<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
1-8979
(Commission File Number)
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Ave, Ste. 900, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The registrant has one class of common stock outstanding. As of August 12,
1997, 13,781,194 shares of registrant's $1 par value common stock were
outstanding.
1
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED JUNE 30, 1997
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
June 30, 1997 and September 30, 1996 3
Consolidated Statements of Operations for the three
months ended June 30, 1997 and 1996 4
Consolidated Statements of Operations for the nine
months ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 6 Exhibits and Reports on Form 8-K 23
SIGNATURES 23
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
June 30, September 30,
1997 1996
------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $535 $374
Accounts receivable, net of allowances
of $44 and $332, respectively 291 317
Prepaid expenses and other 569 79
------------- -------------
Total current assets 1,395 770
Properties, net (Note 2) 36,153 21,248
Net assets of discontinued operations (Note 7) 2,467 2,202
Other assets 751 320
------------- -------------
$40,766 $24,540
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $1,125 $2,849
Current portion of long-term debt, including
$58,510 in 1997 due to a related party 58,775 738
Accrued expenses and other, including $884
in 1997 due to a related party (Note 3) 3,402 2,292
------------- -------------
Total current liabilities 63,302 5,879
Long-term debt, including $39,433 and $80,109,
respectively, due to a related party 42,393 83,334
Funding agreement (Note 4) 20,237 11,513
Other liabilities, including $776 and $2,411,
respectively, due to a related party (Note 5) 3,827 4,705
------------- -------------
129,759 105,431
Contingent liabilities (Note 7)
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000 shares
authorized; shares issued and outstanding:
13,781,194 and 13,776,194, respectively 13,781 13,776
Additional paid-in capital 53,635 53,581
Accumulated deficit (156,409) (148,248)
------------- -------------
(88,993) (80,891)
------------- -------------
$40,766 $24,540
============= =============
The accompanying notes are an integral part of these financial statements.
3
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
June 30,
----------------------------
1997 1996
------------- -------------
REVENUES
Sales and operating revenue $3 $1
Other income -- 6
------------- -------------
3 7
------------- -------------
COSTS AND EXPENSES
Operating costs 48 75
Depreciation, depletion, and amortization 57 40
Overhead, Colombian operations 492 385
General and administrative 523 478
Exploration costs -- 43
Interest on indebtedness including $1,602
and $1,200, respectively, to a
related party 1,602 1,304
------------- -------------
2,722 2,325
------------- -------------
Loss from continuing operations
before income taxes (2,719) (2,318)
Income tax expense (benefit) -- --
------------- -------------
Loss from continuing operations (2,719) (2,318)
Loss from discontinued operations (Note 7) -- --
------------- -------------
Net Loss $(2,719) $(2,318)
============= =============
Loss per share:
Continuing operations $(0.19) $(0.17)
Discontinued operations -- --
------------- -------------
Net loss per share $(0.19) $(0.17)
============= =============
Weighted average common shares outstanding 13,781,194 13,776,194
The accompanying notes are an integral part of these financial statements.
4
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the nine months ended
June 30,
----------------------------
1997 1996
------------- -------------
REVENUES
Sales and operating revenue $4 $2
Other income 19 107
------------- -------------
23 109
------------- -------------
COSTS AND EXPENSES
Operating costs 383 172
Depreciation, depletion, and amortization 172 116
Overhead, Colombian operations 1,619 2,109
General and administrative 1,519 1,430
Exploration costs 13 1,760
Interest on indebtedness including $4,480
and $3,575, respectively, to a
related party 4,480 3,682
------------- -------------
8,186 9,269
------------- -------------
Loss from continuing operations
before income taxes (8,163) (9,160)
Income tax expense (benefit) (2) --
------------- -------------
Loss from continuing operations (8,161) (9,160)
Loss from discontinued operations (Note 7) -- --
------------- -------------
Net Loss $(8,161) $(9,160)
============= =============
Loss per share:
Continuing operations $(0.59) $(0.67)
Discontinued operations -- --
------------- -------------
Net loss per share $(0.59) $(0.67)
============= =============
Weighted average common shares outstanding 13,780,083 13,638,231
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the nine months ended
June 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations $(8,163) $(9,160)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation, depletion and amortization 172 116
Capitalized interest (563) (150)
Accrued interest added to long-term debt 5,261 25
Accrued interest paid with common stock -- 4,742
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 26 18
Prepaid expenses and other (490) (82)
Other assets (570) 12
Increase (decrease) in:
Accounts payable 695 748
Accrued expenses and other 881 1,779
Funding agreement 1,425 2,564
Other liabilities (1,613) (2,445)
------------- -------------
Net cash used by continuing operations (2,939) (1,833)
Net cash used by discontinued operations (296) (172)
Income taxes (paid) received 2 --
------------- -------------
Net cash used by operating activities (3,233) (2,005)
------------- -------------
Cash flows from investing activities:
Sale of assets -- 1
Capital expenditures (8,441) (715)
------------- -------------
Net cash used by investing activities (8,441) (714)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 12,600 1,325
Principal payments on long-term debt (765) (235)
Issuance of stock -- 251
------------- -------------
Net cash provided by financing activities 11,835 1,341
------------- -------------
Net increase (decrease) in cash and cash equivalents 161 (1,378)
Cash and cash equivalents at the beginning of the period 374 1,771
------------- -------------
Cash and cash equivalents at the end of the period $535 $393
============= =============
</TABLE>Refer to Notes 2 and 4 for descriptions of non-cash transactions.
The accompanying notes are an integral part of these financial statements.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an independent oil
and gas exploration and development company. 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. The Hondo Company owns 68.6% 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 74.3% of the Company's outstanding shares.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. There has not been any change in the
Company's significant accounting policies for the periods presented. There
have not been any significant developments or changes in contingent
liabilities and commitments since September 30, 1996, other than the
contingency described in Note 7. Certain reclassifications have been made
to the prior year's amounts to make them comparable to the current
presentation. These changes had no impact on previously reported results of
operations or shareholders' equity (deficit).
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results for these interim periods are not necessarily
indicative of results for the entire year. These statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1996.
(b) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. Under the new requirements, the dilutive
effect of stock options is to be excluded from the primary earnings per
share computation. The Company has incurred losses in each of the periods
covered in these financial statements, thereby making the inclusion of stock
options in the primary earnings per share computation antidilutive.
Accordingly, stock options have already been excluded from the primary
earnings per share computation and previously reported primary earnings per
share amounts do not need to be restated. Fully diluted per share amounts
are the same as primary per share amounts and, accordingly, are not
presented.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(c) 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.
The Company provides for income taxes in interim periods based on estimated
annual effective rates. The Company records current income tax expense to
the extent that federal, state or alternative minimum tax is projected to be
owed. The Company has investment tax credit carryforwards of $687 which
are accounted for by the flow-through method.
2) Properties
----------
Properties, at cost, consist of the following:
June 30, September 30,
1997 1996
------------- -------------
(Unaudited)
Oil and gas properties (Colombia):
Proved, undeveloped $11,893 $11,803
Accumulated depletion, depreciation
and amortization -- --
------------- -------------
11,893 11,803
------------- -------------
Other properties - Colombia:
Wellsite facilities (a) 4,294 2,039
Pipelines (a) 11,236 5,398
Drilling in progress 8,604 1,858
Other properties - domestic
Other fixed assets 320 311
Accumulated depreciation (194) (161)
------------- -------------
$36,153 $21,248
============= =============
(a) Under construction.
The balances of wellsite facilities and pipelines include non-cash increases
of $5,372 and $6,520 for the nine months ended June 30, 1997 and 1996,
respectively, which were charged to the Funding Agreement (Note 4).
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(All Dollar Amounts in Thousands)
3) Accrued expenses
----------------
Accrued expenses consist of the following:
June 30, September 30,
1997 1996
------------- -------------
(Unaudited)
Refining and marketing costs (Note 7) $1,997 $2,028
Interest payable to Lonrho Plc (Note 5) 884 --
Other 521 264
------------- -------------
$3,402 $2,292
============= =============
4) Funding Agreement
-----------------
Effective July 26, 1995, the Company's wholly-owned subsidiary, Hondo
Magdalena Oil & Gas Limited ("Hondo Magdalena"), Amoco Colombia Petroleum
Company ("Amoco Colombia"), and Opon Development Company entered into a
Funding Agreement for Tier I Development Project costs (the "Funding
Agreement") for the interim financing of costs associated with the
construction of a pipeline from the Opon Contract area, 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 up to 365 days after the date of first production,
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 balance of the Funding Agreement consists of the following:
June 30, September 30,
1997 1996
------------- -------------
(Unaudited)
Outstanding principal $16,054 $9,771
Equity premiums 4,183 1,742
------------- -------------
$20,237 $11,513
============= =============
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(All Dollar Amounts in Thousands)
4) Funding Agreement (continued)
-----------------------------
The Company has accrued equity premiums computed in accordance with the 22%
annualized interest rate option. Equity premiums of $1,926 and $781 related
to the financed pipeline and wellsite facilities costs have been capitalized
for the nine months ended June 30, 1997 and 1996, respectively. The
remainder of the equity premiums accrued to date, relating to the financed
geological and geophysical work and overheads, have been expensed.
5) Other Liabilities
-----------------
Other liabilities consist of the following:
June 30, September 30,
1997 1996
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc $776 $2,411
Accrued pipeline construction costs 794 --
City of Long Beach 1,572 1,533
Deferred compensation contracts 535 610
Other 150 151
------------- -------------
$3,827 $4,705
============= =============
In accordance with the terms of the Company's debts to Lonrho Plc, accrued
interest is either added to the outstanding principal or paid by issuance of
the Company's common stock on the interest due date, at the option of Lonrho
Plc. Accrued interest of $2,823 and $2,411 has been added to the
outstanding debt as of April 1, 1997 and October 1, 1996, respectively.
Accrued interest of $2,375 was paid by the issuance of 197,944 shares of the
Company's common stock for interest due on April 1, 1996.
6) Cash Flow Information
---------------------
Cash interest expense, all of which arises from discontinued operations, was
$181 and $196 for the nine months ended June 30, 1997 and 1996,
respectively.
7) Discontinued Operations
-----------------------
In 1991, the Company adopted plans of disposal for its refining and
marketing and real estate segments. 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.
10
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(All Dollar Amounts in Thousands)
7) Discontinued Operations (continued)
-----------------------------------
Operating income (losses) of discontinued operations for the quarters ended
June 30, 1997 and 1996 were $(74) and $135, respectively. Corresponding
amounts for the nine-month periods were $(265) and $(94), respectively, and
were charged against loss provisions established in earlier periods. The
Company recorded no loss provisions for discontinued operations for the nine
months ended June 30, 1997 or 1996.
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 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
concluded taxes and penalties of $10,820 were due as a result of the audit.
The State of California issued a Notice of Determination in July 1997
indicating taxes and penalties of $5,740 are due. Assessed amounts are
subject to a process of appeal and further adjustment. The State of
California's audit could result in a liability different from that accrued
when concluded. The Company has provided its consultant to Fletcher to
assist in disputing the audit findings. The buyer notified the Company that
it claims indemnity in this matter and in January 1997 filed suit in
Superior Court, Los Angeles, California for a declaratory judgment enforcing
the indemnity and for other relief. The Company believes the liability
accrued is sufficient to provide for the amount that will ultimately be paid
based on the information available.
The balance of net assets of discontinued operations is comprised solely of
two parcels of land in the real estate segment. Changes in this balance for
the nine months ended June 30, 1997 are as follows:
Balance as of September 30, 1996 $2,202
Valuation provisions established --
Valuation provisions used 265
-------------
Balance at June 30, 1997 (Unaudited) $2,467
=============
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 $62 and $65 for
the quarters ended June 30, 1997 and 1996, respectively. Corresponding
amounts for the nine-month periods ended June 30, 1997 and 1996 were $187
and $196, respectively.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL DISCUSSION
Introduction
------------
Hondo Oil & Gas Company is an independent oil and gas company focusing
on international oil and gas exploration and development. 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 wellsite facilities to deliver natural gas and
condensate to a market are complete, and await the completion of
improvements to Ecopetrol's gas plant so that production can commence.
A third well, Opon No. 6, has been drilled. The well encountered
mechanical problems during completion operations and is temporarily
suspended to evaluate information and develop a plan for further
operations on the well. Construction of the drilling pad for the next
well, Opon No. 14, began in July 1997 and it is expected to begin
drilling operations in October. 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 June 30, 1997 the Company had a deficiency in net
assets of $89.0 million.
Role of Ecopetrol. As described below and in the Company's 1996 Annual
Report on Form 10-K, Ecopetrol is a quasi-governmental corporate
organization wholly-owned by the Colombian government, a party to the
Opon Contract and the purchaser of natural gas and liquid hydrocarbons
under contracts for the sale of production from the Opon field. At
12
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 gas markets and an infrastructure for the
delivery of natural gas in Colombia. Also, other producers of natural
gas in Colombia will compete for the natural gas market and for access
to limited pipeline transportation facilities.
