental liability.
(2) Newhall Refinery Site
The Company has evaluated the Newhall Refinery site to determine
the impact of refining activities on the environment. The Company
has conducted an environmental assessment of the refinery site and
a remediation plan for the site has been submitted to the Regional
Water Quality Control Board and has received staff approval. The
Company estimates that $2.0 million would be incurred in executing
the approved remediation plan; however, the Company expects to sell
the property without incurring these costs by reducing the purchase
11
price. The Company's estimate of the net realizable value of this
property has been reduced by estimated remediation costs in
determining the carrying value of the property and therefore the
remediation costs will not affect future results of operations.
See Note 12 to the Consolidated Financial Statements in Item 8.
(3) Fletcher Refinery
Generators of hazardous substances found in disposal sites at which
environmental problems are alleged to exist, as well as the owners
of those sites and certain other classes of persons, are subject to
claims brought by state and federal regulatory agencies. Fletcher
has been notified by the EPA that it is a potentially responsible
party in a proceeding under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"). The notice
relates to the Operating Industries, Inc. ("OII") dump site in
Monterey Park, California. During fiscal 1993, the Company sold
the Fletcher refinery in a stock sale through which the purchaser
assumed environmental liabilities of Fletcher, known and unknown.
Any liability related to OII (to which Fletcher has asserted the
defense of bankruptcy discharge and with respect to which Fletcher
entered into a settlement with certain potentially responsible
parties at the time of the bankruptcy) remains a liability of
Fletcher and is no longer a liability of the Company. However, the
statutes impose liability on "owners" and "operators," and these
statutes have been used to assert claims against controlling
shareholders of corporations involved in claims under CERCLA and
related statutes. The Company is sole shareholder of Pauley
Pacific Inc. which was sole shareholder of Fletcher. The assertion
of such a claim against the Company in the case of OII is
considered by management to be remote, since the Company was not an
owner of Fletcher until after the events occurred that are the
basis of the notice to Fletcher on the OII dump site.
Government Regulations and Legislative Proposals
The Company is subject to governmental regulations which include various
controls on the exploration for, production, sale, and transportation of
crude oil and natural gas in Colombia. See International Operations
above, particularly the description of regulations adopted by CREG. A
number of foreign, federal and other legislative proposals, if enacted,
may have adverse effects on companies in the petroleum industry,
including the Company. These proposals involve, among other matters,
the imposition of additional taxes, price controls, land use controls
and other restrictive measures. The Company cannot determine to what
extent future operations and earnings may be affected by new regulations
or changes in current regulations.
EMPLOYEES
The Company employed 7 full-time personnel as of September 30, 1996.
12
CAUTIONARY STATEMENTS
The Company believes that this report contains certain forward-looking
statements, as defined in the Private Securities Litigation Reform Act
of 1995, including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," "may" and words of
similar import, or statements of management's opinion. Such forward
looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following:
Substantial Reliance On Single Investment. The Company's success
currently is dependent on its investment in the Opon project in
Colombia, South America. The Company has no operating assets which are
presently generating cash to fund its operating and capital
requirements. At September 30, 1996 the Company had a deficiency in net
assets of $80.9 million. See Note 1 to the Consolidated Financial
Statements in Item 8.
Role Of Ecopetrol. Ecopetrol is a quasi-governmental corporate
organization wholly-owned by the Colombian government. See
International Operations, above. At present, the price of natural gas
is set by law enacted by the legislature of Colombia in 1983. The
regulated price of natural gas could be changed in the future by
governmental action. The participation of Ecopetrol, a government-owned
company, in the Opon project as a producer and as a purchaser, and the
power of the government of Colombia to set the price of natural gas
creates the potential for a conflict of interest in Ecopetrol and/or the
government. If such a conflict of interest materializes, the economic
value of the Company's interest in the Opon project could be diminished.
Marketing Of Natural Gas. The Company must secure additional markets
and sales contracts for natural gas in Colombia in order to increase
production and cash flow from the Opon project. This will depend on the
continued development of markets for, and an infrastructure for the
delivery of natural gas in Colombia. Also, competition from other
producers of natural gas may adversely affect the amount of the market
for natural gas the Company may secure. See International Operations
and Competitive Factors, above.
Foreign Operations. Operations in Colombia are subject to the risks
inherent in foreign operations. See International Operations, above.
Risks Of Oil And Gas Exploration. Inherent to the oil and gas industry
is the risk that future wells will not find hydrocarbons where existing
wells and engineering and geological data indicate hydrocarbons should
be found. Further, existing wells can deplete at rates faster than
those anticipated, potentially causing revisions to reserve estimates
and increasing costs due to replacement wells. Operations in the Opon
project are also subject to operating risks associated with the
exploration for, and production of oil and gas. See International
Operations, above.
13
Laws And Regulations. The Company may be adversely affected by new laws
or regulations in the United States or Colombia affecting its operations
and/or environmental compliance, or by existing laws and regulations.
See Other Factors Affecting the Company's Business, above.
Limited Capital. The Company has no source of current income from its
operations. The Company's principal asset, its investment in the Opon
project, does not currently provide any income and will require
additional capital for exploitation. See Liquidity and Capital
Resources in Item 7 and Note 1 to the Consolidated Financial Statements
in Item 8.
Losses From Operations. The Company experienced losses of $11,056,000,
$11,906,000 and $12,657,000 for the years ended September 30, 1994, 1995
and 1996, respectively. As discussed above under Limited Capital,
because the Company's principal asset does not currently provide any
income and requires additional capital for exploitation, the Company
anticipates continued losses through fiscal 1998. See Results of
Operations in Item 7.
Continuation Of American Stock Exchange Listing. Because of losses in
prior years and negative shareholders' equity, the Company does not
fully meet all of the guidelines of the American Stock Exchange for
continued listing of its shares. See Market for Registrant's Common
Equity and Related Stockholder Matters in Item 5.
Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
(d) Financial Information About Foreign Operations
See Note 11 to the Consolidated Financial Statements in Item 8. The
Company operates in one foreign location: Colombia, South America. See
International Operations, above.
Item 2. PROPERTIES
OIL AND GAS PROPERTIES
The Company's principal asset is its interest in the Opon Association
Contract (the "Opon Contract"), an exploration concession for an area in
the Middle Magdalena Valley of Colombia, South America. Two wells
drilled during 1994 and 1995 have confirmed the existence of a
significant natural gas field. The following information should be read
in conjunction with the description of the Opon Contract contained in
International Operations in Item 1, particularly the descriptions of
commerciality, acreage relinquishment, and the term of the Opon
Contract.
14
(1) For estimated net quantities of proved oil and gas reserves,
results of operations from oil and gas producing activities and the
standardized measure of discounted future net cash flows relating
to proved oil and gas reserve quantities for the years ended
September 30, 1996, 1995 and 1994, as applicable, see Supplementary
Information about Oil and Gas Producing Activities and Reserves
(Unaudited) following the Consolidated Financial Statements in Item
8.
(2) The only estimates of total proved net oil and gas reserves filed
with any federal agency during fiscal 1996 are those contained in
this Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.
(3) No production income and cost per unit data for the years ended
September 30, 1996, 1995 and 1994 exists and none will be reported
until production in Colombia commences.
(4) The Company had two (0.3 net) wells capable of production (located
in Colombia) at September 30, 1996. An area of 2,500 acres (386
net acres), which encompasses the two completed wells, was declared
commercial in May 1996. The Company's interest in the commercial
area is 15.444375%. Additional wells are permitted to be drilled
on this acreage and additional areas reported as undeveloped in (5)
below may be declared commercial in the future.
(5) Undeveloped acreage at September 30, 1996, all located in Colombia,
consists of 59,327 gross acres, or 18,325 net acres, contained
within the areas of the Opon Contract which have not been declared
commercial. The Company's interest in this area is 30.88875%.
Portions of this acreage are subject to relinquishment to Ecopetrol
in the future.
(6) Net wells completed (all located in Colombia) for the years ended
September 30:
1996 1995 1994
____ ____ ____
Productive exploratory - 0.3 0.3
Dry exploratory - - -
Productive development - - -
Dry development - - -
The Company's interest in net productive exploratory wells is
computed at the Company's interest at the time they are drilled.
The Company's interest in these wells is subject to a 50% reduction
upon a declaration of commerciality.
(7) Present activity: The Opon No. 6 well was commenced on October 24,
1996 in the non-commercial area of the Opon Contract.
15
(8) Delivery Commitments:
The Company has negotiated a contract for sales of specific
quantities of natural gas from the Company's wells in Colombia.
See International Operations in Item 1. The Company believes the
reserves discovered in the Opon No. 3 and 4 wells are adequate to
meet these sales commitments in the near future. Additional wells
are and will be drilled to insure the ability to meet delivery
commitments over the life of the contract.
OTHER PROPERTIES
Refer to Item 1 for descriptions of properties owned by the Company
other than those described in Item 2, above.
Item 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal and administrative
proceedings incident to the ordinary course of its business. In the
opinion of management, any liability to the Company relative to the
various proceedings will not have a material adverse effect on the
Company's operations or financial condition.
The Company has evaluated the Newhall Refinery site to determine the
impact of refining activities on the environment. The Company has
conducted an environmental assessment of the refinery site and a
remediation plan for the site has been submitted to the Regional Water
Quality Control Board and has received staff approval. The Company
estimates that $2.0 million would be incurred in executing the approved
remediation plan; however, the Company expects to sell the property
without incurring these costs by reducing the purchase price. The
Company's estimate of the net realizable value of this property has been
reduced by estimated remediation costs in determining the carrying value
of the property and therefore the remediation costs will not affect
future results of operations. See Note 12 to the Consolidated Financial
Statements in Item 8.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Closing stock price ranges for the quarterly periods during the fiscal
years ended September 30, 1996 and 1995, as reported by the American
Stock Exchange Monthly Market Statistics reports, were as follows:
December 31 March 31 June 30 September 30
___________ ________ _______ ____________
Fiscal 1996:
Low $ 13.50 $ 9.25 $ 11.13 $ 11.00
High $ 20.88 $ 13.88 $ 14.50 $ 16.88
Fiscal 1995:
Low $ 11.50 $ 9.38 $ 11.88 $ 18.50
High $ 16.25 $ 14.00 $ 18.50 $ 24.13
The common stock is listed on the American Stock Exchange under the
symbol HOG. The Company does not fully meet all of the guidelines of
the American Stock Exchange for continued listing of its shares. The
delisting policies and procedures of the Exchange provide guidelines
under which the Exchange will normally give consideration to suspending
dealings in a security, or removing a security from listing. Among
those guidelines that may be applicable to the Company are: (i) having
stockholders' equity of less than $2,000,000 if such company has
sustained losses from continuing operations and/or net losses in two of
its three most recent fiscal years; or (ii) having sustained losses
which are so substantial in relation to its overall operations or its
existing financial resources, or its financial condition has become so
impaired that it appears questionable, in the opinion of the Exchange,
as to whether such company will be able to continue operations and/or
meet its obligations as they mature; or (iii) having sold or otherwise
disposed of its principal operating assets or having ceased to be an
operating company or having discontinued a substantial portion of its
operations or business for any reason whatsoever. Where the company has
substantially discontinued the business that it conducted at the time it
was listed or admitted to trading, and has become engaged in ventures or
promotions which have not developed to a commercial stage or the success
of which is problematical, it shall not be considered an operating
company for the purposes of continued trading and listing on the
Exchange.
The number of shareholders of record on December 6, 1996 was 710.
DIVIDEND POLICY
The Company has not paid a dividend on its common stock in the two most
recent fiscal years, nor has it ever done so. The Company's loan
agreement with Thamesedge, Ltd. restricts the payment of dividends to
35% of the Company's Consolidated Net Adjusted Income (as defined in the
loan agreement) plus $2.0 million. Since the Company has incurred net
losses during this fiscal year and prior years, the payment of dividends
is restricted.
17
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<HEADING>
For the Fiscal Year Ended September 30,
---------------------------------------------------------
1996 a 1995 a 1994 a 1993 1992 e
--------- --------- --------- --------- ---------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue $112 $46 $728 $980 $50,557
Gain (loss) on sale of assets (6) -- (1,240) (8) 21,403
Operating costs and expenses 6,293 1,943 2,880 5,910 38,687
Depreciation, depletion 156
and amortization 266 220 365 16,230
Interest expense 5,009 4,680 4,605 3,411 9,939
Provision for income taxes 5 113 (199) (46) (285)
--------- --------- --------- --------- ---------
Income (loss) from
continuing operations (11,357) (6,956) (8,018) (8,668) 7,389
Loss from discontinued
operations (1,300) b (4,950) c (3,038) c (15,176) d (64,147) e
--------- --------- --------- --------- ---------
Net Loss $(12,657) $(11,906) $(11,056) $(23,844) $(56,758)
========= ========= ========= ========= =========
Earnings (loss) per share
Continuing operations $(0.83) $(0.53) $(0.62) $(0.67) $0.57
Discontinued operations (0.10) (0.37) (0.23) (1.16) (4.94)
--------- --------- --------- --------- ---------
$(0.93) $(0.90) $(0.85) $(1.83) $(4.37)
========= ========= ========= ========= =========
Weighted average common
shares outstanding 13,673 13,171 13,009 13,007 13,001
========= ========= ========= ========= =========
</TABLE>
18
<TABLE>
<HEADING>
For the Fiscal Year Ended September 30,
---------------------------------------------------------
1996 a 1995 a 1994 a 1993 1992 e
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Working capital (deficit) $(5,109) $(1,077) $2,413 $1,729 $8,142
========= ========= ========= ========= =========
Properties, net $21,248 $12,777 $10,855 $15,910 $10,758
========= ========= ========= ========= =========
Net assets of discontinued
operations $2,202 b $2,978 c $6,851 c $7,750 d $24,129 e
========= ========= ========= ========= =========
Total assets $24,540 $18,398 $24,908 $30,142 $59,532
========= ========= ========= ========= =========
Long-term debt $83,334 $82,213 $81,888 $78,828 $67,005
========= ========= ========= ========= =========
Shareholders' equity (deficit$(80,891) $(73,364) $(66,681) $(55,815) $(31,971)
========= ========= ========= ========= =========
</TABLE>
- -----------------------------
a Under the terms of a Farmout Agreement, the Company's partner in the
Company's Colombian operations paid for most costs incurred (both capitalized
and expensed) in Colombia in 1995 and 1994. The Company became responsible
for its share of costs in Colombia in 1996.
b The Company recorded valuation provisions against the carrying value of its
discontinued real estate operations in 1996.
c The Company recorded valuation provisions against the carrying value of its
discontinued real estate operations and accrued for a contingent liability
arising from its discontinued refining and marketing operations in 1995 and
1994.
d The Company completed the sale of substantially all of its discontinued
refining and marketing segment and recorded valuation provisions against the
carrying value of its discontinued real estate segment in 1993.
e In 1992, the Company sold substantially all of its domestic oil and gas
operations, repaid significant portions of its debt with the proceeds from
the sale, and recorded valuation provisions against the carrying value of its
discontinued segments.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
Hondo Oil & Gas Company is an independent oil and gas company focusing
on international oil and gas exploration and development. The Company's
domestic exploration and production assets were sold in 1992 and
substantially all of its refining and marketing assets were disposed of
in 1993. Today, the Company's principal asset is its interest in the
Opon Association Contract (the "Opon Contract"), an exploration
concession for an area in the Middle Magdalena Valley of Colombia, South
America. Significant reserves of natural gas and condensate were shown
to exist in the Opon Contract area by two discovery wells drilled during
1994 and 1995. In accordance with the terms of the Opon Contract,
Empresa Colombiana de Petroleos ("Ecopetrol") declared a portion of the
area as commercial in May 1996. A pipeline and related facilities to
deliver natural gas and condensate to a market is under construction. A
new well, Opon No. 6, is being drilled to confirm additional gas
resources north of the commercial area. As further described below, the
Company will require additional financing to continue development of the
Opon project.
CAUTIONARY STATEMENTS
The Company believes that this report contains certain forward-looking
statements, as defined in the Private Securities Litigation Reform Act
of 1995, including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," "may" and words of
similar import, or statements of management's opinion. Such forward
looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following:
Substantial Reliance On Single Investment. The Company's success
currently is dependent on its investment in the Opon project in
Colombia, South America. The Company has no operating assets which are
presently generating cash to fund its operating and capital
requirements. At September 30, 1996 the Company had a deficiency in net
assets of $80.9 million. See Note 1 to the Consolidated Financial
Statements in Item 8.
Role Of Ecopetrol. Ecopetrol is a quasi-governmental corporate
organization wholly-owned by the Colombian government. See
International Operations in Item 1. At present, the price of natural
gas is set by law enacted by the legislature of Colombia in 1983. The
regulated price of natural gas could be changed in the future by
governmental action. The participation of Ecopetrol, a government-owned
company, in the Opon project as a producer and as a purchaser, and the
power of the government of Colombia to set the price of natural gas
creates the potential for a conflict of interest in Ecopetrol and/or the
government. If such a conflict of interest materializes, the economic
value of the Company's interest in the Opon project could be diminished.
20
Marketing Of Natural Gas. The Company must secure additional markets
and sales contracts for natural gas in Colombia in order to increase
production and cash flow from the Opon project. This will depend on the
continued development of markets for, and an infrastructure for the
delivery of natural gas in Colombia. Also, competition from other
producers of natural gas may adversely affect the amount of the market
for natural gas the Company may secure. See International Operations
and Competitive Factors in Item 1.
Foreign Operations. Operations in Colombia are subject to the risks
inherent in foreign operations. See International Operations in Item 1.
Risks Of Oil And Gas Exploration. Inherent to the oil and gas industry
is the risk that future wells will not find hydrocarbons where existing
wells and engineering and geological data indicate hydrocarbons should
be found. Further, existing wells can deplete at rates faster than
those anticipated, potentially causing revisions to reserve estimates
and increasing costs due to replacement wells. Operations in the Opon
project are also subject to operating risks associated with the
exploration for, and production of oil and gas. See International
Operations in Item 1.
Laws And Regulations. The Company may be adversely affected by new laws
or regulations in the United States or Colombia affecting its operations
and/or environmental compliance, or by existing laws and regulations.
See Other Factors Affecting the Company's Business in Item 1.
Limited Capital. The Company has no source of current income from its
operations. The Company's principal asset, its investment in the Opon
project, does not currently provide any income and will require
additional capital for exploitation. See Liquidity and Capital
Resources, below, and Note 1 to the Consolidated Financial Statements in
Item 8.
