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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to:
Commission file number: 1-8979
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Avenue, Suite 900, Houston, TX 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange on
Title of each class which registered
------------------- ----------------
Common stock, par American Stock
value $1 per share Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(continued)
1
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on December 12, 1997 based on the
closing price on the American Stock Exchange of such stock on such date
was $32,381,596.
Registrant's Common Stock outstanding at December 12, 1997 was
13,788,424 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement
for the annual shareholders meeting are incorporated by reference into
Part III.
2
HONDO OIL & GAS COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
Caption Page
PART I
Item 1. Business ............................................. 4
Item 2. Properties ...........................................14
Item 3. Legal Proceedings ....................................15
Item 4. Submission of Matters to a Vote of Security
Holders .............................................16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .........................17
Item 6. Selected Financial Data ..............................18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................20
Item 8. Financial Statements .................................31
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ..............61
PART III
Item 10. Directors and Executive Officers of
the Registrant ......................................61
Item 11. Executive Compensation ...............................61
Item 12. Security Ownership of Certain Beneficial
Owners and Management ...............................61
Item 13. Certain Relationships and Related Transactions .......61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .................................61
SIGNATURES ........................................................62
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PART I
As used in this report, unless the context otherwise requires, the terms
"Registrant", "the Company" and "Hondo Oil" refer to Hondo Oil & Gas
Company and its consolidated subsidiaries.
Item 1. BUSINESS
(a) General Development of Business
The Company is an independent oil and gas company, presently focusing on
international oil and gas exploration and development. The Company was
incorporated as Pauley Petroleum Inc. ("Pauley") in 1958. In January
1988, The Hondo Company ("Hondo") acquired a controlling interest in
Pauley in exchange (the "Exchange") for all of the outstanding stock of
Hondo's subsidiary, Hondo Oil & Gas Company. In March 1988, the Company
acquired Fletcher Oil and Refining Company ("Fletcher" or the "Fletcher
refinery"). In January 1990, Pauley merged ("the Merger") with the
wholly-owned subsidiary acquired in the Exchange, Hondo Oil & Gas
Company. In conjunction with the Merger, Pauley Petroleum Inc., the
surviving corporation, changed its name to Hondo Oil & Gas Company.
In December 1989, the Company permanently suspended operations at its
wholly-owned subsidiary, Newhall Refining Co., Inc. ("Newhall
refinery"). During 1991, Hondo Oil adopted plans of disposal for both
its refining and marketing operations and its real estate operations
(primarily the land underlying the Newhall refinery). The Company
suspended operations at its Fletcher refinery in October 1992 and
completed a sale of substantially all of the refining and marketing
operations in October 1993.
In June 1992, the Company completed a sale of substantially all of its
domestic oil and gas assets and repaid a substantial portion of its
long-term debt with the proceeds.
In January 1996, Lonrho Plc acquired control of the Company. Prior to
that date the control of the Company was effectively shared with Robert
O. Anderson and his family. In a Schedule 13D amendment filed October
15, 1997, by Lonrho Plc and its affiliates, the filing parties said that
Lonrho Plc had retained Morgan Stanley & Co. Incorporated to assess and
implement strategic alternatives with respect to Lonrho's direct and
indirect investment in the Company. Lonrho Plc said such strategic
alternatives could include, without limitation, a possible
recapitalization of the Company or a sale or business combination
involving the Company or Lonrho's direct and indirect equity interest in
the Company (including the sale or assumption of the debt obligations of
the Company to affiliates of Lonrho).
The Company's principal asset is its exploration concession in Colombia.
(b) Financial Information About Industry Segments
See Note 11 to the Consolidated Financial Statements in Item 8. The
Company presently operates in one segment.
4
(c) Narrative Description of Business
INTERNATIONAL OPERATIONS
The Company's wholly-owned subsidiary, Hondo Magdalena Oil & Gas Limited
("Hondo Magdalena"), participates in the Opon Association Contract (the
"Opon Contract") with Empresa Colombiana de Petroleos ("Ecopetrol"),
Opon Development Company ("ODC") and Amoco Colombia Petroleum Company
("Amoco Colombia"). Ecopetrol is a quasi-governmental corporate
organization wholly-owned by the government of Colombia. The Opon
Contract was entered into between Ecopetrol and ODC in 1987, and
approved by the Ministry of Mines and Energy in 1988, to explore and
develop an area of approximately 190 square miles located in the Middle
Magdalena Basin about 125 miles north of Bogota, Colombia. The Opon
Contract is divided into an exploration period and an exploitation
period and expires in July 2015.
The Opon Contract provides for an exploration period of six years, which
commenced in July 1988 and was extended through September 30, 1995. The
minimum work obligations required by the Opon Contract for the
exploration period were completed by the associate parties (Amoco
Colombia, Hondo Magdalena and ODC). The Opon Contract provides that at
the end of the exploration period, the associate parties may seek to
declare a field capable of producing commercial hydrocarbons (repaying
investment and expenses and returning a profit) by presenting an
application to Ecopetrol. Ecopetrol has 90 days to respond to the
associate parties' application. If Ecopetrol agrees, then the field is
declared to be commercial and production may commence. Upon the
designation of an area or field as commercial, Ecopetrol acquires a 50%
interest in such area or field and reimburses the associate parties for
50% of the direct exploration costs for each commercial discovery from
its share of production. Thereafter, Ecopetrol pays 50% of costs and
will receive 50% of production. Revenue from the Opon Contract area is
subject to a 20% royalty, which is paid to the Colombian government.
The associate parties completed the minimum work obligations for each of
the six years of the exploration period with completion of the Opon No.
4 well in September 1995. An application for commerciality was
submitted by Amoco Colombia in February 1996. On May 8, 1996, Ecopetrol
approved a commercial field of approximately 2,500 acres around the Opon
No. 3 and No. 4 wells (described below). The interests in the
commercial field are approximately: Ecopetrol, 50%, Amoco Colombia, 30%,
Hondo Magdalena, 15.4%, and ODC, 4.6%. Amoco Colombia, Hondo Magdalena
and ODC have interests in the remainder of the Opon Contract area of
approximately 60%, 30.9% and 9.1%, respectively. The commercial field
is substantially smaller than that requested by Amoco Colombia. The
commercial field may be enlarged by future drilling and/or additional
technical information.* The associate parties submitted an application
to declare the area around the Opon No. 6 well commercial in August
1997. Ecopetrol responded in September 1997 that it considered the
information presented to be insufficient to evaluate the application for
the extension of the commercial area. The associate parties are
evaluating Ecopetrol's response in light of the terms of the Opon
Contract and plan to approach Ecopetrol for clarification of its
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
5
response. At this date, the area around the Opon No. 6 well is not a
part of the commercial area. 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.
The Opon Contract provides that at the end of the exploration period, if
a field capable of producing hydrocarbons in commercial quantities has
been discovered, the Opon Contract area will be reduced by 50%. Two
years thereafter, the Opon Contract area will be further reduced to 25%
of the original area. Two years thereafter, the Opon Contract area will
be reduced to the area of the commercial field that is in production or
development, plus a reserve zone of five kilometers in width around the
productive limit of such field. The commercial field plus the zone
surrounding such field will become the area of exploitation. The
associate parties designate the acreage to be released. Additional
wells will be required to enlarge the commercial area and to increase
the size of the area of exploitation.
The first acreage relinquishment of 50% occurred during 1996, effective
September 30, 1995, reducing the area of the Opon Contract area to
25,021.5 hectares (61,828 acres). The Company believes that the first
relinquishment did not cause the loss of significant exploration
opportunities. The second acreage relinquishment was due on September
30, 1997. By agreement with Ecopetrol, the second relinquishment has
been postponed until September 30, 1998. As consideration, the
associate parties agreed to perform, for the full Opon Contract area,
surface geological studies and petrochemical analysis, and to undertake
a study to determine the economic and technical viability of putting the
shallow oil producing wells in the Opon Contract area into production.
Hondo Magdalena acquired its interest in the Opon Contract from ODC.
Prior to fiscal 1993, Hondo Magdalena and ODC drilled four wells to the
shallow Mugrosa formation. Following extended production and pressure
testing, one of these wells was declared a dry hole. In fiscal 1993,
Hondo Magdalena drilled the Lilia No. 10 well to the La Paz formation at
its sole cost. The well was drilled to a total depth of 10,003 feet.
The well encountered mechanical problems after the logs were run, and it
was temporarily plugged and suspended. The well may be re-entered at a
future date. By completing these operations, Hondo Magdalena acquired
an 80% interest in the Opon Contract from ODC.
Under a Farmout Agreement dated August 9, 1993, Amoco Colombia earned a
60% participating interest in the Opon Contract, 50% from Hondo
Magdalena and 10% from ODC. Hondo Magdalena retained a 30% interest.
Amoco Colombia paid $3.0 million in cash and paid Hondo Magdalena's
costs related to the Opon No. 3 well, a well drilled to the La Paz
formation. Under the Farmout Agreement, Amoco Colombia paid Hondo
Magdalena an additional $5.0 million in October 1994 and paid all but
$2.0 million of Hondo Magdalena's costs related to the Opon No. 4 well,
also drilled to the La Paz formation.
The Opon No. 3 well, completed in September 1994, was drilled to a depth
of 12,710 feet at a total cost of approximately $30.0 million. The well
tested at a daily rate of 45 million cubic feet of natural gas and 2,000
barrels of condensate. The hydrocarbons were tested from 1,118 feet of
perforations in the La Paz formation through a 42/64-inch opening at the
surface with 6,000 pounds-per-square-inch flowing tubing pressure.
Downhole restrictions prevented the well from testing at higher rates.
6
The Opon No. 4 well, completed in September 1995, was drilled to a depth
of 11,500 feet at a total cost of approximately $28.5 million. The well
tested at a daily rate of 58 million cubic feet of natural gas and 1,900
barrels of condensate. The hydrocarbons were tested from 1,022 feet of
perforations in the La Paz formation through a 40/64-inch opening at the
surface with 8,121 pounds-per-square-inch flowing tubing pressure.
These two wells have confirmed the existence of a significant natural
gas field.
The Opon No. 6 well commenced drilling in October 1996. This well is
slightly more than 1 kilometer north of the Opon No. 3 well and is
outside the current commercial area. The well is presently estimated to
cost $30.2 million, of which Hondo Magdalena's share is 30.9%.* After
the drilling was completed, several mechanical problems in the
completion and testing of the Opon No. 6 well occurred. After there was
a failure of a portion of the guns during the initial completion attempt
in April 1997, a second set of perforating guns were fired. 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
actions. Amoco Colombia has recently proposed a workover of the Opon
No. 6 well using propellant stimulation technology. A decision on the
proposal will be made in January 1998 following an economic analysis.*
The associate parties are attempting to negotiate a settlement of claims
against suppliers of services and equipment related to the problems
encountered during completion operations on the Opon No. 6 well, but no
settlement has been reached. If a settlement is not reached, the next
step will be arbitration.* No prediction of the outcome of these
matters can be made at this time.
The Opon No. 14 well, approximately 4 kilometers south of the Opon No. 4
well commenced drilling in October 1997. The total cost of the well is
estimated to be $21.5 million, of which Hondo Magdalena will bear
30.9%.* The well is planned for a total depth of 11,000 feet and is
intended to confirm the existence of the La Paz gas and condensate
reservoir in the south of the Opon Contract area.* The drilling of the
well has progressed in accordance with its plan to this date.
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.
Production is subject to political risks inherent in all foreign
operations, including: (i) loss of revenue, property, and equipment as a
result of unforeseen events such as expropriation, nationalization, war
and insurrection, (ii) risks of increases in taxes and governmental
royalties, (iii) renegotiation of contracts with governmental entities,
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
7
as well as, (iv) changes in laws and policies governing operations of
foreign-based companies in Colombia. Guerrilla activity in Colombia has
disrupted the operation of oil and gas projects, including those at the
Opon Contract area. Security in the area has been improved and the
associate parties have taken steps to enhance relations with the local
population through a community relations program. The government
continues its efforts through negotiation and legislation to reduce the
problems and effects of insurgent groups, including regulations
containing sanctions such as impairment or loss of contract rights on
companies and contractors if found to be giving aid to such groups. The
associate parties will continue to cooperate with the government, and do
not expect that future guerrilla activity will have a material impact on
the exploration and development of the Opon Project. However, there can
be no assurance that such activity will not occur or have such an impact
and no opinion can be given on what steps the government may take in
response to any such activity.
Colombia is among several nations whose progress in stemming the
production and transit of illegal drugs is subject to annual
certification by the United States government. 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.