Foreign Operations. The Company's operations in Colombia are 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.
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 February 1997,
the President of the United States announced that Colombia again 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.
Risks of Oil and Gas Exploration. Inherent to the oil and gas industry
is the risk that future wells will not find hydrocarbons where
information from prior wells and engineering and geological data
indicate hydrocarbons should be found. Further, existing wells can
deplete faster than anticipated, potentially causing revisions to
13
reserve estimates and increasing costs due to replacement wells.
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, No. 4 and No. 6 wells by the use of a
top-drive drilling rig, heavy-weight and oil-based drilling fluids and
other technical drilling enhancements.
Laws and Regulations. The Company may be adversely affected by new laws
or regulations in the United States or Colombia regarding its operations
and/or environmental compliance, or by existing laws and regulations.
For additional information, see Other Factors Affecting the Company's
Business in Item 1, Business of the Company's 1996 Annual Report on Form
10-K.
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.
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.
Continuation of American Stock Exchange Listing. 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. For additional information, see Item 5, Market
For Registrant's Equity and Related Shareholder Matters in the Company's
1996 Annual Report on Form 10-K. 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.
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.
14
Opon Exploration
----------------
Hondo Magdalena Oil & Gas Limited ("Hondo Magdalena"), a wholly-owned
subsidiary, became involved in the Opon Contract through a farmout
agreement with Opon Development Company ("ODC") in 1991. In August
1993, Hondo Magdalena and ODC entered into a Farmout Agreement 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 and will supply gas for the contracts described below.
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. In May 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 50%, 30%, 15.4%, and
4.6% for Ecopetrol, Amoco Colombia, Hondo Magdalena, and ODC,
respectively. The commercial field is substantially smaller than that
requested, but 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 associate parties are preparing an
application to Ecopetrol to declare commercial the part of the Opon
Contract area around the Opon No. 6 well. The application is based upon
data collected from the well to date. Ecopetrol has 90 days to give an
answer after the application is submitted and accepted.
The Opon Contract provides that the Opon Contract area will be reduced
after the end of the exploration period, or September 30, 1995. The
first acreage relinquishment of 50% was completed during 1996. The Opon
Contract area now covers 25,021.5 hectares (61,828 acres). A second
acreage relinquishment of 25% of the original area was required on July
15, 1997. The associate parties have proposed to Ecopetrol a
relinquishment of 5,000 hectares and an obligation to drill the Opon No.
15
14 well as a substitute to the relinquishment of approximately 12,500
hectares. Ecopetrol has not responded at this time. On July 15, 1999,
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 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 current commercial area. Hondo Magdalena is paying 30.9% of
the costs of this well, presently estimated at $28.7 million. After the
drilling was completed, several mechanical problems in the completion
and testing of the Opon No. 6 well have occurred. A second set of
perforating guns were fired after there was a failure of a portion of
the guns during the initial completion attempt in April 1997. Cleanup
and testing on the second set of perforations commenced in May 1997 and,
while all the guns fired, the well has not flowed as anticipated. The
associate parties have suspended operations on the well in order to
fully evaluate all data from the well and prepare a plan for further
operations. The evaluation is continuing at this time. The associate
parties have decided to pursue claims against suppliers of services and
equipment related to the problems encountered during completion
operations on the Opon No. 6 well. Only preliminary correspondence and
discussions have occurred related to these claims, and no prediction of
the outcome can be made at this time. As noted above, the associate
parties are preparing an application to Ecopetrol to declare the area
around the Opon No. 6 well commercial.
The next well will be the Opon No. 14 well, to be drilled approximately
4 kilometers south of the Opon No. 4 well and estimated to cost $21.5
million. Construction of the drilling pad for the Opon No. 14 well has
begun and the well is expected to commence drilling in October 1997.
The well is intended to confirm the existence of the La Paz gas and
condensate reservoir in the south of the Opon Contract area.
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
Barrancabermeja. The pipeline will have a capacity of 120 million cubic
feet per day and is now estimated to cost $55.8 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% of its share of wellhead facilities
16
(total estimated cost of $30.8 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.
After lengthy negotiations, contracts covering the sale of natural gas,
the sale of condensate and natural gas liquids, and the processing of
the gas stream have been completed. 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
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$1.08 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 US$0.20 per
thousand cubic feet of gas.
Preliminary work for the pipeline began in late 1994 and construction
began in July 1996. Construction of the pipeline and wellsite facilities
has been completed. Completion of improvements to Ecopetrol's El Centro
gas plant is presently expected to occur in October 1997.* Work on the
El Centro gas plant improvements has been interrupted by labor disputes.
Production will commence after the El Centro improvements are completed
and tested. The estimate of the completion date of the El Centro
project is subject to delays due to weather, labor interruptions,
guerrilla activity, unanticipated shortages of materials or equipment
and other causes beyond the control of Ecopetrol or the associate
parties.
The associate parties are reviewing the contracts with Ecopetrol,
particularly the take-or-pay clause of the gas sales agreement, to
determine whether to submit invoices to Ecopetrol for gas not taken
after the pipeline and wellsite facilities were completed. No course of
action has been determined at this time.
--------------------
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above, for a description of
important risk factors that may affect actual results.
17
On March 3, 1997, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol, as
sellers, signed a contract with Termo Santander de Colombia E.S.P., as
purchaser ("Termo Santander"), to supply natural gas to an electric
generation plant being built at the Opon Contract area. The parties to
the Opon Contract will supply natural gas to the power plant which is
expected to begin commercial operations by the end of calendar 1997.*
The estimate of the completion date of the power plant is subject to
delays due to weather, labor interruptions, guerrilla activity,
unanticipated shortages of materials or equipment and other causes
beyond the control of Termo Santander. The sellers will supply natural
gas requested by the purchaser up to 60 million cubic feet per day. The
sellers will receive $4.2 million per year for making the gas available
for purchaser's call. Purchaser will pay 60% of the government-
regulated price (described above) for the natural gas it takes. The
sellers will also receive additional bonus payments when the power plant
achieves a price for its electrical power in excess of certain target
rates. Condensate associated with the natural gas that is delivered to
the purchaser will be separately sold to Ecopetrol. The contract
provides for substantial penalties, decreasing over the life of the
contract, to the sellers for the failure to deliver gas as and when
requested by the purchaser. The commencement of the contract is
contingent upon the completion of the electric generation plant and a
determination by the sellers that there are sufficient reserves to
supply natural gas to the purchaser for the entire term of the
agreement.
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, and no budget for calendar
year 1998 has been formally submitted. 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. If the dispute cannot be resolved, the joint operating
agreement among Amoco Colombia, Hondo Magdalena and ODC provides for
arbitration of disputes.
--------------------
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above, for a description of
important risk factors that may affect actual results.
18
Discontinued Operations
-----------------------
Two of the Company's former business segments, refining and marketing
operations and real estate operations were discontinued in 1991. Except
as noted below, no change in the status of these discontinued operations
from that reported in the Company's 1996 Annual Report on Form 10-K
occurred during the current period. See Part II, Item 1, of the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1996, concerning a legal proceeding involving the sale of the
Fletcher refinery.
As more fully described in Note 7 to the Consolidated Financial
Statements in Item 1, the State of California issued a preliminary
report in June 1996 finding that the Fletcher refinery owed $10.8
million for certain state excise taxes (and related penalties and
interest) arising from periods when the Company owned the Fletcher
refinery. The State of California issued a revised preliminary report
in January 1997 reducing this amount to $6.4 million. The State of
California issued an assessment of $5.7 million in July 1997. Assessed
amounts are subject to a process of appeals and may be further
adjusted.* The Company and the Fletcher refinery intend to further
contest the assessment through the appeals and hearing process. The
Company believes the liability it has accrued is sufficient to provide
for the amount ultimately found to be due.*
RESULTS OF OPERATIONS
Quarters Ended June 30, 1997 and 1996
--------------------------------------
Results of continuing operations for the quarter ended June 30, 1997
amounted to a net loss of $2.7 million, or 19 cents per share. The
Company reported a net loss from continuing operations of $2.3 million,
or 17 cents per share, for the quarter ended June 30, 1996. No losses
from discontinued operations were reported for either period.
The level of the Company's indebtedness to Lonrho Plc and to Amoco
Colombia under the Funding Agreement has increased by approximately
$27.6 million between June 30, 1996 and June 30, 1997. Interest expense
increased by only $0.3 million between the quarters ended June 30, 1997
and 1996 because the majority of the charges from the Funding Agreement
are capitalized.
Nine Months Ended June 30, 1997 and 1996
----------------------------------------
Results of continuing operations for the nine months ended June 30, 1997
amounted to a net loss of $8.2 million, or 59 cents per share. The
Company reported a net loss from continuing operations of $9.2 million,
or 67 cents per share, for the nine months ended June 30, 1996. No
losses from discontinued operations were reported for either period.
--------------------
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above, for a description of
important risk factors that may affect actual results.
19
Operating costs for the nine months ended June 30, 1997 include an
accrual of $0.4 million for revisions to estimated plugging and
abandonment costs of an offshore unit in California. No comparable
costs were incurred in the nine months ended June 30, 1996.
Overhead, Colombian operations decreased $0.5 million between the nine
months ended June 30, 1997 and 1996 primarily because:(i) year end
adjustments recorded by Amoco Colombia increasing the figure in December
1995 did not recur in December 1996 and (ii) Ecopetrol participated in
overhead expenses pertaining to the commercial operations for the nine
months ended June 30, 1997.
The Company's Colombian operations undertook a seismic exploration
program during fiscal 1996. The decrease of $1.7 million in exploration
costs between the nine-month periods arises because there were no
comparable expenses incurred in fiscal 1997.
The level of the Company's indebtedness to Lonrho Plc and to Amoco
Colombia under the Funding Agreement has increased by approximately
$27.6 million between June 30, 1996 and June 30, 1997. Interest expense
increased by only $0.8 million between the nine months ended June 30,
1997 and 1996 because the majority of the charges from the Funding
Agreement are capitalized.
Management expects losses from continuing operations to continue through
fiscal 1998.*
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 1997, cash inflows of $12.6
million arose from borrowings from Lonrho Plc under existing loan
agreements. The Company utilized cash of $2.9 million and $0.3 million
to finance continuing and discontinued operations, respectively, $8.4
million for capital expenditures, and made scheduled debt repayments of
$0.8 million. At June 30, 1997, the Company had cash balances of $0.5
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 a 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. This loan was amended and restated, as
described below. In December 1996, the Company obtained extensions of
the maturity of its debts to Lonrho Plc. The maturity of the loans from
--------------------
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above, for a description of
important risk factors that may affect actual results.
20
Lonrho Plc maturing on October 1, 1997 was extended 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. The Company signed a
Security Interest Agreement dated as of May 13, 1997 to document the
pledge of the Hondo Magdalena shares. The Company also agreed to give
Lonrho an option to convert $13.5 million of existing loans with an
interest rate of 6% 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 was approved by the Company's shareholders at the 1997 Annual
Meeting on March 12, 1997.
In July 1997, the Company and Thamesedge, Ltd. agreed to amend and
restate the June 1996 Revolving Credit Agreement. Under the Amended and
Restated Revolving Credit Agreement dated as of July 2, 1997, Thamesedge
agreed to make additional advances of $7.0 million to the Company,
making the total amount of the loan $20.5 million. The interest rate
remains 13%, due semi-annually; as provided in other debts to Thamesedge
and described above, the Company may make interest payments in shares of
its common stock. The loan now matures January 1, 1999. As additional
consideration for the loan, the Company has agreed to give Lonrho an
option to convert $7.0 million of existing debt with an interest rate of
6% into the Company's shares at $7.70 per share (110% of the closing
price on July 1, 1997). The option to convert must be approved by the
Company's shareholders at the next annual meeting. If the option to
convert is not approved by the shareholders, the interest rate on $7
million of existing debt will increase to 13.5%. Lonrho has further
agreed to vote its shares on the matter of the option to convert in
proportion to the votes cast by disinterested shareholders. As of June
30, 1997, $12.6 million of this facility has been drawn.
The Company presently owes Lonrho Plc $97.9 million, of which $58.5
million is due January 1, 1998. The Company does not have the resources
to pay these amounts due in less than twelve months. Lonrho has
demonstrated its willingness to work with the Company on this matter in
the past, as evidenced by several prior modifications of the debts'
maturity terms. Management believes that the Company will be able to
obtain further extensions of the maturity of the Company's debts to
Lonrho Plc.*
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 4 to
the Consolidated Financial Statements in Item 1, 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 costs (including overhead) for
the pipeline and an approved geological and geophysical work program for
--------------------
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above, for a description of
important risk factors that may affect actual results.