Losses From Operations. The Company experienced losses of $11,056,000,
$11,906,000 and $12,657,000 for the years ended September 30, 1994, 1995
and 1996, respectively. As discussed above under Limited Capital,
because the Company's principal asset does not currently provide any
income and requires additional capital for exploitation, the Company
anticipates continued losses through fiscal 1998. See Results of
Operations, below.
Continuation Of American Stock Exchange Listing. Because of losses in
prior years and negative shareholders' equity, the Company does not
fully meet all of the guidelines of the American Stock Exchange for
continued listing of its shares. See Market for Registrant's Common
Equity and Related Stockholder Matters in Item 5.
Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
21
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. During 1991,
1992 and 1993, Hondo Magdalena and ODC drilled four shallow oil wells to
the Mugrosa formation, one of which was a dry hole, and one deep gas
well to the La Paz formation. These efforts met with limited success.
In August 1993, Hondo Magdalena and ODC entered into a Farmout Agreement
under 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.
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. 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.
These two wells have confirmed the existence of a significant natural
gas field.
The Company has for the first time attributed proved reserves to the
discovery described above. See Note 3 to the Consolidated Financial
Statements in Item 8 and Supplementary Information About Oil and Gas
Producing Activities and Reserves (Unaudited) following the Consolidated
Financial Statements in Item 8. The rules concerning reporting of
proved reserves require that the hydrocarbons be recoverable under
existing economic and operating conditions. The quantum of proved
reserves reported is limited to the volumes that the Company has
reasonable certainty will be sold under existing and pending sales
arrangements.
Presently, Amoco Colombia, Hondo Magdalena and ODC have interests in the
Opon Contract (outside the commercial area described below) of
approximately 60%, 30.9% and 9.1%, respectively. As provided in the
Opon Contract, upon the designation of an area or field as commercial,
Ecopetrol acquires a 50% interest in such area or field and will
reimburse the associate parties for 50% of the direct exploration costs
for each commercial discovery from its share of production. An
application for commerciality was submitted by Amoco Colombia in
February 1996. On May 8, 1996, Ecopetrol approved a commercial field of
approximately 2,500 acres around the Opon No. 3 and No. 4 wells. The
interests in the commercial field are approximately: Ecopetrol, 50%,
Amoco Colombia, 30%, Hondo Magdalena, 15.4%, and ODC, 4.6%. The
commercial field is substantially smaller than that requested by Amoco
Colombia. The commercial field may be enlarged by future drilling
and/or additional technical information. Ecopetrol will not pay for its
share of expenditures to enlarge the commercial field until the new
areas are proven and declared commercial. Ecopetrol will participate in
further development costs of the existing commercial field. As
22
described below, Ecopetrol has agreed to reimburse in cash certain costs
related to the construction of pipeline and wellhead facilities incurred
before commerciality was declared.
The Opon Contract provides that at the end of the exploration period, if
a field capable of producing hydrocarbons in commercial quantities has
been discovered, the Opon Contract area will be reduced by 50%. Two
years thereafter, the Opon Contract area will be further reduced to 25%
of the original area. Two years thereafter, the Opon Contract area will
be reduced to the area of the commercial field that is in production or
development, plus a reserve zone of five kilometers in width around the
productive limit of such field. The commercial field plus the zone
surrounding such field will become the area of exploitation. The
associate parties designate the acreage to be released. Additional
wells will be required to enlarge the commercial area and to increase
the size of the area of exploitation.
The first acreage relinquishment of 50% was completed during 1996. The
Opon Contract area now covers 25,021.5 hectares (61,828 acres). The
Company believes that the first relinquishment did not cause the loss of
significant exploration opportunities. Drilling of additional wells and
further assessment of geological and geophysical information will be
necessary to evaluate the effects of further acreage reductions.
The next well on the Opon Contract area, the Opon No. 6 well, commenced
drilling on October 24, 1996. This well is slightly more than 1
kilometer north of the Opon No. 3 well and is outside the presently
designated commercial area. Hondo Magdalena will pay 30.9% of the costs
of this well estimated at $23.7 million. This well is intended to
confirm the existence of the La Paz reservoir in this area. Contingent
upon the results of the Opon No. 6 well, the next well will be either
(i) the Opon No. 14 well, located south of the commercial area, to
confirm the existence of the La Paz reservoir in that area or (ii) the
Opon No. 5 well, located within the commercial area to support sales
commitments.
Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol executed a Memorandum
of Understanding ("MOU") in July 1995 for the construction of a pipeline
and wellhead facilities (which were not contemplated in the Opon
Contract) and the sale of natural gas from the Opon Contract area. The
MOU provides that the parties will construct a 16 inch pipeline
approximately 88 kilometers in length from the Opon Contract area north
to Ecopetrol's gas processing plant at El Centro, and from there to
Ecopetrol's refinery at Barrancabermeja. The pipeline will have a
capacity of 120 million cubic feet per day and is estimated to cost
$40.6 million. Under the MOU, Hondo Magdalena, ODC and Amoco Colombia
each pay their respective share of the costs incurred prior to July 1,
1995, up to a maximum of 10% of the total pipeline costs. Ecopetrol
will pay cash for its share of pipeline costs incurred after July 1,
1995; the remainder of Ecopetrol's share of costs (those incurred prior
to July 1, 1995) will be recovered out of production. The investment in
pipeline costs will be recovered through a pipeline tariff. In the MOU,
Ecopetrol agreed to construct improvements at its El Centro gas
processing plant to handle incremental production from the Opon Contract
area. Ecopetrol will recover its investment through a gas processing
fee. The parties agreed in the MOU to negotiate contracts necessary to
carry out the agreements made in the MOU. Ecopetrol agreed to fund 80%
23
of its share of wellhead facilities (total estimated cost of $23.5
million) in cash with 20% to be recovered subsequently from production.
After new regulations were adopted in late 1995 by 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 of the
Colombian government, the parties began to renegotiate certain terms of
the MOU. The 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, thus 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.
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. Management believes
that the new contracts achieve an arrangement that is an economic
equivalent to the terms of the MOU and comply with the new CREG
regulations. The three contracts 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. Amoco Colombia
has received a letter from Ecopetrol dated December 16, 1996, stating
that the three contracts previously signed are effective and enforceable
without the need for the completion and signing of a fourth contract.
Ecopetrol's letter confirmed that because the pipeline being built to
transport gas is owned by the parties who own the gas, a transportation
agreement will not be necessary. The Company had previously reported
that a fourth contract, covering the transportation of the gas and
liquids was required for all of the contracts to become effective.
Negotiations are continuing for another contract for the sale of up to
60 million cubic feet of natural gas per day. The gas will be used as
fuel to generate electricity in a power generation plant to be built
near the Opon field.
Preliminary work for the pipeline began in late 1994 and construction
began in July 1996. Completion of the pipeline is estimated to occur in
March 1997. Construction of wellsite facilities began in August 1996;
completion is estimated to occur in March 1997. Ecopetrol has begun the
improvements to the El Centro gas plant; completion is estimated to
occur in the summer of 1997. Production will commence when all of these
construction projects are completed, estimated to occur in the summer of
1997. The estimates of the completion dates of the three projects are
subject to delays due to weather, labor interruptions, guerrilla
activity, unanticipated shortages of materials or equipment and other
causes beyond the control of the associate parties.
24
Amoco Colombia submitted a budget to Hondo Magdalena and ODC for
calendar 1996 in April 1996. Hondo Magdalena approved capital
expenditures for wells and the pipeline projects, and certain other
expenditures, but did not approve the proposed overhead. Similarly,
Amoco Colombia submitted a budget for calendar 1997 on November 5, 1996,
and 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 calendar years 1996 and 1997. The parties continue to try
to resolve the dispute about overhead. Hondo Magdalena has paid
invoices from Amoco Colombia, including disputed overhead and has
charged the full overhead amount to expense. It is management's opinion
that the Company is not obligated to pay for overhead unless charged
pursuant to an approved budget; however the Company has paid Amoco
Colombia's invoices, under protest and subject to audit, in the hope of
resolving the dispute about overhead. If the dispute cannot be
resolved, the joint operating agreement among Amoco Colombia, Hondo
Magdalena and ODC provides for arbitration of disputes.
Corporate Activities
--------------------
In fiscal 1996, the Company continued to maintain general and
administrative expenses at the lowest levels prudent to maintain its
business. The Company moved its principal offices to Houston, Texas in
March 1996 to facilitate its relationships with Amoco Colombia, the
international oil and gas community in general, and travel to Colombia.
On December 20, 1995, Lonrho Plc and Robert O. Anderson and his family
entered into a Revised Settlement Agreement under which the parties
reallocated their ownership in The Hondo Company, the Company's
controlling shareholder. Lonrho Plc now owns or controls 76.6% of The
Hondo Company, has an option to acquire the remaining 23.4% of The Hondo
Company in three years for 1.1 million shares of the Company's common
stock owned by The Hondo Company, and controls the Company. Robert O.
Anderson and his family have informed Lonrho Plc that they will exercise
their call for 300,000 of the shares in January 1997 in exchange for
approximately 6.4% of The Hondo Company.
Discontinued Operations
-----------------------
The Company began an effort to sell its refining and marketing assets in
April 1991. On October 1, 1993 the Company completed a transaction for
the sale of its Fletcher refinery and asphalt terminal in Hilo, Hawaii.
The Company received net proceeds of $1.1 million in 1994. Further
proceeds from the sale of certain components of the refinery equipment
have not been realized and the Company wrote off the related receivable
in 1996. The Company completed disposal of the remaining minor portions
of the refining and marketing assets during 1994.
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. Fletcher notified the Company in July 1994 that an audit for
California Motor Vehicle Fuels Tax was underway and a preliminary review
25
by then 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 $1.4 million as a
result of the consultant's evaluation. An additional $0.7 million was
accrued in September 1995, primarily because of increases in the
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 $10.8 million are due as a result of the audit.
However, no final audit report or assessment has been issued and the
Company does not believe the preliminary report is accurate. The buyer
has notified the Company that it claims indemnity in this matter. The
Company has provided 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. The State of California's audit is still
in process and could result in a liability different from that accrued
when concluded.
The Company owns in fee simple approximately 11 acres of undeveloped
land located in eastern Los Angeles County. An option to a developer on
the Via Verde tract expired on August 18, 1996 and will be extended
until December 1997 at an option price of $3.1 million. The
renegotiated option agreement will allow the Company the right to be
released from the current agreement should there be a potential sale of
the parcel to a ready and willing buyer.
In 1993, the Company suspended a development plan for the Valley Gateway
property, a former refinery site, due to the Company's limited cash
resources and poor market conditions in California. The Company listed
the Valley Gateway property with a broker for $5.0 million and recorded
additional loss provisions of $4.3 million and $1.4 million for its
discontinued real estate operations during 1995 and 1994, respectively.
In September 1996, the Company revised its estimate of the realizable
value of the Valley Gateway property to zero, resulting in an additional
loss provision of $0.9 million and making the carrying value a liability
of $0.3 million (due to accruals for future carrying costs). Management
believes it can dispose of the property and any associated liabilities
for an insignificant price and little or no additional cost. See Note
12 to the Consolidated Financial Statements in Item 8.
Other
-----
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. See Item 5, Market For
Registrant's Equity and Related Shareholder Matters. 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.
The Company is subject to various federal, state and local environmental
laws and regulations. As is the case with other companies engaged in
oil and gas exploration, production and refining, the Company faces
26
exposure from actual or potential claims and lawsuits involving
environmental matters. These matters may involve alleged soil and water
contamination and air pollution. Future environmental related
expenditures cannot be reasonably quantified in many circumstances due
to the conjectural nature of remediation and clean-up cost estimates and
methods, the imprecise and conflicting data regarding the
characteristics of various types of waste, the number of other
potentially responsible parties involved and changing environmental laws
and interpretations. Management believes the reduced scope of the
Company's operations following the sale of the Company's domestic oil
and gas properties and the Fletcher refinery have significantly reduced
the Company's potential exposure to environmental liability. The
Company will continue to closely monitor and administer its compliance
with environmental matters. See Other Factors Affecting the Company's
Business in Item 1.
RESULTS OF OPERATIONS
Results of operations for the year ended September 30, 1996 amounted to
a loss of $12.7 million, or 93 cents per share, of which $11.4 million
arose from continuing operations and $1.3 million resulted from
discontinued operations. The Company reported a net loss of $11.9
million, or 90 cents per share, for the year ended September 30, 1995.
The 1995 loss included discontinued loss provisions of $5.0 million and
a loss of $6.9 million from continuing operations. In 1994, the Company
reported a net loss of $11.0 million, or 85 cents per share, which
included losses from discontinued operations of $3.0 million and a loss
of $8.0 million from continuing operations.
As described previously, the Company is in transition from a domestic
oil and gas operation to a foreign oil and gas operation. The
historical results of continuing operations contain many non-recurring
transactions. As a result, they are not comparable and are a poor
indicator of the Company's future operating results. Management expects
losses from continuing operations to continue through fiscal 1998.
1996 vs 1995
------------
The Company's share of expenses from the Opon operation was borne solely
by Amoco Colombia during 1995 and 1994 while the Opon Nos. 3 and 4 wells
were being drilled. The increases in operating expenses, overhead -
Colombian operations and exploration costs of $0.1 million, $2.5 million
and $1.6 million, respectively, for the year ended September 30, 1996 as
compared to the year ended September 30, 1995, all arise from the
Company assuming its share of these costs in 1996.
Management has the following expectations for 1997 results of
operations: revenue and related operating costs and depreciation,
depletion and amortization will increase significantly in conjunction
with the commencement of production in the summer of 1997; overhead -
Colombian operations should not vary significantly from 1996;
exploration expenses should decline to a negligible amount as the 1996
seismic data acquisition program is complete and no further activity is
presently planned.
27
The increase in interest expense of $0.3 million between the years
arises primarily from Colombian costs financed with the Funding
Agreement described in Liquidity and Capital Resources below.
Management expects interest expense to continue to increase in 1997 as
additional costs are financed with the Funding Agreement.
1995 vs 1994
------------
The decreases in operating revenues, other income, operating costs and
loss on sale of assets all arise primarily from non-recurring
transactions recorded in 1994.
The decrease in general and administrative expense of $0.6 million
between the years arises primarily from reductions in the number of
employees and insurance costs. Exploration costs had no significant
activity in 1994 but reflect the beginning of a seismic data acquisition
program in 1995.
Discontinued Operations
-----------------------
The Company implemented disposal accounting for its refining and
marketing and real estate segments during 1991. In 1996, the Company
recorded loss provisions of $0.4 million and $0.9 million for its
refining and marketing and real estate segments, respectively, as
described previously. Loss provisions of $0.7 million for the refining
and marketing segment and $4.3 million for the real estate segment were
recorded in 1995. Loss provisions for 1994 amounted to $2.0 million and
$1.4 million for refining and marketing and real estate, respectively.
Operating losses from discontinued operations of $0.1 million, $0.4
million, and $0.4 million for 1996, 1995, and 1994, respectively, were
charged against loss provisions established in earlier periods.
28
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, cash inflows of $1.8 million, and $0.2 million arose
from borrowings from Lonrho Plc under existing loan agreements, and
issuance of common stock as a result of the exercise of stock options,
respectively. The Company utilized cash of $2.1 million and $0.2
million to finance continuing and discontinued operations, respectively,
$0.9 million for capital expenditures, and made scheduled debt
repayments of $0.2 million. At September 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.
The Company 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., a subsidiary of Lonrho Plc. 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
semiannually; as provided in other debts to Thamesedge and described
above, the Company may make payment of interest in shares of its common
stock. The first draw on this facility of $4.0 million occurred in
October 1996.
In December 1996, 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, 1997 to not earlier than
January 1, 1998. As consideration for the extensions and certain other
financial undertakings, the Company has granted to Lonrho a security
interest in all of the shares of Hondo Magdalena and agreed to give
Lonrho an option to convert $13.5 million of existing loans with an
interest rate of 6% (see Note 5 to the Consolidated Financial Statements
in Item 8) into the Company's common stock. The debt will be
convertible at Lonrho's option at any time prior to maturity (January 1,
1998) at a rate of $12.375 per share. The portion of the debt that may
be converted into common stock will not be secured by the pledge of the
Hondo Magdalena shares. The option to convert the debt into common
stock will be subject to the approval of the Company's shareholders at
the 1997 annual meeting. If the conversion option is not approved by
the shareholders, the interest rate on the $13.5 million will revert to
13.5%, the rate of interest on such debt prior to the December 1993
restructuring.
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 (see Note 6 to
the Consolidated Financial Statements in Item 8 and General Discussion,
Opon Exploration, above) and certain other costs related to the Opon
Contract. The Funding Agreement became effective on July 26, 1995 with
the execution of the MOU. Hondo Magdalena may finance its share of the
29
costs (including overhead) for the pipeline and an approved 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. See
Note 6 to the Consolidated Financial Statements in Item 8.
Based upon the Company's budget and current information, management
believes existing cash, available facilities and commitments, and the
interim Funding Agreement will be sufficient to finance the Company's
known obligations (the pipeline and related facilities, drilling of the
Opon No. 6 well, overhead obligations unrelated to capital projects and
other business activities) during fiscal 1997. However, management
believes the Company will need additional cash to participate in the
drilling of additional wells in Colombia, or to participate in other
capital projects which may be proposed in Colombia. In addition, funds
are required to retire the Funding Agreement since a significant portion
of the anticipated cash flow is dedicated to servicing the Funding
Agreement. There is a financial incentive to prepay the Funding
Agreement within 90 days after production begins. If the Company
becomes obligated for the drilling of an additional well, or other
capital projects, the Company has the option to not 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.
Cash from operations are not expected to be a source of funds until the
Opon Project begins commercial production, estimated in summer 1997.
Management is reviewing several options for raising funds including
sale of the Company's 15.4 % interest in the pipeline. Management
continues to pursue discussions with a number of financial institutions
regarding debt or equity financing of the Company's future obligations
for the Opon project but has received no commitments. While the
Company will continue to seek permanent financing in the near-term,
there can be no assurance that the Opon Project will be successfully
developed or that additional debt or equity funds will become available.