The government of Colombia has established a natural gas policy and is
pursuing a program to maximize the utilization of natural gas throughout
the country, including the industrial cities of Medellin, Cali and
Bogota, where developed markets and infrastructure are expanding. The
Colombian government's policy on natural gas is intended to increase the
consumption of natural gas in order to provide a more balanced use of
its energy resources. The policy includes the use of natural gas in
place of higher cost electricity and in place of wood to reduce
deforestation. The government intends to encourage the development of
markets for natural gas and is pursuing the development of pipeline
transportation systems for new markets. The proximity of the Opon
Contract area to these potential gas markets will be an advantage for
marketing the natural gas.
In July 1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol agreed
to construct a pipeline and wellhead facilities (which were not
contemplated in the Opon Contract). The parties constructed a 16 inch
pipeline approximately 88 kilometers in length from the Opon Contract
area north to Ecopetrol's gas processing plant at El Centro, and from
there to Ecopetrol's refinery at Barrancabermeja. The investment in
8
pipeline costs will be recovered through a pipeline tariff.* Ecopetrol
has constructed 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 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, regulates natural gas
pipelines and the sale of natural gas in Colombia. CREG's regulations
provide the ceiling price for natural gas and the methodology for
establishing pipeline tariffs. Based upon these regulations, Amoco
Colombia, as operator applied for a tariff for the pipeline; CREG has
not yet responded to this application.
Contracts, covering the sale of natural gas, the sale of condensate and
natural gas liquids, the processing of the gas stream, and
transportation of natural gas and liquids are complete and have been
signed by all parties. 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 $0.159 per thousand cubic feet of gas. In a recent
amendment to the gas processing agreement the associate parties agreed
to bear the cost of processing royalty gas that is attributable to their
interests and Ecopetrol reduced the fee for processing from $0.20 to
$0.159 per thousand cubic feet of gas. Ecopetrol, as purchaser, pays
the pipeline tariff for the natural gas sold by the associate parties.
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, subject to the conditions
noted below, natural gas to an electric generation plant at the Opon
Contract area. Termo Santander's power plant is located at the Opon
Contract area. Under the contract, 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 if 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. The
commencement of the contract is conditioned 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. In order to begin deliveries before the
condition concerning the sufficiency of reserves is satisfied, an
interim agreement for the sale of gas to Termo Santander was signed on
November 20, 1997. The interim agreement will be effective until
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
9
January 1, 1999, or until sufficient reserves are determined through
additional work on the Opon No. 6 well or the successful completion of
the Opon No. 14 well.* The gas sales price under the interim agreement
will be equivalent to the price, including the pipeline tariff, that
would have been received if the same gas were sold under the contract
with Ecopetrol described in the preceding paragraph.
The pipeline and wellsite facilities were completed in June 1997.
Ecopetrol completed the improvements to the El Centro gas plant in
November 1997. Production from the Opon field began on December 1,
1997, with gas supplied to Termo Santander for testing the first of two
turbines at the power plant. The first shipment of gas through the
pipeline began on December 5, 1997, but was interrupted for one week
shortly thereafter by a landslide. The first shipment of gas was 10
million cubic feet and the quantity is expected to increase to the
contract quantity of 100 million cubic feet per day by calendar year end
1997.*
Development of the Opon Project will require significant future capital
expenditures for which the Company will need additional funds. See
Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources in Item 7.
DISCONTINUED OPERATIONS
Refining and Marketing Operations
On October 1, 1993, the Company completed the sale of the common stock
of its Fletcher refinery and the assets of the Hilo, Hawaii asphalt
terminal. The Company's 41,000 bbl asphalt barge was sold in May 1993.
An asphalt terminal in Honolulu, Hawaii and two gasoline stations
acquired through bankruptcy proceedings against a former customer of
Fletcher were disposed of in 1994. There are no remaining assets of the
refining and marketing operations. See Note 12 to the Consolidated
Financial Statements in Item 8.
Real Estate Operations
On December 15, 1989, the Company suspended operations at its Newhall
refinery. Subsequently, the Company adopted a plan of disposition which
included dismantling the refinery, effecting environmental remediation
of the land and further developing the land to a condition where it may
be sold. Execution of the plan was suspended in September 1993 and the
Company is now marketing the site in its current condition and with
existing land-use entitlements. The Newhall refinery site consists of
approximately 105 acres located adjacent to a major freeway intersection
in northern Los Angeles County. See Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 and
Note 12 to the Consolidated Financial Statements in Item 8.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
10
The Company owns in fee simple approximately 11 acres of undeveloped
land located in eastern Los Angeles County. An option to a developer on
the Company's Via Verde tract at a price of $3.1 million expires in
December 1997. The option agreement will allow the Company the right to
be released from the current agreement should there be a potential sale
of the parcel to a ready and willing buyer.
Each of the above real properties is subject to a mortgage in favor of
Lonrho Plc. See Note 5 to the Consolidated Financial Statements in Item
8.
COMPETITIVE FACTORS
Other parties have developed or announced discoveries of natural gas in
Colombia. These reserves and potential reserves exist on the north
coast of Colombia and in the Llanos Basin, east of the Company's
interest at the Opon Contract area. In the developing gas market of
Colombia, these gas supplies will compete for existing and new markets,
and for access to transportation facilities for natural gas. Such
competition may adversely affect the Company's ability to market its
natural gas and/or the price of natural gas. At this time, no
prediction can be made as to the effect such competition will ultimately
have upon the Company.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
Environmental matters
The Company's operations are subject to certain federal, state and local
laws, including those of Colombia, and regulations governing the
management of hazardous materials, the discharge of pollutants into the
environment and the handling and disposal of solid and hazardous waste.
(1) General
Minor spillage or discharge of petroleum and related substances are
a common occurrence at oil refineries and at oil and gas production
and drilling facilities. Such spills and discharges could create
liability under various federal, state and local environmental laws
and regulations. As is the case with other companies engaged in
oil and gas exploration, production and refining, the Company faces
exposure from potential claims and lawsuits involving environmental
matters. These matters may involve alleged soil and water
contamination and air pollution. The Company's policy is to accrue
environmental and clean-up costs when it is probable that a
liability has been incurred and the amount of the liability is
reasonably estimable. However, future environmental related
expenditures cannot be reasonably quantified in many circumstances
due to the conjectural nature of remediation and clean-up cost
estimates and methods, the imprecise and conflicting data regarding
the characteristics of various types of waste, the number of other
potentially responsible parties involved and changing environmental
laws and interpretations. Management believes the reduced scope of
the Company's operations following the sale of the Company's
domestic oil and gas properties and the Fletcher refinery has
significantly reduced the Company's potential exposure to
environmental liability.
11
(2) Fletcher Refinery
Generators of hazardous substances found in disposal sites at which
environmental problems are alleged to exist, as well as the owners
of those sites and certain other classes of persons, are subject to
claims brought by state and federal regulatory agencies. Fletcher
has been notified by the EPA that it is a potentially responsible
party in a proceeding under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"). The notice
relates to the Operating Industries, Inc. ("OII") dump site in
Monterey Park, California. During fiscal 1993, the Company sold
the Fletcher refinery in a stock sale through which the purchaser
assumed environmental liabilities of Fletcher, known and unknown.
Any liability related to OII (to which Fletcher has asserted the
defense of bankruptcy discharge and with respect to which Fletcher
entered into a settlement with certain potentially responsible
parties at the time of the bankruptcy) remains a liability of
Fletcher and is no longer a liability of the Company. However, the
statutes impose liability on "owners" and "operators," and these
statutes have been used to assert claims against controlling
shareholders of corporations involved in claims under CERCLA and
related statutes. The Company is sole shareholder of Pauley
Pacific Inc. which was sole shareholder of Fletcher. The assertion
of such a claim against the Company in the case of OII is
considered by management to be remote, since the Company was not an
owner of Fletcher until after the events occurred that are the
basis of the notice to Fletcher on the OII dump site.
(3) Newhall Refinery Site
The Company has evaluated the Newhall Refinery site to determine
the impact of refining activities on the environment. The Company
has conducted an environmental assessment of the refinery site and
a remediation plan for the site has been submitted to the Regional
Water Quality Control Board and has received staff approval. The
Company estimates that $2.0 million would be incurred in executing
the approved remediation plan; however, the Company expects to sell
the property without incurring these costs by reducing the purchase
price. The Company's estimate of the net realizable value of this
property has been reduced by estimated remediation costs in
determining the carrying value of the property and therefore the
remediation costs will not affect future results of operations.
See Note 12 to the Consolidated Financial Statements in Item 8.
The Newhall Refinery was recently notified by a California state
agency that it is considered a potentially responsible party, under
a state law that is equivalent to CERCLA, in the matter of the
cleanup of a dump site previously operated by Environmental
Protection Corporation, the Eastside Disposal Facility, near
Bakersfield, California. The Company has no record of having
disposed of any waste at the site, and is continuing its
investigation of the circumstances that have led to the
notification. Based upon the records obtained from other parties,
the quantities of waste attributed to Newhall are minute relative
to the total amount of waste delivered to the landfill. However,
management cannot assess at this time the potential exposure or
liability, if any, to the Company.
12
Government Regulations and Legislative Proposals
The Company is subject to governmental regulations which include various
controls on the exploration for, production, sale, and transportation of
crude oil and natural gas in Colombia. See International Operations
above. A number of foreign, federal and other legislative proposals, if
enacted, may have adverse effects on companies in the petroleum
industry, including the Company. These proposals involve, among other
matters, the imposition of additional taxes, price controls, land use
controls and other restrictive measures. The Company cannot determine to
what extent future operations and earnings may be affected by new
regulations or changes in current regulations.
EMPLOYEES
The Company employed 7 full-time personnel as of September 30, 1997.
(d) Financial Information About Foreign Operations
See Note 11 to the Consolidated Financial Statements in Item 8. The
Company operates in one foreign location: Colombia, South America. See
International Operations, above.
13
Item 2. PROPERTIES
OIL AND GAS PROPERTIES
The Company's principal asset is its interest in the Opon Association
Contract (the "Opon Contract"), an exploration concession for an area in
the Middle Magdalena Valley of Colombia, South America. Two wells
drilled during 1994 and 1995 have confirmed the existence of a
significant natural gas field. The following information should be read
in conjunction with the description of the Opon Contract contained in
International Operations in Item 1, particularly the descriptions of
commerciality, acreage relinquishment, and the term of the Opon
Contract.
(1) For estimated net quantities of proved oil and gas reserves,
results of operations from oil and gas producing activities and the
standardized measure of discounted future net cash flows relating
to proved oil and gas reserve quantities for the years ended
September 30, 1997, 1996 and 1995, as applicable, see Supplementary
Information about Oil and Gas Producing Activities and Reserves
(Unaudited) following the Consolidated Financial Statements in Item
8.
(2) The only estimates of total proved net oil and gas reserves filed
with any federal agency during fiscal 1997 are those contained in
this Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.
(3) No production income and cost per unit data for the years ended
September 30, 1997, 1996 and 1995 exists and none will be reported
until production in Colombia commences in fiscal 1998.
(4) The Company had two (0.3 net) wells capable of production (located
in Colombia) at September 30, 1997. An area of 2,500 acres (386
net acres), which encompasses the two completed wells, was declared
commercial in May 1996. The Company's interest in the commercial
area is 15.444375%. Additional wells are permitted to be drilled
on this acreage and additional areas reported as undeveloped in (5)
below may be declared commercial in the future.
(5) Undeveloped acreage at September 30, 1997, all located in Colombia,
consists of 59,327 gross acres, or 18,325 net acres, contained
within the areas of the Opon Contract which have not been declared
commercial. The Company's interest in this area is 30.88875%.
Portions of this acreage are subject to relinquishment to Ecopetrol
in the future.
(6) Net wells completed (all located in Colombia) for the years ended
September 30:
1997 1996 1995
---- ---- ----
Productive exploratory - - 0.3
Dry exploratory - - -
Productive development - - -
Dry development - - -
14
The Company's interest in net productive exploratory wells is
computed at the Company's interest at the time they are drilled.
The Company's interest in these wells is subject to a 50% reduction
upon a declaration of commerciality.
(7) Present activity: The Opon No. 6 well was commenced on October 24,
1996 in the non-commercial area of the Opon Contract and
encountered several mechanical problems during completion and
testing in April and May 1997. Work on the well has been suspended
until a plan for further actions has been developed. Amoco
Colombia has recently proposed a workover of the Opon No. 6 well
using propellant stimulation technology. A decision on the
proposal will be made in January 1998 following an economic
analysis.* Drilling of the Opon 14 commenced on October 23, 1997
in the non-commercial area of the Opon Contract and is expected to
be completed in the spring of 1998.*
(8) Delivery Commitments:
The Company has executed two contracts for sales of specific
quantities of natural gas from the Company's wells in Colombia.