21
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 up to 365 days after the date of first
production, 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.
Based upon the Company's budget and current information, management
believes existing cash, available facilities, Lonrho commitments, and
the interim Funding Agreement will be sufficient to finance the
Company's known obligations (the pipeline and related facilities,
unanticipated increased drilling and completion expenses of the Opon No.
6 well, drilling of the Opon No. 14 well, overhead obligations unrelated
to capital projects and other business activities) during calendar
1997.* However, management believes the Company will need additional
cash to participate in the drilling of additional wells in Colombia and
to fund its corporate overheads, 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 fall 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.* Additional
deliverability from current drilling projects and adequate production
capability through the pipeline infrastructure will be important factors
in obtaining third party financing.* In the interim, the Company must
continue to rely on the financial support of Lonrho.* 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.
--------------------
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above, for a description of
important risk factors that may affect actual results.
22
Part II
Item 1. LEGAL PROCEEDINGS
Refer to Item 1 of Part II of the Company's Form 10-Q for the period
ended December 31, 1996 for a description of a legal proceeding
involving the sale of the Fletcher refinery that arose in that quarter.
No significant developments in this legal proceeding occurred during the
quarter ended June 30, 1997.
The Company was recently notified by an agency of the State of
California that its subsidiary, Newhall Refining Co., Inc., is
considered a potentially responsible party in the matter of the cleanup
of a dump site near Bakersfield, California. The Company has not
completed its investigation of the circumstances that have led to the
notification, and, therefore, management cannot assess the potential
exposure or liability, if any, to the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-K are incorporated
by reference. Refer to Exhibit Index on page 24.
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date: August 14, 1997 /s/ Stanton J. Urquhart
--------------- -----------------------
Stanton J. Urquhart
Vice President and Controller
The above officer of the registrant has signed this report as its duly
authorized representative and as its chief accounting officer.
23
EXHIBIT INDEX
Exhibit
Number Subject
------- ------------------------------------------------
10.1 Security Interest Agreement dated as of May 13, 1997 by
and between the Company, Thamesedge Ltd., Folio Trust
Company Limited and Folio Nominees Limited
10.2 Amended and Restated Revolving Credit Agreement dated
as of July 2, 1997 by and between the Company and
Thamesedge Ltd.
10.3 Promissory Note for $20,500,000 dated as of July 2,
1997 from the Company to Thamesedge Ltd. delivered
pursuant to the Amended and Restated Revolving Credit
Agreement (Exhibit 10.2, above)
10.4 Guaranty dated as of July 2, 1997 of Hondo Magdalena
Oil & Gas Limited to Thamesedge Ltd. guaranteeing the
obligations of the Company under the Amended and
Restated Revolving Credit Agreement (Exhibit 10.2,
above)
27 Financial Data Schedule
24
SECURITY INTEREST AGREEMENT
Security interest in Securities
-------------------------------
DATED this 13th of May, 1997
BETWEEN:-
(1) THAMESEDGE LIMITED a company incorporated in England whose
registered office is at 4 Grosvenor Place, London SW1X 7DL, England
(the "Leader")
AND
(2) HONDO OIL & GAS COMPANY a Delaware corporation whose principal
office is at 10375 Richmond Avenue, Suite 900, Houston, Texas,
77042 USA (the "Debtor")
AND
(3) FOLIO TRUST COMPANY LIMITED a company incorporated in Jersey whose
registered office is at Westaway Chambers, 39 Don Street, St.
Helier, Jersey, Channel Islands ("Folio Trust")
AND
(4) FOLIO NOMINEES LIMITED a company incorporated in the British Virgin
Islands whose administrative office is at Westaway Chambers, 39 Don
Street, St. Helier, Jersey, Channel Islands ("Folio Nominees")
WHEREAS:
(A) The Lender has agreed to continue to make available to the Debtor
certain credit and loan facilities made under the Obligations (as
hereinafter defined);
(B) The Debtor has therefore agreed to furnish the Lender with security
for the Obligations from time to time owed by the Debtor to the
Lender;
(C) Folio Trust and Folio Nominees (collectively referred to as the
"Nominees") hold on trust as nominees for the benefit of the Debtor
shares in a company known as Hondo Magdalena Oil & Gas Limited, a
company registered in Jersey, Channel Islands ("Hondo");
IT IS HEREBY AGREED AS FOLLOWS:
Grant of security interest and assignment
l. As a continuing security for the payment on demand to the Lender
of:
(i) the monies and liabilities payable under the credit and loan
facilities described in the First Schedule;
(ii) any other indebtedness or liabilities whatsoever of the Debtor
on any account or accounts; and
1
(iii) all other costs, charges, legal or other expenses (incurred by
the Lender in respect of the facilities detailed in the First
Schedule) on a full and unqualified indemnity basis;
(collectively the "Obligations"):
(a) the Debtor as beneficial owner HEREBY ASSIGNS to the Lender
beneficial title to the stocks, shares, bonds and other
securities identified in the Second Schedule together with all
and any property and rights arising and/or deriving therefrom
or in any way granted in respect thereof and any securities
substituted therefor or added thereto (the "Collateral") and
agrees that the Lender shall have a security interest in the
same; and
(b) the Nominees, contracting to this Security Interest Agreement
as Trustees of the Collateral, and not otherwise, as legal
owners do HEREBY AGREE that from the date hereof they hold the
Collateral on behalf of and for the benefit of the Lender
under the terms of this Security Interest Agreement.
Warranty and undertaking
2. The Debtor and the Nominees hereby jointly and severally warrant,
undertake and agree that:
(a) the Lender is and shall continue to be solely and beneficially
entitled to all rights in relation to the Collateral (subject
to the terms hereof); and
(b) the Debtor and the Nominees shall not take or omit to take any
action which will or might impair the value of the Collateral
or create or permit to exist any mortgage or charge upon and
shall procure that no lien, encumbrance or right of set-off or
other equities whatsoever shall in any case or in any manner
arise or affect the Collateral, either in priority to, or pari
passu with the Lender's rights hereunder;
(c) the Debtor and the Nominees shall not procure the issue of
further shares in Hondo without the prior permission of the
Lender in writing and any such permission shall be without
prejudice to, or waiver of, the Lender's rights pursuant to
this Security Interest Agreement.
Restriction on the Collateral
3. The Debtor agrees (without prejudice to the security interests and
other rights of the Lender pursuant to this Security Interest
Agreement) that dealings with the Collateral are conditional upon
the Lender having received discharge in full of the Obligations and
until such discharge the Debtor shall not be entitled to deal with
the Collateral PROVIDED THAT the Lender may in its absolute
discretion permit the Debtor to deal with the Collateral subject to
such conditions as the Lender shall from time to time specify and
any such permission shall be without prejudice to, or waiver of,
the Lender's rights pursuant to this Security Interest Agreement.
2
Set-off and Lien
4. In addition and without prejudice to any other rights of the Lender
pursuant to this Security Interest Agreement, in the event that
payment of the Obligations is not made when due the Lender shall
have the benefit of any lien over securities. The Lender shall be
entitled (as well before as after demand) to combine or consolidate
all monies now or hereafter standing to the Debtor's credit with
the Lender on any account and in any currency and to set off the
Debtor's liability under the Obligations against any credit balance
in any account whatever in the name of the Debtor (whether sole or
joint with any other person or persons) with the Lender or any
subsidiary of the Lender.
The Collateral; voting, calls and other matters
5. (a) The Debtor shall promptly pay or procure that the Nominees
promptly pay all calls and all other monies the Debtor or the
Nominees are lawfully required to pay (or would have lawfully
been required to pay had the Debtor not assigned beneficial
title to the Collateral to the Lender pursuant hereto) and in
the event of default the Lender may make such payment in which
event such sums paid shall be secured under this Security
Interest Agreement and payable on demand together with
interest at the then prevailing lending interest rate (as
determined by the Lender) compounded at such rests as the
Lender shall determine until actual payment by the Debtor.
(b) Provided that no Event of Default has occurred the Debtor may
continue to instruct the Nominees as to how they should
exercise all voting and other rights and powers attached to
the Collateral.
(c) The Lender is not under any obligation to take any step or
action in respect of any right of the Debtor in connection
with the Collateral, including without limitation any
obligation to pay any call or instalment or present any
investment coupon, bond or stock called for repayment or
redemption and shall have no liability for having taken or
abstained from taking any such step or action.
Further assurance and agency
6. (a) The Debtor and the Nominees undertake without delay or
impediment to execute and sign from time to time all
transfers, powers of attorney and other documents required by
the Lender to perfect its title to the Collateral or to vest
the Collateral in a purchaser from, or trustee or nominee of,
the Lender and the Debtor and the Nominees hereby appoint the
Lender (or any person nominated by the Lender) the agent of
the Debtor and the Nominees at any time after demand hereunder
to give effectual discharge for, or otherwise howsoever to
deal with, the Collateral including (without limitation) to
sign, seal and deliver any transfer, give and perfect any
assurance, deed, notice, request or do any act, in connection
with the Lender's rights under this Security Interest
Agreement.
(b) In accordance with Article 5(2)(a) of the Powers of Attorney
3
(Jersey) Law, 1995 (the "Powers of Attorney Law"), for the
purpose of facilitating the exercise of the powers of the
Lender under the Law and of the powers given pursuant to this
Security Interest Agreement, the Debtor and the Nominees
hereby irrevocably jointly and severally appoint the Lender as
the Debtor and the Nominees' attorney (with full power of
substitution in accordance with Article 8 of the Powers of
Attorney Law) for the Debtor and the Nominees and in the name
and on behalf of the Debtor and the Nominees to sign, execute,
seal, deliver, acknowledge, tile, register and perfect any and
all such assurances, documents, instruments, agreements,
certificates and consent whatsoever and to do any and all such
acts and things whatsoever which the Debtor and the Nominees
might or could do in relation to the Collateral or in relation
to any matters dealt with in this Security Interest Agreement
and which the Lender may deem to be necessary or advisable in
order to give full effect to the purposes of this Security
Interest Agreement. Without limitation, this power of attorney
extends to anything referred to in clause 6(a) hereof and to
any sale or other disposal by the Lender of the Collateral
pursuant to this Security Interest Agreement. The Debtor and
the Nominees hereby covenant with the Lender to ratify and
confirm any lawful exercise or purported exercise of this
power of attorney.
Events of Default
7. The occurrence of any of the following shall be an event of default
(each an "Event of Default") namely:
(a) any breach of any of the terms of any of the Obligations or of
this Security Interest Agreement;
(b) failure to pay on demand any money or liability hereby
secured; or
(c) the Debtor: (in relation to any law or jurisdiction)
(i) being unable to pay debts when due or being otherwise
insolvent; resolving or taking any step or procedure,
preparatory to ceasing trading or stopping or suspending
payments; being subject to any Order in respect of
bankruptcy, winding-up, desastre, administration,
receivership, reconstruction, compromise with creditors,
execution of judgment, sequestration or attachment of
assets; or
(ii) doing or omitting to do anything as a result of which the
Debtor is or is liable to be struck off the Register of
Companies (or its equivalent) in its place of
incorporation.
Enforcement
8. Upon the occurrence of an Event of Default and provided that the
Lender has served on the Debtor and the Nominees a notice in
accordance with the Law, specifying the particular Event of Default
complained of and the Debtor has failed to remedy such Event of
Default (if capable of remedy) within 14 days following receipt of
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such notice, the Lender shall be entitled without notice or further
demand to:
(a) (i) exercise and be entitled to any and all rights of an
owner in relation to the Collateral;
(ii) collect, receive or compromise and give a good discharge
for any and all monies and claims for monies due and to
become due for the time being under or in the Collateral;
and otherwise put into force and effect all rights, powers and
remedies available to it, at law or otherwise; and
(b) exercise the power of sale over the Collateral or any of it
without further process and without the necessity for any
application in respect thereof by the Lender to the Royal
Court and the power of sale may be exercised in such manner
and for such consideration as the Lender sees fit (and for
consideration payable by instalments with or without security
if the Lender decides and by way of sale to itself or its
nominees or associates at the discretion of the Lender) and
the Lender shall not be liable for any loss caused by
application of the proceeds of sale in accordance with the
Law.
Other arrangements
9. The Lender may increase, extend or otherwise amend any facility
given to the Debtor, give time to release or make other
arrangements with the Debtor (or if the Debtor is more than one
person any one or more of them) or any surety, in each case without
prejudicing any rights or interests pursuant to this Security
Interest Agreement and the rights of the Lender pursuant to this
Security Interest Agreement shall not be affected by:
(a) the making or absence of any demand;
(b) the absence, or any defective exercise of the Debtor's
borrowing powers;
(c) the death, insolvency or disability of the Debtor or where the
Debtor is more than one person, any one or more of them; or
(d) any change in the constitution of the Debtor.