30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HONDO OIL & GAS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors 32
Financial Statements:
Consolidated Balance Sheets as of
September 30, 1996 and 1995 33
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995 and 1994 34
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended September 30, 1996, 1995 and 1994 35
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994 36
Notes to Consolidated Financial Statements 37
Supplementary Information about Oil and Gas Producing Activities
and Reserves (Unaudited) 55
31
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Hondo Oil & Gas Company
We have audited the accompanying consolidated balance sheets of Hondo
Oil & Gas Company as of September 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the three years in the period ended
September 30, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Hondo Oil & Gas Company at September 30, 1996
and 1995, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended September 30,
1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
/s/ ERNST & YOUNG LLP
Denver, Colorado
November 19, 1996,
except for Note 5 as to which the date is
December 17, 1996
</AUDIT-REPORT>
32
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
September 30,
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $374 $1,771
Accounts receivable, net of allowances
of $332 and $399, respectively 317 440
Prepaid expenses and other 79 7
----------- -----------
Total current assets 770 2,218
Properties, net (Note 3) 21,248 12,777
Net assets of discontinued operations (Note 12) 2,202 2,978
Other assets 320 425
----------- -----------
$24,540 $18,398
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $2,849 $355
Current portion of long-term debt (Note 5) 738 235
Accrued expenses and other (Note 4) 2,292 2,705
----------- -----------
Total current liabilities 5,879 3,295
Long-term debt, including $80,109 and
$78,284, respectively, payable to a
related party (Note 5) 83,334 82,213
Funding agreement (Note 6) 11,513 1,148
Other liabilities, including $2,411 and
$2,367, respectively, payable to a
related party (Note 7) 4,705 5,106
----------- -----------
105,431 91,762
Contingent liabilities (Notes 8 and 12)
Shareholders' equity (deficit) (Notes 5 and 9):
Preferred stock -- --
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 (148,248) (135,591)
----------- -----------
(80,891) (73,364)
----------- -----------
$24,540 $18,398
=========== ===========
The accompanying notes are an integral part of these financial statements.
33
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Share and Per Share Data)
For the years ended
-------------------------------------
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Sales and operating revenue $2 $23 $369
Other income 110 23 359
----------- ----------- -----------
112 46 728
----------- ----------- -----------
COSTS AND EXPENSES
Operating costs 169 47 668
Depreciation, depletion, and amortization 156 266 220
Overhead, Colombian operations 2,576 119 --
General and administrative 1,779 1,608 2,210
Exploration costs 1,769 169 2
Interest on indebtedness including $4,786,
$4,659 and $4,604, respectively, to a
related party (Note 5) 5,009 4,680 4,605
Loss on sale of assets 6 -- 1,240
----------- ----------- -----------
11,464 6,889 8,945
----------- ----------- -----------
Loss from continuing operations
before income taxes (11,352) (6,843) (8,217)
Income tax expense (benefit) (Note 10) 5 113 (199)
----------- ----------- -----------
Loss from continuing operations (11,357) (6,956) (8,018)
Loss from discontinued operations (Note 12) (1,300) (4,950) (3,038)
----------- ----------- -----------
Net Loss $(12,657) $(11,906) $(11,056)
=========== =========== ===========
Loss per share:
Continuing operations $(0.83) $(0.53) $(0.62)
Discontinued operations (0.10) (0.37) (0.23)
----------- ----------- -----------
Net loss per share $(0.93) $(0.90) $(0.85)
=========== =========== ===========
Weighted average common shares outstanding 13,672,722 13,171,049 13,009,174
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In Thousands Except Common Shares)
Common Stock Retained
------------------------ Additional Earnings
Paid-In (Accumulated
Shares Amount Capital Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at October 1, 1993 13,006,892 $13,007 $43,807 $(112,629)
Exercise of stock options (Note 9) 25,384 25 165 --
Net loss -- -- -- (11,056)
----------- ----------- ----------- -----------
Balance at September 30, 1994 13,032,276 13,032 43,972 (123,685)
Purchase of interest in Opon Association
Contract with common stock (Note 3) 44,438 44 845 --
Payment of interest with common stock (Note 5) 189,080 189 2,104 --
Exercise of stock options (Note 9) 157,584 158 1,883 --
Net loss -- -- -- (11,906)
----------- ----------- ----------- -----------
Balance at September 30, 1995 13,423,378 13,423 48,804 (135,591)
Payment of interest with common stock (Note 5) 319,316 319 4,423 --
Exercise of stock options (Note 9) 33,500 34 354 --
Net loss -- -- -- (12,657)
----------- ----------- ----------- -----------
Balance at September 30, 1996 13,776,194 $13,776 $53,581 $(148,248)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the years ended
-------------------------------------
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations $(11,352) $(6,843) $(8,217)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation, depletion and amortization 156 266 220
Loss on sale of assets 6 -- 1,240
Capitalized interest (180) -- --
Accrued interest added to long-term debt 34 2,385 2,250
Accrued interest paid with common stock 4,742 2,292 --
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 10 199 1,735
Inventory -- -- 770
Prepaid expenses and other (72) 26 132
Other assets (12) (201) 121
Increase (decrease) in:
Accounts payable 1,189 159 (1,675)
Accrued expenses and other -- 123 (577)
Funding agreement 3,361 275 --
Other liabilities 2 (357) 2,968
----------- ----------- -----------
Net cash used by continuing operations (2,116) (1,676) (1,033)
Net cash used by discontinued operations (210) (473) (511)
----------- ----------- -----------
Net cash used by operating activities (2,326) (2,149) (1,544)
----------- ----------- -----------
Cash flows from investing activities:
Sale of assets 1 4,804 1,971
Capital expenditures (913) (2,021) (897)
----------- ----------- -----------
Net cash provided (used) by investing activities (912) 2,783 1,074
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings 1,825 3,175 1,000
Principal payments on long-term debt (235) (5,220) (180)
Issuance of stock 251 2,041 190
----------- ----------- -----------
Net cash provided (used) by financing activities 1,841 (4) 1,010
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,397) 630 540
Cash and cash equivalents at the beginning of the year 1,771 1,141 601
----------- ----------- -----------
Cash and cash equivalents at the end of the year $374 $1,771 $1,141
=========== =========== ===========
</TABLE>Refer to Notes 3 and 6 for descriptions of non-cash transactions.
The accompanying notes are an integral part of these financial statements.
36
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
1) Nature of Business
------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an independent oil
and gas exploration and development company. The Hondo Company owns 70.9%
of Hondo Oil & Gas Company. Lonrho Plc ("Lonrho"), a publicly-traded
English company and the Company's primary lender, controls The Hondo Company
and owns an additional 5.7% of the Company through another wholly-owned
subsidiary. In total, Lonrho controls 76.6% of the Company's outstanding
shares.
During 1991 the Company adopted plans of disposal for its refining and
marketing and real estate operations. Substantially all of the refining and
marketing assets were sold in 1993. Following the sale of substantially all
of its domestic oil and gas properties in 1992, the Company's sole
continuing business activity is exploitation of an oil and gas concession in
Colombia, South America.
The Company's wholly-owned subsidiary, Hondo Magdalena Oil & Gas Limited
("Hondo Magdalena"), became involved in the Opon Association Contract (the
"Opon Contract") in Colombia in 1991. Amoco Colombia Petroleum Company
("Amoco Colombia") earned an interest in the Opon Contract through a Farmout
Agreement executed in 1993. Amoco Colombia, Hondo Magdalena, and Opon
Development Company presently have working interests of approximately 60%,
31%, and 9%, respectively. The Colombian national oil company, Ecopetrol,
has the right to acquire 50% of the Opon Contract when commerciality is
declared and will reimburse the associate parties (out of future production)
for 50% of the direct exploration costs. Ecopetrol has agreed to include
certain costs related primarily to construction of a pipeline and wellsite
facilities in the commercial area, and to pay cash for its share of those
costs. Commerciality was declared for a portion of the Contract area in May
1996 and Ecopetrol reimbursed the associate parties for its share of the
above described costs in September 1996 (See Note 6). Subsequent to the
declaration of commerciality, the Company's share of costs for activities
within the commercial area is approximately 15%.
Amoco Colombia was obligated by the 1993 Farmout Agreement to fund all but
$2,000 of Hondo Magdalena's share of drilling and related costs during the
drilling of two exploration wells and to make certain payments to Hondo
Magdalena. Amoco Colombia spent approximately $56,500 to drill the first
two exploratory natural gas wells in 1994 and 1995. The combined results of
production tests of these wells indicate they will produce at a daily rate
of 103 million cubic feet of natural gas and 3,900 barrels of condensate.
The Company was able to attribute proved reserves to this discovery as of
September 30, 1996 following completion of negotiations for sales of the
discovered hydrocarbons. As more fully described in Note 6, Amoco Colombia
agreed to finance the Company's share of costs to build a natural gas
pipeline, construct wellhead facilities, and acquire seismic data, including
related overhead. Acquisition of the seismic data was completed during
fiscal 1996, the pipeline and related wellhead facilities are under
construction, and the drilling of a third well has begun. The third well is
located in the non-commercial portion of the concession, therefore,
Ecopetrol will not pay a share of the drilling costs.
37
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
1) Nature of Business (continued)
------------------------------
The Company has no operating assets which are presently generating cash to
fund its operating and capital expenditure requirements. Additionally, at
September 30, 1996 the Company had a deficiency in net assets. Based upon
the Company's budget and current information, management believes existing
cash, available facilities and commitments, and the interim Funding
Agreement (see Note 6) will be sufficient to finance the Company's known
obligations (the pipeline and related facilities, drilling of the third
exploratory well, overhead obligations unrelated to capital projects and
other business activities) during fiscal 1997. The Company will require
significant additional funding for the continued development of the Opon
Contract area subsequent to fiscal 1997. The Company has the option to not
participate in some or all of the Opon capital projects which may be
proposed in the future if it does not have sufficient funds. However,
substantial penalties would be incurred by not participating.
The Company's cash resources are presently limited to cash on hand and
advances under a line of credit from Lonrho Plc (See Note 5). Cash from
operations is not expected to be a source of funds until revenues from the
Colombian concession commence. Management estimates its available cash
resources are sufficient to meet its cash needs for the next fiscal year
assuming no material adverse changes to present plans occur. Management
believes that permanent financing may not be forthcoming until production
commences, presently estimated to be the summer of 1997. Obtaining permanent
financing for development of the Company's Opon project is vital to the
Company's ability to successfully exploit this concession in the future.
There can be no assurance that the Opon Project will be successfully
developed or that additional debt or equity funds will become available.
2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil include the accounts of
all subsidiaries, all of which are wholly owned. All significant
intercompany transactions have been eliminated.
In 1991, the Company adopted plans of disposal for its refining and
marketing and its real estate segments, respectively. Accordingly, the
results of operations and the net assets of the discontinued segments have
been reclassified to discontinued operations for all periods presented.
Assets of discontinued operations are recorded at the lower of cost or net
realizable value. On October 1, 1993, the Company completed the sale of
substantially all of its refining and marketing assets. Refer to Note 12.
38
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(b) Cash Equivalents
----------------
Cash equivalents represent highly liquid investments with original
maturities of three months or less.
(c) Oil and Gas Properties
----------------------
Oil and gas properties are accounted for using the successful efforts
method. Under this method, property acquisition costs are capitalized when
incurred. Exploratory geological and geophysical costs and general and
administrative costs, including salaries, are expensed as incurred. The
Company capitalizes interest expense for individual capital projects
requiring more than three months for completion and costing more than
$1,000. The costs of drilling exploratory wells are capitalized pending
determination of whether the wells have found proved reserves. If proved
reserves are not discovered, such dry hole costs are expensed. All
developmental drilling costs, including intangible drilling and equipment
costs incurred on unsuccessful wells, are capitalized.
Acquisition costs of unproved properties which are considered to be
individually significant are periodically assessed for impairment on a
property-by-property basis. Individually insignificant properties are
assessed for impairment as a group. Any decline in value is included in the
statement of operations in exploration costs.
Intangible drilling and development costs and tangible equipment are
depleted by the units-of-production method using proved developed reserves
on a field basis. Leasehold costs are also depleted on a field basis using
total proved reserves. Estimates of proved reserves are based upon reports
of independent petroleum engineers.
(d) Other Fixed Assets
------------------
Other fixed assets are recorded at historical cost and are depreciated by
the straight-line method using useful lives of 7 to 10 years.
(e) Earnings Per Share
------------------
Net income 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.
39
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(f) Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes". Under Statement 109, the liability method is
used in 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.
Investment tax credits are accounted for by the flow-through method which
recognizes related benefits in the year realized.
(g) Loan Fees
---------
Capitalized loan fees pertaining to long-term loans are included in other
assets. The loan fees are stated at cost and are amortized by the
straight-line method, which approximates the level yield method, over the
life of the related loan.
(h) Foreign Currency Translation
----------------------------
The Company's Colombian business is conducted in a highly inflationary
economic environment. Accordingly, the financial statements of the
Company's foreign subsidiary are remeasured as if the functional currency
were the U.S. dollar using historical exchange rates. Exchange gains and
losses, which have been immaterial to date, are included in operating costs.
(i) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, particularly in regard to discontinued operations, that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(j) Fair Value of Financial Instruments
-----------------------------------
SFAS Statement No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosures of fair value information about financial
instruments for which it is practicable to estimate that value. The
Company's financial instruments include: cash and cash equivalents,
receivables, accounts payable, long-term debt, the Funding Agreement, and
certain other long-term liabilities. Disclosures of fair values determined
in accordance with SFAS No. 107 are included in Notes 5, 6, and 7. The
Company believes that the recorded values approximate fair values for
financial instruments for which no separate disclosure of fair value is
made.
40
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(k) New Accounting Standards
------------------------
The Financial Accounting Standards Board has recently issued two standards
applicable to the Company. Statement of Financial Accounting Standard
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, was implemented for the year ended
September 30, 1995 and did not have a material impact on the Company's
financial statements. SFAS No. 123, Accounting and Disclosure of Stock-Based
Compensation, gives companies the option to either follow fair value
accounting or to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. The Company has elected to continue to follow APB No. 25
for future stock options and stock-based awards.
(l) Reclassifications
-----------------
Certain reclassifications have been made to the prior years' amounts to make
them comparable to the fiscal 1996 presentation. These additional changes
had no impact on previously reported results of operations or shareholders'
equity (deficit).
3) Properties
----------
Properties, at cost, consist of the following:
September 30,
1996 1995
----------- -----------
Oil and gas properties (Colombia):
Proved, undeveloped $11,803 $--
Accumulated depletion, depreciation
and amortization -- --
----------- -----------
11,803 --
----------- -----------
Other properties - Colombia:
Wellsite facilities (a) 2,039 70
Pipelines (a) 5,398 803
Drilling in progress 1,858 11,775
Other properties - domestic
Other fixed assets 311 279
Accumulated depreciation (161) (150)
----------- -----------
$21,248 $12,777
=========== ===========
(a) Under construction.
41
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
3) Properties (continued)
----------------------
The balance of drilling in progress includes non-cash increases of $2,112
which were accrued in accounts payable as of September 30, 1996. The
balances of wellsite facilities and pipelines include non-cash increases of
$7,968 and $816 for 1996 and 1995, respectively, which were charged to the
Funding Agreement (Note 6). The balances of drilling in progress, wellsite
facilities and pipelines include a non-cash decrease of $2,916 for 1996
pertaining to amounts due from Ecopetrol under the commerciality declaration
(See Note 1), of which $2,629 had been collected and applied to the Funding
Agreement as of September 30, 1996. The balance of $287 was retained by
Ecopetrol subject to completion of an audit and is included in accounts
receivable as of September 30, 1996.
Total costs incurred (both capitalized and expensed) in Colombia for oil and
gas producing activities were:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Property acquisition costs (a) $38 $889 $--
=========== =========== ===========
Exploration costs $3,731 $169 $2,068
=========== =========== ===========
Development costs $2,558 $190 $--
=========== =========== ===========
</TABLE>
(a) In September 1995, the Company acquired an additional 0.88875%
interest in the Opon Contract by the issuance of 44,438 shares of its
common stock.
4) Accrued expenses
----------------
Accrued expenses consist of the following:
September 30,
1996 1995
----------- -----------
Refining and marketing costs (Note 12) $2,028 $2,114
Drilling costs -- 190
Other 264 401
----------- -----------
$2,292 $2,705
=========== ===========
42
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
5) Long-Term Debt
--------------
Long-term debt consists of the following:
September 30,
1996 1995
----------- -----------
Notes payable to Lonrho Plc (a),(b):
Note A (c) $3,277 $3,277
Note B (c) 4,271 4,271
Note C (d) 36,361 36,361
Note D (d) 31,200 31,200
Note E (e) 5,000 3,175
Note F (f) -- --
Pollution Control Revenue Bonds (g) 2,475 2,710
Industrial Development Revenue Bonds (g) 1,000 1,000
Other 488 454
----------- -----------
84,072 82,448
Less current maturities (738) (235)
----------- -----------
$83,334 $82,213
=========== ===========
Maturities are as follows for the years ending September 30:
1997 $738
1998 56,155
1999 19,969
2000 1,804
2001 1,824
Thereafter 3,582
-----------
$84,072
===========
Hondo Oil paid interest of $234, $248 and $260 for the years ended September
30, 1996, 1995 and 1994, respectively. In accordance with the provisions of
SFAS No. 107, the Company has estimated the fair value of its long-term debt
to be $76,743 as of September 30, 1996 using a discount rate of 13% .
(a) In December 1996, the Company and Lonrho agreed to defer commencement
of principal amortization for each of the six loans. The maturity
terms noted below reflect the revisions. As consideration for the
extensions and certain other financial undertakings, the Company has
granted to Lonrho a security interest in all of the shares of Hondo
Magdalena and agreed to give Lonrho an option to convert $13,500 of
Note C into the Company's common stock. The debt will be convertible
at Lonrho's option at any time prior to maturity at a rate of $12.375
per share. The portion of the debt that may be converted into common
stock will not be secured by the pledge of the Hondo Magdalena shares.
The option to convert the debt into common stock will be subject to
shareholder approval at the Company's 1997 annual meeting. If the
conversion option is not approved by the shareholders, the interest
rate on the $13,500 will revert to 13.5%, the rate of interest on such
debt prior to the 1993 restructuring.
43
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(b) The following terms apply to each of the first five notes:
(1) Interest is payable semiannually at a rate of 6%.
(2) If management determines sufficient cash is not available to pay
interest, management may offer to issue the Company's unregistered
stock valued at the American Stock Exchange closing price on the
interest due date as payment in kind. Lonrho may choose to either add
the accrued interest to the balance of the debt outstanding or accept
the payment in kind. The Company has an obligation to register any
shares issued in connection with the above if so requested by Lonrho.
(3) Accrued interest of $2,411, $2,354, $2,250 and $6,005 has been
added to the outstanding debt as of October 1, 1996, October 1, 1994,
April 1, 1994 and September 30, 1993, respectively. Accrued interest
of $2,375, $2,367 and $2,293 has been paid by the issuance of 197,944,
121,372 and 189,080 shares, respectively, of the Company's common
stock for amounts due on April 1, 1996, October 1, 1995 and April 1,
1995, respectively.