See International Operations in Item 1. The Company believes the
reserves discovered in the Opon No. 3 and 4 wells are adequate to
meet these sales commitments in the near future.* Additional wells
are needed and will be drilled to insure the ability to meet
delivery commitments over the life of the contract.*
OTHER PROPERTIES
Refer to Item 1 for descriptions of properties owned by the Company
other than those described in Item 2, above.
Item 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal and administrative
proceedings incident to the ordinary course of its business. In the
opinion of management, any liability to the Company relative to the
various proceedings will not have a material adverse effect on the
Company's operations or financial condition.
The Company has evaluated the Newhall Refinery site to determine the
impact of refining activities on the environment. The Company has
conducted an environmental assessment of the refinery site and a
remediation plan for the site has been submitted to the Regional Water
Quality Control Board and has received staff approval. The Company
estimates that $2.0 million would be incurred in executing the approved
remediation plan; however, the Company expects to sell the property
without incurring these costs by reducing the purchase price. The
Company's estimate of the net realizable value of this property has been
reduced by estimated remediation costs in determining the carrying value
of the property and therefore the remediation costs will not affect
future results of operations. See Note 12 to the Consolidated Financial
Statements in Item 8.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
15
In the agreement for the sale of Fletcher Refinery in 1993, the Company
indemnified the buyer as to liabilities in excess of $0.3 million for
certain federal and state excise taxes arising from periods prior to the
sale. Fletcher notified the Company in July 1994 that an audit for
California Motor Vehicle Fuels Tax was underway and a preliminary review
by then Fletcher employees indicated that a significant liability might
exist. The Company retained a consultant to evaluate the contingent
liability. In September 1994, the Company accrued $1.4 million as a
result of the consultant's evaluation. An additional $0.7 million was
accrued in September 1995, primarily because of increases in the
estimated amounts of penalties and interest which could be due. The
State of California issued a preliminary report in June 1996 which
concluded taxes and penalties of $10.8 million were due as a result of
the audit. The State of California issued a Notice of Determination in
July 1997 reducing the taxes and penalties due to $5.7 million.
Assessed amounts are subject to a process of appeal and further
adjustment, which remedies are still being pursued. 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
accrued an additional $1.2 million in September 1997. The Company has
accrued its best estimate of the ultimate liability and believes this is
sufficient to provide for the amount that will ultimately be paid based
on the information available. No assurances can be given that the
ultimate liability, if any, will be the amount accrued, and any such
liability may be greater or less than the amount accrued.
The Newhall Refinery was recently notified by a California state agency
that it is considered a potentially responsible party, under a state law
that is equivalent to the Federal Comprehensive Response, Compensation
and Liability Act, in the matter of the cleanup of a dump site
previously operated by Environmental Protection Corporation, the
Eastside Disposal Facility, near Bakersfield, California. The Company
has no record of having disposed of any waste at the site, and is
continuing its investigation of the circumstances that have led to the
notification. Based upon the records obtained from other parties, the
quantities of waste attributed to Newhall are minute relative to the
total amount of waste delivered to the landfill. However, management
cannot assess at this time the potential exposure or liability, if any,
to the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Closing stock price ranges for the quarterly periods during the fiscal
years ended September 30, 1997 and 1996, as reported by the American
Stock Exchange Monthly Market Statistics reports, were as follows:
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
Fiscal 1997:
Low $ 10.75 $ 10.50 $ 6.44 $ 5.88
High $ 15.00 $ 14.00 $ 10.75 $ 7.25
Fiscal 1996:
Low $ 13.50 $ 9.25 $ 11.13 $ 11.00
High $ 20.88 $ 13.88 $ 14.50 $ 16.88
The common stock is listed on the American Stock Exchange under the
symbol HOG. The Company does not fully meet all of the guidelines of
the American Stock Exchange for continued listing of its shares. The
delisting policies and procedures of the Exchange provide guidelines
under which the Exchange will normally give consideration to suspending
dealings in a security, or removing a security from listing. Among
those guidelines that may be applicable to the Company are: (i) having
stockholders' equity of less than $2,000,000 if such company has
sustained losses from continuing operations and/or net losses in two of
its three most recent fiscal years; or (ii) having sustained losses
which are so substantial in relation to its overall operations or its
existing financial resources, or its financial condition has become so
impaired that it appears questionable, in the opinion of the Exchange,
as to whether such company will be able to continue operations and/or
meet its obligations as they mature; or (iii) having sold or otherwise
disposed of its principal operating assets or having ceased to be an
operating company or having discontinued a substantial portion of its
operations or business for any reason whatsoever. Where the company has
substantially discontinued the business that it conducted at the time it
was listed or admitted to trading, and has become engaged in ventures or
promotions which have not developed to a commercial stage or the success
of which is problematical, it shall not be considered an operating
company for the purposes of continued trading and listing on the
Exchange.
The number of shareholders of record on December 12, 1997 was 689.
DIVIDEND POLICY
The Company has not paid a dividend on its common stock in the two most
recent fiscal years, nor has it ever done so. The Company's loan
agreement with Thamesedge, Ltd. restricts the payment of dividends to
35% of the Company's Consolidated Net Adjusted Income (as defined in the
loan agreement) plus $2.0 million. Since the Company has incurred net
losses during this fiscal year and prior years, the payment of dividends
is restricted.
17
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<HEADING>
For the Fiscal Year Ended September 30,
----------------------------------------------------------
1997 a 1996 a 1995 a 1994 a 1993
---------- --------- --------- --------- ---------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue $29 $112 $46 $728 $980
Gain (loss) on sale of assets -- (6) -- (1,240) (8)
Operating costs and expenses 4,367 6,293 1,943 2,880 5,910
Depreciation, depletion
and amortization 230 156 266 220 365
Interest expense 6,222 5,009 4,680 4,605 3,411
Provision for income taxes (2) 5 113 (199) (46)
---------- --------- --------- --------- ---------
Income (loss) from
continuing operations (10,788) (11,357) (6,956) (8,018) (8,668)
Loss from discontinued
operations (1,600) b (1,300) c (4,950) b (3,038) b (15,176) d
---------- --------- --------- --------- ---------
Net Loss $(12,388) $(12,657) $(11,906) $(11,056) $(23,844)
========== ========= ========= ========= =========
Earnings (loss) per share
Continuing operations $(0.78) $(0.83) $(0.53) $(0.62) $(0.67)
Discontinued operations (0.12) (0.10) (0.37) (0.23) (1.16)
---------- --------- --------- --------- ---------
$(0.90) $(0.93) $(0.90) $(0.85) $(1.83)
========== ========= ========= ========= =========
Weighted average common
shares outstanding 13,781 13,673 13,171 13,009 13,007
========== ========= ========= ========= =========
</TABLE>
18
<TABLE>
<HEADING>
For the Fiscal Year Ended September 30,
----------------------------------------------------------
1997 a 1996 a 1995 a 1994 a 1993
---------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Working capital (deficit) $(5,834) $(5,109) $(1,077) $2,413 $1,729
========== ========= ========= ========= =========
Properties, net $40,612 $21,248 $12,777 $10,855 $15,910
========== ========= ========= ========= =========
Net assets of discontinued
operations $2,137 b $2,202 c $2,978 b $6,851 b $7,750 d
========== ========= ========= ========= =========
Total assets $44,930 $24,540 $18,398 $24,908 $30,142
========== ========= ========= ========= =========
Long-term debt $102,903 $83,334 $82,213 $81,888 $78,828
========== ========= ========= ========= =========
Shareholders' equity(deficit) $(93,173) $(80,891) $(73,364) $(66,681) $(55,815)
========== ========= ========= ========= =========
</TABLE>
- -----------------------------
a Under the terms of a Farmout Agreement, the Company's partner in the
Company's Colombian operations paid for most costs incurred (both capitalized
and expensed) in Colombia in 1995 and 1994. The Company became responsible
for its share of costs in Colombia in 1996.
b The Company recorded valuation provisions against the carrying value of its
discontinued real estate operations and accrued for a contingent liability
arising from its discontinued refining and marketing operations in 1997, 1995
and 1994.
c The Company recorded valuation provisions against the carrying value of its
discontinued real estate operations in 1996.
d The Company completed the sale of substantially all of its discontinued
refining and marketing segment and recorded valuation provisions against the
carrying value of its discontinued real estate segment in 1993.
19
Item 7. 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 production began in December
1997. Deliveries of natural gas to a power plant located at the Opon
Contract area also began in December 1997. The Opon No. 6 well
encountered mechanical problems during completion operations and is
temporarily suspended to evaluate information and develop plans for
further operations on the well, including workover of the well.*
Drilling of the Opon No. 14 well began in October 1997. If no problems
are encountered, the Opon No. 14 well should be completed and tested in
the Spring of 1998.* 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. See Note 1 to the Consolidated Financial
Statements in Item 8.
Role Of Ecopetrol. Ecopetrol is a quasi-governmental corporate
organization wholly-owned by the Colombian government, 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. See
International Operations, above. At present, the price of natural gas
is set by law enacted by the legislature of Colombia in 1983. The
____________________
* This statement may be considered forward-looking. See Cautionary
Statements.
20
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. See International
Operations and Competitive Factors in Item 1.
Foreign Operations. The Company's operations in Colombia are subject to
political risks inherent in all foreign operations. See International
Operations in Item 1.
Risks Of Oil And Gas Exploration. Inherent to the oil and gas industry
is the risk that future wells will not find hydrocarbons where
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
reserve estimates and increasing costs due to replacement wells. Also,
because of the limited number of wells in the Opon Contract area, the
impact of the loss of a single well would potentially affect the
Company's production capability. Operations in the Opon Contract area
are subject to the operating risks normally associated with exploration
for, and production of oil and gas. See International Operations in
Item 1.
Laws And Regulations. The Company may be adversely affected by new laws
or regulations in the United States or Colombia 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.
Limited Capital. At September 30, 1997 the Company had a deficiency in
net assets of $93.2 million. The Company's principal asset, its
investment in the Opon project, will require additional capital for
exploitation. The Company has been unable to secure financing from
sources other than its principal shareholder. See Liquidity and Capital
Resources below and Note 1 to the Consolidated Financial Statements in
Item 8.
Losses From Operations. The Company experienced losses of $11,906,000,
$12,657,000 and $12,388,000 for the years ended September 30, 1995, 1996
and 1997, respectively. The Company anticipates continued losses
through fiscal 1998. See Results of Operations below.
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. See Market for Registrant's Common Equity and
Related Stockholder Matters in Item 5. Management has kept the Exchange
fully informed regarding the Company's present status and future plans.
21
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.
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. 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.* The
associate parties submitted an application to declare the area around
the Opon No. 6 well commercial in August 1997. Ecopetrol responded in
September 1997 that it considered the information presented to be
insufficient to evaluate the application for the extension of the
commercial area. The associate parties are evaluating Ecopetrol's
response in light of the terms of the Opon Contract and plan to approach
Ecopetrol for clarification of its response. At this date, the area
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
22
around the Opon No. 6 well is not a part of the commercial area.
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.
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 (61,827 acres). The second
acreage relinquishment was due on September 30, 1997. By agreement with
Ecopetrol, the second relinquishment has been postponed until September
30, 1998. As consideration, the associate parties agreed to perform,
for the full Opon Contract area, surface geological studies and
petrochemical analysis, and to undertake a study to determine the
economic and technical viability of putting the shallow oil producing
wells in the Opon Contract area into production. On September 30, 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 in October 1996. This well is
slightly more than 1 kilometer north of the Opon No. 3 well and is
outside the current commercial area. The well is presently estimated to
cost $30.2 million, of which Hondo Magdalena's share is 30.9%.* After
the drilling was completed, several mechanical problems in the
completion and testing of the Opon No. 6 well occurred. After there was
a failure of a portion of the guns during the initial completion attempt
in April 1997, a second set of perforating guns were fired. 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
actions. Amoco Colombia has recently proposed a workover of the Opon
No. 6 well using propellant stimulation technology. A decision on the
proposal will be made in January 1998 following an economic analysis.*
The associate parties are attempting to negotiate a settlement of claims
against suppliers of services and equipment related to the problems
encountered during completion operations on the Opon No. 6 well, but no
settlement has been reached. If a settlement is not reached, the next
step will be arbitration.* No prediction of the outcome of these
matters can be made at this time.