10. The rights of the Lender under this Security Interest Agreement are
in addition to and are not to prejudice or be prejudiced by any
guarantee or any other security which the Lender may now or
hereafter hold for the Obligations nor are they to prejudice any
other rights of lien or set-off the Lender may have.
11. The Lender may assign or otherwise transfer the benefit of this
Security Interest Agreement.
Conditional Discharge and Retention of Security
12. (a) Any settlement, discharge or release between the Debtor and
the Lender shall be conditional on no security given or
payment made to the Lender by the Debtor or any other person
5
being avoided or reduced by virtue of any enactment relating
to insolvency for the time being in force. The Lender shall be
entitled (subject to any limit in the total amount recoverable
hereunder) to recover the value or amount of any such security
or payment from the Debtor subsequently as if such settlement,
discharge or release had not occurred.
(b) The Lender may retain any security held by it for the Debtor's
liability under the Obligations for the relevant period after
repayment of all sums due to the Lender from the Debtor. If
within the relevant period after such repayment a
representation shall be presented for an order for the
winding-up or bankruptcy order, the Lender may continue to
retain such security or any part of it for such further period
as the Lender shall determine in its discretion. In this
clause, the "relevant period" means the relevant statutory
period, extended by one month, within which any payment or
security made to or held by the Lender may be avoided or
invalidated under any applicable - relating to insolvency.
Currency
13. On any set-off, appropriation or exercise of a power of sale under
this Security Interest Agreement, the Lender may from time to time
convert the proceeds of sale of, or any other monies received in
relation to the Collateral, into the currency or currency of the
Obligations or any of them and such a conversion shall be at the
then prevailing spot or forward rate of exchange (as conclusively
determined by the Lender) for the purchase of the other currency
with the existing currency.
Interpretation
14. (a) In this Security Interest Agreement:
(i) the "Law" means the Security Interests (Jersey) Law, 1983
as amended from time to time;
(ii) the expression the "Debtor" shall include personal
representatives and successors and the Debtor shall be
the "debtor" for the purposes of the Law;
(iii) the expression the "Lender" shall include its successors
and assigns and the Lender shall be the "secured party"
for the purposes of the Law;
(iv) the expression the "Obligations" shall include all monies
payable and all indebtedness or liability of the Debtor
whether actual or contingent, whether alone or jointly
with another, and whether as principal or surety and the
words "monies", "liabilities" and "indebtedness" shall be
construed accordingly; and
(v) the singular shall include the plural;
(b) The headings used herein are for description only and shall
not affect the construction of any provision of this Security
Interest Agreement.
6
(c) In the event of invalidity or unenforceability of any
provision hereunder that part shall be severed from the
remainder and shall not prejudice the validity or
enforceability of the remainder.
(d) Where this Security Interest Agreement is executed by more
than one person, the obligations and liabilities of each of
them shall be joint and several and every agreement and
undertaking on their part shall he construed accordingly.
(e) This Security Interest Agreement and any variation thereof
shall be deemed to constitute a separate security agreement
for each and every one of the securities subject hereto and no
defect in respect of any one of such securities shall affect
the validity of this Security Interest Agreement in relation
to the other such securities or any of them.
Law, Jurisdiction and Notices
15. (a) The parties hereto agree that this Security Interest Agreement
shall in all respects be governed by and construed in
accordance with the law of the Island of Jersey, and the
parties hereto hereby agree to submit to the non-exclusive
jurisdiction of the Courts of Jersey.
(b) Any notice or demand to be given or made pursuant to this
Security Interest Agreement or the Law shall be given or made
when delivered to any party to this Security Interest
Agreement, or posted to any party to this Security Interest
Agreement at that party's last known address, or sent by fax
to any fax number recorded for that party and shall be deemed
to have been received immediately upon delivery, or 48 hours
after posting, or immediately after completion of facsimile
transmission.
SCHEDULES
FIRST SCHEDULE
--------------
The Obligations
1. Note Purchase Agreement dated 28th November, 1988, between Pauley
Petroleum Inc. and Thamesedge Limited ("Thamesedge"), as amended
(the "Thamesedge Note Purchase Agreement") and a Note dated 30th
November, 1988, for US$75,000,000.00 (seventy-five million United
States dollars) from Pauley Petroleum Inc. to Thamesedge Limited
(the "Thamesedge Note") excepting therefrom US$13,500,000.00
(thirteen million five hundred thousand United States dollars) of
the principal balance which is subject to an option to convert such
an amount into shares in the common stock of the Debtor;
2. Letter agreements dated 28th November, 1988, and 18th December,
1992, referring to and amending the Thamesedge Note Purchase
Agreement and the Thamesedge Note;
3. Net Profits Share Agreement dated 18th December, 1992, by and among
Hondo Oil & Gas Company("Hondo"), Lonrho Plc ("Lonrho") and
7
Thamesedge (the "Net Profits Share Agreement");
4. Amended and Restated Letter Agreement dated 20th December, 1991,
between Hondo and Lonrho (the "Lonrho Loan Agreement") and Notes
dated 1st September, 1991, for US$10,000,000.00 (ten million United
States dollars), dated 1st November, 1991 for US$9,000,000.00 (nine
million United States dollars) and dated 20th December, 1991, for
US$13,000,000.00 (thirteen million United States dollars) (the
"Lonrho Notes");
5. Letter Agreement dated 18th December, 1992 between Hondo and Lonrho
referring to and amending the Lonrho Loan Agreement and the Lonrho
Notes;
6. Note dated 30th April, 1993, for US$3,000,000.00 (three million
United States dollars) from Via Verde Development Company ("Via
Verde") to Lonrho (the "Via Verde Note"), secured by a deed of
trust recorded as Instrument No. 93-840817 in the Real Property
Records of Los Angeles County, California (the "Via Verde
Mortgage"), guaranteed by Hondo in a Guaranty dated 30th April,
1993, (the "Honda Guaranty") and subject to a Letter Agreement
dated 30th April, 1993;
7. Note dated 25th June, 1993, for US$4,000,000.00 (four million
United States dollars) from Hondo to Lonrho (the "Valley Gateway
Note") secured by a deed of trust dated 30th August, 1993, granted
by Hondo and Newhall Refining Co., Inc., ("Newhall") recorded as
Instrument No. 93-2006475 in the Real Property Records of Los
Angeles County, California (the "Valley Gateway Mortgage");
8. Letter Agreement dated 17th December, 1993, between Hondo, Via
Verde, Newhall, Lonrho and Thamesedge, restructuring the
aforementioned indebtedness and amending the Thamesedge Note, the
Lonrho Notes, the Via Verde Note and the Valley Gateway Note;
9. Letter Agreement dated 10th November, 1994, between Hondo, Via
Verde. Newhall. Lonrho and Thamesedge, restructuring the
aforementioned restructured indebtedness and amending the amended
Thamesedge Note, the amended Lonrho Notes, the amended Via Verde
Note and the amended Valley Gateway Note; and creating a new
US$5,000,000.00 (five million United States dollars) loan facility
and a Note therefor dated 31st October, 1994 (the "Facility Note");
10. Letter Agreement dated 22nd December, 1995, between Hondo, Via
Verde, Newhall, Lonrho and Thamesedge, restructuring the
aforementioned restructured indebtedness, and amending the amended
Thamesedge Note, the amended Lonrho Notes, the amended Via Verde
Note and the amended Valley Gateway Note;
11. Revolving Credit Agreement dated 28th June, 1996, between Hondo and
Thamesedge and Promissory Note for US$13,500,000.00 (thirteen
million five hundred thousand United States dollars) from Hondo to
Thamesedge (the "Revolving Credit Note"):
12. The Thamesedge Note as amended, the Lonrho Notes as amended, the
Via Verde Notes as amended, the Valley Gateway Note as amended, the
Facility Note as amended, and the Revolving Credit Note as amended,
are collectively referred to hereafter as the "Indebtedness";
8
13. Assignment dated 29th March, 1996, between Lonrho and Thamesedge
under which Lonrho assigned all or its interests in the
Indebtedness to Thamesedge; and
14. Letter Agreement dated the 13th December, 1996, between Hondo, Via
Verde, Newhall and Thamesedge amending the dates of repayment of
the Indebtedness and pledging, as security for the Indebtedness,
all of the shares of Hondo Magdalena Oil & Gas Limited.
SECOND SCHEDULE
---------------
The Collateral
12 shares in the share capital of Hondo Magdalena Oil & Gas
Limited, whose registered office is at P.O. Box 1471, Westaway
Chambers, 39 Don Street, St. Helier, Jersey, Channel Islands, JE4
8UA, which are held by the Nominees on trust for the Debtor.
IN WITNESS whereof the parties hereto have hereunto set their hands and
seals the day and year first above written.
The Common Seal of
THAMESEDGE LIMITED
was hereunto affixed in the presence of:-
/s/ R.E. Whitten
Director
/s/ J. Hughes
Secretary
Signed by:
/s/ John J. Hoey
duly authorised
for and on behalf of
HONDO OIL & GAS COMPANY
The Common Seal of
FOLIO TRUST COMPANY LIMITED
was hereunto affixed in the presence of:-
/s/ Robert David Johnson
Director
/s/ Peter Anthony Barnes
Director
The Common Seal of
FOLIO NOMINEES LIMITED
was hereunto affixed in the presence of:
9
/s/ Robert David Johnson
Director
/s/ Peter Anthony Barnes
Director
10
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
-----------------------------------------------
This Amended and Restated Revolving Credit Agreement (referred to
herein as the "Agreement" or "this Agreement") is made as of July 2,
1997 between HONDO OIL & GAS COMPANY, a Delaware corporation (the
"Borrower"), and THAMESEDGE, LTD., a United Kingdom corporation (the
"Lender").
RECITALS
--------
Lender and Borrower entered into a Revolving Credit Agreement as of
June 28, 1996 (the "1996 Agreement") under which Lender agreed to
advance to Borrower $13,500,000. The Borrower has requested that Lender
make additional advances of $7,000,000 and to include those advances
under the terms and conditions of the 1996 Agreement. The Lender has
agreed to make additional revolving advances to the Borrower from time
to time in a new aggregate amount not to exceed $20,500,000 of principal
at any time outstanding plus all accrued interest. The monies will be
used exclusively as follows:
- $18,200,000 for Borrowers wholly owned subsidiary, Hondo
Magdalena Oil & Gas Limited ("Hondo Magdalena"), for its requirements
pursuant to the OPON Budget hereinafter defined; and
- $2,300,000 to meet Borrower's corporate general and
administrative expenses.
ARTICLE I
INTERPRETATION AND DEFINITIONS
SECTION 1.01 Definitions. The following terms, as used herein,
shall have the following respective meanings:
"AMEX" means the American Stock Exchange.
"Advances" has the meaning set forth in Section 2.01.
"Business Day" means any day of the year on which banks are not
required or authorized to close in London or Houston, Texas.
"Closing Date" has the meaning set forth in Section 3.01.
"Code" means the Internal Revenue Code of 1986.
"Commitment" has the meaning set forth in Section 2.01.
"Credit Documents" means this Agreement, the Note, and the
Guaranty.
"Debt" means, as to any Person, all (a) indebtedness for borrowed
money, (b) obligations evidenced by bonds, debentures, notes or other
similar instruments, (c) obligations to pay the deferred purchase price
of property or services, (d) obligations as lessee under leases that
have been or should be, in accordance with generally accepted accounting
principles, recorded as capital leases, (d) obligations under direct or
1
indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to assure a
creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clauses (a) through (d) above, and
(f) liabilities in respect of unfunded vested benefits under plans
covered by Title IV of ERISA.
"Default" means any event or condition that would, with the giving
of any requisite notice and/or the passage of any requisite period of
time, constitute an Event of Default.
"Event of Default" has the meaning set forth in Section 6.01.
"Free Cash Flow" means that amount of Borrower's net income
attributable to Hondo Magdalena reported each year in accordance with
GAAP as applicable to the international petroleum industry, applied
consistently after deduction of all expenses incurred by Borrower or
Hondo Magdalena in each respective year which are directly related to
the operations of Hondo Magdalena in Colombia including, but not limited
to: (i) Hondo Magdalena's share of royalty and other financial
obligations due the government of Colombia; (ii) Hondo Magdalena's share
of operating expenses under operating agreements and the Association
Contract of 15th July 1987; (iii) overhead and general and
administrative expenses attributable to operating agreements and the
Association Contract of 15th July 1987; and (iv) remittance and income
taxes.
"GAAP" means generally accepted accounting principles for the
United States or Colombia, as applicable.
"Governmental Action" means any authorization, approval, consent,
waiver, exception, license, filing registration, permit, notarization,
special lease or other requirement of any Governmental Person.