(4) As consideration for past deferrals of interest and principal
payments due under the terms of the first four notes, the Company has
granted Lonrho Plc a 5% share of the Company's net profits, as
defined, under the Opon Contract. Following repayment of these notes,
Lonrho's entitlement will be reduced by half.
(5) Net proceeds from asset sales are to be applied to the reduction
of Notes C and D.
(c) Notes A and B are secured by the Company's real estate included in
discontinued operations. Absent repayment in full as a result of the
sale of the securing real estate, principal amortization in ten equal
semiannual installments will commence January 1, 1998. Note A is
secured by the Company's Via Verde Bluffs real estate. Note B is
secured by the Company's Valley Gateway real estate.
(d) Notes C and D are secured by the Company's Valley Gateway real estate.
Notes C and D are due January 1, 1998. Notes C and D are subordinated
to the Company's other indebtedness existing at September 30, 1996.
(e) In October 1994, the Company received $4,800, net of withholding
taxes, from Amoco Colombia under the terms of the Farmout Agreement
(See Note 1). Also in October 1994, the Company paid $5,000 to Lonrho
Plc to reduce the balance of Note D and the related interest expense.
At the same time, Lonrho Plc made available $5,000 in the form of a
new facility loan to be drawn as needed by the Company. The Company
drew $3,175 of this facility loan during 1995 and the remaining $1,825
during 1996.
(f) On June 28, 1996, Lonrho Plc agreed to provide the Company an
additional facility loan of $13,500 at a rate of 13%, payable
semiannually. The provisions for payment of interest with the
Company's common shares described in (b) above apply to this loan. The
loan is due January 1, 1998 and is secured by free cash flow, as
defined, from Hondo Magdalena's operations. The Company made its first
draw on this facility in October 1996 in the amount of $4,000.
44
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(g) Both issues of these tax-exempt bonds were issued under the authority
of the California Pollution Control Financing Authority. The
Pollution Control Revenue bonds bear interest at an average rate of
6.14%, payable semiannually, and mature serially through November 1,
2003. The Industrial Development Revenue Bonds bear interest at a
rate of 7.5%, payable semiannually, and mature September 1, 2011.
Both bond issues are collateralized by certain refinery facilities and
equipment located at Valley Gateway and the Fletcher refinery. The
collateral at the Fletcher refinery is leased to the buyer for a
nominal annual fee. The trustee of the bonds was notified of changes
to the collateral in 1993 and the trustee has not taken any action to
declare a breach of covenant or a default. The Company routinely
communicates with the Trustee and has received no indication that the
Trustee is contemplating any such action.
According to the terms of the various credit agreements, the Company is
restricted in its ability to: (a) incur additional debt; and (b) pay
dividends on and/or redeem capital stock.
6) Funding Agreement
-----------------
Effective July 26, 1995, Hondo Magdalena, 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,
certain wellsite facilities, a 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 will be
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 $1,262 and $57 related
to the financed pipeline costs and wellsite facilities have been capitalized
for the years ended September 30, 1996 and 1995, respectively. The
remainder of the equity premiums accrued to date, relating to the financed
geological and geophysical work and overheads, have been expensed.
45
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
6) Funding Agreement (continued)
-----------------------------
The balance of the Funding Agreement consists of the following:
September 30,
1996 1995
----------- -----------
Outstanding principal $9,771 $1,071
Equity premiums 1,742 77
----------- -----------
$11,513 $1,148
=========== ===========
The balance of the Funding Agreement was reduced by $2,629 in September 1996
by application of the Company's share of payments from Ecopetrol arising
from the declaration of commerciality (Note 1).
In accordance with the provisions of SFAS No. 107, the Company has estimated
the fair value of the Funding Agreement to be $12,911 as of September 30,
1996 using a discount rate of 13% .
7) Other Liabilities
-----------------
Other liabilities consist of the following:
September 30,
1996 1995
----------- -----------
Interest payable to Lonrho Plc (Note 5) $2,411 $2,367
City of Long Beach (a) 1,533 1,533
Deferred compensation contracts (b) 610 671
Other 151 535
----------- -----------
$4,705 $5,106
=========== ===========
(a) The due date of this obligation has been extended from January 1, 1997
to January 1, 1999. As part of the extension, the Company agreed to
pay interest at a rate of 6%, due January 1, 1999. In accordance with
the provisions of SFAS No. 107, the Company has estimated the fair
value of this liability to be $1,311 as of September 30, 1996 using a
discount rate of 13% .
(b) The Company has deferred compensation contracts with two former
officers of the Company. The contracts were entered into to provide
benefits greater than the amounts allowable (in accordance with IRS
regulations) under a former defined benefit plan available to all
employees (terminated in 1989). The amounts above represent the
actuarial present value of the Company's liability under the contracts
computed with discount rates of 8.0% and 7.5% for September 30, 1996
and 1995, respectively.
46
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
8) Contingent liabilities
----------------------
The Company is involved in a number of legal and administrative proceedings
incident to the ordinary course of its business. In the opinion of
management, any liability to the Company relative to the various proceedings
will not have a material adverse effect on the Company's operations or
financial condition.
The Company is subject to various environmental laws and regulations of the
United States and Colombia. As is the case with other companies engaged in
similar industries, the Company faces exposure from actual or potential
claims and lawsuits involving environmental matters. These matters may
involve alleged soil and water contamination and air pollution. The
Company's policy is to accrue environmental and clean-up costs when it is
probable that a liability has been incurred and the amount of the liability
is reasonably estimable. However, future environmental related expenditures
cannot be reasonably quantified in many circumstances due to the conjectural
nature of remediation and clean-up cost estimates and methods, the imprecise
and conflicting data regarding the characteristics of various types of
waste, the number of other potentially responsible parties involved, and
changing environmental laws and interpretations. Management believes the
reduced scope of the Company's operations following the sale of the
Company's domestic oil and gas properties and the Fletcher refinery have
significantly reduced the Company's potential exposure to environmental
liability, including potential Superfund claims against Fletcher, which
liability, in the opinion of management, is not material.
9) Shareholders' Equity
--------------------
In addition to its common shares, the Company has authorized 10,000,000
shares of one dollar par value preferred stock. No preferred shares have
been issued as of September 30, 1996.
The Company has a stock option plan under which options to purchase common
shares of the Company are granted to certain officers, directors and key
employees. The options are priced equal to or greater than the market price
in effect at the date of grant. Accordingly, no compensation expense is
recognized in connection with this plan.
The Company granted an option for 25,000 shares at $7.50 per share to a
former officer in March 1995. The option was not granted under the stock
option plan and was priced less than the market price at date of grant.
Compensation of $138 was included in general and administrative expense at
the date of grant. The option was exercised during 1996.
47
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
9) Shareholders' Equity (continued)
--------------------------------
The following table summarizes certain information relative to stock options
outstanding:
Share
Options
-----------
Outstanding at October 1, 1995 187,732
Granted (a) 50,000
Exercised (b) (33,500)
Expired or terminated --
-----------
Outstanding at September 30, 1996 (c) 204,232
===========
(a) An additional 14,000 options have been tentatively granted to two
directors of the Company by the other members of the Board of
Directors. This transaction is subject to shareholder approval at the
next annual meeting.
(b) Priced at $7.50.
(c) Includes 54,232, 85,000, 15,000, and 50,000 options priced at $7.50,
$14.625, $12.625, and $14.125, respectively; 154,232 options are
exercisable at September 30, 1996.
As of September 30, 1996 and 1995 additional options of 15,000 and 79,000,
respectively, were available for future grants under the stock option plan.
A total of 319,316 and 233,518 shares of common stock were issued during
1996 and 1995, respectively, in transactions not involving stock options.
See Notes 3 and 5.
10) Income Taxes
------------
The components of income tax expense (benefit) from continuing operations
are as follows:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Foreign $5 $113 $--
Deferred:
Federal -- -- ($190)
State -- -- (9)
----------- ----------- -----------
$5 $113 $(199)
=========== =========== ===========
</TABLE>
48
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
10) Income Taxes (continued)
------------------------
Significant components of the Company's deferred tax assets and
liabilities are as follows:
September 30,
1996 1995
----------- -----------
Deferred tax assets, long-term:
Domestic net operating loss carryforwards $43,734 $42,739
Foreign income tax basis of
capitalized assets in excess of
financial reporting basis 1,432 1,355
Income tax basis of real estate in
excess of financial reporting basis 1,965 1,654
Financial reporting basis of accrued
liabilities in excess of tax basis 1,045 1,101
Valuation allowances (47,467) (45,643)
----------- -----------
709 1,206
----------- -----------
Deferred tax liabilities, long-term:
Foreign income tax depreciation in
excess of financial reporting
depreciation 709 1,206
----------- -----------
709 1,206
----------- -----------
Net deferred tax liability $-- $--
=========== ===========
The differences between income tax expense (benefit) from continuing opera-
tions and the amount computed by applying the statutory Federal income tax
rate to loss from continuing operations before income taxes are as follows:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Benefit computed at the effective
statutory rate $(4,499) $(2,365) $(2,794)
Reduction of future reversals by utilization
of net operating loss carryforwards -- -- 93
State taxes, net -- -- (9)
Alternative minimum tax -- -- (190)
Nondeductible interest 1,425 -- --
Losses from foreign operations 1,919 215 137
Foreign income tax expense 5 113 --
Net operating loss for which no benefit
is recognized 1,155 2,150 2,564
----------- ----------- -----------
$5 $113 $(199)
=========== =========== ===========
</TABLE>
49
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
10) Income Taxes (continued)
------------------------
At September 30, 1996, the Company had the following domestic net operating
loss and investment tax credit carryforwards:
<TABLE>
<HEADING>
Alternative
Tax Net Minimum Net Investment
Operating Tax Operating Tax
Year of Expiration Loss Loss Credit
------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Consolidated Carryforwards:
2003 $3,166 $--
2004 12,469 $10,917
2005 2,803 --
2006 26,612 22,012
2007 15,781 30,041
2008 25,551 23,919
2009 13,115 14,517
2010 7,616 7,620
2011 3,298 3,298
----------- -----------
$110,411 $112,324
=========== ===========
Separate Carryforwards (a)
1997 $-- $-- $259
1998 -- -- 144
1999 -- -- 210
2000 $12,397 $12,397 74
2002 6,101 6,101 --
2003 6,714 10,715 --
----------- ----------- -----------
$25,212 $29,213 $687
=========== =========== ===========
</TABLE>
(a) These separate carryforwards can only be used against future income
and tax liabilities of the company within the consolidated group which
generated the carryforwards.
In conjunction with the sale of the Fletcher refinery in 1993 as described
in Note 12, unrestricted net operating loss carryforwards of $59,658 and
separate net operating loss carryforwards of $23,983 pertaining to the
Fletcher refinery were reattributed to Hondo Oil.
50
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
11) Segment information
-------------------
Following reclassification of the Company's refining and marketing and real
estate segments to discontinued operations in 1991, the Company's operations
have been concentrated in one industry segment: the exploration for and
production of reserves of oil and natural gas. In 1992, the Company sold
substantially all of its domestic oil and gas reserves. The Company's
continuing activities are presently limited to exploration for oil and gas
reserves located in Colombia. The Company has no foreign sales and no export
sales as yet. The Company has no significant customers (comprising more
than 10% of continuing operation's revenue) with which it will do business
in the foreseeable future. Information segregating the Company's continuing
domestic and foreign operations is as follows:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales and operating revenue:
United States $2 $23 $369
Foreign -- -- --
----------- ----------- -----------
$2 $23 $369
=========== =========== ===========
Operating profit (loss):
United States $(45) $(140) $155
Foreign (4,511) (326) (283)
----------- ----------- -----------
Operating loss (4,556) (466) (128)
Loss on sale of assets (6) -- (1,240)
Interest expense (5,009) (4,680) (4,605)
Corporate expense and other (1,781) (1,697) (2,244)
----------- ----------- -----------
Loss from continuing operations
before income taxes $(11,352) $(6,843) $(8,217)
=========== =========== ===========
Identifiable assets:
United States $2,973 $5,645 $9,175
Foreign 21,567 12,753 15,733
----------- ----------- -----------
$24,540 $18,398 $24,908
=========== =========== ===========
</TABLE>
51
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
12) Discontinued Operations
-----------------------
In 1991, the Company adopted plans of disposal for its refining and
marketing and real estate segments. The refining and marketing segment had
operating revenues of $64 in 1994. A summary, by segment, of the results of
discontinued operations is as follows:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Refining and marketing $(400) $(650) $(2,000)
Real estate (900) (4,300) (1,400)
Income tax expense (benefit) -- -- (362)
----------- ----------- -----------
$(1,300) $(4,950) $(3,038)
=========== =========== ===========
Per share $(0.10) $(0.37) $(0.23)
=========== =========== ===========
</TABLE>
In September 1993, the Company executed an agreement for the sale of its
Fletcher refinery and its asphalt terminal in Hilo, Hawaii. These assets
represented the material portion of the Company's refining and marketing
segment. Loss provisions pertaining to the refining and marketing segment of
$400, $650 and $2,000 have been required in 1996, 1995 and 1994 for reasons
described below.
The agreement for the sale of Fletcher included a provision allowing the
Company to share in the proceeds from the sale of certain components of the
refinery equipment which the buyer planned to sell. Based on estimates of a
broker of used refinery equipment, the Company recorded $1,000 as the
estimated realizable value at the time of the transaction. The buyer and
the Company have not succeeded in selling this equipment. In September 1994,
the Company reduced the carrying value of the receivable by $600 on the
basis of an offer from the buyer for the Company's share of equipment sale
proceeds. In September 1996, the Company wrote off the remaining receivable
of $400 as uncollectible.
52
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
12) Discontinued Operations (continued)
-----------------------------------
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 then
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 the 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 the Company does not believe the preliminary report is accurate. The
buyer has notified the Company that it claims indemnity in this matter. The
Company has provided 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. The State of California's audit is still in
process and could result in a liability different from that accrued when
concluded.
In 1989, the Company permanently suspended operations at its Newhall
refinery because of expectations of continued operating losses. The Company
reclassified the cost of Newhall's dismantled properties to the real estate
segment. All costs incurred subsequent to 1989 have been charged against
previously established loss provisions. In 1993, the Company suspended
execution of a development plan for the property, now referred to as Valley
Gateway, which included dismantling the refinery, effecting environmental
remediation of the land and further developing the land to a condition where
it could be sold as land ready for construction. This decision was made as
a result of continued declines in the local real estate market and the
Company's limited cash resources. Management believed that a sale of the
property in its present condition with existing entitlements was the best
course of action. The Company has conducted an environmental assessment of
the refinery site and a remediation plan for the site has been submitted to
the Regional Water Quality Control Board and has received staff approval.
The Company estimates that $2.0 million would be incurred in executing the
approved remediation plan; however, the Company expects to sell the property
without incurring these costs by reducing the purchase price. The Company's
estimate of the net realizable value of this property has been reduced by
estimated remediation costs in determining the carrying value of the
property and therefore the remediation costs will not affect future results
of operations.
In addition to the Valley Gateway property, the Company owns the 11 acre Via
Verde Bluffs property, carried at $2,548 and $2,528 at September 30, 1996
and 1995, respectively. Both properties have been listed with brokers since
1994.
53
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(All Dollar Amounts in Thousands)
12) Discontinued Operations (continued)
-----------------------------------
In 1995 and 1994, the carrying value of the real estate was reduced by
$4,300 and $1,400, respectively, as a result of depressed demand in the
local market, sale negotiations, and the timing of possible sales. In
September 1996, the Company revised its estimate of the realizable value of
the Valley Gateway property to zero, resulting in an additional loss
provision of $900 and making the carrying value a liability of $346 (due to
accruals for future carrying costs). This decision was made following three
years of unsuccessful efforts to sell the property in its present state and
little interest from potential buyers. Management believes it can dispose
of the property and any associated liabilities for an insignificant price
and little or no additional cost.
Changes in the balance of real estate are as follows:
September 30,
1996 1995
----------- -----------
Beginning balance $2,978 $6,851
Development and dismantlement costs -- --
Valuation provisions established (900) (4,300)
Valuation provisions used 124 427
----------- -----------
Ending balance $2,202 $2,978
=========== ===========
Remaining acres 116 116
=========== ===========
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued segments.
Allocations of interest to the real estate operations were $262, $274 and
$285 for 1996, 1995 and 1994, respectively.
54
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1996
(All Dollar Amounts in Thousands)
The following supplemental information regarding the oil and gas
activities of Hondo Oil is presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission
("SEC") and Statement of Financial Accounting Standards ("SFAS") No.
69, "Disclosures About Oil and Gas Producing Activities." Estimated
Reserve Quantities and the Standardized Measure of Discounted Future
Net Cash Flows Relating to Proved Reserves are presented on the basis
of reserve reports prepared by Netherland, Sewell and Associates.
Information regarding capitalized costs relating to oil and gas
producing activities and costs incurred for property acquisition,
exploration, and development activities are included in Note 3 to the
consolidated financial statements.
SEC rules limit the disclosure of reserves to proved reserves. Proved
reserves are estimated quantities of crude oil, condensate, natural
gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating
conditions. Proved reserves do not include hydrocarbons the recovery
of which is subject to reasonable doubt because of uncertainty as to
economic factors. These rules mean that the Company cannot report
reserves beyond the volumes that can be sold with reasonable
certainty.
The Company successfully completed drilling of a second well in
Colombia in September 1995. Construction of a pipeline and related
wellhead facilities for production and transportation of the
discovered natural and related liquids is underway. Production is
expected to commence in the summer of 1997.
During fiscal 1996, three contracts covering the sale of natural
gas, the sale of condensate and natural gas liquids, and the
processing of the gas stream have been executed with the Colombian
national oil company, Ecopetrol. These provide for (i) the sale of
100 million cubic feet of natural gas per day for the life of the
concession (July 2015) 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; (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. In addition,
negotiations are proceeding for sales of another 30 million cubic
feet of natural gas per day to an electric generation facility
proposed to be constructed adjacent to the concession.
The quantum of proved reserves which are reported below is
economically limited to the volumes described above.
55
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1996
(All Dollar Amounts in Thousands)
Assumptions used in determining proved reserves and future net cash flows are:
- - Natural gas reserve volumes reportable as proved reserves are
limited to 130 million cubic feet per day for the life of the
concession (July 2015). Condensate reserves produced in association
with the natural gas are a function of the natural gas reserves.
- - The Company's share of reserves and future net cash flows is
15.444375%, subject to a royalty of 20% payable to the Colombian
government.