The Opon No. 14 well, approximately 4 kilometers south of the Opon No. 4
well, commenced drilling in October 1997. The total cost of the well is
estimated to be $21.5 million, of which Hondo Magdalena will bear
30.9%.* The well is planned for a total depth of 11,000 feet and is
intended to confirm the existence of the La Paz gas and condensate
reservoir in the south of the Opon Contract area.* The drilling of the
well has progressed in accordance with its plan to this date.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
23
In July 1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol agreed
to construct a pipeline and wellhead facilities (which were not
contemplated in the Opon Contract). The parties constructed a 16 inch
pipeline approximately 88 kilometers in length from the Opon Contract
area north to Ecopetrol's gas processing plant at El Centro, and from
there to Ecopetrol's refinery at Barrancabermeja. The investment in
pipeline costs will be recovered through a pipeline tariff.* Ecopetrol
has constructed 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 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, regulates natural gas
pipelines and the sale of natural gas in Colombia. CREG's regulations
provide the ceiling price for natural gas and the methodology for
establishing pipeline tariffs. Based upon these regulations, Amoco
Colombia, as operator applied for a tariff for the pipeline; CREG has
not yet responded to this application.
Contracts, covering the sale of natural gas, the sale of condensate and
natural gas liquids, the processing of the gas stream, and
transportation of natural gas and liquids are complete and have been
signed by all parties. 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 $0.159 per thousand cubic feet of gas. In a recent
amendment to the gas processing agreement the associate parties agreed
to bear the cost of processing royalty gas that is attributable to their
interests and Ecopetrol reduced the fee for processing from $0.20 to
$0.159 per thousand cubic feet of gas. Ecopetrol, as purchaser, pays
the pipeline tariff for the natural gas sold by the associate parties.
In March 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, subject to the conditions
noted below, natural gas to an electric generation plant at the Opon
Contract area. Termo Santander's power plant is located at the Opon
Contract area. Under the contract, 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 if 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. The
commencement of the contract is conditioned upon the completion of the
electric generation plant and a determination by the sellers that there
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
24
are sufficient reserves to supply natural gas to the purchaser for the
entire term of the agreement. In order to begin deliveries before the
condition concerning the sufficiency of reserves is satisfied, an
interim agreement for the sale of gas to Termo Santander was signed on
November 20, 1997. The interim agreement will be effective until
January 1, 1999, or until sufficient reserves are determined through
additional work on the Opon No. 6 well or the successful completion of
the Opon No. 14 well.* The gas sales price under the interim agreement
will be equivalent to the price, including pipeline tariff, that would
have been received if the same gas were sold under the contract with
Ecopetrol described in the preceding paragraph.
The pipeline and wellsite facilities were completed in June 1997.
Ecopetrol completed the improvements to the El Centro gas plant in
November 1997. Production from the Opon field began on December 1,
1997, with gas supplied to Termo Santander for testing the first of two
turbines at the power plant. The first shipment of gas through the
pipeline began on December 5, 1997, but was interrupted for one week
shortly thereafter by a landslide. The first shipment of gas was 10
million cubic feet and the quantity is expected to increase to the
contract quantity of 100 million cubic feet per day by the end of
calendar 1997.*
The associate parties have submitted invoices to Ecopetrol under the gas
sales agreement for payments under the take-or-pay clause. Ecopetrol
has indicated that it will not pay these invoices. The associate
parties are reviewing their legal options to pursue the collection of
these invoices.*
Amoco Colombia has submitted budgets to Hondo Magdalena and ODC for
calendar years 1996, 1997 and 1998. 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, 1997 or
1998. The parties are currently at an impasse in resolving 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.
25
Discontinued Operations
-----------------------
Two of the Company's former business segments, refining and marketing
operations and real estate operations were discontinued in 1991.
On December 15, 1989, the Company suspended operations at its Newhall
refinery. Subsequently, the Company adopted a plan of disposition which
included dismantling the refinery, effecting environmental remediation
of the land and further developing the land to a condition where it may
be sold. Execution of the plan was suspended in September 1993 and the
Company is now marketing the site in its current condition and with
existing land-use entitlements. The Newhall refinery site consists of
approximately 105 acres located adjacent to a major freeway intersection
in northern Los Angeles County. See Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 and
Note 12 to the Consolidated Financial Statements in Item 8.
The Company owns in fee simple approximately 11 acres of undeveloped
land located in eastern Los Angeles County. An option to a developer on
the Company's Via Verde tract at a price of $3.1 million expires in
December 1997. The option agreement allows the Company the right to be
released from the current agreement should there be a potential sale of
the parcel to a ready and willing buyer.
On October 1, 1993 the Company completed a transaction for the sale of
its Fletcher refinery and related assets. In the agreement for the sale
of the Fletcher refinery, the Company indemnified the buyer as to
liabilities in excess of $0.3 million for certain federal and state
excise taxes arising from periods prior to the sale. As more fully
described in Note 12 to the Consolidated Financial Statements in Item 8,
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
Notice of Determination in July 1997 reducing this amount to $5.7
million. 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
Results of operations for the year ended September 30, 1997 amounted to
a loss of $12.4 million, or 90 cents per share, of which $10.8 million
arose from continuing operations and $1.6 million resulted from
discontinued operations. The Company reported a net loss of $12.7
million, or 93 cents per share, for the year ended September 30, 1996.
The 1996 loss included discontinued loss provisions of $1.3 million and
a loss of $11.4 million from continuing operations. In 1995, the
Company reported a net loss of $11.9 million, or 90 cents per share,
which included losses from discontinued operations of $5.0 million and a
loss of $6.9 million from continuing operations.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
26
As described previously, the Company had moved from a domestic oil and
gas operation to a foreign oil and gas operation. The historical
results of continuing operations contain many non-recurring
transactions. As a result, they are not comparable and are a poor
indicator of the Company's future operating results. Management expects
losses from continuing operations to continue through fiscal 1998.*
1997 vs 1996
------------
Operating costs for fiscal 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 fiscal 1996.
Overhead, Colombian operations decreased $0.4 million between the years
ended September 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 all of
fiscal 1997, but only the last five months of fiscal 1996.
The Company's Colombian operations undertook a seismic exploration
program during fiscal 1996. The decrease of $1.7 million in exploration
costs between the years 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 $31.1 million
between September 30, 1996 and September 30, 1997. Interest expense
increased by only $1.2 million between the years ended September 30,
1997 and 1996 because the majority of the charges from the Funding
Agreement are capitalized.
Management has the following expectations for 1998 results of
operations: revenue and related operating costs and depreciation,
depletion and amortization will increase significantly in conjunction
with the commencement of production in December 1997; overhead,
Colombian operations, general and administrative expense, and
exploration expenses should not vary significantly from 1997.* These
factors are expected to combine to produce approximately break-even
results before interest expense.* The level of interest expense to be
reported in 1998 is difficult to predict at the current time, but it
will increase substantially from 1997 if no outside financing to repay
the Funding Agreement is acquired.*
1996 vs 1995
------------
The Company's share of expenses from the Opon operation was borne solely
by Amoco Colombia during 1995 and 1994 while the Opon Nos. 3 and 4 wells
were being drilled. The increases in operating expenses, overhead,
Colombian operations and exploration costs of $0.1 million, $2.5 million
and $1.6 million, respectively, for the year ended September 30, 1996 as
compared to the year ended September 30, 1995, all arise from the
Company assuming its share of these costs in 1996. The increase in
interest expense of $0.3 million between the years arises primarily from
Colombian costs financed with the Funding Agreement.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
27
Discontinued Operations
-----------------------
The Company implemented disposal accounting for its refining and
marketing and real estate segments during 1991. In 1997, the Company
recorded loss provisions of $1.2 million and $0.4 million for its
refining and marketing and real estate segments, respectively, as
described previously. Loss provisions of $0.4 million for the refining
and marketing segment and $0.9 million for the real estate segment were
recorded in 1996. Loss provisions for 1995 amounted to $0.7 million and
$4.3 million for refining and marketing and real estate, respectively.
Operating losses from discontinued operations of $0.3 million, $0.1
million, and $0.4 million for 1997, 1996, and 1995, respectively, were
charged against loss provisions established in earlier periods.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal, 1997, cash inflows of $14.6 million arose from borrowings
from Lonrho Plc. The Company utilized cash of $3.9 million and $0.4
million to finance continuing and discontinued operations, respectively,
$8.9 million for capital expenditures, and made scheduled debt
repayments of $0.8 million. At September 30, 1997, the Company had cash
balances of $1.0 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. This loan was amended and
restated, as described below. Under a December 1996 letter agreement,
as consideration for extension of maturities and certain other financial
undertakings, the Company 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 January 1, 1998 at a rate of
$12.375 per share. The portion of the debt that may be converted into
common stock is not 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.
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
28
consideration for the loan, the Company 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
September 30, 1997, $14.6 million of this facility has been drawn.
In August 1997, Thamesedge Ltd. assigned all of its interest in the
Company's indebtedness to London Australian & General Property Company
Limited ("LAGP"), a subsidiary of Lonrho Plc. In December 1997 the
Company restructured the terms of certain debt to LAGP, and obtained an
additional funding commitment of $7.0 million for fiscal 1998. The
Company extended all of the above described indebtedness due on January
1, 1998 to January 15, 1999 and amended the notes by adding a cross-
default provision and a new event of default. The new event of default
requires the Company to furnish to LAGP by October 1, 1998 a reserve
report that shows a minimum of 13 billion cubic feet of gas increase
over the 1997 proved reserve figure. In the event of a default under
this new provision, LAGP has the right to declare all the loans in
default and demand payment. The new $7.0 million commitment from Lonrho
Plc for fiscal 1998 will be added to the July 1997 Amended and Restated
Revolving Credit Agreement under the same terms and condition as the
existing agreement explained above. The Company presently owes Lonrho
Plc $99.9 million, of which $93.8 million is due January 15, 1999.
On May 5, 1995, Hondo Magdalena, ODC and Amoco Colombia entered into a
Funding Agreement for Tier I Development Project costs (the "Funding
Agreement") for the interim financing of costs associated with the
construction of a pipeline from the Opon Contract area (see Note 6 to
the Consolidated Financial Statements in Item 8) and certain other costs
related to the Opon Contract. The Funding Agreement became effective on
July 26, 1995. Hondo Magdalena has financed its share of the costs
(including overhead) for the pipeline and an approved geological and
geophysical work program. 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 is 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. Production may be deemed
to have commenced in December 1997 and the Company does not have the
commitments or funds to repay the Funding Agreement within either the 90
or 365 day option periods.* If the Company does not secure financing to
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
29
repay the Funding Agreement prior to 365 days after the date of first
production, it will incur the 100% penalty and will pay the increased
amount out of production, as described above.*
Based upon the Company's budget and current information, management
believes existing cash, available facilities, Lonrho commitments, net
proceeds from the sale of Opon gas and the Funding Agreement will be
sufficient to finance the Company's known obligations (the pipeline and
related facilities, estimated completion expenses of the Opon No. 6
well, estimated drilling and completion expenses of the Opon No. 14
well, overhead obligations unrelated to capital projects and other
business activities) during fiscal 1998.* However, management believes
the Company will need additional cash to participate in the drilling of
additional wells in Colombia and/or to participate in other capital
projects.* 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 flow from operations which commenced in December 1997 is not
expected to be a source of free funds since pursuant to the Funding
Agreement, Amoco receives the proceeds from the first 80 million cubic
feet of gas and associated liquids.* Any additional free cash flow is
committed to existing loan obligations. 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.* Furthermore, the success of the
Opon No. 14 well is critical to obtaining third party financing (either
debt or equity) and for the decision by the associate parties to the
Opon Contract to continue the development of the Opon project.*
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HONDO OIL & GAS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors 32
Financial Statements:
Consolidated Balance Sheets as of
September 30, 1997 and 1996 33
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995 34
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended September 30, 1997, 1996 and 1995 35
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 36
Notes to Consolidated Financial Statements 37
Supplementary Information about Oil and Gas Producing Activities
and Reserves (Unaudited) 56
31
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Hondo Oil & Gas Company
We have audited the accompanying consolidated balance sheets of Hondo Oil & Gas
Company as of September 30, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended September 30, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hondo
Oil & Gas Company at September 30, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Denver, Colorado
November 21, 1997,
except for Note 5 as to which the date is
December 18, 1997
</AUDIT-REPORT>
32
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
September 30,
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $1,019 $374
Accounts receivable, net of allowances
of $44 and $332, respectively 296 317
Prepaid expenses and other 1 79
----------- -----------
Total current assets 1,316 770
Properties, net (Note 3) 40,612 21,248
Net assets of discontinued operations (Note 12) 2,137 2,202
Other assets 865 320
----------- -----------
$44,930 $24,540
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $3,464 $2,849
Current portion of long-term debt (Note 5) 265 738
Accrued expenses and other (Note 4) 3,421 2,292
----------- -----------
Total current liabilities 7,150 5,879
Long-term debt, including $99,943 and
$80,109, respectively, payable to a
related party (Note 5) 102,903 83,334
Funding agreement (Note 6) 22,788 11,513
Other liabilities, including $3,407 and
$2,411, respectively, payable to a
related party (Note 7) 5,262 4,705
----------- -----------
138,103 105,431
Contingent liabilities (Notes 10 and 12)
Shareholders' equity (deficit) (Notes 5 and 8):
Preferred stock -- --
Common stock, $1 par value, 30,000,000 shares
authorized; shares issued and outstanding:
13,788,424 and 13,776,194, respectively 13,788 13,776
Additional paid-in capital 53,675 53,581
Accumulated deficit (160,636) (148,248)
----------- -----------
(93,173) (80,891)
----------- -----------
$44,930 $24,540
=========== ===========
The accompanying notes are an integral part of these financial statements.