"Governmental Person" means, whether domestic or foreign, any
national, federal, state or local government, any political subdivision
thereof or any governmental, quasi-governmental (including, without
limitation, AMEX or other markets in which Borrower's securities are
traded), judicial, public, statutory or regulator instrumentality,
authority, body, bureau or entity, including any central bank and any
comparable authority.
"Governmental Rule" means any treaty, law, rule, regulation,
ordinance, order, code, interpretation, judgment, writ, injunction,
decree, directive, guideline, policy or similar form of decision of any
Governmental Person.
"Guaranty" means the Amended and Restated Guaranty of Hondo
Magdalena substantially in the form of Exhibit B.
"Guarantor" means Hondo Magdalena.
"Lien" means, with respect to any asset, (a) any lien, charge,
claims, mortgage, security interest, pledge, negative pledge or other
encumbrance of any kind in respect of such asset or (b) the interest of
a vendor or lessor under any conditional sale agreement, capital lease
or other title-retention agreement relating to such asset.
2
"Note" means the Promissory Note of the Borrower substantially in
the form of Exhibit A.
"OPON" means the Opon Association Contract dated July 15, 1987
between Empresa Colombiana de Petroleos ("Ecopetrol") and Opon
Development Company.
"OPON Budget" means the budgets for the calendar years 1996 and
1997 in connection with OPON, prepared by Amoco Colombia Petroleum
Company and submitted at the operating committee meetings on April 10,
1996, and November 5, 1996, and the drilling of Opon Well No. 14 as
described in letter dated June 18, 1997, from Amoco Colombia Petroleum
Company to Hondo Magdalena and Opon Development Company copies of which
have been previously supplied to Lender.
"Person" means any individual, partnership, corporation (including
a business trust), joint stock company, trust, unincorporated
association, joint venture or other entity, or any Governmental Person.
"PIK Shares" means the securities, assets or property issued as
payment in kind for interest on Advances pursuant to Section 2.05(b)(i).
"Termination Date" means January 1, 1999 or the earlier date of
termination of the Commitment pursuant to Section 6.01.
SECTION 1.02 Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP
on a basis consistent with that used in the preparation of the financial
statements referred to in Section 4.01(e).
SECTION 1.03 Interpretation. In the Agreement the singular
includes the plural and the plural the singular; words importing any
gender include the other genders; references to statutes are to be
construed as including all statutory provisions consolidating, amending
or replacing the statute referred to; references to "writing" include
printing, typing, lithography and other means of reproducing words in a
tangible visible form; the words "including," "includes" and "include"
shall be deemed to be followed by the words "without limitation";
references to articles, sections (or subdivisions of sections),
exhibits, annexes or schedules are to those of this Agreement unless
otherwise indicated; references to agreements and other contractual
instruments shall be deemed to include all subsequent amendments and
other modifications to such instruments, and references to Persons
include their respective permitted successors and assigns.
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01 The Advances. The Lender agrees, on the terms and
conditions hereinafter set forth, to make advances (the "Advances") to
the Borrower from time to time during the period from the date hereof
until the Termination Date in an aggregate amount not to exceed at any
time outstanding $20,500,000, as such amount is reduced from time to
time pursuant to Section 2.03 (the "Commitment"). Each Advance shall be
in an amount not less than $1,000,000 and, if greater shall be in
increments of $100,000. Within the limits of the Commitment, the
3
Borrower may borrow, prepay pursuant to Section 2.04(a) and reborrow
under this Section 2.01.
SECTION 2.02 Making the Advances. Each Advance shall be made on
at least three Business Days notice from the Borrower to the Lender
specifying the date and amount thereof. Not later than 10:00 a.m.,
London time, on the date of such Advance and upon fulfillment of the
applicable conditions set forth in Article III, the Lender will make
such Advance available to the Borrower in immediately available funds at
such account and location as Borrower may designate in writing.
SECTION 2.03 Optional and Mandatory Reductions of Commitment.
Without any notice to the Borrower or any other action by an Person, the
Commitment shall be automatically and permanently reduced (i) by an
amount equal to the aggregate principal amount of the Advances repaid
(or due but not repaid) pursuant to Section 2.04(c); (ii) advances
repaid (or to be repaid) in kind pursuant to Section 2.05(b); and (iii)
in accordance with Section 6.01.
SECTION 2.04 Optional and Mandatory Prepayments of Advances.
(a) The Borrower may, upon at least three Business Day's notice to
the Lender stating the proposed date and amount of the prepayment,
prepay the Advances in whole or in part with accrued interest to the
date of such prepayment on the amount prepaid, provided that each
partial prepayment shall be in a principal amount not less than
$100,000.
(b) The Borrower shall immediately repay to the Lender, and there
shall become due and payable by the Borrower an amount equal to the
amount by which the aggregate amount of the Advances outstanding exceeds
the Commitment at any time.
(c) The Borrower shall immediately repay to the Lender, and there
shall become due and payable by the Borrower, an amount equal to 75% of
Free Cash Flow immediately upon receipt by OPON
(for avoidance of doubt said 75% being over and above the 5% net profits
interest agreed to be paid by Borrower to Lender pursuant to agreement
among Borrower, Lender and Lonrho Plc dated as of December 18, 1992, as
amended.)
SECTION 2.05. Principal and Interest.
(a) The Borrower shall repay the unpaid principal amount of each
Advance, and shall pay interest on each Advance, in accordance with the
terms of the Note.
(b) Notwithstanding the foregoing:
(i) Payment in Kind. If, in the opinion of management, Borrower
does not have sufficient cash resources to pay interest on any of
the Advances when due, then Borrower may offer to Lender a payment
of the interest in shares of Borrower's common stock, valued at (i)
the last reported sales price regular way on the interest due day
or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way on
such day, in either case on AMEX or other principal national
securities exchange on which the Borrower's Common Stock is listed
or, if not listed on any national securities exchange, on The
4
Nasdaq Stock Market's National Market System or, (ii) if (i) is not
applicable, the average of the bid and asked prices at the end of
the interest due day in the over-the-counter market as furnished by
any New York Stock Exchange member firm selected by the Lender in
good faith for that purpose. In making this determination, the
Borrower's management will not, without the consent of Lender
allocate cash resources to new capital projects not related to
OPON. Lender will then notify Borrower whether it will either
accept the payment of interest in kind or add the amount of
interest due to the principal of the note. If Lender accepts the
payment of interest in kind, Borrower will issue the requisite
number of shares to Lender within ten business days after Borrower
receives notice of acceptance from Lender in the same manner as
provided in other loans between Borrower and Lender.
(ii) Unregistered Shares. Lender recognizes that any PIK Shares
will not have been registered under the Securities Act of 1933 and
may not be sold in the absence of an effective registration under
said Act or an exemption from the registration requirements of said
Act.
(iii) Registration Rights. If Lender so requests at any time and
from time to time, Borrower will use its best efforts to promptly
effect registration under the Securities Act of 1933 of the PIK
shares so issued.
SECTION 2.06 Payments and Computations.
(a) The Borrower shall make each payment under the Note and any
Credit Document not later than 12:00 noon, London time, on the day when
due in lawful money of the United States of America to the Lender at
such account and location as it may designate, in immediately available
funds. All computations of interest under the Note shall be made by the
Lender on the basis of a year of 360 days and the actual number of days
(including the first day but excluding the last day) occurring in the
period for which such interest is payable.
(b) Any amount payable under the Note or any Credit Document not
paid when due shall bear interest until paid at the rate specified in
the Note for late payments.
SECTION 2.07 Payment on Non-Business Days. Whenever any payment
to be made under the Note or any Credit Document shall be due on a day
other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case
be included in the computation of payment of interest.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01 Conditions Precedent to Effectiveness. The Agreement
shall become effective on the day (the "Closing Date") that is the later
of July 2, 1997 or when the Lender shall have received all of the
following, each dated the Closing Date and otherwise in form and
substance satisfactory to the Lender shall have been delivered to
Lender; provided, however, that this Agreement shall be null and void
(and the 1996 Agreement shall remain effective) unless all the following
5
shall have occurred or been delivered to Lender on or prior to July 31,
1997:
(a) the Note executed by the Borrower;
(b) copies of the resolutions of the Board of Directors of the
Borrower unanimously authorizing this Agreement and the Note and the
transactions contemplated hereby and thereby, certified by the Secretary
of the Borrower to be in full force and effect, and all documents
evidencing other necessary corporate action and governmental approvals,
if any, with respect to this Agreement and the Note;
(c) a certificate of the Secretary of the Borrower certifying the
names and true signatures of the officers of the Borrower authorized to
sign this Agreement and the Note and the other documents to be delivered
by the Borrower hereunder;
(d) the Guaranty executed by the Guarantor;
(e) copies of resolutions of the board of directors of Guarantor
authorizing the Guaranty, certified by the Secretary or Assistant
Secretary of such Guarantor to be in full force and effect together with
all other documents evidencing other necessary corporate action and
governmental approvals, if any, with respect to the Guaranty;
(f) a certificate of the Secretary or Assistant Secretary of
Guarantor certifying the names and true signatures of the officers of
the Guarantor authorized to sign the Guaranty and the other documents to
be delivered by Guarantor hereunder;
(g) certificates of good standing of each of the Borrower and the
Guarantor, dated as of a recent date, from appropriate officials of the
state of incorporation of such company;
(h) a favorable opinion of Charles B. McDaniel, Esq. as counsel
for the Borrower and as counsel for Guarantor covering such matters as
may be required by Lender; and
(i) a letter from Charles B. McDaniel, Esq. as the "Process Agent"
pursuant to which the Process Agent agrees to act as process agent for
Borrower and Guarantor and to forward forthwith to Borrower and
Guarantor all process received by the Process Agent.
SECTION 3.02 Conditions Precedent to All Advances. The obligation
of the Lender to make each Advance shall be subject to the further
conditions precedent that on the date of such Advance:
(a) the representations and warranties contained in Section 4.01
are correct on and as of the date of such Advance as though made on and
as of such date;
(b) no event has occurred and is continuing, or would result from
such Advance, that constitutes a Default or an Event of Default; and
(c) The Lender shall have received such other approvals, opinions
and documents as the Lender may reasonably request.
6
ARTICLE IIIA
OPTION TO CONVERT DEBT INTO SHARES OF COMMON STOCK OF BORROWER
SECTION 3A.01 Option to Convert. As additional consideration and
requirement for the increase in the commitment reflected in this
Agreement, Lender will have the option to convert $7,000,000 of the
principal amount of the outstanding balance of the Note Purchase
Agreement dated November 28, 1988, between Pauley Petroleum Inc. (now
Borrower) and Lender, as amended, and Note dated November 30, 1988, for
$75,000,000 from Pauley Petroleum Inc. to Lender, as amended (the
"Thamesedge Note"), into shares of common stock, $1.00 par value, of
Borrower at the conversion price of $7.70 per share (110% of the closing
price of such shares on the American Stock Exchange on July 1, 1997).
SECTION 3A.02 Approval by Borrower's Stockholders. Such
conversion option will be subject to and conditioned upon approval by
Borrower's stockholders at the next annual meeting of stockholders to be
held approximately March 1998. Lender agrees to provide a letter from
Lonrho Plc to Borrower, substantially in the form of Exhibit C, to the
effect that on the matter of the approval of the option to convert such
debt, Lonrho Plc agrees to cause its subsidiaries, The Hondo Company and
Lender, to vote at that meeting the Borrower's shares held by them in
proportion to the votes cast by stockholders other than The Hondo
Company and Thamesedge. If the conversion option is not approved by the
stockholders, then the interest rate on such $7,000,000 will become
13.5% per annum (the original rate of the Thamesedge Note) on the date
of the meeting at which such conversion option is not approved.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01 Representations and Warranties of the Borrower. The
Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly organized, validly existing
and in good standing under the laws of Delaware and is duly qualified,
in good standing and authorized to do business in all other
jurisdictions within the United States wherein the character of the
properties owned or held by it or the nature of the business transacted
by it makes such qualification necessary. The Borrower has taken all
actions and procedures customarily taken in order to enter, for the
purpose of conducting business or owning property, each jurisdiction
outside the United States wherein the character of the properties owned
or held by it or the nature of the business transacted by it makes such
actions and procedures desirable.
(b) The execution, delivery and performance by the Borrower of the
Credit Documents to which it is a party and the consummation of the
transactions contemplated hereby and thereby, are within the Borrower's
corporate powers, have been duly authorized by all necessary corporate
action and do not contravene (i) the Borrower's charter documents or
bylaws or (ii) any applicable Governmental Rule, (including, without
limitation, AMEX or other markets in which Borrower's securities are
traded) or any contractual restriction binding on or affecting the
Borrower.
7
(c) No Governmental Action is required for the due execution,
delivery and performance by the Borrower of this Agreement, or any
Credit Documents or the consummation of the transactions contemplated
hereby and thereby.