- - Prices of $21.31 per barrel of condensate and natural gas liquids
and $1.20 per million British Thermal Units of natural gas are used
in the cash flow projections for September 30, 1996. These prices
were determined in accordance with the terms of the executed sales
contracts described above. Both prices are held constant through
the life of the properties. Production costs and capital costs
were projected at current price levels.
- - Pipeline capital and operating costs are not included in the cash
flow projections because these costs will be recovered through
pipeline tariffs.
Estimated Reserve Quantities
- ----------------------------
Proved reserves are estimated quantities of crude oil, condensate,
natural gas, and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those proved reserves that
can be expected to be recovered through existing wells with existing
equipment and operating methods.
Estimates of oil and gas proved reserves and production, all located
in Colombia, are as follows:
Oil (a) Gas
(MBBLS) (MMCF)
----------- -----------
Proved reserves, October 1, 1995 -- --
Revisions in previous estimates -- --
Extensions, discoveries and purchases 2,337 61,561
----------- -----------
Proved reserves, September 30, 1996 2,337 61,561
=========== ===========
(a) All natural gas condensate
None of the above reserves may be classified as proved developed
reserves until production commences.
56
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1996
(All Dollar Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows Relating to
- --------------------------------------------------------------------
Proved Reserves
- ---------------
The following table sets forth the computation of the standardized
measure of discounted future cash flows relating to proved reserves.
The standardized measure is the estimated future cash inflows from
proved reserves less estimated future production and development
costs, estimated future income taxes and a discount factor. Future
cash inflows represent expected revenues from the production of proved
reserves based on prices in existence at the fiscal year end.
Escalation based on inflation, regulatory changes and supply and
demand are not considered. Estimated future production and
development costs related to future production of reserves are based
on historical information, as available, and estimates drawn from
similar gas fields in other locations. Such costs include, but are
not limited to, production, drilling development wells and
installation of production facilities. Inflation and other
anticipatory costs are not considered until the actual cost change
takes effect. Estimated future income tax expenses are computed using
tax rates legislated in Colombia. Consideration is given to the
effects of permanent differences, utilization of net operating loss
carryforwards, tax credits and allowances. A discount rate of 10% is
applied to the annual future net cash flows after income taxes.
The methodology and assumptions used in calculating the standardized
measure are those required by SFAS NO. 69. It is not intended to be
representative of the fair market value of proved reserves. The
valuations of revenues and costs do not necessarily reflect the
amounts to be received or expended by the Company. In addition to
the valuations used, numerous other factors are considered in
evaluating known and prospective oil and gas reserves.
For the year
ended
September 30,
1996
-----------
Future cash inflows $126,564
Future production costs (33,934)
Future development costs (36,063)
Future income tax expenses (14,843)
-----------
Net future cash flows 41,724
10% annual discount for estimated timing
of cash flows (22,071)
-----------
Standardized measure of discounted
future net cash flows $19,653
===========
57
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1996
(All Dollar Amounts in Thousands)
Results of Operations for Oil and Gas Producing Activities
- ----------------------------------------------------------
The following table sets forth the results of operations from oil
and gas producing and exploration activities. Income tax expense
was computed using the statutory tax rate for the period adjusted
for utilization of net operating loss carryforwards, permanent
differences, tax credits and allowances.
<TABLE>
<HEADING> For the years ended
-------------------------------------
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $2 $23 $369
Production costs (2,745) (166) (386)
Exploration expenses (1,769) (169) (2)
Depreciation, depletion and amortization -- -- --
----------- ----------- -----------
(4,512) (312) (19)
Income tax benefit (1,787) (124) (7)
----------- ----------- -----------
Results of operations from exploration
and production activities (excluding
corporate overhead and interest) $(2,725) $(188) $(12)
=========== =========== ===========
</TABLE>
58
HONDO OIL & GAS COMPANY
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
September 30, 1996
(All Dollar Amounts in Thousands)
<TABLE>
<HEADING>
Additions
Balance at charged to Balance
beginning costs and at end
of period expenses Write-offs of period
----------- ----------- ----------- -----------
Allowance for doubtful receivables:
<S> <C> <C> <C> <C>
Continuing operations:
1996 $399 $4 $(71) $332
=========== =========== =========== ===========
1995 $399 $-- $-- $399
=========== =========== =========== ===========
1994 $555 $61 $(217) $399
=========== =========== =========== ===========
</TABLE>
59
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in the Company's auditors during the two most
recent fiscal years.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: See the Index to Financial Statements
in Item 8 hereof.
(2) Financial Statement Schedules: Page
II. Valuation and Qualifying Accounts 59
Schedules other than those listed above are omitted because they are
not required or not applicable, or because the information required in
a schedule is otherwise included in the Notes to Consolidated
Financial Statements.
(3) Exhibits filed with this report: See Item (c) below.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter
ended September 30, 1996.
(c) Exhibits: See Exhibit Index on page 63 for exhibits required by
Item 601 of Regulation S-K.
(d) Financial statement schedules required by Regulation S-X which
are excluded from the annual report to shareholders by Rule
14a-3 (b)(1): See Item (a)(2) above.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report
on Form 10-K for the year ended September 30, 1996 to be signed on its
behalf by the undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
Date: December 27, 1996 By/s/ Stanton J. Urquhart
------------------------
Stanton J. Urquhart
Vice President
(continued)
61
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K for the year ended September 30, 1996 has
been signed below by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
<TABLE>
<HEADING>
Signature Title Date
- ----------------------- -------------------------- -----------------
<S> <C> <C>
/s/ Dieter Bock Director December 27, 1996
- -----------------------
DIETER BOCK
/s/ John J. Hoey President, Chief Executive December 27, 1996
- ----------------------- Officer, and Director
JOHN J. HOEY
/s/ C.B. McDaniel Secretary, Director December 27, 1996
- -----------------------
C.B. MCDANIEL
/s/ Douglas G. McNair Director December 27, 1996
- -----------------------
DOUGLAS G. MCNAIR
/s/ Nicholas J. Morrell Director December 27, 1996
- -----------------------
Nicholas J. Morrell
/s/ John F. Price Director December 27, 1996
- -----------------------
JOHN F. PRICE
/s/ Robert K. Steer Director December 27, 1996
- -----------------------
ROBERT K. STEER
/s/ R.E. Whitten Director December 27, 1996
- -----------------------
R.E. WHITTEN
/s/ Stanton J. Urquhart Vice President, Principal December 27, 1996
- ----------------------- Financial and Principal
STANTON J. URQUHART Accounting Officer
</TABLE>
62
EXHIBIT INDEX
Exhibit
Number Subject
- ------- ---------------------------------------------------------------------
3.1 Restated Certificate of Incorporation.
3.2 Bylaws, as amended on September 5, 1995.
* 4.1 Documents relating to the $1 million principal amount of California
Pollution Control Authority, 7 1/2% Industrial Development Revenue
Bonds (Newhall Refining Co., Inc. Project) including Installment Sale
Agreement and Indenture of Trust.
* 4.2 Documents relating to the $5 million principal amount of California
Pollution Control Financing Authority Pollution Control Revenue Bonds
(Newhall Refining Co., Inc. Project), including Pollution Control
Facilities Lease Agreement, Indenture, U.S. Small Business
Administration Pollution Control Facility Payment Guaranty and
Reimbursement Agreement.
* 10.1 Note Purchase Agreement and Letter Agreement dated November 28, 1988,
between the Company and Thamesedge, Ltd.
**10.2 Letter Agreement dated December 18, 1992, between the Company and
Thamesedge, Ltd., amending Note Purchase Agreement (Exhibit 10.1,
above) (incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1992, filed with the Securities and Exchange Commission on December
28, 1992).
**10.3 Loan Agreement dated December 20, 1991, by and between Hondo Oil & Gas
Company and Lonrho Plc, including the Promissory Notes and Letter
Agreement related thereto (incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1991, filed with the Securities and Exchange Commission
on January 13, 1992).
**10.4 Letter Agreement dated December 18, 1992, between the Company and
Lonrho Plc, amending Loan Agreement (Exhibit 10.3, above)
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1992,
filed with the Securities and Exchange Commission on December 28,
1992).
**10.5 Net Profits Share Agreement dated December 18, 1992, among the
Company, Lonrho Plc, Thamesedge, Ltd. (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1992, filed with the Securities and
Exchange Commission on December 28, 1992).
**10.6 Note Dated April 30, 1993, for $3,000,000, from Via Verde Development
Company to Lonrho Plc; Guaranty of the Company (incorporated by
reference to Exhibit 19.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1993, filed with the Securities
and Exchange Commission on May 17, 1993).
63
EXHIBIT INDEX (continued)
Exhibit
Number Subject
- ------- ---------------------------------------------------------------------
**10.7 Note dated June 25, 1993 for $4,000,000 from the Company to Lonrho
Plc; Letter Agreement relating to same (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993, filed with the Securities and
Exchange Commission on December 28, 1993).
**10.8 Letter Agreement dated December 17, 1993, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., Lonrho Plc
and Thamesedge Ltd. and Note Amendments, amending prior loan
agreements and notes (Exhibits 10.1 through 10.7, above),(incorporated
by reference to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1993, filed with the
Securities and Exchange Commission on December 28, 1993).
**10.9 Letter Agreement dated November 10, 1994, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., Lonrho Plc
and Thamesedge Ltd. and Note Amendments (excluding Exhibit E to the
Letter Agreement filed as Exhibit 10.10, below) amending prior loan
agreements and notes (Exhibits 10.1 through 10.8, above),(incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K dated November 29, 1994, filed with the Securities and Exchange
Commission on November 29, 1994).
**10.10 Promissory Note dated October 31, 1994, in the original principal
amount of $5,000,000, from the Company to Lonrho Plc (additional loan
facility),(incorporated by reference to Exhibit 10.2 to the Company's
Report on Form 8-K dated November 29, 1994, filed with the Securities
and Exchange Commission on November 29, 1994).
**10.11 Letter Agreement dated December 22, 1995, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., Lonrho Plc
and Thamesedge Ltd. and Note Amendments amending prior loan agreements
and notes (Exhibits 10.1 through 10.10, above),(incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1995, filed with the Securities and
Exchange Commission on December 28, 1995).
**10.12 Revolving Credit Agreement dated as of June 28, 1996 between the
Company and Thamesedge, Ltd., excluding exhibits and schedules
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, filed with
the Securities and Exchange Commission on August 14, 1996).
**10.13 Noted dated June 28, 1996, for $13,500,000 from the Company to
Thamesedge, Ltd. delivered pursuant to the Revolving Credit Agreement
(Exhibit 10.12, above), (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996, filed with the Securities and Exchange Commission on August
14, 1996).
**10.14 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 10.12, above), (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, filed with the Securities
and Exchange Commission on August 14, 1996).
64
EXHIBIT INDEX (continued)
Exhibit
Number Subject
- ------- ---------------------------------------------------------------------
10.15 Letter Agreement dated December 13, 1996, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., and
Thamesedge Ltd. and Note Amendments amending prior loan agreements and
notes (Exhibits 10.1 through 10.11, above).
* 10.16 Employee Capital Appreciation Savings Plan, effective January 1, 1985.
**10.17 Form of Indemnity Agreement between Pauley and its directors and
officers, approved January 27, 1987 (incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1992, filed with the Securities and
Exchange Commission on December 28, 1992).
**10.18 Opon Association Contract (translation) dated July 15, 1987, between
Ecopetrol and Opon Development Company, excluding exhibits and
attachments (incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1991, filed with Securities and Exchange Commission on
January 13, 1992).
**10.19 Farmout Agreement dated August 9, 1993, among Hondo Magdalena Oil &
Gas Limited, Opon Development Company and Amoco Colombia Petroleum
Company, excluding exhibits (incorporated by reference to Exhibit 19.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993, filed with the Securities and Exchange Commission on
August 16, 1993).
**10.20 New Operating Agreement dated as of August 9, 1993, among Hondo
Magdalena Oil & Gas Limited, Amoco Colombia Petroleum Company, and
Opon Development Company (incorporated by reference to Exhibit 10.15
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993, filed with Securities and Exchange Commission on
December 28, 1993).
**10.21 Stock and Asset Purchase Agreement dated September 15, 1993, between
Signal Oil & Refining Company, Inc. and the Company and Pauley Pacific
Inc., excluding exhibits (incorporated by reference to Exhibit 99.1 to
the Company's Current Report on Form 8- K dated October 12, 1993,
filed with the Securities and Exchange Commission on October 12,
1993).
**10.22 Letter Agreement dated February 2, 1994 between the Company and the
City of Long Beach, excluding exhibits (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1993, filed with the Securities and
Exchange Commission on February 14, 1994).
10.23 Amendment to Letter Agreement dated November 26, 1996 between the
Company and the City of Long Beach, excluding exhibits.
**10.24 Hondo Oil & Gas Company 1993 Stock Incentive Plan, excluding exhibits
(incorporated by reference to Exhibit A to the Company's Proxy
Statement on Schedule 14A filed with the Securities and Exchange
Commission on January 28, 1994).
65
EXHIBIT INDEX (continued)
Exhibit
Number Subject
- ------- ---------------------------------------------------------------------
**10.25 Funding Agreement for Tier 1 Development Project dated May 5, 1995,
among Hondo Magdalena Oil & Gas Limited, Amoco Colombia Petroleum
Company and Opon Development Company, excluding exhibits (except
exhibit A) (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995,
filed with the Securities and Exchange Commission on July 28, 1995).
**10.26 Memorandum of Understanding (translation) dated July 26, 1995, among
Hondo Magdalena Oil & Gas Limited, Amoco Colombia Petroleum Company,
Opon Development Company, and Empresa Colombiana de Petroleos,
excluding exhibits (except Exhibit A) (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, filed with the Securities and Exchange
Commission on July 28, 1995).
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedules.
- --------
* These exhibits, which were previously incorporated by reference
to the Company's reports which have now been on file with the
Commission for more than 5 years, are not filed with this Annual
Report pursuant to 17 C.F.R. 229.601(b)(4)(iii)(A). The Company
agrees to furnish these documents to the Commission upon
request.
** Incorporated by reference
66
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION OF
HONDO OIL & GAS COMPANY
Hondo Oil & Gas Company, a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of corporation is Hondo Oil & Gas Company and the name under
which the corporation was originally incorporated is Pauley Petroleum
Inc. The date of filing of its original Certificate of Incorporation
was June 2, 1958.
2. This Restated Certificate of Incorporation only restates and
integrates and does not further amend the provisions of the
Certificate of Incorporation of this corporation as heretofore amended
or supplemented; there is no discrepancy between those provisions and
the provisions of this Restated Certificate of Incorporation. The
restatement of the articles of incorporation does not contain an
amendment of the articles of incorporation that requires shareholder
approval.
3. The text of the Certificate of Incorporation as amended or
supplemented heretofore is hereby restated, without further amendments
or changes, to read as set forth in Exhibit A hereto.
4. This Restated Certificate of Incorporation was duly adopted by the
Board of Directors of the corporation in accordance with Section 245
of the Delaware General Corporation Law.
Dated: November 10, 1994 Hondo Oil & Gas Company
By:/s/ John J. Hoey
--------------------------
John J. Hoey
President and Chief Executive Officer
By:/s/ C.B. McDaniel
---------------------------
C.B. McDaniel
Secretary
Exhibit A
RESTATED
CERTIFICATE OF INCORPORATION
OF
HONDO OIL & GAS COMPANY
FIRST: The name of the corporation is Hondo Oil & Gas Company.
SECOND: Its principal office in the State of Delaware is located at
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.
The name and address of its resident agent is The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801.
THIRD: The nature of the business, or objects or purposes to be
transacted, promoted or carried on are:
To purchase, or otherwise acquire or invest in, own, mortgage,
pledge, sell, assign, transfer, or otherwise dispose of, in whole or
in part, oil, gas and mineral leases; oil, gas and mineral
concessions, rights or interests granted or created by any government
or any subdivision thereof; oil, gas and mineral rights; any interest
of any type in any of the foregoing, including expressly interests
known as oil payments, gas payments and production payments; fee
lands; mineral interests in lands; mining claims; applications or
options to acquire oil, gas or mineral leases, concessions or rights;
royalty interests; overriding royalty interests; net profits interests
and any other interest in lands or any rights or interests created by
contract or otherwise which entitle the owner or owners thereof to
participate in any way in, or obtain any advantage from, the
production or sale of oil, gas or other minerals.
To operate, maintain, improve and develop oil, gas or other
mineral properties, to explore for oil, gas or other minerals by any
means, including the drilling of wells for such purposes, and to
purchase and sell oil, gas or other minerals and all products and by-
products thereof.
To enter into, maintain, operate or carry on in any or all of its
branches the business of exploring for, producing, developing, mining,
processing, refining, treating, handling, marketing or dealing in,
petroleum, oil, natural gas, asphalt, bituminous rock and any and all
other mineral and hydrocarbon substances, and any and all products or
by-products which may be derived from such substances, or any of them;
and for all or any of such purposes to acquire, own, lease, operate or
otherwise deal in or with oil or gas wells, tanks, storage facilities,
gathering systems, pipelines, processing plants, mines, refineries,
smelters, crushers, mills, wharves, watercraft, aircraft, tank cars,
communication systems, machinery, equipment and any and all other
kinds and types of real or personal property that may in anywise be
deemed necessary, convenient or advisable in connection with the
1
carrying on of such business or any branch thereof.
To acquire, own, store, transport, buy and sell salt brine and
other mineral solutions and sand and clay for the manufacture and sale
of clay products.
To buy, exchange, contract for, lease, and in any and all other
ways, acquire, take, hold and own, and to deal in, sell, mortgage,
lease or otherwise dispose of real property, and rights and interests
in and to real property, and to manage, operate, maintain, improve,
and develop the same.
To manufacture, purchase or otherwise acquire, invest in, own,
mortgage, pledge, sell, assign and transfer or otherwise dispose of,
trade, deal in and deal with machinery, equipment, pipe, appliances,
building materials, goods, wares and merchandise and personal property
of every class and description.
To acquire, and pay for in cash, stock, or bonds of the
corporation or otherwise, the good will, rights, assets and property,
and to undertake or assume the whole or any part of the obligations or
liabilities, of any person, firm, association or corporation.
To acquire, hold, use, sell, assign, lease, grant licenses in
respect of, mortgage or otherwise dispose of letters patent of the
United States or any foreign country, patent rights, licenses and
privileges, inventions, improvements and processes, copyrights,
trademarks and trade-names, relating to or useful in connection with
any business of this corporation.