33
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Share and Per Share Data)
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Sales and operating revenue $4 $2 $23
Other income 25 110 23
----------- ----------- -----------
29 112 46
----------- ----------- -----------
COSTS AND EXPENSES
Operating costs 575 169 47
Depreciation, depletion, and amortization 230 156 266
Overhead, Colombian operations 2,183 2,576 119
General and administrative 1,582 1,779 1,608
Exploration costs 27 1,769 169
Interest on indebtedness including $6,222,
$4,786 and $4,659, respectively, to a
related party (Note 5) 6,222 5,009 4,680
Loss on sale of assets -- 6 --
----------- ----------- -----------
10,819 11,464 6,889
----------- ----------- -----------
Loss from continuing operations
before income taxes (10,790) (11,352) (6,843)
Income tax expense (benefit) (Note 9) (2) 5 113
----------- ----------- -----------
Loss from continuing operations (10,788) (11,357) (6,956)
Loss from discontinued operations (Note 12) (1,600) (1,300) (4,950)
----------- ----------- -----------
Net Loss $(12,388) $(12,657) $(11,906)
=========== =========== ===========
Loss per share:
Continuing operations $(0.78) $(0.83) $(0.53)
Discontinued operations (0.12) (0.10) (0.37)
----------- ----------- -----------
Net loss per share $(0.90) $(0.93) $(0.90)
=========== =========== ===========
Weighted average common shares outstanding 13,780,963 13,672,722 13,171,049
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In Thousands Except Common Shares)
Common Stock Retained
------------------------ Additional Earnings
Paid-In (Accumulated
Shares Amount Capital Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at October 1, 1994 13,032,276 $13,032 $43,972 $(123,685)
Purchase of interest in Opon Association
Contract with common stock (Note 3) 44,438 44 845 --
Payment of interest with common stock (Note 5) 189,080 189 2,104 --
Exercise of stock options (Note 8) 157,584 158 1,883 --
Net loss -- -- -- (11,906)
----------- ----------- ----------- -----------
Balance at September 30, 1995 13,423,378 13,423 48,804 (135,591)
Payment of interest with common stock (Note 5) 319,316 319 4,423 --
Exercise of stock options (Note 8) 33,500 34 354 --
Net loss -- -- -- (12,657)
----------- ----------- ----------- -----------
Balance at September 30, 1996 13,776,194 13,776 53,581 (148,248)
Payment of liabilities with common stock 12,230 12 94 --
Net loss -- -- -- (12,388)
----------- ----------- ----------- -----------
Balance at September 30, 1997 13,788,424 $13,788 $53,675 $(160,636)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations $(10,790) $(11,352) $(6,843)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation, depletion and amortization 230 156 266
Loss on sale of assets -- 6 --
Accrued interest added to long-term debt 5,261 34 2,385
Accrued interest paid with common stock -- 4,742 2,292
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 21 10 199
Prepaid expenses and other 78 (72) 26
Other assets (731) (12) (201)
Increase (decrease) in:
Accounts payable 230 1,189 159
Accrued expenses and other (40) -- 123
Funding agreement 1,961 3,361 275
Other liabilities (118) (178) (357)
----------- ----------- -----------
Net cash used by continuing operations (3,898) (2,116) (1,676)
Net cash used by discontinued operations (366) (210) (473)
----------- ----------- -----------
Net cash used by operating activities (4,264) (2,326) (2,149)
----------- ----------- -----------
Cash flows from investing activities:
Sale of assets -- 1 4,804
Capital expenditures (8,926) (913) (2,021)
----------- ----------- -----------
Net cash provided (used) by investing activities (8,926) (912) 2,783
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings 14,600 1,825 3,175
Principal payments on long-term debt (765) (235) (5,220)
Issuance of stock -- 251 2,041
----------- ----------- -----------
Net cash provided (used) by financing activities 13,835 1,841 (4)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 645 (1,397) 630
Cash and cash equivalents at the beginning of the year 374 1,771 1,141
----------- ----------- -----------
Cash and cash equivalents at the end of the year $1,019 $374 $1,771
=========== =========== ===========
</TABLE>Refer to Notes 3 and 6 for descriptions of non-cash transactions.
The accompanying notes are an integral part of these financial statements.
36
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
1) Nature of Business
------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an independent oil
and gas exploration and development company. The Hondo Company owns 62.7%
of Hondo Oil & Gas Company. Lonrho Plc ("Lonrho"), a publicly-traded
English company and the Company's primary lender, owns 100% of The Hondo
Company and owns an additional 5.7% of the Company through another
wholly-owned subsidiary. In total, Lonrho controls 68.4% of the Company's
outstanding shares.
During 1991 the Company adopted plans of disposal for its refining and
marketing and real estate operations. Substantially all of the refining and
marketing assets were sold in 1993. Following the sale of substantially all
of its domestic oil and gas properties in 1992, the Company's sole
continuing business activity is exploitation of an oil and gas concession in
Colombia, South America.
The Company's wholly-owned subsidiary, Hondo Magdalena Oil & Gas Limited
("Hondo Magdalena"), became involved in the Opon Association Contract (the
"Opon Contract") in Colombia in 1991. Amoco Colombia Petroleum Company
("Amoco Colombia") earned an interest in the Opon Contract through a Farmout
Agreement executed in 1993. Amoco Colombia, Hondo Magdalena, and Opon
Development Company presently have working interests of approximately 60%,
31%, and 9%, respectively. The Colombian national oil company, Ecopetrol,
has the right to acquire 50% of the Opon Contract when commerciality is
declared and will reimburse the associate parties (out of future production)
for 50% of the direct exploration costs. In 1995, Ecopetrol agreed to
include certain costs related primarily to construction of a pipeline and
wellsite facilities in the commercial area, and to pay cash for its share of
those costs. Commerciality was declared for a portion of the Contract area
in May 1996 and Ecopetrol reimbursed the associate parties for its share of
the above described costs in September 1996 (See Note 6). Subsequent to the
declaration of commerciality, the Company's share of costs for activities
within the commercial area is approximately 15%.
Amoco Colombia was obligated by the 1993 Farmout Agreement to fund all but
$2,000 of Hondo Magdalena's share of drilling and related costs during the
drilling of two exploration wells and to make certain payments to Hondo
Magdalena. Amoco Colombia spent approximately $56,500 to drill the first
two exploratory natural gas wells in 1994 and 1995. The combined results of
production tests of these wells indicate they will produce at a daily rate
of 103 million cubic feet of natural gas and 3,900 barrels of condensate.
The Company was able to attribute proved reserves to this discovery as of
September 30, 1996 following completion of negotiations for sales of the
discovered hydrocarbons. As more fully described in Note 6, Amoco Colombia
agreed to finance the Company's share of costs to build a natural gas
pipeline, construct wellhead facilities, and acquire seismic data, including
related overhead. Acquisition of the seismic data was completed during
fiscal 1996, and construction of the pipeline and related wellhead
facilities was completed during fiscal 1997. The Company began earning
revenue in December 1997.
37
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
1) Nature of Business (continued)
------------------------------
A third well was drilled during fiscal 1997. In April and May 1997, several
mechanical problems were encountered during the completion and testing of
the third well. Further work on the well has been suspended until a plan
has been finalized (estimated to occur in January 1998). Drilling of a
fourth well commenced in October 1997. Both of the third and fourth wells
are located in the non-commercial portion of the concession, therefore,
Ecopetrol does not pay a share of the drilling costs.
As more fully described in Note 6, a substantial portion of the Company's
revenue is pledged to repayment of the Funding Agreement. Cash from
operations after Funding Agreement repayments will not be sufficient to fund
Colombian operating costs and capital expenditures, and U.S. overheads,
during fiscal 1998. Based upon the Company's budget, management believes
existing facilities and further commitments from Lonrho and the Funding
Agreement will be sufficient to finance the Company's known cash
requirements during fiscal 1998. The Company will require significant
additional funding for the continued development of the Opon Contract area
and repayment of the Funding Agreement subsequent to fiscal 1998. The
Company has the option to not participate in some or all of the Opon capital
projects which may be proposed in the future and the option to allow the
Funding Agreement to be repaid entirely from production. However,
substantial penalties would be incurred by choosing either of these
alternatives.
The Company continues to be dependent on its majority shareholder, Lonrho
Plc, to fund its future cash needs. Management believes that outside
financing will not be forthcoming until Opon 14 is successfully completed in
the spring of 1998. Obtaining permanent financing for development of the
Company's Opon project is vital to the Company's ability to successfully
exploit this concession in the future. There can be no assurance that the
Opon Project will be successfully developed or that additional debt or
equity funds will become available.
2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil include the accounts of
all subsidiaries, all of which are wholly owned. All significant
intercompany transactions have been eliminated.
In 1991, the Company adopted plans of disposal for its refining and
marketing and its real estate segments, respectively. Accordingly, the
results of operations and the net assets of the discontinued segments have
been reclassified to discontinued operations for all periods presented.
Assets of discontinued operations are recorded at the lower of cost or net
realizable value. Refer to Note 12.
38
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(b) Cash Equivalents
----------------
Cash equivalents represent highly liquid investments with original
maturities of three months or less.
(c) Oil and Gas Properties
----------------------
Oil and gas properties are accounted for using the successful efforts
method. Under this method, property acquisition costs are capitalized when
incurred. Exploratory geological and geophysical costs and general and
administrative costs, including salaries, are expensed as incurred. The
Company capitalizes interest expense for individual capital projects
requiring more than three months for completion and costing more than
$1,000. The costs of drilling exploratory wells are capitalized pending
determination of whether the wells have found proved reserves. If proved
reserves are not discovered, such dry hole costs are expensed. All
developmental drilling costs, including those for unsuccessful wells, are
capitalized.
Acquisition costs of unproved properties which are considered to be
individually significant are periodically assessed for impairment on a
property-by-property basis. Individually insignificant properties are
assessed for impairment as a group. Any decline in value is included in the
statement of operations in exploration costs.
Intangible drilling and development costs and tangible equipment are
depleted by the units-of-production method using proved developed reserves
on a field basis. Leasehold costs are also depleted on a field basis using
total proved reserves. Estimates of proved reserves are based upon reports
of independent petroleum engineers.
(d) Other Fixed Assets
------------------
Other fixed assets are recorded at historical cost and are depreciated by
the straight-line method using useful lives of 7 to 10 years.
(e) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued SFAS 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.
39
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(f) Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes." Under Statement 109, the liability method is
used in accounting for income taxes. Deferred tax assets and liabilities
are determined based on reversals of differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted
effective tax rates and laws that will be in effect when the differences are
expected to reverse.
Investment tax credits are accounted for by the flow-through method which
recognizes related benefits in the year realized.
(g) Loan Fees
---------
Capitalized loan fees pertaining to long-term loans are included in other
assets. The loan fees are stated at cost and are amortized by the
straight-line method, which approximates the level yield method, over the
life of the related loan.
(h) Foreign Currency Translation
----------------------------
The Company's Colombian business is conducted in a highly inflationary
economic environment. Accordingly, the financial statements of the
Company's foreign subsidiary are remeasured as if the functional currency
were the U.S. dollar using historical exchange rates. Exchange gains and
losses, which have been immaterial to date, are included in operating costs.
(i) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(j) Fair Value of Financial Instruments
-----------------------------------
SFAS Statement No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosures of fair value information about financial
instruments for which it is practicable to estimate that value. The
Company's financial instruments include: cash and cash equivalents,
receivables, accounts payable, long-term debt, the Funding Agreement, and
certain other long-term liabilities. Disclosures of fair values determined
in accordance with SFAS No. 107 are included in Notes 5, 6, and 7. The
Company believes that the recorded values approximate fair values for
financial instruments for which no separate disclosure of fair value is
made.