(d) The Credit Documents to which the Borrower is a party when
delivered hereunder will be, legal, valid and binding obligations of the
Borrower enforceable against the Borrower in accordance with their
respective terms.
(e) The consolidated balance sheet of the Borrower and its
subsidiaries as of September 30, 1996 and 1995 and the related
statements of operations, changes in stockholders' equity and cash flows
of the Borrower and its subsidiaries for the years then ended, audited
by Ernst & Young and copies of which have been delivered to the Lender,
fairly present in conformity with generally accepted accounting
principles the financial position of the Borrower and its subsidiaries
as of such dates and the results of the operations and cash flows for
such periods. No material adverse change has occurred in the financial
position, results of operations or business or prospects of the Borrower
since September 30, 1996 except as described in documents on file by
Borrower with the Securities and Exchange Commission, copies of which
have been delivered to Lender, or of which Lender has actual knowledge.
(f) There is no fact that the Borrower has not disclosed in
writing to the Lender, or of which Lender has actual knowledge, that has
or will have a material adverse effect on the financial condition of the
Borrower or the ability of the Borrower to perform any of its
obligations under any Credit Documents or the Guarantor under any Credit
Documents.
(g) There are no actions, suits or proceedings pending against
or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any subsidiary of the Borrower that could materially and
adversely affect the financial condition or operations of the Borrower
or any such subsidiary of the Borrower or the ability of the Borrower or
the Guarantor to perform its obligations under any Credit Documents,
except as described in the financial statements referred to in Section
4.01(e).
(h) The obligations of the Borrower under this Agreement and the
Guarantor under the Guarantee will rank at least pari passu with all
claims of other senior creditors of the Borrower and the Guarantor, as
the case may be.
(i) The Borrower, the Guarantor and each of their subsidiaries
have good title to their respective assets, and the same are not subject
to any Liens.
The only permitted exceptions to the Representations and Warranties
set forth above are set forth in Schedule 1 attached hereto.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01 Covenants of the Borrower. So long as any amount due
hereunder or under the Note or any other Credit Document shall remain
8
unpaid or the Lender shall have any Commitment hereunder, the Borrower
will, unless the Lender shall otherwise consent in writing, comply in
all respects with the following:
(a) The Borrower and its subsidiaries will at all time maintain
full and accurate books of account and records in conformity with GAAP.
The Borrower and its subsidiaries will maintain a standard system of
accounting and will furnish the following statements and reports to the
Lender at the Borrower's expense:
(i) as soon as available and in any event within 120 days after
the end of each fiscal year of the Borrower, complete consolidated
financial statements of the Borrower and its subsidiaries, together
with all notes thereto, prepared in reasonable detail in accordance
with GAAP, together with an opinion, based on an audit using
generally accepted auditing standards by Ernst & Young or other
independent certified public accountants selected by the Borrower
and acceptable to the Lender, stating without exception or
qualification that such financial statements have been prepared in
accordance with GAAP consistently applied and present fairly, in
all material respects, the consolidated financial position, result
of operations and cash flows presented, such financial statements
to contain a balance sheet as of the end of such fiscal year and
statements of earnings, stockholders' equity and cash flows for
such fiscal year, each setting forth in comparative form the
corresponding figures for the preceding fiscal year;
(ii) as soon as available and in any event within 120 days after
the end of each fiscal year of Guarantor complete consolidated
financial statements of Guarantor together with all notes thereto,
prepared in reasonable detail in accordance with GAAP
internationally recognized in the industry, together with an
opinion, based on an audit using generally accepted auditing
standards by Ernst & Young or other independent certified public
accountants acceptable to the Lender, stating without exception or
qualification that such financial statements have been prepared in
accordance with GAAP consistently applied and present fairly, in
all material respects, the consolidated financial position, and
result of operations and cash flows presented, such financial
statements to contain a balance sheet as of the end of such fiscal
year, a consolidated profit and loss statement for such fiscal year
and a statement of cash flows for such fiscal year, each setting
forth in comparative form the corresponding figures for the
preceding fiscal year;
(iii) as soon as available, and in any event within 60 days after
the end of each fiscal quarter of the Borrower, the Borrower's
consolidated balance sheet as of the end of such fiscal quarter and
statements of the Borrower's consolidated earnings, and cash flows
for such quarter and for the period from the beginning of the then
current fiscal year to the end of such fiscal quarter all in
reasonable detail and prepared in accordance with GAAP, subject to
changes resulting from normal year-end adjustments; and, together
with each such set of financial statements and each set of
financial statements furnished under subsection (i) of this
section, a certificate signed by the chief financial officer of the
Borrower stating that financial statements are accurate and
complete and present fairly, in all material respects, the
consolidated financial position and result of operations presented,
9
stating that the chief financial officer of the Borrower has
reviewed this Agreement and that no Default or Event of Default
exists at the time of such certificate or, if he concludes that a
Default or Event of Default exists, specifying its nature and the
action being taken or proposed to be taken with respect thereto;
(iv) forthwith upon the occurrence of any Default or Event of
Default, a certificate of the chief financial officer of the
Borrower setting forth the details thereof and the action that the
Borrower is taking or proposes to take with respect thereto;
(v) promptly upon the mailing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy
statements so mailed;
(vi) promptly after the Borrower has become aware of the same,
notice of all pending or threatened litigation or arbitration
proceedings and proceedings before any Governmental Person that
could materially and adversely affect the financial condition or
operations of the Borrower or the Guarantor;
(vii) promptly upon any such occurrence, written notice to the
Lender of any sale of assets by the Borrower in excess of $150,000
in any one transaction; and
(viii) from time to time such additional information regarding the
financial position, results of operations, cash flows or business
or prospects of the Borrower or the Guarantor as the Lender may
reasonably request.
(b) The Borrower will preserve and maintain its, and cause its
subsidiaries to preserve and maintain their corporate existence and all
of its right, privileges and franchises necessary or desirable in the
normal conduct of its business and will conduct its business in a
regular manner. The Borrower will notify the Lender 30 days in advance
of any change in the location of its or any of its subsidiary's
principal place of business, of the establishment or discontinuance of
its principal place of business or of a change in the corporate name,
trade names or articles of incorporation or bylaws of the Borrower or
any subsidiary of the Borrower.
(c) The Borrower will keep, and will cause each of its
subsidiaries to keep, all of its properties necessary, in the reasonable
judgment of its Board of Directors, in its business in good working
order and condition, ordinary wear and tear excepted, and will permit
representatives of the Lender to inspect such properties and to examine
and make extracts from the books and records of the Borrower and its
subsidiaries during normal business hours.
(d) The Borrower will comply with the requirements of all
applicable Governmental Rules, a breach of which could have a material
adverse effect on the consolidated financial condition or the business
taken as a whole of the Borrower and its subsidiaries, except where
contested in good faith and by proper proceedings.
(e) The Borrower will, and will cause its subsidiaries to, keep
proper books of records and accounts in which full, true and correct
entries in conformity with GAAP shall be made of all dealings and
transactions in relation to the Borrower's and its subsidiaries'
10
business and activities. The Borrower will, and will cause its
subsidiaries to, permit representatives of the Lender to visit and
inspect all of its and its subsidiaries' properties to the extent
permitted by applicable law and applicable safety and security policies
of the Borrower and its subsidiaries (and to the extent such visitation
and inspection shall not interfere with the normal operations of the
Borrower and its subsidiaries) and to examine, subject to proprietary
and confidentiality policies and agreements of or binding upon the
Borrower and its subsidiaries, any or all of their books and records and
to discuss their affairs, finances and accounts with their officers and
employees, subject to proprietary and confidentiality policies and
agreements of or binding upon the Borrower and its subsidiaries, all at
such reasonable times and as often as may reasonably be desired.
(f) The Borrower will pay and discharge all taxes, assessments,
governmental charges and levies imposed on it, on its income or profits
or on any of its property prior to the date on which interest and
penalties attach thereto, except that the Borrower will not be required
hereby to pay any such tax, assessment, charge or levy the payment of
which is being contested in good faith and by proper proceedings and
against which it is maintaining adequate reserves.
(g) The Borrower will, and will cause its subsidiaries to,
maintain insurance with responsible companies in such amounts and
against such risks as is usually carried by owners of similar businesses
and properties in the same general areas in which they operate.
(h) The Borrower will not create or suffer to exist any Lien upon
or with respect to any of its properties, whether now owned or hereafter
acquired, or assign any right to receive income, except as set forth on
Schedule 1.
(i) The Borrower will not (A) consolidate with or merge into any
other Person or (B) sell, lease or otherwise transfer all or any
substantial part of its assets to any other person.
(j) The Borrower will not take any action that would result in the
Borrower's obligations to the Lender under this Agreement and the Note
not ranking at least pari passu in right of payment with all senior
obligations of the Borrower to other creditors unless approved by
Lender.
(k) The Borrower will use the proceeds of this loan in the manner
specified in the recitals first above written.
(l) The Borrower will undertake no new capital projects not
related to OPON of any type for so long as any monies remain due under
any of the Credit Documents.
(m) The Borrower will not sell, pledge, encumber transfer or in
any way adversely affect the shares of or the assets held by Hondo
Magdalena and it will similarly cause Hondo Magdalena to do likewise.
ARTICLE VI
EVENTS OF DEFAULT
11
SECTION 6.01 Events of Default. If any of the following events
(each an "Event of Default") shall occur and be continuing:
(a) the Borrower shall fail to pay any installment of principal
of, or interest on, the Advances and/or other amounts payable under this
Agreement, the Note or any Credit Document when due and such failure
shall remain unremedied for 3 days;
(b) the Borrower or Guarantor shall fail to perform or observe any
other term, covenant or agreement contained in any Credit Document on
its part to be performed or observed and any such failure shall remain
unremedied for 10 days after written notice thereof shall have been
given to the Borrower or Guarantor (as the case may be) by the Lender;
(c) any representation or warranty made by the Borrower or
Guarantor (or any of their officers) in or in connection with any Credit
Document or Advance shall prove to have been incorrect in any material
respect when made;
(d) the Borrower, Guarantor and any of their respective
subsidiaries shall (i) fail to pay any Debt (but excluding indebtedness
evidenced by the Note) of the Borrower, Guarantor or such subsidiary (as
the case may be), or any interest or premium thereon, when due (whether
upon scheduled maturity, required prepayment, acceleration, demand or
other notice or formality of any kind) and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Debt or (ii) fail to perform or observe any
term, covenant or condition on its part to be performed or observed
under any agreement or instrument relating to any such Debt, when
required to be performed or observed, and such failure shall continue
after the applicable grace period, if any, specified in such agreement
or instrument, if the effect of such failure to perform or observe is to
accelerate, or to permit the acceleration of, the maturity of such Debt;
or any such Debt shall be declared to be due and payable, or required to
be prepaid (other than by a regularly scheduled required prepayment),
prior to the stated maturity thereof;
(e) the Borrower, Guarantor or any of their respective
subsidiaries shall generally not pay its debts as they become due, shall
admit in writing its inability to pay its debts or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower, the Guarantor or any of their
respective subsidiaries seeking to adjudicate it a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
Debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it or
for any substantial part of its property; or the Borrower, Guarantor or
any of their respective subsidiaries shall take any corporate or other
action to authorize any of the actions set forth above in this paragraph
(e);
(f) a final judgment or order for the payment of money in excess
of $75,000 shall be rendered against the Borrower, the Guarantor or any
of their subsidiaries, and any such judgment or order shall continue
unsatisfied and in effect for a period of 60 consecutive days;
(g) any of the Credit Documents shall be terminated, repudiated or
12
contested in any respect, any material provision of any of the Credit
Documents shall for any reason cease to be valid and binding on the
Borrower or Guarantor, Guarantor shall breach any obligation set forth
in its Guaranty or there shall be a material adverse change in the
financial condition of the Borrower or Guarantor affecting the ability
of the Borrower or Guarantor to perform their respective obligations
under the Note or the Guaranty; then, and in any such event, the Lender
may, by notice to the Borrower, (i) declare the Commitment to make
Advances to be terminated, whereupon the same shall forthwith terminate,
and/or (ii) declare all Advances, all interest thereon and all other
amounts payable under this Agreement the Note and all Credit Documents
to be forthwith due and payable, whereupon the Advances, all such
interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Borrower.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01 Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Note, or consent to any departure by
the Borrower therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Lender, and then such waiver or
consent shall be effective only in the specific instance and for the
specific purpose for which given.