To acquire by purchase, subscription or otherwise, and to
receive, hold, own, guarantee, sell, assign, exchange, transfer,
mortgage, pledge or otherwise dispose of or deal in or with any of the
shares of capital stock, or any voting trust certificates in respect
of shares of capital stock, or any scrip, warrants, rights, bonds,
debentures, notes, trust receipts, obligations, evidences of
indebtedness or interest or other securities or choses in action,
issued or created by any corporations, joint stock companies,
syndicates, associations, firms, trusts or persons, public or private,
or by the government of the United States of America, or by any
foreign government, or by any state, territory, province, municipality
or other political subdivision or by any governmental agency, and as
owner thereof to possess and exercise all the rights, powers and
privileges of ownership, including the right to execute consents and
vote thereon, and to do any and all acts and things necessary or
advisable for the preservation, protection, improvement and
enhancement in value thereof.
To enter into, make and perform contracts of every kind and
description with any person, firm, association, corporation,
municipality, county, state, body politic or government or colony or
dependency thereof.
To borrow or raise moneys for any of the purposes of the
corporation and, from time to time, without limit as to amount, to
draw, make, accept, endorse, execute and issue promissory notes,
2
drafts, bills of exchange, warrants, bonds, debentures and other
negotiable or non-negotiable instruments and evidences of
indebtedness, and to secure the payment of any thereof and of the
interest thereon by mortgage upon or pledge, conveyance or assignment
in trust of the whole or any part of the property of the corporation,
whether at the time owned or thereafter acquired, or by assignment of
the proceeds, applicable to the corporation's interest, in any and all
oil, gas and other hydrocarbons or minerals produced from any
properties in which the corporation may own any interest, or by
assignment of any moneys owing or to be owing to the corporation, or
otherwise and to sell, pledge or otherwise dispose of such bonds or
other obligations of the corporation for its corporate purposes.
To buy, sell or otherwise deal in notes, open accounts, and other
similar evidences of debt, or to loan money and take notes, open
accounts, and other similar evidences of debt as collateral security
therefor.
To purchase, hold, sell and transfer the shares of its own
capital stock; provided it shall not use its funds or property for the
purchase of its own shares of capital stock when such use would cause
any impairment of its capital except as otherwise permitted by law,
and provided further that shares of its own capital stock belonging to
it shall not be voted upon directly or indirectly.
To have one or more offices, to carry on all or any of its
operations and business and, without restriction or limit as to
amount, to purchase or otherwise acquire, hold, own, mortgage, sell,
convey or otherwise dispose of real and personal property of every
class and description in any of the States, Districts, Territories or
Colonies of the United States, and in any and all foreign countries,
subject to the laws of such State, District, Territory, Colony or
Country.
In general, to carry on any other business in connection with the
foregoing, and to have and exercise all the powers conferred by the
laws of Delaware upon corporations formed under the act hereinafter
referred to, and to do any or all of the things hereinbefore set forth
to the same extent as natural persons might or could do; provided,
however, that nothing herein contained shall be deemed to authorize
this corporation to carry on within the State of Delaware any public
utility business.
The objects and purposes specified in the foregoing clauses
shall, except where otherwise expressed, be in nowise limited or
restricted by reference to, or inference from, the terms of any other
clause in this certificate of incorporation, but the objects and
purposes specified in each of the foregoing clauses of this article
shall be regarded as independent objects and purposes.
FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is forty million (40,000,000)
shares, divided into ten million (10,000,000) shares of Preferred Stock, of
the par value of one dollar ($1.00) per share (herein called "Preferred
Stock"), and thirty million (30,000,000) shares of Common Stock, of the par
value of one dollar per share (herein called "Common Stock").
3
The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, of the classes of stock of the corporation:
I.
1. The Preferred Stock may be issued in one or more series. The
designations, powers, preferences and relative, participating,
optional, and other special rights, and the qualifications,
limitations and restrictions thereof, of the Preferred Stock of each
series shall be such as are stated and expressed herein and to the
extent not stated and expressed herein, shall be such as may be fixed
by the Board of Directors (authority so to do being hereby expressly
granted) and stated and expressed in a resolution or resolutions
adopted by the Board of Directors providing for the issue of Preferred
Stock of such series. Such resolution or resolutions shall (a)
specify the series to which such Preferred Stock shall belong, (b) fix
the dividend rate therefor, (c) fix the amount which the holders of
the Preferred Stock of such series shall be entitled to be paid in the
event of a voluntary or involuntary liquidation, dissolution or
winding up of the corporation, (d) state whether or not the Preferred
Stock of such series shall be redeemable and at what times and under
what conditions and the amount or amounts payable thereon in the event
of redemption; and may, in a manner not inconsistent with the
provisions of this Article Fourth, (i) limit the number of shares of
such series which may be issued, (ii) provide for a sinking fund for
the purchase or redemption or a purchase fund for the purchase of
shares of such series and the terms and provisions governing the
operation of any such fund and the status as to reissuance of shares
of Preferred Stock purchased or otherwise re-acquired or redeemed or
retired through the operation thereof, (iii) grant voting rights to
the holders of shares of such series, (iv) impose conditions or
restrictions upon the creation of indebtedness of the corporation or
upon the issue of additional Preferred Stock or other capital stock
ranking equally therewith or prior thereto as to dividends or
distributions of assets on liquidation, (v) impose conditions or
restrictions upon the payment of dividends upon, or the making of
other distributions to, or the redemption, purchase or acquisition of
shares of capital stock ranking junior to the Preferred Stock as to
dividends or distribution of assets upon liquidation (referred to in
this Article Fourth as "junior stock"), (vi) grant to the holders of
the Preferred Stock of such series the right to convert such stock
into other shares of the corporation, and (vii) grant such other
special rights to the holders of shares of such series as the
directors may determine. The term "fixed for such series" and similar
terms shall mean stated and expressed in this Article Fourth or in a
resolution or resolutions adopted by the Board of Directors providing
for the issue of Preferred Stock of the series referred to.
2. The holders of the Preferred Stock of the respective series
shall be entitled to receive, when and as declared by the Board of
Directors, out of any funds legally available therefor, cumulative
preferential dividends in cash, at the rate per annum fixed for such
series, and no more, payable quarter-yearly on the first days of
February, May, August and November to stockholders of record on a
4
date, not exceeding fifty days preceding each such dividend payment
date fixed for the purpose by the Board of Directors in advance of
payment of each particular dividend. Dividends on shares of the
Preferred Stock shall accrue from the dividend payment date
immediately preceding the date of issuance (unless the date of
issuance shall be a dividend payment date, in which case they shall
accrue from that date), or from such other date or dates as may be
fixed by the Board of Directors for any series, and shall be
cumulative.
3. Except as by law expressly provided and except as may be
provided for any series of Preferred Stock by the resolution of the
Board of Directors providing for the issuance thereof as herein
permitted, the Preferred Stock shall have no right or power to vote on
any question or in any proceeding or to be represented at or to
receive notice of any meeting of stockholders.
4. Preferred Stock redeemed or otherwise retired by the
corporation shall assume the status of authorized but unissued
preferred stock and may thereafter, subject to the provisions of this
Article Fourth and of any restrictions contained in any resolution of
the Board of Directors providing for the issue of any particular
series of Preferred Stock, be reissued in the same manner as other
authorized but unissued Preferred Stock:
II.
Subject to and on the conditions set forth in any resolution of
the Board of Directors providing for the issuance of any particular
series of Preferred Stock, and not otherwise, such dividends (payable
in cash, stock or otherwise) as may be determined by the Board of
Directors may be declared and paid on the Common Stock from time to
time out of any funds legally available therefor.
The holders of the Common Stock shall be entitled to one vote for
each share held at all meetings of the stockholders of the
corporation.
FIFTH: The minimum amount of capital with which the corporation will
commence business is $1,000.
SIXTH: The names and places of residence of the incorporators are as
follows:
Names Residences
H. K. Webb Wilmington, Delaware
H. C. Broadt Wilmington, Delaware
A. D. Atwell Wilmington, Delaware
SEVENTH: The corporation is to have perpetual existence.
EIGHTH: The private property of the stockholders shall not be subject to
the payment of corporate debts to any extent whatever.
5
NINTH: No holder of stock of the corporation of any class authorized
hereby or which may hereafter be authorized, or any series of any such
class, shall as such holder and because of his ownership of such stock have
any preemptive or other right to purchase or subscribe for any shares of
stock of the corporation of any class, or of any series of any class, or
for any notes, debentures, bonds, obligations or instruments which the
corporation may issue or sell that are convertible into or exchangeable for
or entitle the holders thereof to subscribe for or purchase any shares of
stock of the corporation of any class, or of any series of any class. Any
part of the stock of the corporation and any part of any notes, debentures,
bonds, obligations, or instruments convertible into or carrying options or
warrants to purchase stock of the corporation of any class authorized
hereby, or which may hereafter be authorized, may at any time be issued,
optioned for sale and sold or otherwise disposed of pursuant to resolutions
of the Board of Directors to such persons, upon such terms and conditions
and for such lawful consideration, as may to the Board of Directors seem
proper and advisable, without first offering said stock or such other
securities, or any part thereof, to any holders of stock of the
corporation.
TENTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
To make, alter or repeal the by-laws of the corporation.
To authorize and cause to be executed mortgages and liens upon
the real and personal property of the corporation.
To set apart out of any of the funds of the corporation available
for dividends a reserve or reserves for any proper purpose and to
abolish any such reserve in the manner in which it was created.
By resolution or resolutions passed by a majority of the whole
Board to designate one or more committees, each committee to consist
of two or more of the directors of the corporation, which, to the
extent provided in said resolution or resolutions or in the by-laws of
the corporation, shall have and may exercise the powers of the Board
of Directors in the management of the business and affairs of the
corporation, and may have power to authorize the seal of the
corporation to be affixed to all papers which may require it. Such
committee or committees shall have such name or names as may be stated
in the by-laws of the corporation or as may be determined from time to
time by resolution adopted by the Board of Directors.
When and as authorized by the affirmative vote of the holders of
a majority of the stock issued and outstanding having voting power
given at a stockholders' meeting duly called for that purpose, or when
authorized by the written consent of the holders of a majority of the
voting stock issued and outstanding, to sell, lease or exchange all of
the property and assets of the corporation, including its good will
and its corporate franchises, upon such terms and conditions and for
such consideration, which may be in whole or in part shares of stock
in, and/or other securities of, any other corporation or corporations,
as its Board of Directors shall deem expedient and for the best
interests of the corporation.
6
ELEVENTH: No contract or other transaction between the corporation and any
other corporation shall be affected or invalidated by the fact that any one
or more of the directors of this corporation is or are interested in or is
or are a director or directors or officer or officers of such other
corporation, and no contract or other transaction between the corporation
and any other person or firm shall be affected or invalidated by the fact
that any one or more directors of this corporation is a party to, or are
parties to, or interested in, such contract or transaction; provided that
in each such case the nature and extent of the interest of such director or
directors in such contract or other transaction and/or the fact that such
director or directors is or are a director or directors or officer or
officers of such other corporation is disclosed at the meeting of the Board
of Directors at which such contract or other transaction is authorized.
TWELFTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application
in a summary way of this corporation or of any creditors or stockholders
thereof, or on the application of any receiver or receivers appointed for
this corporation under the provisions of section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this corporation under the provisions
of section 279 of Title 8 of the Delaware Code order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as
the case may be, agree to any compromise or arrangement and to any
reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been
made, be binding on all the creditors or class of creditors, and/or on all
the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
THIRTEENTH: Meetings of stockholders may be held without the State of
Delaware, if the by-laws so provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside of the
State of Delaware at such place or places as may be from time to time
designated by the Board of Directors or in the by-laws of the corporation.
FOURTEENTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
FIFTEENTH: To the fullest extent permitted by the General Corporation Law
of the State of Delaware as the same exists or may hereafter be amended, a
director of the corporation shall not be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as director.
Any repeal or modification of this Article shall not result in any
liability for a director with respect to any action or omission occurring
prior to such repeal or modification.
7
<PAGE>
HONDO OIL & GAS COMPANY
BYLAWS
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the
Corporation shall be located in the City of Wilmington, County of New
Castle, State of Delaware, and the name of the resident agent in charge
thereof shall be The Corporation Trust Company.
Section 2. Other Offices. The Corporation may also have
offices at such other places, within or without the State of Delaware, as
the Board of Directors may from time to time appoint or the business of the
Corporation may require.
ARTICLE II
Seal
The corporate seal shall be circular in form and shall contain
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware".
ARTICLE III
Meeting of Stockholders
Section 1. Place of Meeting. Meetings of the stockholders for
the selection of directors shall be held at such place within the State of
New Mexico, or such other place, as the Board of Directors may fix,
provided that at least ten (10) days' notice be given to stockholders
entitled to vote thereat of the place so fixed. Each other meeting of the
stockholders may be held at such place, either within or without the State
of Delaware, as may be stated in the notice or waiver of notice of such
meeting.
Section 2. Annual Meetings. The Annual Meeting of
Stockholders shall be held on such date and at such time each year as shall
be designated from time to time by the Board of Directors and stated in the
notice of the meeting, at which meeting the stockholders shall elect
directors by a plurality vote and shall transact such other business as may
properly be brought before the meeting.
Section 3. Special Meeting. Special meetings of the
stockholders for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorporation, may be called by the
Chairman of the Board of Directors, the President or by the Board of
Directors (either by written instrument signed by a majority or by
resolution adopted by a vote of the majority), and special meetings shall
be called by the Chairman, the President or the Secretary whenever
stockholder owning a majority of the capital stock issued, outstanding and
entitled to vote so request in writing. Such request shall state the
purpose or purposes of the proposed meeting.
Section 4. Notice. Written or printed notice of every meeting
of stockholders, annual or special, stating the time and place thereof,
1
and, if a special meeting, the purpose or purposes in general terms for
which the meeting is called shall not less than ten (10) days before such
meeting be served upon or mailed to each stockholder entitled to vote
thereat, at his address as it appears upon the stock records of the
Corporation or, if such stockholder shall have filed with the Secretary of
the Corporation a written request that notices intended for him be mailed
to some other address, then to the address designated in such request.
Notice of the time, place and/or purpose of any meeting of
stockholders may be dispensed with if every stockholder entitled to vote
thereat shall attend either in person or by proxy, or if every absent
stockholder entitled to such notice shall in writing, filed with the
records of the meeting, either before or after the holding thereof, waive
such notice.
SECTION 5. Quorum. Except as otherwise provided by law or by
the Certificate of Incorporation, the presence in person or by proxy at any
meeting of stockholders of the holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to
vote thereat, shall be requisite and shall constitute a quorum. If,
however, such majority shall not be present or represented at any meeting
of the stockholders regularly called, the holders of a majority of the
shares present or represented and entitled to vote thereat shall have power
to adjourn the meeting to another time, or to another time and place,
without notice other than announcement of adjournment at the meeting, and
there may be successive adjournment for like cause and in like manner until
the requisite amount of shares entitled to vote at such meeting shall be
represented. At such adjourned meeting at which the requisite amount of
shares entitled to vote thereat shall be present or represented, any
business may be transacted which might have been transacted at the meeting
as originally notified.
SECTION 6. Votes. Proxies. At each meeting of stockholders,
every stockholder shall have one vote for each share of capital stock
entitled to vote which is registered in his name on the books of the
Corporation on the date on which the transfer books were closed, if closed,
or on the date set by the Board of Directors for the determination of
stockholders entitled to vote at such meeting. At each such meeting every
stockholder shall be entitled to vote in person, or by proxy appointed by
an instrument in writing subscribed by such stockholder and bearing a date
not more than three years prior to the meeting in question, unless said
instrument provides for a longer period during which it is to remain in
force.
All elections of directors shall be held by ballot. If the
Chairman of the meeting shall so determine, a vote may be taken upon any
other matter by ballot, and shall be so taken upon the request of any
stockholder entitled to vote on such matter.
At elections of directors, the Chairman shall appoint two
inspectors of election, who shall first take and subscribe an oath or
affirmation faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of their ability and who
shall take charge of the polls and after the balloting shall make a
certificate of the result of the vote taken; but no director or candidate
for the office of director shall be appointed as such inspector.
2
A nomination for the position of director shall be accepted,
and votes cast for a proposed nominee shall be counted, by the inspectors
of election only if the Secretary of the Company has received at least 30
days prior to the meeting a statement over the signature of the proposed
nominee that he consents to being a nominee and, if elected, intends to
serve as a director. Such statement shall also contain the number of
shares of stock of the Corporation held by the nominee, occupations and
business history for the previous five years, other directorships, names of
business entities in which the proposed nominee owns a 10 percent or more
equity interest, listing of any criminal convictions including federal or
state securities violations, and all other information required by the
federal proxy rules in effect at the time the proposed nominee submits said
statement.
SECTION 7. Organization. The Chairman of the Board, if there
be one, or in his absence the President, or in the absence of both the
Chairman of the Board and the President, a Vice President, shall call
meetings of the stockholders to order and shall act as chairman thereof.
The Secretary of the Corporation, if present, shall act as secretary of all
meetings of stockholders and, in his absence, the presiding officer may
appoint a secretary.
ARTICLE IV
Directors
SECTION 1. Number. The business and property of the
Corporation shall be conducted and managed by a Board of Directors
consisting of not less than three (3) nor more than eleven (11) directors,
none of whom need be a stockholder. The Board of Directors of the
Corporation shall initially be composed of five (5) directors, but the
Board may at any time by resolution increase or decrease the number of
directors to not more than eleven (11) or less than three (3), and the
vacancies resulting from any such increase shall be filled as provided in
Section 3 of this Article IV.
SECTION 2. Term of Office. Each director shall hold office
until the next annual meeting of stockholders and until his successor is
duly elected and qualified or until his earlier death or resignation,
subject to the right of the stockholders at any time to remove any director
or directors as provided in Section 4 of this Article.
SECTION 3. Vacancies. If any vacancy shall occur among the
directors, or if the number of directors shall at any time be increased,
the directors in office, although less than a quorum, by a majority vote
may fill the vacancies or newly created directorships, or any such
vacancies or newly created directorships may be filled by the stockholders
at any meeting.
SECTION 4. Removal by Stockholders. The holders of record of
the capital stock of the Corporation entitled to vote for the election of
directors may in their discretion at any meeting duly called for the
purpose, by a majority vote, remove any director or directors and elect a
new director or directors in place thereof.