40
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(k) Stock Option Valuation
----------------------
The Company implemented the disclosure requirements of SFAS No. 123,
Accounting and Disclosure of Stock-Based Compensation as of September 30,
1997. The Statement gives companies the option to either follow fair value
accounting or to continue to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. The Company has elected to continue to follow APB No. 25
for recognition of expense from stock options and stock-based awards.
Therefore, implementation of the Statement had no impact on results of
operations for any of the years reported.
(l) Reclassifications
-----------------
Certain reclassifications have been made to the prior years' amounts to make
them comparable to the fiscal 1997 presentation. These additional changes
had no impact on previously reported results of operations or shareholders'
equity (deficit).
3) Properties
----------
Properties, at cost, consist of the following:
September 30,
1997 1996
----------- -----------
Oil and gas properties (Colombia):
Proved $11,923 $11,803
Accumulated depletion, depreciation
and amortization -- --
----------- -----------
11,923 11,803
----------- -----------
Other properties - Colombia:
Wellsite facilities 4,689 2,039
Pipelines 12,061 5,398
Wells in progress 11,821 1,858
Other properties - domestic
Other fixed assets 323 311
Accumulated depreciation (205) (161)
----------- -----------
$40,612 $21,248
=========== ===========
41
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
3) Properties (continued)
----------------------
The balance of wells in progress includes non-cash increases of $674 and
$1,225 which were accrued in accounts payable as of September 30, 1997 and
1996, respectively. The Company capitalized interest of $782 and $180 in
the balance of wells in progress for the years ended September 30, 1997
and 1996, respectively. The balances of wellsite facilities and pipelines
include non-cash increases of $6,538 and $7,968 for 1997 and 1996,
respectively, which were charged to the Funding Agreement (Note 6). The
balances of wells in progress, wellsite facilities and pipelines include
a non-cash decrease of $2,916 for 1996 pertaining to amounts due from
Ecopetrol under the commerciality declaration (See Note 1), of which $2,629
had been collected and applied to the Funding Agreement as of September 30,
1997. The balance of $287 was retained by Ecopetrol subject to completion
of an audit and is included in accounts receivable as of September 30, 1997.
Total costs incurred (both capitalized and expensed) in Colombia for oil and
gas producing activities were:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Property acquisition costs (a) $-- $38 $889
=========== =========== ===========
Exploration costs $10,051 $3,731 $169
=========== =========== ===========
Development costs $2,709 $2,558 $190
=========== =========== ===========
</TABLE>
(a) In September 1995, the Company acquired an additional 0.88875%
interest in the Opon Contract by the issuance of 44,438 shares of its
common stock.
4) Accrued expenses
----------------
Accrued expenses consist of the following:
September 30,
1997 1996
----------- -----------
Refining and marketing costs (Note 12) $3,198 $2,028
Other 223 264
----------- -----------
$3,421 $2,292
=========== ===========
42
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
5) Long-Term Debt
--------------
Long-term debt consists of the following: September 30,
1997 1996
----------- -----------
Notes payable to Lonrho Plc (a),(b):
Note A (c) $3,479 $3,277
Note B (c) 4,535 4,271
Note C (a),(d) 38,577 36,361
Note D (d) 33,126 31,200
Note E (e) 5,294 5,000
Note F (f) 14,932 --
Pollution Control Revenue Bonds (g) 2,225 2,475
Industrial Development Revenue Bonds (g) 1,000 1,000
Other -- 488
----------- -----------
103,168 84,072
Less current maturities (265) (738)
----------- -----------
$102,903 $83,334
=========== ===========
Maturities are as follows for the years ending September 30:
1998 $265
1999 93,812
2000 1,898
2001 1,918
2002 1,938
Thereafter 3,337
-----------
$103,168
===========
(a) In December 1997, the Company and Lonrho agreed to defer commencement
of principal amortization for Notes A through E. The descriptions in
(b) through (e) below reflect the revisions. As consideration for
extensions and certain other financial undertakings received from
Lonrho in 1996, the Company granted to Lonrho a security interest in
all of the shares of Hondo Magdalena and agreed to give Lonrho an
option to convert $13,500 of Note C into the Company's common stock 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. In 1997, as consideration for extension of
the term of Note F and the granting of $7,000 additional credit
thereunder, the Company gave Lonrho an option to convert another
$7,000 of Note C into the Company's common stock at a rate of $7.70
per share. The debt will be convertible at Lonrho's option at any
time prior to maturity. The option to convert the debt into common
stock given in 1997 will be subject to shareholder approval at the
Company's 1998 annual meeting. If the conversion option is not
approved by the shareholders, the interest rate on the $7,000 will
revert to 13.5%, the rate of interest on such debt prior to the 1993
restructuring.
43
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(b) The following terms apply to Notes A through E:
(1) Interest is payable semiannually at a rate of 6%.
(2) If management determines sufficient cash is not available to pay
interest, management may offer to issue the Company's unregistered
stock valued at the American Stock Exchange closing price on the
interest due date as payment in kind. Lonrho may choose to either add
the accrued interest to the balance of the debt outstanding or accept
the payment in kind. The Company has an obligation to register any
shares issued in connection with the above if so requested by Lonrho.
(3) Accrued interest of $3,407, $2,823, $2,411 and $2,354 has been
added to the outstanding debt as of October 1, 1997, April 1, 1997,
October 1, 1996, and October 1, 1994, respectively. Accrued interest
of $2,375, $2,367 and $2,293 has been paid by the issuance of 197,944,
121,372 and 189,080 shares, respectively, of the Company's common
stock for amounts due on April 1, 1996, October 1, 1995 and April 1,
1995, respectively.
(4) As consideration for past deferrals of interest and principal
payments due under the terms of the first four notes, the Company has
granted Lonrho Plc a 5% share of the Company's net profits, as
defined, under the Opon Contract. Following repayment of these notes,
Lonrho's entitlement will be reduced by half.
(5) If the Company does not furnish to Lonrho by October 1, 1998 a
report that shows an increase in proved gas reserves of 13,000,000
mcf, then Lonrho has the right to declare Notes A through E in default
and demand payment.
(c) Notes A and B are secured by mortgages on the Company's real estate
included in discontinued operations. Absent repayment in full as a
result of the sale of the securing real estate, principal amortization
in ten equal semiannual installments will commence January 15, 1999.
Note A is secured by the Company's Via Verde Bluffs real estate. Note
B is secured by the Company's Valley Gateway real estate.
(d) Notes C and D are secured by the Company's Valley Gateway real estate.
Notes C and D are due January 15, 1999 and are subordinated to the
Company's other indebtedness existing at September 30, 1997.
(e) In October 1994, the Company received $4,800, net of withholding
taxes, from Amoco Colombia under the terms of the Farmout Agreement
(See Note 1). Also in October 1994, the Company paid $5,000 to Lonrho
Plc to reduce the balance of Note D and the related interest expense.
At the same time, Lonrho Plc made available $5,000 in the form of a
new facility loan to be drawn as needed by the Company. The Company
drew $3,175 of this facility loan during 1995 and the remaining $1,825
during 1996. Note E is due January 15, 1999.
(f) In June 1996, Lonrho Plc agreed to provide the Company an additional
facility loan of $13,500 at a rate of 13%, payable semiannually. In
July 1997, the loan was amended to extend the maturity date to January
1, 1999 and revise the amount available to $20,500. The provisions
for payment of interest with the Company's common shares described in
(b)(2) above apply to this loan. The loan is secured by free cash
flow, as defined, from Hondo Magdalena's operations. The Company drew
$14,600 during fiscal 1997 and additional amounts of $1,700 and $1,400
in October and December 1997, respectively.
44
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(g) Both issues of these tax-exempt bonds were issued under the authority
of the California Pollution Control Financing Authority. The
Pollution Control Revenue bonds bear interest at an average rate of
6.15%, payable semiannually, and mature serially through November 1,
2003. The Industrial Development Revenue Bonds bear interest at a
rate of 7.5%, payable semiannually, and mature September 1, 2011.
Both bond issues are collateralized by certain refinery facilities and
equipment located at Valley Gateway and the Fletcher refinery. The
collateral at the Fletcher refinery is leased to the buyer for a
nominal annual fee. The trustee of the bonds was notified of changes
to the collateral in 1993 and the trustee has not taken any action to
declare a breach of covenant or a default. The Company routinely
communicates with the Trustee and has received no indication that the
Trustee is contemplating any such action.
According to the terms of the various credit agreements, the Company is
restricted in its ability to: (a) incur additional debt; and (b) pay
dividends on and/or redeem capital stock.
Hondo Oil paid interest of $219, $234 and $248 for the years ended September
30, 1997, 1996 and 1995, respectively. In accordance with the provisions of
SFAS No. 107, the Company has estimated the fair value of its long-term debt
to be $97,414 as of September 30, 1997 using a discount rate of 13%.
6) Funding Agreement
-----------------
Effective July 26, 1995, Hondo Magdalena, Amoco Colombia, and Opon
Development Company entered into a Funding Agreement for Tier I Development
Project costs (the "Funding Agreement") for the interim financing of costs
associated with the construction of a pipeline from the Opon Contract area,
certain wellsite facilities, a geological and geophysical work program, and
for related overheads. The Funding Agreement provides that Hondo Magdalena
may repay the amounts financed by Amoco Colombia from prior to the date of
first production until 365 days thereafter, along with an equity premium
computed using a 22% annualized interest rate. The equity premium will be
computed monthly on Hondo Magdalena's share of expenditures (including any
amounts to be recouped from Ecopetrol after commerciality). Alternatively,
from the date of first production until 90 days thereafter, Hondo Magdalena
may elect to repay 125% of its share (excluding any amounts to be recouped
from Ecopetrol after commerciality) of the total costs accumulated up to the
date of repayment. If the financed amounts are not repaid within 365 days
after the date of first production, an additional penalty of 100% of the
amount then due would be recovered out of Hondo Magdalena's revenues. Hondo
Magdalena's revenues from production of the first 80 million cubic feet of
natural gas and related condensate and natural gas liquids are pledged to
secure its obligations under the Funding Agreement.
45
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
6) Funding Agreement (continued)
-----------------------------
The Company has accrued equity premiums computed in accordance with the 22%
annualized interest rate option. Equity premiums of $2,774, $1,262 and $57
related to the financed pipeline costs and wellsite facilities have been
capitalized for the years ended September 30, 1997, 1996 and 1995,
respectively. The remainder of the equity premiums accrued to date,
relating to the financed geological and geophysical work and overheads, have
been expensed.
The balance of the Funding Agreement consists of the following:
September 30,
1997 1996
----------- -----------
Outstanding principal $17,566 $9,771
Equity premiums 5,222 1,742
----------- -----------
$22,788 $11,513
=========== ===========
The balance of the Funding Agreement was reduced by $2,629 in September 1996
by application of the Company's share of payments from Ecopetrol arising
from the declaration of commerciality (Note 1).
In accordance with the provisions of SFAS No. 107, the Company has estimated
the fair value of the Funding Agreement to be $24,690 as of September 30,
1997 using a discount rate of 13%.
7) Other Liabilities
-----------------
Other liabilities consist of the following:
September 30,
1997 1996
----------- -----------
Interest payable to Lonrho Plc (Note 5) $3,407 $2,411
City of Long Beach (a) 1,594 1,533
Other 261 761
----------- -----------
$5,262 $4,705
=========== ===========
(a) Due January 1, 1999 together with interest accrued at 6%. In
accordance with the provisions of SFAS No. 107, the Company has
estimated the fair value of this liability to be $1,462 as of
September 30, 1997 using a discount rate of 13%.
46
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
8) Shareholders' Equity
--------------------
In addition to its common shares, the Company has authorized 10,000,000
shares of one dollar par value preferred stock. No preferred shares have
been issued as of September 30, 1997.
The Company has a stock option plan under which options to purchase common
shares of the Company are granted to certain officers, directors and key
employees. The options are priced equal to or greater than the market price
in effect at the date of grant. Accordingly, no compensation expense is
recognized in connection with this plan. Generally, options granted under
the plan have a term of five years, are half vested after six months of
service and are fully vested after eighteen months of service. As of
September 30, 1997 and 1996 additional options of 94,000 and 15,000,
respectively, were available for future grants under the stock option plan.