SECTION 7.02 Notices, Etc. Except as otherwise specifically
provided in this Agreement all notices and other communications provided
for hereunder shall be in writing and shall be delivered to the
addressees at the applicable addresses set forth below by mail,
telecopy, Federal Express or other equivalent overnight carrier or by
telephone (confirmed in writing within 24 hours) or telecopy or hand-
delivered, if to the Borrower, to it at Hondo Oil & Gas Company, 10375
Richmond Avenue, Suite 900, Houston, TX 77042, telephone (713) 954-4600,
telecopier (713) 954-4601, Attention: Charles B. McDaniel, Esq.; if to
the Lender, to it at Thamesedge, Ltd., 4 Grosvenor Place, London, SW1X
7DL England, telephone 011-44-171-201-6000, telecopier 011-44-171-201-
6100, Attention Robin Whitten with a copy to Rudolph H. Funke, Esq. at
805 Third Avenue, 18th Floor, New York, NY 10022, telephone 212-715-
7001, telecopy 212-838-8141; or, as to each party, to it at such other
address as shall be designated by such party in a written notice to the
other party. All such notices and communications shall, except that
notices to the Lender pursuant to the provisions of Article II shall not
be effective until received by the Lender.
SECTION 7.03 No Waiver; Remedies. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder or
under the Note shall operate as a waiver thereof, nor shall any single
or partial exercise of any right hereunder or under the Note preclude
any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of
any remedies provided by law.
SECTION 7.04. Costs, Expenses and Taxes. The Borrower agrees to
pay on demand all out-of-pocket costs and expenses in connection with
the preparation, execution, delivery, administration and amendment of
this Agreement, the Note, the Guaranty and the other Credit Documents
13
to be delivered hereunder, including the reasonable fees and out-of-
pocket expenses of counsel for the Lender with respect thereto and with
respect to advising the Lender as to its rights and responsibilities
under this Agreement, and all costs and expenses, if any (including
reasonable fees and expenses of counsel), in connection with the
enforcement of this Agreement, the Note, the Guaranty and the other
Credit Documents to be delivered hereunder. In addition, the Borrower
shall pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Agreement,
the Note and the other Credit Documents to be delivered hereunder, and
agrees to save the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
SECTION 7.05 Right of Setoff. Upon the occurrence and during the
continuance of any Event of Default, the Lender is hereby authorized at
any time and from time to time, without notice to the Borrower (any such
notice being expressly waived by the Borrower), to set off and apply any
indebtedness at any time owing by the Lender to or for the credit or the
account of the Borrower against any and all of the obligations of the
Borrower now or hereafter existing under this Agreement and the Note,
irrespective of whether or not the Lender shall have made any demand
under this Agreement or the Note and although such obligations may be
unmatured. The Lender agrees to notify the Borrower promptly after any
such set off and application, provided that the failure to give such
notice shall not affect the availability of such set off and
application. The rights of the Lender under this Section are in
addition to other rights and remedies (including other rights of setoff)
that the Lender may have.
SECTION 7.06 Binding Effect: Governing Law. This Agreement shall
be binding upon and inure to the benefit of the Borrower and the Lender
and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights hereunder or any interest
herein without the prior written consent of the Lender. This Agreement
and the Note shall be governed by, and construed in accordance with, the
laws of the State of New York (without giving effect to New York's
principles of conflicts of law, other than title 14 of Article 5 of New
York's General Obligations Law).
SECTION 7.07 Counterparts. This Agreement may be executed in any
number of counterparts, and all such counterparts taken together shall
be deemed to constitute one and the same instrument.
SECTION 7.08 Entirety of Agreement. The Credit Documents
represent the complete understanding between the parties with respect to
the subject matter of this transaction.
SECTION 7.09 Jurisdiction.
(a) The Borrower hereby irrevocably submits to the jurisdiction of
any New York State or United States Federal court sitting in New York
City over any action or proceeding arising out of or relating to this
Agreement or the Note, and hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such
New York State or Federal court. The Borrower irrevocably consents to
the service of any and all process in any such action or proceeding by
sending copies of such process to it at its address and in the manner
14
determined under Section 7.02 hereof. The Borrower agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. The Borrower further waives any objections to
venue in such State and any objection to an action or proceeding in such
State on the basis of forum non conveniens. The Borrower further agrees
that any action or proceeding brought by it against the Lender shall be
brought only in New York State or United States Federal court sitting in
New York County, New York. The Borrower and the Lender waive any right
it may have to jury trial.
(b) Nothing in this Section 7.09 shall affect the right of the
Lender to serve legal process in any other manner permitted by law or
affect the right of the Lender to bring any action or proceeding against
the Borrower or any of its properties in the courts of any other
jurisdictions.
(c) To the extent that the Borrower has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process
(whether from service or notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise) with respect to
itself or its property, the Borrower hereby irrevocable waives such
immunity in respect of its obligations under the Credit Documents.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
--------------------------
John J. Hoey
President and CEO
THAMESEDGE, LTD.
By: /S/ R. E. Whitten
--------------------------
Name: R. E. Whitten
Title: Finance Director
By: /s/ N. J. Morrell
--------------------------
Name: N. J. Morrell
Title: Chief Executive
15
PROMISSORY NOTE
---------------
FOR VALUE RECEIVED, the undersigned, HONDO OIL & GAS COMPANY, a
Delaware corporation (the "Borrower"), hereby promises to pay to the
order of THAMESEDGE, LTD., a United Kingdom corporation (the "Lender")
on January 1, 1999 the principal sum of $20,500,000 or, if less than
$20,500,000, the aggregate unpaid principal amount of all Advances (as
defined below), made by the Lender to the Borrower pursuant to the
Agreement (as defined below) together with all accrued but unpaid
interest and all interest added to the principal of this Note.
The Borrower promises to pay interest on the unpaid principal
amount of each Advance from the date of such Advance until such
principal amount is paid in full, at the rate per annum equal at all
times to 13% (or the maximum interest rate permitted by law, whichever
is less) on each October 1 and April 1 until maturity; provided,
however, that any amount of principal on Advances that are not paid when
due (whether at stated maturity, by acceleration or otherwise) shall
bear interest from the date on which such amount is due until such
amount is paid in full, payable on demand, at a rate per annum equal at
all time to 18% (or the maximum interest rate permitted by law,
whichever is less).
As used herein, "Business Day" means any day of the year on which
banks are not required or authorized to close in London or Houston,
Texas. All computations of interest shall be made by the Lender on the
basis of a year of 360 days and the actual number of days occurring in
the period from which such interest is payable. Whenever any payment
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of payment of
interest.
Both principal and interest are payable not later than 12:00 noon
London time on the day when due in lawful money of the United States of
America to the Lender at such account and place as Lender shall
designate in immediately available funds. Each Advance made by the
Lender to the Borrower pursuant to the Agreement, and all payments made
on account of principal thereof, may, but need not be recorded by the
Lender on its books and records on the grid attached hereto and such
books and records shall be conclusive as to the existence and amounts
thereof absent manifest error. Failure to make any such entry or
endorsement shall not effect the actual principal amount outstanding or
the enforceability of this Note.
This Note is the "Note" referred to in, and is entitled to the
benefits of, the Amended and Restated Revolving Credit Agreement between
the Borrower and the Lender dated as of July 2, 1997 (the "Agreement").
The Agreement, among other things: (1) provides for the making of
advances (the "Advances") by the Lender to the Borrower and (2)
contains provisions for acceleration of the maturity hereof upon the
happening of certain stated events and also for prepayments on account
of principal hereof prior to the maturity hereof upon the terms and
conditions specified therein.
This Note is a renewal and replacement of that certain other note
in the amount of $13,500,000 from Borrower to Lender dated as of June
28, 1996.
1
This Note is guaranteed by the Amended and Restated Guaranty of
Hondo Magdalena Oil & Gas Limited dated as of July 2, 1997.
This Note shall be governed by, and construed in accordance with,
the laws of the State of New York (without giving effect to New York's
principles of conflicts of law, other than Title 14 of Article 5 of New
York's General Obligations Law).
The Borrower hereby irrevocably submits to the jurisdiction of any
New York State or United States Federal court sitting in New York City
over any action or proceeding arising out of or relating to this Note or
the Agreement, and hereby irrevocably agrees that all claims in respect
of such action or proceeding may be heard and determined in such New
York State or Federal court. The Borrower irrevocably consents to the
service of any and all process in any such action or proceeding by
sending copies of such process to it at its address and in the manner
determined under Section 7.02 of the Agreement. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. The Borrower further
waives any objections to venue in such State and any objection to an
action or proceeding in such State on the basis of forum non conveniens.
The Borrower further agrees that any action or proceeding brought by it
against the Lender shall be brought only in New York State or United
States Federal court sitting in New York County, New York. The Borrower
and the Lender waive any right it may have to jury trial.
Nothing herein shall affect the right of the Lender to serve legal
process in any other manner permitted by law or affect the right of the
Lender to bring any action or proceeding against the Borrower or any of
its properties in the courts of any other jurisdictions.
To the extent that the Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process
(whether from service or notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise) with respect to
itself or its property, the Borrower hereby irrevocable waives such
immunity in respect of its obligations under the Credit Documents.
HONDO OIL & GAS COMPANY
By: /s/ J. J. Hoey
-------------------------
John J. Hoey
President and CEO
SCHEDULE TO NOTE
----------------
Amount of Principal Principal Notation
Date Advance Paid Outstanding Made By
2
AMENDED AND RESTATED GUARANTY OF
HONDO MAGDALENA OIL & GAS LIMITED
---------------------------------
This Amended and Restated Guaranty dated as of July 2, 1997, is
made by Hondo Magdalena Oil & Gas Limited, a Jersey, Channel Islands
corporation (the "Guarantor"), and THAMESEDGE, LTD. an English
corporation (the "Lender"). This Guaranty amends and restates the
Guaranty made by Guarantor to the Lender dated as of June 28, 1996.
RECITAL
The Lender has entered into an Amended and Restated Revolving
Credit Agreement dated as of July 2, 1997, as it may hereafter be
amended or otherwise modified (the "Agreement"), with HONDO OIL & GAS
COMPANY, a corporation organized and existing under the laws of Delaware
(the "Borrower"). It is a condition precedent to the effectiveness of
the Agreement that this company, a wholly owned subsidiary of the
Borrower, shall have executed and delivered this Guaranty. Terms
defined in the Agreement and not otherwise defined herein have the same
respective meanings when used herein, and the rules of interpretation
set forth in Section 1.03 of the Agreement are incorporated herein by
reference.
SECTION 1. Guaranty. The Guarantor hereby unconditionally
guarantees the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all obligations of the Borrower now or
hereafter existing under the Credit Documents, whether for principal,
interest, fees, expenses or otherwise (the "Obligations"), and agree to
pay any and all expenses incurred by the Lender in enforcing any rights
under this Guaranty.
SECTION 2. Guaranty Absolute. The Guarantor guarantees that
the Obligations will be paid strictly in accordance with the terms of
the Credit Document, regardless of any law, regulation or order now or
hereafter in effect in any jurisdiction affecting any of such terms or
the rights of the Lender with respect thereto. The liability of the
Guarantor under this Guaranty shall be absolute and unconditional,
irrespective of the following:
(a) any lack of validity or enforceability of, or any release or
discharge of the Borrower from liability under, the Credit Documents;
(b) any change in the time, manner or place of payment of, or in
any other term of, all or any of the Obligations or any other amendment
or waiver of, or any consent to departure from the Credit Documents;
(c) any subordination, compromise, exchange, release,
nonperfection or liquidation of any collateral, or any unenforceability,
release, amendment or waiver of, or consent to departure from, any other
guaranty, for any or all of the Obligations;
(d) any express or implied amendment, modification, renewal,
supplement, extension or acceleration of the Obligations or any of the
Credit Documents;
(e) any exercise or nonexercise by the Lender of any right or
privilege under this Guaranty or any of the other Credit Documents;
1
(f) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceeding relating
to either Guarantor, The Borrower or any other guarantor of the
Obligations or any action taken with respect to this Guaranty by any
trustee, receiver or court in any such proceeding, whether or not the
Guarantors shall have had notice or knowledge of any of the foregoing;
(g) any assignment or other transfer, in whole or in part, of this
Guaranty or of any of the other Credit Documents;
(h) any acceptance of partial performance of the Obligations;
(i) any consent to the transfer of, or any bid or purchase at sale
of, any collateral for the Obligations; or
(j) any other circumstance that might otherwise constitute a
defense available to, or a discharge of, the Borrower or any guarantor.
This Guaranty shall continue to be effective or be reinstated, as
the case may be, if at any time any payment of any of the Obligations is
rescinded or must otherwise be returned by the Lender upon the
insolvency, bankruptcy or reorganization of the Borrower or otherwise,
all as though such payment had not been made.