SECTION 5. Meetings. Meetings of the Board of Directors shall
be held at such place within or without the State of Delaware, as may from
time to time be fixed by resolution of the Board or as may be specified in
3
the notice or waiver of notice of any meeting. Meetings may be held at any
time upon the call of the Chairman, the President or the Secretary or any
two (2) or the directors by oral, telegraphic, or written notice, duly
served or sent or mailed to each director not less than two (2) days before
such meeting. Meetings may be held at any time and place without notice if
all the directors are present or if those not present shall, in writing or
by telegram, waive notice thereof. A regular meeting of the Board may be
held without notice immediately following the annual meeting of
stockholders at the place where such annual meeting is held or at such
other place, as determined by the directors. Regular meetings of the Board
may also be held without notice at such time and place as shall from time
to time be determined by resolution of the Board.
SECTION 6. Action Without a Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors
or of any committee thereof may be taken without a meeting, if all members
of the Board or committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of
the Board or committee.
SECTION 7. Telephone Meetings. Subject to the provisions of
applicable law and these Bylaws regarding notice of meetings, members of
the Board of Directors or members of any committee designated by such Board
may, unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, participate in and hold a meeting of such Board of Directors
or committee by using conference telephone or similar communications
equipment by means of which all persons participating in the meeting can
hear each other, and participation in a meeting pursuant to this Section
shall constitute presence in person at such meeting, except when a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting was not lawfully
called or convened.
SECTION 8. Quorum. A majority of the directors shall
constitute a quorum for the transaction of business. If at any meeting of
the Board there shall be less than a quorum present, a majority of those
present may adjourn the meeting from time to time without notice other than
announcement of the adjournment at the meeting, and at such adjourned
meeting at which a quorum is present any business may be transacted which
might have been transacted at the meeting as originally noticed.
SECTION 9. Compensation. Directors, as such, shall not
receive any stated compensation for their services, but by resolution of
the Board of Directors, a fixed sum, and expenses of attendance, if any,
may be allowed for attendance at each regular or special meeting thereof.
By resolution of the Board of Directors, outside directors who do not
receive compensation from the Corporation in any other capacity may receive
compensation for their services. Nothing in this Section shall be
construed to preclude a director from serving the Corporation in any other
capacity and receiving compensation therefor.
ARTICLE V
Executive Committee
SECTION 1. Executive Committee. The Board of Directors may
appoint an Executive Committee of three (3) or more members (with such
4
alternates, if any, as may be deemed desirable), to serve during the
pleasure of the Board, to consist of such directors as the Board may from
time to time designate. The Chairman of the Executive Committee shall be
designated by the Board of Directors.
SECTION 2. Procedure. The Executive Committee, by a vote of a
majority of its members, shall fix its own times and places of meeting,
shall determine the number of its members constituting a quorum for the
transaction of business, and shall prescribe its own rules or procedure; no
change in which shall be made save by a majority vote to its members.
SECTION 3. Powers. During the intervals between the meetings
of the Board of Directors, the Executive Committee shall possess and may
exercise all the powers of the Board in the management and direction of the
business and affairs of the Corporation.
SECTION 4. Reports. The Executive Committee shall keep
regular minutes of its proceedings and all action by the Executive
Committee shall be reported promptly to the Board of Directors. Such
action shall be subject to review by the Board, provided that no rights of
third parties shall be affected by such review.
ARTICLE VI
Other Committee of the Board of Directors
The Board of Directors may designate one or more directors
(with such alternate, if any, as may be deemed desirable) to constitute
another committee or committees for any purpose, which shall have and may
exercise the powers of the Board of Directors in the management of the
business and affairs of the Corporation, and may have power to authorize
the seal of the Corporation to be affixed to all papers which may require
it.
ARTICLE VII
Officers
SECTION 1. Officers. The Board of Directors shall elect, as
executive officers, a Chairman of the Board of Directors (who may also
occupy the office of President), a President, a Secretary and a Treasurer,
one or more Vice Presidents (in the case of each such Vice President, with
such descriptive title, if any, as the Board of Directors may deem
appropriate), and one or more Assistant Secretaries and Assistant
Treasurers. The Chairman of the Board of Directors or the President may
also be the Chief Executive Officer, as designated by the Board of
Directors.
SECTION 2. Vacancies. Any vacancy in any office may be
filled for the unexpired portion of the term by the Board of Directors, at
any regular or special meeting.
SECTION 3. President. The President may be a member of the
Board of Directors and the chief operating officer of the Corporation.
Subject to the directions of the Board of Directors, he shall have any
exercise direct charge of and general supervision over the business and
affairs of the Corporation and shall perform all duties incident to the
5
office of a president of a corporation, and such other duties as from time
to time may be assigned to him by the Board of Directors.
SECTION 4. Chairman of the Board. The Chairman of the Board,
if elected, shall be a member of the Board of Directors and shall preside
at its meetings. He shall keep in close touch with the administration of
the affairs of the Corporation, shall advise and counsel with the
President, and, in his absence, with other executives of the Corporation,
and shall perform such other duties as may from time to time be assigned to
him by the Board of Directors.
SECTION 5. Vice Presidents. Each Vice President, if elected,
shall be and exercise such powers and shall perform such duties as from
time to time may be conferred upon or assigned to him by the Board of
Directors, or as may be delegated to him by the President.
SECTION 6. Secretary. The Secretary shall keep the minutes of
all meetings of the stockholders and of the Board of Directors in books
provided for the purpose; he shall see that all notices are duly given in
accordance with the provisions of law and these bylaws; he shall be
responsible for the custody and safekeeping of the records, and of the
corporate seal or seals of the Corporation; he shall see that the corporate
seal is affixed to all documents, the execution of which, on behalf of the
Corporation, under its seal, is duly authorized and when the seal is so
affixed he may attest the same; he may sign, with the President or Vice
President, certificates of stock of the Corporation; and in general, he
shall perform all duties incident to the office of a secretary of a
corporation, and such other duties as from time to time may be assigned to
him by the Board of Directors.
SECTION 7. Assistant Secretaries. The Assistant Secretaries
shall, in the absence or disability or at the direction of the Secretary,
perform the duties and exercise the powers of the Secretary and shall
perform such other duties as the Board of Directors shall prescribe.
SECTION 8. Treasurer. The Treasurer shall have charge of and
be responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of
the Corporation, all moneys or other valuable effects in such banks, trust
companies or other depositaries as shall, from time to time, be selected by
the Board of Directors; he may indorse for collection on behalf of the
Corporation, checks, notes and other obligations; he may sign receipts and
vouchers for payments made to the Corporation; singly or jointly with
another person as the Board of Directors may authorize, he may sign checks
of the Corporation and pay out and dispose of the proceeds under the
direction of the Board; he shall render to the President and to the Board
of Directors, whenever requested, an account of the financial condition of
the Corporation; he may sign, with the President or a Vice President,
certificates of stock of the Corporation; and in general, shall perform
all the duties incident to the office of a treasurer of a corporation, and
such other duties as from time to time may be assigned to him by the Board
of Directors.
SECTION 9. Assistant Treasurers. The Assistant Treasurers
shall, in the absence or disability or at the direction of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall
perform such other duties as the Board of Directors shall prescribe.
6
SECTION 10. Subordinate Officers. The Board of Directors may
appoint such subordinate officers as it may deem desirable. Each such
officer shall hold office for such period, have such authority and perform
such duties as the Board of Directors may prescribe. The Board of
Directors may, from time to time, authorize any officer to appoint and
remove subordinate officers and to prescribe the powers and duties thereof.
SECTION 11. Compensation. The Board of Directors shall have
power to fix the compensation of all officers of the Corporation. It may
authorize any officer, upon whom the power of appointing subordinate
officers may have been conferred, to fix the compensation of such
subordinate officers.
SECTION 12. Removal. Any officer of the Corporation may be
removed, with or without cause, by a majority vote of the Board of
Directors at a meeting called for that purpose.
SECTION 13. Bonds. The Board of Directors may require any
officer of the Corporation to give a bond to the Corporation, conditional
upon the faithful performance of his duties, with one or more sureties and
in such amount as may be satisfactory to the Board of Directors.
ARTICLE VIII
Certificates of Stock
SECTION 1. Form and Execution of Certificates. The interest
of each stockholder of the Corporation shall be evidenced by a certificate
or certificates for shares of stock in such form as the Board of Directors
may from time to time prescribe. The certificates of stock of each class
and series shall be consecutively numbered and signed by the President or
Vice President and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer of the Corporation, and may be
countersigned and registered in such manner as the Board of Directors may
by resolution prescribe, and shall bear the corporate seal or a printed or
engraved facsimile thereof. Where any such certificate is signed by a
transfer agent or transfer clerk acting on behalf of the Corporation and by
a registrar, the signatures of any such President, Vice President,
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be
facsimiles, engraved or printed. In case any officer or officers who shall
have signed, or whose facsimile signature or signatures shall have been
used on, any such facsimile signature or signature shall have been used on,
any such certificate or certificates shall cease to be such officer or
officers, whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the Corporation,
such certificate or certificates may nevertheless be issued and delivered
by the Corporation as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures
shall have been used thereon had not ceased to be such officer or officers.
SECTION 2. Transfer of Shares. Subject to any applicable
restrictions contained in the Certificate of Incorporation, the shares of
the stock of the Corporation shall be transferred on the books of the
Corporation by the holder thereof in person or by his attorney lawfully
constituted, upon surrender for cancellation of certificates for the same
number of shares, with an assignment and power of transfer endorsed thereon
or attached thereto, duly executed, with such proof or guaranty of the
7
authenticity of the signature as the Corporation or its agents may
reasonably require. The Corporation shall be entitled to treat the holder
of record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person whether
or not it shall have express or other notice thereof, save as expressly
provided by law or by the Certificate of Incorporation.
SECTION 3. Closing of Transfer Books. The stock transfer
books of the Corporation may, if deemed expedient by the Board of
Directors, be closed for such length of time not exceeding sixty (60) days
as the Board may determine, preceding the date of any meeting of
stockholders or the date for the payment of any dividend or the date for
the allotment of rights or the date when any issuance, change, conversion
or exchange of capital stock shall go into effect, during which time no
transfer of stock on the books of the Corporation may be made.
SECTION 4. Dates of Record. If deemed expedient, the Board of
Directors may fix in advance a date for such length of time not exceeding
sixty (60) days as the Board may determine, preceding the date of any
meeting of stockholders, or the date for the payment of any dividend, or
the date for the allotment of rights or the date when any issuance, change,
conversion or exchange or capital stock shall go into effect, as a record
date for the determination of the stockholders entitled to notice of, and
to vote at, any such meeting or entitled to receive payment of any such
dividend or to any such allotment of rights, or to exercise the rights in
respect of any such issuance, change, conversion or exchange of capital
stock, as the case may be, and in such case only such stockholders as shall
be stockholders of record on the date so fixed shall be entitled to such
notice of, and to vote at, such meeting, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any stock on
the books of the Corporation after any record date fixed as aforesaid;
provided, however, that no record date for the determination of the
stockholders entitled to notice of, and to vote at, any meeting of
stockholders shall be fixed on a date less than ten (10) days before the
date of such meeting.
SECTION 5. Lost or Destroyed Certificates. In case of the
loss or destruction of any certificate of stock, a new certificate may be
issued upon the following conditions:
The owner of said certificate shall file with the Secretary of
the Corporation an affidavit giving the facts in relations to the
ownership, and in relation to the loss or destruction of said certificate,
stating its number and the number of shares represented thereby; such
affidavit to be in such form and contain such statements as shall satisfy
the President and Secretary that said certificate has been accidentially
destroyed or lost, and that a new certificate ought to be issued in lieu
thereof. Upon being so satisfied, the President and Secretary shall
require such owner to file with the Secretary a bond in such penal sum and
in such form as they may deem advisable, and with a surety or sureties
approved by them, to indemnify and save harmless the Corporation from any
claim, loss, damage or liability which may be occasioned by the issuance of
a new certificate in lieu thereof. Upon such bond being so filed a new
certificate for the same number of shares shall be issued to the owner of
the certificate so lost or destroyed; and the transfer agent and registrar
8
of stock shall countersign and register such new certificate upon receipt
of a written order signed by the said President and Secretary, and
thereupon the Corporation will save harmless said transfer agent and
registrar in the premise. A Vice President may act hereunder in the stead
of the President, and an Assistant Secretary in the stead of the Secretary.
In case of the surrender of the original certificate, in lieu of which a
new certificate has been issued, or the surrender of such new certificate,
for cancellation, the bond or indemnity given as a condition of the issue
of such new certificate may be surrendered.
ARTICLE IX
Checks, Notes, Etc.
SECTION 1. Execution of Checks, Notes Etc. All checks and
drafts on the Corporation's bank accounts and all bills of exchange and
promissory notes, and all acceptances, obligations and other instruments
for the payment of money, shall be signed by such officer or officers,
agent or agents, as shall be thereunto authorized from time to time by the
Board of Directors.
SECTION 2. Execution of Contracts, Assignments, Etc. All
contracts, agreements, endorsements, assignments, transfers, stock powers,
or other instruments shall be signed by the President, the Chairman of the
Board, or any Vice President or by such other officer of officers, agent or
agents, as shall be thereunto authorized from time to time by the Board of
Directors; and, when necessary or appropriate, shall be attested by the
Secretary or any Assistant Secretary or the Treasurer or any Assistant
Treasurer.
SECTION 3. Execution of Proxies. The President or the
Chairman of the Board or, in their absence or disability, a Vice President,
may authorize from time to time the signature and issuance of proxies to
vote shares of stock of other companies standing in the name of the
Corporation. All such proxies shall be signed in the name of the
Corporation by the President, the Chairman of the Board or a Vice President
and by the Secretary or an Assistant Secretary.
9
ARTICLE X
Waivers and Consents
Whenever any notice is required to be given by law, or under
the provisions of the Certificate of Incorporation, or of these bylaws,
such notice may be waived, in writing, signed by the person or persons
entitled to such notice, or by his attorney or attorneys thereunto
authorized, whether before or after the event or action to which such
notice relates.
Whenever the vote of stockholders at a meeting thereof is
required or permitted to be taken in connection with any corporate action
by any provision of law or of the Certificate of Incorporation or of these
bylaws, the meeting and vote of stockholders may be dispensed with if all
the stockholders who would have been entitled to vote upon the action if
such meeting were held shall consent in writing to such action being taken.
Any action required or permitted to be taken at any meeting of
the Board of Directors or of any Committee of the Board of Directors may be
taken without a meeting, if prior to such action a written consent thereto
is signed by all members of the Board of Directors or of such Committee as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or of such Committee.
ARTICLE XI
Dividends
Except as otherwise provided by law or by the Certificate of
Incorporation, the Board of Directors may declare dividends out of the
surplus of the Corporation at such times and in such amounts as it may from
time to time designate.
Before crediting net profits to surplus in any year, there may
be set aside out of the net profits of the Corporation for that year such
sum or sums as the Board of Directors from time to time in its absolute
discretion may deem proper as a reserve fund or funds to meet contingencies
or for equalizing dividends or for repairing or maintaining any property of
the Corporation or for such other purpose as the Board of Directors shall
deem conducive to the interests of the Corporation.
ARTICLE XII
Indemnification and Insurance
SECTION 1. Right to Indemnification. Each person who was or
is a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he
or she, or a person of whom he or she is the legal representative, is or
was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action or inaction in an
official capacity or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the laws of Delaware, as the
same exist or may hereafter be amended, against all costs, charges,
10
expenses, liabilities and losses (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators; provided,
however, that, except as provided in Section 2 hereof, the Corporation
shall indemnify any such person seeking indemnification in connection with
a proceeding (or part thereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Article
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Delaware
General Corporation Law requires, the payment of such expenses incurred by
a director or officer in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such
person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director of officer, to repay all
amounts so advanced if it shall ultimately be determined that such director
or officer is not entitled to be indemnified under this Section or
otherwise. The Corporation may, by action of its Board of Directors,
provide indemnification to employees and agents of the Corporation with the
same scope and effect as the foregoing indemnification of directors and
officers.
SECTION 2. Right of Claimant to Bring Suit. If a claim under
Section 1 of this Article is not paid in full by the Corporation within
thirty days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in
defending and proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has failed to meet a standard of conduct
which makes it permissible under Delaware law for the Corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) to have made a determination prior to the commencement
of such action that indemnification of the claimant is permissible in the
circumstances because he or she has met such standard or conduct, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholder) that the claimant has not
met such standard or conduct, shall be a defense to the action or create a
presumption that the claimant has failed to meet such standard of conduct.
SECTION 3. Non-Exclusivity or Rights. The right to
indemnification and the payment of expenses incurred in defending a
proceeding in advance of its final disposition conferred in this Article
shall not be exclusive or any other right which any person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
11
SECTION 4. Insurance. The Corporation may maintain insurance,
at its expense, to protect itself and any director, officer, employee or
agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise against any such expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under Delaware law.
SECTION 5. Expenses as a Witness. To the extent that any
director, officer, employee or agent of the Corporation is by reason of
such position, or a position with another entity at the request of the
Corporation, a witness in any action, suit or proceeding, he shall be
indemnified against all costs and expenses actually and reasonably incurred
by him or her or on his or her behalf in connection therewith.
SECTION 6. Indemnity Agreements. The Corporation may enter
into agreements with any director, officer, employee or agent of the
Corporation providing for indemnification to the full extent permitted by
Delaware law.
ARTICLE XIII
Inspection of Books
The Board of Directors shall determine from time to time
whether, and if allowed, when and under what conditions and regulations,
the accounts and books of the Corporation (except such as may be
specifically open to inspection) or any of them, shall be open to the
inspection of the stockholders and the stockholders' rights in this respect
are and shall be restricted and limited accordingly.
ARTICLE XIV
Fiscal Year
The fiscal year of the Corporation shall end on such dates as
the Board of Directors may by resolution specify and the Board of Directors
may by resolution change such date for future fiscal years at any time or
from time to time.
ARTICLE XV
Amendments
These Bylaws may be altered, amended or repealed and new Bylaws
adopted by the stockholders or by the Board of Directors by a majority vote
at any meeting called for that purpose.
12
<PAGE>
[LETTERHEAD OF HONDO OIL & GAS COMPANY APPEARS HERE]
December 13, 1996
Thamesedge, Ltd.