The information for 1995 in the table below includes the exercise of 74,700
options priced at $19.00 per share originating from the Company's terminated
1982 Stock Option Plan. The Company granted an option for 25,000 shares at
$7.50 per share to a former officer in March 1995. The option was not
granted under a stock option plan and was priced less than the market price
at date of grant. Compensation of $138 was included in general and
administrative expense at the date of grant. The option was exercised
during 1996. All other reported options originate from the Company's 1993
Stock Incentive Plan.
As required by SFAS 123 "Accounting for Stock-Based Compensation," the
Company has determined the fair value of options granted in 1997 and 1996
and the pro forma effect on net loss and net loss per share as if
compensation expense equal to that fair value had been recorded. The fair
value at date of grant was determined using the Black-Scholes option pricing
model and the assumptions listed in the table below. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, management believes the model used does not necessarily provide a
reliable single measure of the fair value of its stock options. The
estimated fair value of an option is included in pro forma expense as it
vests. Therefore, as required by the transition provisions of SFAS 123,
options granted in 1995 and vesting in 1996 were not valued and were not
included in the pro forma computations.
47
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
8) Shareholders' Equity (continued)
--------------------------------
The following table summarizes information relative to stock options
outstanding:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Options outstanding - beginning of year 218,232 187,732 220,316
Granted 58,000 64,000 125,000
Exercised -- (33,500) (157,584)
----------- ----------- -----------
Options outstanding - end of year 276,232 218,232 187,732
=========== =========== ===========
Options exercisable - end of year 186,232 154,232 137,732
Weighted-average exercise prices:
Options outstanding - beginning of year $12.57 $11.14 $11.40
Granted
Contractual price $9.00 $14.13 $12.96
Fair value price $3.99 $6.24 NA
Exercised NA $7.50 $12.95
Options outstanding - end of year $11.82 $12.57 $11.14
Options exercisable - end of year $12.30 $11.93 $9.98
End of year - outstanding options:
Low exercise price $7.50 $7.50 $7.50
High exercise price $14.63 $14.63 $14.63
Average remaining contractual life (years) 2.81 3.32 3.29
Fair value of options granted:
Net loss - as reported $(12,388) $(12,657) NA
Net loss - pro forma $(12,630) $(12,773) NA
Loss per share - as reported $(0.90) $(0.93) NA
Loss per share - pro forma $(0.92) $(0.93) NA
Assumptions for fair value determination:
Expected life (years) 3.56 3.56 NA
Volatility 0.52 0.52 NA
Interest rate 6.41% 6.30% NA
Dividend yield 0.00% 0.00% NA
</TABLE>
48
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
9) Income Taxes
------------
Income tax expense (benefit) reported in the statements of operations is
comprised entirely of current income taxes paid (received) in Colombia.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
September 30,
1997 1996
----------- -----------
Deferred tax assets, long-term:
Domestic net operating loss carryforwards $44,953 $43,734
Foreign income tax basis of
capitalized assets in excess of
financial reporting basis 1,178 1,432
Income tax basis of real estate in
excess of financial reporting basis 1,991 1,965
Financial reporting basis of accrued
liabilities in excess of tax basis 1,311 1,045
Valuation allowances (48,850) (47,467)
----------- -----------
583 709
----------- -----------
Deferred tax liabilities, long-term:
Foreign income tax depreciation in
excess of financial reporting
depreciation 583 709
----------- -----------
583 709
----------- -----------
Net deferred tax liability $-- $--
=========== ===========
The differences between income tax expense (benefit) from continuing opera-
tions and the amount computed by applying the statutory Federal income tax
rate to loss from continuing operations before income taxes are as follows:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Benefit computed at the effective
statutory rate $(4,273) $(4,499) $(2,365)
Nondeductible interest 2,468 1,425 --
Losses from foreign operations 999 1,919 215
Foreign income tax expense (2) 5 113
Net operating loss for which no benefit
is recognized 806 1,155 2,150
----------- ----------- -----------
$(2) $5 $113
=========== =========== ===========
</TABLE>
49
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
9) Income Taxes (continued)
------------------------
At September 30, 1997, the Company had the following domestic net operating
loss and investment tax credit carryforwards:
<TABLE>
<HEADING>
Alternative
Tax Net Minimum Net Investment
Operating Tax Operating Tax
Year of Expiration Loss Loss Credit
------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Consolidated Carryforwards:
2003 $3,166 --
2004 12,469 $10,917
2005 2,803 --
2006 26,755 22,155
2007 15,807 30,041
2008 25,551 23,919
2009 13,115 14,517
2010 7,616 7,620
2011 3,388 3,393
2012 2,818 2,818
----------- -----------
$113,488 $115,380
=========== ===========
Separate Carryforwards (a)
1998 -- -- $144
1999 -- -- 210
2000 $12,397 $12,397 74
2002 6,101 6,101 --
2003 6,714 10,715 --
----------- ----------- -----------
$25,212 $29,213 $428
=========== =========== ===========
</TABLE>
(a) These separate carryforwards can only be used against future income
and tax liabilities of the company within the consolidated group which
generated the carryforwards.
In conjunction with the sale of the Fletcher refinery in 1993 as described
in Note 12, unrestricted net operating loss carryforwards of $59,658 and
separate net operating loss carryforwards of $23,983 pertaining to the
Fletcher refinery were reattributed to Hondo Oil.
50
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
10) Contingent liabilities
----------------------
The Company is involved in a number of legal and administrative proceedings
incident to the ordinary course of its business. In the opinion of
management, any liability to the Company relative to the various proceedings
will not have a material adverse effect on the Company's operations or
financial condition.
The Company is subject to various environmental laws and regulations of the
United States and Colombia. As is the case with other companies engaged in
similar industries, the Company faces exposure from actual or potential
claims and lawsuits involving environmental matters. These matters may
involve alleged soil and water contamination and air pollution. The
Company's policy is to accrue environmental and clean-up costs when it is
probable that a liability has been incurred and the amount of the liability
is reasonably estimable. However, future environmental related expenditures
cannot be reasonably quantified in many circumstances due to the conjectural
nature of remediation and clean-up cost estimates and methods, the imprecise
and conflicting data regarding the characteristics of various types of
waste, the number of other potentially responsible parties involved, and
changing environmental laws and interpretations. Management believes the
reduced scope of the Company's operations following the sale of the
Company's domestic oil and gas properties and the Fletcher refinery have
significantly reduced the Company's potential exposure to environmental
liability, including potential Superfund claims against Fletcher, which
liability, in the opinion of management, is not material.
51
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
11) Segment information
-------------------
The Company's operations are concentrated in one industry segment, the
exploration for and production of reserves of oil and natural gas. Since
1992, the Company's continuing activities have been limited to exploration
for oil and gas reserves located in Colombia. The Company has no foreign
sales and no export sales in the reported periods, but has begun producing
its reserves in fiscal 1998. The Company currently has two contracts for
the sale of its production in place. These two customers, Ecopetrol and
Termosantander (an affiliate of Amoco Corporation separate from the
Company's partner in Opon), will comprise 100% of the Company's revenue.
Information segregating the Company's continuing domestic and foreign
operations is as follows:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales and operating revenue:
United States $1 $2 $23
Foreign 3 -- --
----------- ----------- -----------
$4 $2 $23
=========== =========== ===========
Operating profit (loss):
United States $(406) $(45) $(140)
Foreign (2,419) (4,511) (326)
----------- ----------- -----------
Operating loss (2,825) (4,556) (466)
Loss on sale of assets -- (6) --
Interest expense (6,222) (5,009) (4,680)
Corporate expense and other (1,743) (1,781) (1,697)
----------- ----------- -----------
Loss from continuing operations
before income taxes $(10,790) $(11,352) $(6,843)
=========== =========== ===========
Identifiable assets:
United States $3,247 $2,973 $5,645
Foreign 41,683 21,567 12,753
----------- ----------- -----------
$44,930 $24,540 $18,398
=========== =========== ===========
</TABLE>
52
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
12) Discontinued Operations
-----------------------
In 1991, the Company adopted plans of disposal for its refining and
marketing and real estate segments. A summary, by segment, of the results of
discontinued operations is as follows:
<TABLE>
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Refining and marketing $(1,200) $(400) $(650)
Real estate (400) (900) (4,300)
Income tax expense (benefit) -- -- --
----------- ----------- -----------
$(1,600) $(1,300) $(4,950)
=========== =========== ===========
Per share $(0.12) $(0.10) $(0.37)
=========== =========== ===========
</TABLE>
In September 1993, the Company executed an agreement for the sale of its
Fletcher refinery and its asphalt terminal in Hilo, Hawaii. These assets
represented the material portion of the Company's refining and marketing
segment. Loss provisions pertaining to the refining and marketing segment of
$1,200, $400 and $650 have been required in 1997, 1996 and 1995 for reasons
described below.
The agreement for the sale of Fletcher included a provision allowing the
Company to share in the proceeds from the sale of certain components of the
refinery equipment which the buyer planned to sell. Based on estimates of a
broker of used refinery equipment, the Company recorded $1,000 as the
estimated realizable value at the time of the transaction. The buyer and
the Company have not succeeded in selling this equipment. In September
1994, the Company reduced the carrying value of the receivable by $600 on
the basis of an offer from the buyer for the Company's share of equipment
sale proceeds. In September 1996, the Company wrote off the remaining
receivable of $400 as uncollectible.
53
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
12) Discontinued Operations (continued)
-----------------------------------
In the agreement for the sale of the Fletcher refinery, the Company
indemnified the buyer as to liabilities in excess of $300 for certain
federal and state excise taxes arising from periods prior to the sale.
Fletcher notified the Company in July 1994 that an audit for California
Motor Vehicle Fuels Tax was underway and a preliminary review by then
Fletcher employees indicated that a significant liability might exist. The
Company retained a consultant to evaluate the contingent liability. In
September 1994, the Company accrued $1,400 as a result of the consultant's
evaluation. An additional $650 was accrued in September 1995, primarily
because of increases in the estimated amounts of penalties and interest
which could 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 reducing the taxes and penalties due to $5,740.
Assessed amounts are subject to a process of appeal and further adjustment,
which remedies are still being pursued. 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 accrued an additional
$1,200 in September 1997. The Company has accrued its best estimate of the
ultimate liability and believes this is sufficient to provide for the amount
that will ultimately be paid based on the information available.
In 1989, the Company permanently suspended operations at its Newhall
refinery because of expectations of continued operating losses. The Company
reclassified the cost of Newhall's dismantled properties to the real estate
segment. All costs incurred subsequent to 1989 have been charged against
previously established loss provisions. In 1993, the Company suspended
execution of a development plan for the property, now referred to as Valley
Gateway, which included dismantling the refinery, effecting environmental
remediation of the land and further developing the land to a condition where
it could be sold as land ready for construction. This decision was made as
a result of continued declines in the local real estate market and the
Company's limited cash resources. Management believed that a sale of the
property in its present condition with existing entitlements was the best
course of action. The Company has conducted an environmental assessment of
the refinery site and a remediation plan for the site has been submitted to
the Regional Water Quality Control Board and has received staff approval.
The Company estimates that $2.0 million would be incurred in executing the
approved remediation plan; however, the Company expects to sell the property
without incurring these costs by reducing the purchase price. The Company's
estimate of the net realizable value of this property has been reduced by
estimated remediation costs in determining the carrying value of the
property and therefore the remediation costs will not affect future results
of operations.
In addition to the Valley Gateway property, the Company owns the 11 acre Via
Verde Bluffs property, carried at $2,580 and $2,548 at September 30, 1997
and 1996, respectively. Both properties have been listed with brokers since
1994.
54
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
12) Discontinued Operations (continued)
-----------------------------------
In 1995 the carrying value of the real estate was reduced by $4,300 as a
result of depressed demand in the local market, sale negotiations, and the
timing of possible sales. In September 1996, the Company revised its
estimate of the realizable value of the Valley Gateway property to zero,
resulting in an additional loss provision of $900. This decision was made
following three years of unsuccessful efforts to sell the property in its
present state and little interest from potential buyers. In September 1997,
the Company provided for an additional carrying costs of $400. Management
believes it can dispose of the property and any associated liabilities for
little or no additional cost.
Changes in the balance of real estate are as follows:
September 30,
1997 1996
----------- -----------
Beginning balance $2,202 $2,978
Development and dismantlement costs -- --
Valuation provisions established (400) (900)
Valuation provisions used 335 124
----------- -----------
Ending balance $2,137 $2,202
=========== ===========
Remaining acres 116 116
=========== ===========
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued segments.
Allocations of interest to the real estate operations were $240, $262 and
$274 for 1997, 1996 and 1995, respectively.