SECTION 3. Waivers. Guarantor unconditionally waives any
defense to the enforcement of this Guaranty, including the following:
(a) all presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor and
notices of acceptance of this Guaranty;
(b) any right to require the lender to proceed against the
Borrower or any other guarantor at any time, to proceed against or
exhaust any security held by the Lender at any time or to pursue any
other remedy whatsoever at any time;
(c) the defense of any statute of limitations affecting the
liability of Guarantor hereunder, the liability of the Borrower or the
enforcement hereof, to the extent permitted by law;
(d) any defense arising by reason of any invalidity or
unenforceability of any of the Credit Documents, any disability of the
Borrower or any other guarantor, any manner in which the Lender has
exercised its rights and remedies under the Credit Documents or any
cessation from any cause whatsoever of the liability of the Borrower;
(e) any defense based upon an election of remedies by the Lender,
including any election to proceed by judicial or nonjudicial foreclosure
of any lien, whether on real property or personal property, or by deed
in lieu thereof, whether or not every aspect of any foreclosure sale is
commercially reasonable, or any election of remedies, including remedies
relating to real-property or personal-property security, that destroys
or otherwise impairs any subrogation rights of Guarantor or any rights
of Guarantor to proceed against the Borrower for reimbursement, or both;
(f) any duty of the Lender to advise Guarantor of any information
known to the Lender regarding the financial condition of the Borrower or
any other circumstance affecting the Borrower's ability to perform its
obligations to the Lender, it being agreed that such Guarantor assumes
2
responsibility for being and keeping informed regarding such condition
or any such circumstance;
(g) any right of subrogation, contribution, indemnity or otherwise
against the Borrower that may arise out of or be caused by this
Guaranty, any right to enforce any remedy that the Lender now has or may
hereafter have against the Borrower and any benefit of, and any right to
participate in, any security now or hereafter held by the Lender; and
(h) without limiting the generality of the foregoing or any other
provision hereof, any rights and benefits that might otherwise by
available to such Guarantor under applicable English Law.
SECTION 4. Payments in Trust. If any amount shall be paid to
either Guarantor contrary to the provisions of Section 3(g), such amount
shall be held in trust for the benefit of the Lender and shall forthwith
be paid to the Lender to be credited and applied to the Obligations,
whether matured or unmatured, in accordance with the terms of the Credit
Agreement.
SECTION 5. Payments Free and Clear of Taxes, Etc.
(a) Any and all payments made by Guarantor hereunder shall be made
free and clear of and without deduction for any and all present or
future taxes, levies, imposts, deductions, charges or withholdings, and
all liabilities with respect thereto, excluding taxes imposed on the
income of the Lender, and franchise taxes imposed on it, by the
jurisdiction under the laws of which the Lender is organized and any
political subdivision thereof (all such nonexcluded taxes, levies,
imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If Guarantor shall be required by
law to deduct any Taxes from or in respect of any sum payable hereunder
to the Lender, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section) the
Lender receives an amount equal to the sum it would have received had no
such deductions been made, (ii) Guarantor shall make such deductions and
(iii) Guarantor shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law.
(b) In addition, the Guarantor agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes,
charges or similar levies that arise from any payment made hereunder or
from the execution, delivery or registration of, or other with respect
to, this Guaranty (hereinafter referred to as "Other Taxes").
(c) The Guarantor will indemnify the Lender for the full amount of
Taxes and Other Taxes (including any Taxes or Other Taxes imposed by any
jurisdiction on amounts payable under this Section) paid by the Lender
and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other
Taxes were correctly or legally asserted. This indemnification shall be
made within 30 days from the date the Lender makes written demand
therefor.
(d) Within 30 days after the date of any payment of Taxes,
Guarantor will furnish to the Lender, at its address referred to in
Section 12, the original or a certified copy of a receipt evidencing
payment thereof. If no Taxes are payable in respect of any payment
3
hereunder to the Lender, Guarantor will furnish to the Lender a
certificate from each appropriate taxing authority or an opinion of
counsel acceptable to the Lender, in either case stating that such
payment is exempt from or not subject to Taxes.
(e) Without prejudice to the survival of any other agreement of
the Guarantor hereunder, the agreements and obligations of the Guarantor
contained in this Section 5 shall survive the payment in full of the
principal of and interest on the Advances.
SECTION 6. Judgment.
(a) If, for the purposes of obtaining judgment in any court, it is
necessary to convert a sum due hereunder in United States dollars into
another currency, the parties hereto agree, to the fullest extent
permitted by law, that the rate of exchange used shall be that at which
in accordance with normal banking procedures the Lender could purchase
United States dollars with such other currency on the Business Day
preceding that on which final judgment is given.
(b) The obligations of the Guarantor in respect of any sum due
from them to the Lender hereunder shall, notwithstanding any judgment in
a currency other than United States dollars, be discharged only to the
extent that, on the Business Day following receipt by the Lender of any
sum adjudged to be so due in such other currency, the Lender may in
accordance with such other currency; if the United States dollars so
purchased are less than the sum originally due to the Lender in United
States dollars, the Guarantor agrees, as a separate obligation and
notwithstanding any such judgment, to indemnify the Lender against such
loss, and, if the United States dollars so purchased exceed the sum
originally due to the Lender in United States dollars, the Lender agrees
to remit such excess to Guarantor.
SECTION 7. Consent to Jurisdiction; Waiver of Immunities.
(a) Guarantor hereby irrevocable submit to the jurisdiction of any
New York or federal court sitting in New York in any action or
proceeding arising out of or relating to this Guaranty, and the
Guarantor hereby irrevocably agree that all claims in respect of such
action or proceeding may be heard and determined in such New York or
federal court. The Guarantor hereby irrevocable waive, to the fullest
extent they may effectively do so, the defense of an inconvenient forum
to the maintenance of such action or proceeding. The Guarantor hereby
irrevocably appoints Charles B. McDaniel, Esq., with an office on the
date hereof at Hondo Oil & Gas Company, 10375 Richmond Avenue, Suite
900, Houston, TX 77042, telephone (713) 954-4600, telecopier (713) 954-
4601, as their agent to receive on behalf of the Guarantors and their
property service of copies of the summons and complaint and any other
process that may be served in any such action or proceeding. Such
service may be made by mailing or delivering a copy of such process to
the Guarantor in care of the Process Agent at the Process Agent's
address above, and the Guarantors hereby irrevocable authorize and
direct the Process Agent to accept such service on their behalf. As an
alternative method of service, Guarantor also irrevocably consents to
the service of any and all process in any such action or proceeding by
the mailing of copies of such process to Guarantor at their respective
addresses specified in Section 12. Guarantor agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other
4
manner provided by law.
(b) Nothing in this Section shall affect the right of the Lender
to serve legal process in any other manner permitted by law or affect
the right of the Lender to bring any action or proceeding against
Guarantor or their property in the courts of any other jurisdictions.
(c) To the extent that Guarantor has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process
(whether through service of notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise) with respect to
Guarantor or its property, such Guarantor hereby irrevocably waives such
immunity in respect of its obligations under this Guaranty.
SECTION 8. Representations and Warranties. Except as to items
disclosed in the Credit Documents, the Guarantor hereby represents and
warrants as follows:
(a) Organization. Guarantor is a corporation duly incorporated,
validly existing and in good standing under the laws of the applicable
jurisdiction set forth in the first paragraph of this Guaranty and is
duly licensed or qualified and in good standing as a foreign corporation
in each other jurisdiction in which failure to qualify would materially
and adversely affect the conduct of its business or the enforceability
of contractual rights of such Guarantor.
(b) Due Authorization. The execution, delivery and performance of
this Guaranty are within Guarantor's corporate powers, have been duly
authorized by all necessary corporate action, and do not contravene (i)
Guarantor's charter documents or by laws or (ii) any applicable
Governmental Rule or any contractual restriction binding on or affecting
Guarantor.
(c) Governmental Action. No Governmental Action is required for
the due execution, delivery or performance by Guarantor of this
Guaranty.
(d) Binding Effect. This Guaranty is the legal, valid and binding
obligation of Guarantor enforceable against such Guarantor in accordance
with the terms hereof.
(e) Financial Information. The audited balance sheet of Guarantor
and its subsidiaries as of December 31, 1996 and the related audited
statements of income and retained earnings of Guarantor and its
subsidiaries for the fiscal year then ended, copies of which have been
furnished to the Lender, fairly present the financial condition of
Guarantor and its subsidiaries as of such date and the results of the
operations of Guarantor and its subsidiaries for the year ended on such
date, all in accordance with GAAP, and since December 31, 1996 there has
been no material adverse change in such condition or operations.
(f) Litigation. There is no pending or (to the knowledge of
Guarantor) threatened action or proceeding affecting Guarantor or any of
its subsidiaries before any Governmental Person that may materially and
adversely affect the financial condition or operations of Guarantor or
any subsidiary thereof or the ability of Guarantor to perform its
obligations under this Guaranty, except as disclosed to the Lender in
the financial statements referred to in Section 8(e).
5
(g) Ownership of Guarantor and Borrower. Borrower owns 100% of
the outstanding capital stock of Guarantor.
SECTION 9. Affirmative Covenants. Guarantor covenants and
agrees that, so long as any part of the Obligations shall remain unpaid
or the Lender shall have any Commitment, Guarantor will, unless the
Lender shall otherwise consent in writing, comply with the following
covenants:
(a) Compliance with Laws, Etc. Guarantor will comply and cause
each of its subsidiaries to comply in all material respects with all
applicable Governmental Rules, such compliance to include paying before
the same become delinquent all taxes, assessments and governmental
charges imposed upon it or upon its property, except to the extent
contested in good faith and by appropriate proceedings.
(b) Maintenance of Existence. Guarantor will preserve and
maintain its corporate existence and all of its rights, privileges and
franchises necessary and desirable in the normal conduct of its business
in a regular manner.
(c) Reporting Requirements. Guarantor will furnish to the Lender
a copy of the annual accounts of Guarantor containing financial
statements for each fiscal year, certified by its auditors in accordance
with GAAP practice, and such other information respecting the condition
of operations, financial or otherwise, of such Guarantor or any of its
subsidiaries as the Lender may from time to time reasonably request.
(d) Notice of Proceedings. Guarantor will promptly give notice in
writing to the Lender of all litigation, arbitration proceedings and
regulatory proceedings affecting such Guarantor, except litigation or
proceedings that, if adversely determined, could not materially and
adversely affect the financial condition of such Guarantor.
SECTION 10. Amendments, Etc. No amendment or waiver of any
provision of this Guaranty or consent to any departure by the Guarantor
therefrom shall in any event be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose
for which given.
SECTION 11. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing and mailed
(certified mail, return-receipt requested), telecopied or delivered
personally, if to Guarantor, c/o Hondo Oil & Gas Company, 10375 Richmond
Avenue, Suite 900, Houston, TX 77042, telephone (713) 954-4600,
telecopier (713) 954-4601, Attention: Charles B. McDaniel, Esq.; if to
Lender at Thamesedge, Ltd., 4 Grosvenor Place, London, SW1X 7DL
England, telephone 011-44-171-201-6000, telecopier 011-44-171-201-6100,
Attention: Robin Whitten with a copy to Rudolph H. Funke, Esq. at 805
Third Avenue, 18th Floor, New York, NY 10022, telephone 212-715-7001,
telecopier 212-838-8141; or, as to each party, to it at such other
address as shall be designated by such party in a written notice to the
other parties. All such notices and other communications shall be
effective, if mailed, 72 hours after being deposited in the mails, or if
telecopied or delivered personally, when received.
6
SECTION 12. No Waiver; Remedies. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof, and no single or partial exercise of
any right hereunder shall preclude any other or further exercise thereof
or the exercise of any other right. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
SECTION 13. Continuing Guaranty; Transfer of Note. This
Guaranty is a continuing guaranty and shall (a) remain in full force and
effect until payment in full of the Obligations and all other amounts
payable under this Guaranty and expiration of the Commitment, (b) be
binding upon the Guarantor and their respective successors and assigns
and (c) inure to the benefit of and be enforceable by the Lender and its
successors, transferees and assigns. Without limiting the generality of
the foregoing clause (c), the Lender may assign or otherwise transfer
the Note and the Advances to any other person or entity, and such other
person or entity shall thereupon become vested with all the rights in
respect thereof granted to the Lender herein or otherwise.
HONDO MAGDELENA OIL & GAS LIMITED
By: /s/ John J. Hoey
------------------------------
John J. Hoey
Managing Director
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Hondo Oil & Gas
Company's Form 10-Q for the period identified
below. This information is qualified in its
entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> 9-MOS
<CASH> 535
<SECURITIES> 0
<RECEIVABLES> 291
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,395
<PP&E> 36,153
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,766
<CURRENT-LIABILITIES> 63,302
<BONDS> 42,393
0
0
<COMMON> 13,781
<OTHER-SE> (102,774)
<TOTAL-LIABILITY-AND-EQUITY> 40,766
<SALES> 4
<TOTAL-REVENUES> 23
<CGS> 0
<TOTAL-COSTS> 383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,480
<INCOME-PRETAX> (8,163)
<INCOME-TAX> (2)
<INCOME-CONTINUING> (8,161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,161)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