4 Grosvenor Place
London, England SW1X 7DL
Dear Sirs:
This Agreement is entered into by and among Hondo Oil & Gas
Company, a Delaware corporation ("Hondo"), and its wholly-owned
subsidiaries, Via Verde Development Company, a California corporation
("Via Verde"), and Newhall Refining Co., Inc., a Delaware corporation
("Newhall"), and Thamesedge, Ltd. ("Thamesedge"), with reference to:
a) Note Purchase Agreement dated November 28, 1988, between
Pauley Petroleum Inc. (now Hondo) and Thamesedge, as amended
(the "Thamesedge Note Purchase Agreement"), and Note dated
November 30, 1988, for $75,000,000 from Pauley Petroleum Inc.
to Thamesedge (the "Thamesedge Note");
b) Letter agreements dated November 28, 1988 and December 18,
1992, between Hondo and Thamesedge referring to and amending
the Thamesedge Note Purchase Agreement and the Thamesedge
Note;
c) Net Profits Share Agreement dated December 18, 1992, by and
among Hondo, Lonrho Plc ("Lonrho") and Thamesedge (the "Net
Profits Share Agreement");
d) Amended and Restated Letter Agreement dated December 20,
1991, between Hondo and Lonrho (the "Lonrho Loan Agreement")
and Notes dated September 1, 1991, for $10,000,000, dated
November 1, 1991, for $9,000,000, and dated December 20, 1991,
for $13,000,000, from Hondo to Lonrho (the "Lonrho Notes");
e) Letter Agreement dated December 18, 1992, between Hondo and
Lonrho referring to and amending the Lonrho Loan Agreement and
the Lonrho Notes;
f) Note dated April 30, 1993, for $3,000,000 from Via Verde to
Lonrho (the "Via Verde Note"), secured by Deed of Trust dated
recorded as Instrument No. 93-840817 in the Real Property
Records of Los Angeles County, California, (the "Via Verde
Mortgage"), guaranteed by Hondo in Guaranty dated April 30,
1993 (the "Hondo Guaranty"), and subject to a letter agreement
dated April 30, 1993;
g) Note dated June 25, 1993, for $4,000,000 from Hondo to
Lonrho (the "Valley Gateway Note"), secured by Deed of Trust
dated August 30, 1993, granted by Hondo and Newhall, recorded
as Instrument No. 93-2006475 in the Real Property Records of
Los Angeles County, California, (the "Valley Gateway
Mortgage");
Thamesedge, Ltd. Letter Agreement
December 13, 1996
Page 2
h) Letter Agreement dated December 17, 1993, between Hondo,
Via Verde, Newhall, and Lonrho and Thamesedge, restructuring
the above-described indebtedness and amending the Thamesedge
Note, the Lonrho Notes, the Via Verde Note and the Valley
Gateway Note;
i) Letter Agreement dated November 10, 1994, between Hondo,
Via Verde, Newhall, and Lonrho and Thamesedge, restructuring
the above-described indebtedness and amending the Thamesedge
Note, the Lonrho Notes, the Via Verde Note and the Valley
Gateway Note, and creating a new $5,000,000 loan facility and
a Note therefor dated October 31, 1994 (the "Facility Note");
j) Letter Agreement dated December 22, 1995, between Hondo,
Via Verde, Newhall, and Lonrho and Thamesedge, restructuring
the above-described indebtedness and amending the Thamesedge
Note, the Lonrho Notes, the Via Verde Note and the Valley
Gateway Note; and
k) Revolving Credit Agreement dated as of June 28, 1996,
between Hondo and Thamesedge (the "Revolving Credit
Agreement") and Promissory Note (the "Revolving Credit Note")
for $13,500,000 from Hondo to Thamesedge.
On March 29, 1996, Lonrho assigned to Thamesedge all of its
interest in the above-described agreements and notes. The Thamesedge
Note, the Lonrho Notes, the Via Verde Note, the Valley Gateway Note, the
Facility Note, and the Revolving Credit Note, each as amended, are
collectively referred to herein as the "Indebtedness".
Hondo and Thamesedge have agreed to extend the date of repayment
for the Indebtedness (i) by changing the mandatory redemption dates on
the Thamesedge Note from November 1, 1997 and 1998, to January 1, 1998;
and (ii) extend the principal repayment date of each of the Lonrho
Notes, the Via Verde Note, the Valley Gateway Note, the Facility Note
and the Revolving Credit Note from October 1, 1997 to January 1, 1998.
Hondo, Via Verde and Newhall, and Lonrho and Thamesedge hereby
agree, as follows:
1. Effective Date. This Agreement shall be effective for all
purposes on September 30, 1996.
2. Amendment of Notes. The Thamesedge Note, the Lonrho Notes
(collectively), the Via Verde Note, the Valley Gateway Note,
the Facility Note and the Revolving Credit Note, each will be
amended as provided, respectively, in Exhibits A, B, C, D, E
and F to this Agreement. Hondo and Via Verde, as applicable,
will execute the note amendments, Thamesedge will execute them
to acknowledge consent thereto, and the note amendments will
be attached to the original notes held by Thamesedge.
Thamesedge, Ltd. Letter Agreement
December 13, 1996
Page 3
3. Conversion of Part of the Indebtedness into Common Stock.
Thamesedge will have the option to convert $13,500,000 of the
principal amount of the Thamesedge Note into shares of common
stock, $1.00 par value, of Hondo at the conversion price of
$12.325 per share (110% of the closing price of such shares on
the American Stock Exchange on December 11, 1996). Such
conversion option will be subject to the approval of the
stockholders of Hondo. If the conversion option is not
approved by the stockholders, then the interest rate on such
$13,500,000 of the Thamesedge debt will become 13.5% per annum
(the original rate of the Thamesedge Note) at the time such
conversion is not approved.
4. Pledge of Shares of Hondo Magdalena. Hondo will pledge as
security for the Indebtedness, except the $13,500,000 that is
subject to the conversion option above, all of the shares of
Hondo's subsidiary, Hondo Magdalena Oil & Gas Limited, a
Jersey, Channel Islands corporation.
5. Effect on Other Agreements. Except as amended by the note
amendments, the terms and provisions of the above-described
agreements relating to the Lonrho Indebtedness shall remain in
full force and effect, including, without limiting the
generality of the foregoing, the Letter Agreements dated
December 17, 1993, November 10, 1994 and December 22, 1995.
The parties agree to execute such other and further documents
as may be necessary to effect the understandings of this
latter agreement. Nothing in this letter agreement shall be
construed as an agreement on the part of Lonrho or Thamesedge
to provide extensions of the maturity or other restructuring
of the Indebtedness in the future.
Thamesedge, Ltd. Letter Agreement
December 13, 1996
Page 4
Please confirm that the foregoing correctly sets forth the
agreement between us.
Very truly yours,
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
-----------------------
John J. Hoey, President
VIA VERDE DEVELOPMENT COMPANY
By: /s/ John J. Hoey
-----------------------
John J. Hoey, President
NEWHALL REFINING CO., INC.
By: /s/ John J. Hoey
-----------------------
John J. Hoey, President
Confirmed and accepted as of the date of first above written:
THAMESEDGE, LTD.
By: /s/ R.E. Whitten
-----------------------
R. E. Whitten, Director
Exhibit A
Thamesedge Note
This Note Amendment dated September 30, 1996 amends that
certain 13.5% Senior Subordinated Note due 1998 dated November
28, 1988 in the original principal amount of US$75,000,000, from
Pauley Petroleum Inc. (now Hondo Oil & Gas Company), to
Thamesedge, Ltd., as amended by Note Amendments dated September
30, 1993, September 30, 1994 and September 30, 1995 (the
"Original Note"), and is attached to the Original Note.
Effective on September 30, 1996, the Original Note is amended as
follows:
1. Principal Amount. As of September 30, 1996, the
principal amount of the Original Note owing is US$
36,361,684.44, and interest accrued thereon is US$
1,090,850.52.
2. Principal Repayment. The mandatory Redemption dates
on the Original Note are amended to January 1, 1998,
with the aggregate principal of the Original Note then
outstanding, plus accrued interest, being payable on
such date.
3. Letter Agreement. This Note Amendment is issued and
delivered under that certain letter agreement dated
December 13, 1996, by and among Hondo Oil & Gas
Company, Via Verde Development Company, and Newhall
Refining Co., Inc., and Thamesedge, Ltd.
HONDO OIL & GAS COMPANY
By:
-----------------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
THAMESEDGE, LTD.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
Exhibit B
Lonrho Notes
This Note Amendment dated September 30, 1996 amends those
certain Promissory Notes dated September 1, 1991, in the original
principal amount of US$10,000.000, dated November 1, 1991, in the
original principal amount of US$9,000,000, and dated December 20,
1991, in the original principal amount of US$13,000,000, each
from Hondo Oil & Gas Company, to Lonrho Plc, as amended by Note
Amendments dated September 30, 1993, September 30, 1994 and
September 30, 1995 (the "Original Notes"), and is attached to the
Original Notes. On March 29, 1996, Lonrho Plc assigned to
Thamesedge, Ltd. all of its interest in the Original Notes.
Effective on September 30, 1996, the Original Notes are amended
as follows:
1. Principal Amount. As of September 30, 1996, the
principal amount of the Original Notes owing is US$
31,199,830.26, and interest accrued thereon is US$
951,594.81.
2. Principal Repayment. The principal of the Original
Notes, together with all accrued interest to such date,
is payable on January 1, 1998.
3. Letter Agreement. This Note Amendment is issued and
delivered under that certain letter agreement dated
December 13, 1996, by and among Hondo Oil & Gas
Company, Via Verde Development Company, and Newhall
Refining Co., Inc., and Thamesedge, Ltd.
HONDO OIL & GAS COMPANY
By:
-----------------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
THAMESEDGE, LTD.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
Exhibit C
Via Verde Note
This Note Amendment dated September 30, 1996 amends that
certain Promissory Note dated April 30, 1993, in the original
principal amount of US$3,000.000, from Hondo Oil & Gas Company to
Lonrho Plc, as amended by Note Amendments dated September 30,
1993, September 30, 1994 and September 30, 1995 (the "Original
Note"), and is attached to the Original Note. On March 29, 1996,
Lonrho Plc assigned to Thamesedge, Ltd. all of its interest in
the Original Note. Effective on September 30, 1996, the Original
Note is amended as follows:
1. Principal Amount. As of September 30, 1996, the
principal amount of the Original Note owing is US$
3,277,161.85, and interest accrued thereon is US$
99,953.43.
2. Principal Repayment. The principal of this note is
payable on the earlier of (i) the sale of the property
securing the loan or (ii) in ten (10) semi-annual
installments, commencing on January 1, 1998.
3. Letter Agreement. This Note Amendment is issued and
delivered under that certain letter agreement dated
December 13, 1996, by and among Hondo Oil & Gas
Company, Via Verde Development Company, and Newhall
Refining Co., Inc., and Thamesedge, Ltd.
VIA VERDE DEVELOPMENT COMPANY
By:
-----------------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
THAMESEDGE, LTD.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
Exhibit D
Valley Gateway Note
This Note Amendment dated September 30, 1996 amends that
certain Promissory Note dated June 25, 1993, in the original
principal amount of US$4,000.000, from Hondo Oil & Gas Company to
Lonrho Plc, as amended by Note Amendments dated September 30,
1993, September 30, 1994 and September 30, 1995 (the "Original
Note"), and is attached to the Original Note. On March 29, 1996,
Lonrho Plc assigned to Thamesedge, Ltd. all of its interest in
the Original Note. Effective on September 30, 1996, the
Original Note is amended as follows:
1. Principal Amount. As of September 30, 1996, the
principal amount of the Original Note owing is US$
4,270,796.24, and interest accrued thereon is US$
130,259.28.
2. Principal Repayment. The principal of this note is
payable on the earlier of (i) the sale of the property
securing the loan or (ii) in ten (10) semi-annual
installments, commencing on January 1, 1998.
3. Letter Agreement. This Note Amendment is issued and
delivered under that certain letter agreement dated
December 13, 1996, by and among Hondo Oil & Gas
Company, Via Verde Development Company, and Newhall
Refining Co., Inc., and Thamesedge, Ltd.
HONDO OIL & GAS COMPANY
By:
-----------------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
THAMESEDGE, LTD.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
Exhibit E
Facility Note
This Note Amendment dated September 30, 1996 amends that
certain Promissory Note dated October 31, 1994, in the original
principal amount of US$5,000.000, from Hondo Oil & Gas Company to
Lonrho Plc, as amended by Note Amendment dated September 30, 1995
(the "Original Note"), and is attached to the Original Note. On
March 29, 1996, Lonrho Plc assigned to Thamesedge, Ltd. all of
its interest in the Original Note. Effective on September 30,
1996, the Original Note is amended as follows:
1. Principal Amount. As of September 30, 1996, the
principal amount of the Original Note owing is US$
5,000,000.00, and interest accrued thereon is US$
138,216.67.
2. Principal Repayment. The principal of the Original
Note is payable on January 1, 1998.
3. Letter Agreement. This Note Amendment is issued and
delivered under that certain letter agreement dated
December 13, 1996, by and among Hondo Oil & Gas
Company, Via Verde Development Company, and Newhall
Refining Co., Inc., and Thamesedge, Ltd.
HONDO OIL & GAS COMPANY
By:
-----------------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
THAMESEDGE, LTD.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
Exhibit F
Revolving Credit Note
This Note Amendment dated September 30, 1996 amends that
certain Promissory Note dated June 28, 1996, in the original
principal amount of US$13,500.000, from Hondo Oil & Gas Company
to Thamesedge, Ltd.. (the "Original Note"), and is attached to
the Original Note. Effective on September 30, 1996, the Original
Note is amended as follows:
1. Principal Amount. As of September 30, 1996, no
principal amounts have been advanced.
2. Principal Repayment. The principal of the Original Note
is payable on January 1, 1998.
3. Interest Payment Dates. In addition to the interest
payment dates specified in the Original Note, interest on
the unpaid principal advanced shall be paid on October 1,
1997.
4. Letter Agreement. This Note Amendment is issued and
delivered under that certain letter agreement dated December
13, 1996, by and among Hondo Oil & Gas Company, Via Verde
Development Company, and Newhall Refining Co., Inc., and
Thamesedge, Ltd.
HONDO OIL & GAS COMPANY
By:
-----------------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
THAMESEDGE, LTD.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
<PAGE>
AMENDMENT TO AGREEMENT
(City Contract No. 23250)
This Amendment to Agreement is made by and between HONDO OIL
AND GAS COMPANY, a Delaware corporation ("Hondo"), and the CITY
OF LONG BEACH, a municipal corporation ("the City").
RECITALS
This Amendment to Agreement is made and entered into with
respect to the following facts and objectives:
1. Hondo and City entered into an Agreement (City Contract
No. 23250) on February 2, 1994 ("the Agreement"), the terms of
which released Hondo from its obligations as a non-operating
contractor under the THUMS Contracts from January 1, 1994 through
August 31, 1994, and terminating Hondo's interest in the THUMS
Contracts effective on September 1, 1994.
2. Under that Agreement, Hondo acknowledged and reaffirmed
its obligation to pay an amount due the City of $1,093,493.39,
plus an amount not yet ascertained for the 1993 Article 9
adjustment.
3. Hondo agreed to pay the total amount of $1,525,812.38 in
full on or before January 1, 1997, and to toll the statute of
limitations applicable to the bringing of suit by the City
against Hondo for recovery of this amount through December 31,
1996.
4. Both Hondo and City are desirous of extending the time
period by which Hondo will pay the total amount due and to extend
the tolling period of the applicable statute of limitations, in
accordance with the provisions of this Amendment to Agreement.
THE AGREEMENT
NOW THEREFORE, for valuable consideration, the receipt of
which is hereby acknowledged, the parties agree as follows:
1. The Agreement is amended in the following respects:
A. Paragraph 5 of the Agreement is amended to read as
follows:
5. Hondo agrees to pay the City, and hereby
reaffirms its obligation to pay, the sum of $1,525,812.38, which
amount consists of the amount of $1,093,493.39, plus the amount
of $432,318.99, representing the 1993 Article 9 adjustment. This
amount shall be paid by Hondo on or before January 1, 1999.
Interest on the amount of $1,525,812.38 shall accrue at the rate
of six percent (6%) per annum, commencing on January 1, 1997,
until the amount owed is paid in full. Until December 31, 1998,
any statute of limitation applicable to the bringing of suit by
the City against Hondo for recovery of these amounts shall be
tolled.
2. Except as specifically amended by this Amendment to
Agreement, all terms of the Agreement shall remain in full force
and effect.
The parties have executed this Amendment to Agreement on the
dates set forth opposite their respective signatures.
HONDO OIL AND GAS COMPANY
/s/ John J. Hoey
September 30, 1996 By: -------------------------
JOHN J. HOEY
President and Chief
Executive Officer
/s/ C.B. McDaniel
By: -------------------------
C.B. McDANIEL
Secretary
THE CITY OF LONG BEACH, a
municipal corporation
/s/ Henry Taboada
December 2, 1996 By: -------------------------
Assistant City Manager
EXECUTED PURSUANT TO SECTION
301 OF THE CITY CHARTER
The foregoing agreement is approved as to form this 2nd day
of December, 1996.
JOHN R. CALHOUN, City Attorney
/s/ Richard Allesso
By: -------------------------
Deputy
<PAGE>
SUBSIDIARIES OF THE COMPANY
State/Country
Name* of Incorporation
----- ----------------
Hondo Magdalena Oil & Gas Limited Jersey/UK
Newhall Refining Co., Inc. Delaware
Pauley Pacific Inc. Delaware
Red-E-Crete, Inc. California
The Anderson Company New Mexico
Via Verde Development Company California
* None of the Company's subsidiaries use trade or other names under
which the do business.
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
and related Prospectuses on:
Form S-3, File No. 33-52496, as amended on February 2, 1995
Form S-3, File No. 33-59197
Form S-3, File No. 33-64015
Form S-8, File No. 33-34833
Form S-8, File No. 33-53813
Form S-8, File No. 33-58517
of our report dated November 19, 1996, except for Note 5 as to which the
date is December 17, 1996, with respect to the consolidated financial
statements and schedule of Hondo Oil & Gas Company included in the Annual
Report on Form 10-K for the year ended September 30, 1996.
/s/ ERNST & YOUNG LLP
Denver, Colorado
December 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from Hondo Oil & Gas Company's Form 10-K for
the period identified below. This information is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<PERIOD-TYPE> YEAR
<CASH> 374
<SECURITIES> 0
<RECEIVABLES> 317
<ALLOWANCES> 399
<INVENTORY> 0
<CURRENT-ASSETS> 770
<PP&E> 21,248
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,540
<CURRENT-LIABILITIES> 5,879
<BONDS> 83,334
0
0
<COMMON> 13,776
<OTHER-SE> (94,667)
<TOTAL-LIABILITY-AND-EQUITY> 24,540
<SALES> 2
<TOTAL-REVENUES> 112
<CGS> 0
<TOTAL-COSTS> 169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,009
<INCOME-PRETAX> (11,352)
<INCOME-TAX> 5
<INCOME-CONTINUING> (11,357)
<DISCONTINUED> (1,300)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,657)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> (0.93)
</TABLE>