55
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1997
(All Dollar Amounts in Thousands)
The following supplemental information regarding the oil and gas activities of
Hondo Oil is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission ("SEC") and Statement of Financial
Accounting Standards ("SFAS") No. 69, "Disclosures About Oil and Gas Producing
Activities." Estimated Reserve Quantities and the Standardized Measure of
Discounted Future Net Cash Flows Relating to Proved Reserves are presented on
the basis of reserve reports prepared by Netherland, Sewell & Associates.
Information regarding capitalized costs relating to oil and gas producing
activities and costs incurred for property acquisition, exploration, and
development activities are included in Note 3 to the consolidated financial
statements. SEC rules restrict the disclosure of reserves to proved reserves.
Proved reserves are estimated quantities of crude oil, condensate, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved reserves do not
include hydrocarbons the recovery of which is subject to reasonable doubt
because of uncertainty as to economic factors.
During fiscal 1996, three contracts covering the sale of natural gas, the sale
of condensate and natural gas liquids, and the processing of the gas stream
were executed with the Colombian national oil company, Ecopetrol. These
provide for (i) the sale of 100 million cubic feet of natural gas per day for
the life of the concession (July 2015) at the regulated price determined
semi-annually by a formula based upon the average price received by Ecopetrol
for exported fuel oil during the prior two six-month periods; (ii) the sale of
condensate and natural gas liquids at market-related and market-indexed prices;
and (iii) the processing of the gas stream at Ecopetrol's El Centro gas
processing plant for a fee of $0.20 per thousand cubic feet of gas. In March
1997, a contract was executed for the sale of up to 60 million cubic feet of
natural gas per day to an electric generation facility being constructed
adjacent to the concession. The contract has not and will not become effective
until the sellers determine that there are sufficient reserves to supply
natural gas to the purchaser for the life of the contract. An interim one-year
agreement has recently been executed to allow deliveries of available gas.
The Company successfully completed drilling of a second well in Colombia in
September 1995 and commenced construction of a pipeline and related wellhead
facilities for production and transportation of the discovered natural gas and
related liquids. Following execution of the first contract described above,
the Company reported proved reserves for the first time in it's 1996 Annual
Report.
A third well was drilled during fiscal 1997. In April and May 1997, several
mechanical problems were encountered during the completion and testing of the
third well. Further work on the well has been suspended until a plan has been
finalized. Construction of the pipeline and wellhead facilities is complete
and production commenced in December 1997. A fourth well is presently being
drilled and is expected to be completed in the spring of 1998.
56
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1997
(All Dollar Amounts in Thousands)
Assumptions used in determining proved reserves and future net cash flows are:
- - Condensate and natural gas liquid reserves produced in association with the
natural gas are a function of the natural gas reserves.
- - The Company's share of reserves and future net cash flows is 15.444375%,
subject to a royalty of 20% payable to the Colombian government.
- - Prices of $18.64 and $21.31 per barrel of condensate and natural gas liquids
and $1.09 and $1.20 per million British Thermal Units of natural gas are
used in the cash flow projections for September 30, 1997 and 1996,
respectively. These prices were determined in accordance with the terms of
the executed sales contract described above. Both prices are held constant
through the life of the properties. Production costs and capital costs were
projected at current price levels.
- - Pipeline capital and operating costs are not included in the cash flow
projections because these costs will be recovered through pipeline tariffs.
Estimated Reserve Quantities
- ----------------------------
Proved reserves are estimated quantities of crude oil, condensate, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods.
Estimates of oil and gas proved reserves and production, all located in
Colombia, are as follows:
Oil (a) Gas
(MBBLS) (MMCF)
----------- -----------
Proved reserves, October 1, 1995 -- --
Revisions in previous estimates -- --
Extensions, discoveries and purchases 2,337 61,561
----------- -----------
Proved reserves, September 30, 1996 2,337 61,561
Revisions in previous estimates (394) (9,085)
----------- -----------
Proved reserves, September 30, 1997 1,943 52,476
=========== ===========
(a) All condensate and natural gas liquids.
As of September 30, 1997, 671 mbbls and 18,176 mmcf of the above reserves were
classified as proved developed. None of the 1996 reserves were classified as
proved developed.
A new interpretation (by the reserve engineers) of the reservoir limits after
the drilling of the third well was the primary reason for a downward revision
of the proved reserves for fiscal 1997.
57
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1997
(All Dollar Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
- ---------------------------------------------------------------------------
Reserves
- --------
The following table sets forth the computation of the standardized measure of
discounted future cash flows relating to proved reserves. The standardized
measure is the estimated future cash inflows from proved reserves less
estimated future production and development costs, estimated future income
taxes and a discount factor. Future cash inflows represent expected revenues
from the production of proved reserves based on prices in existence at the
fiscal year end. Escalation based on inflation, regulatory changes and supply
and demand are not considered. Estimated future production and development
costs related to future production of reserves are based on historical
information, as available, and estimates drawn from similar gas fields in other
locations. Such costs include, but are not limited to, production, drilling
development wells and installation of production facilities. Inflation and
other anticipatory costs are not considered until the actual cost change takes
effect. Estimated future income tax expenses are computed using tax rates
legislated in Colombia. Consideration is given to the effects of permanent
differences, utilization of net operating loss carryforwards, tax credits and
allowances. A discount rate of 10% is applied to the annual future net cash
flows after income taxes.
The methodology and assumptions used in calculating the standardized measure
are those required by SFAS NO. 69. It is not intended to be representative of
the fair market value of proved reserves. The valuations of revenues and costs
do not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
For the years ended
------------------------
September 30,
1997 1996
----------- -----------
Future cash inflows $96,223 $126,564
Future production costs (40,239) (33,934)
Future development costs (27,028) (36,063)
Future income tax expenses -- (14,843)
----------- -----------
Net future cash flows 28,956 41,724
10% annual discount for estimated timing
of cash flows (12,942) (22,071)
----------- -----------
Standardized measure of discounted
future net cash flows $16,014 $19,653
=========== ===========
58
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1997
(All Dollar Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
- ---------------------------------------------------------------------------
Reserves (continued)
- --------------------
The principal sources of changes in the standardized measure of discounted
future cash flows between September 30, 1997 and 1996 are as follows:
Net change due to changes in prices and production
costs $(12,532)
Net change due to revisions in quantity estimates (5,530)
Previously estimated development costs incurred
during the period 11,056
Changes in estimated future development costs (1,324)
Net change in income taxes 6,991
Accretion of discount 1,965
Other (4,265)
-----------
$(3,639)
===========
Results of Operations for Oil and Gas Producing Activities
- ----------------------------------------------------------
The following table sets forth the results of operations from oil and gas
producing and exploration activities. Income tax expense was computed using
the statutory tax rate for the period adjusted for utilization of net operating
loss carryforwards, permanent differences, tax credits and allowances.
<TABLE>
<HEADING> For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $4 $2 $23
Production costs (2,758) (2,745) (166)
Exploration expenses (27) (1,769) (169)
Depreciation, depletion and amortization -- -- --
----------- ----------- -----------
(2,781) (4,512) (312)
Income tax benefit (1,102) (1,787) (124)
----------- ----------- -----------
Results of operations from exploration
and production activities (excluding
corporate overhead and interest) $(1,679) $(2,725) $(188)
=========== =========== ===========
</TABLE>
59
HONDO OIL & GAS COMPANY
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
September 30, 1997
(All Dollar Amounts in Thousands)
<TABLE>
<HEADING>
Additions
Balance at charged to Balance
beginning costs and at end
of period expenses Write-offs of period
----------- ----------- ----------- -----------
Allowance for doubtful receivables:
<S> <C> <C> <C> <C>
Continuing operations:
1997 $332 $-- $(288) $44
=========== =========== =========== ===========
1996 $399 $4 $(71) $332
=========== =========== =========== ===========
1995 $399 $-- $-- $399
=========== =========== =========== ===========
</TABLE>
60
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: See the Index to Financial Statements
in Item 8 hereof.
(2) Financial Statement Schedules: Page
II. Valuation and Qualifying Accounts 60
Schedules other than those listed above are omitted because they are
not required or not applicable, or because the information required in
a schedule is otherwise included in the Notes to Consolidated
Financial Statements.
(3) Exhibits filed with this report: See Item (c) below.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter
ended September 30, 1997.
(c) Exhibits: See Exhibit Index on page 63 for exhibits required by
Item 601 of Regulation S-K.
(d) Financial statement schedules required by Regulation S-X which
are excluded from the annual report to shareholders by Rule
14a-3 (b)(1): See Item (a)(2) above.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report
on Form 10-K for the year ended September 30, 1997 to be signed on its
behalf by the undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
Date: December 23, 1997 By/s/ Stanton J. Urquhart
------------------------
Stanton J. Urquhart
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K for the year ended September 30, 1997 has
been signed below by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
<TABLE>
<HEADING>
Signature Title Date
- ----------------------- -------------------------- -----------------
<S> <C> <C>
/s/ John J. Hoey President, Chief Executive December 23, 1997
- ----------------------- Officer, and Director
JOHN J. HOEY
/s/ Douglas G. McNair Director December 23, 1997
- -----------------------
DOUGLAS G. MCNAIR
/s/ Nicholas J. Morrell Director December 23, 1997
- -----------------------
Nicholas J. Morrell
/s/ John F. Price Director December 23, 1997
- -----------------------
JOHN F. PRICE
/s/ Robert K. Steer Director December 23, 1997
- -----------------------
ROBERT K. STEER
/s/ R.E. Whitten Director December 23, 1997
- -----------------------
R.E. WHITTEN
/s/ Stanton J. Urquhart Vice President, Principal December 23, 1997
- ----------------------- Financial and Principal
STANTON J. URQUHART Accounting Officer
</TABLE>
62
EXHIBIT INDEX
Exhibit
Number Subject
- ------- ---------------------------------------------------------------------
3.1 Restated Certificate of Incorporation.
3.2 Bylaws, as amended on September 5, 1995.
* 4.1 Documents relating to the $1 million principal amount of California
Pollution Control Authority, 7 1/2% Industrial Development Revenue
Bonds (Newhall Refining Co., Inc. Project) including Installment Sale
Agreement and Indenture of Trust.
* 4.2 Documents relating to the $5 million principal amount of California
Pollution Control Financing Authority Pollution Control Revenue Bonds
(Newhall Refining Co., Inc. Project), including Pollution Control
Facilities Lease Agreement, Indenture, U.S. Small Business
Administration Pollution Control Facility Payment Guaranty and
Reimbursement Agreement.
* 10.1 Note Purchase Agreement and Letter Agreement dated November 28, 1988,
between the Company and Thamesedge, Ltd.
* 10.2 Letter Agreement dated December 18, 1992, between the Company and
Thamesedge, Ltd., amending Note Purchase Agreement (Exhibit 10.1,
above).
* 10.3 Loan Agreement dated December 20, 1991, by and between Hondo Oil & Gas
Company and Lonrho Plc, including the Promissory Notes and Letter
Agreement related thereto.
* 10.4 Letter Agreement dated December 18, 1992, between the Company and
Lonrho Plc, amending Loan Agreement (Exhibit 10.3, above).
* 10.5 Net Profits Share Agreement dated December 18, 1992, among the
Company, Lonrho Plc, Thamesedge, Ltd.
**10.6 Note Dated April 30, 1993, for $3,000,000, from Via Verde Development
Company to Lonrho Plc; Guaranty of the Company (incorporated by
reference to Exhibit 19.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1993, filed with the Securities
and Exchange Commission on May 17, 1993).
**10.7 Note dated June 25, 1993 for $4,000,000 from the Company to Lonrho
Plc; Letter Agreement relating to same (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993, filed with the Securities and
Exchange Commission on December 28, 1993).
**10.8 Letter Agreement dated December 17, 1993, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., Lonrho Plc
and Thamesedge Ltd. and Note Amendments, amending prior loan
agreements and notes (Exhibits 10.1 through 10.7, above),(incorporated
by reference to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1993, filed with the
Securities and Exchange Commission on December 28, 1993).
63
EXHIBIT INDEX (continued)
Exhibit
Number Subject
- ------- ---------------------------------------------------------------------
**10.9 Letter Agreement dated November 10, 1994, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., Lonrho Plc
and Thamesedge Ltd. and Note Amendments (excluding Exhibit E to the
Letter Agreement filed as Exhibit 10.10, below) amending prior loan
agreements and notes (Exhibits 10.1 through 10.8, above),(incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K dated November 29, 1994, filed with the Securities and Exchange
Commission on November 29, 1994).
**10.10 Promissory Note dated October 31, 1994, in the original principal
amount of $5,000,000, from the Company to Lonrho Plc (additional loan
facility),(incorporated by reference to Exhibit 10.2 to the Company's
Report on Form 8-K dated November 29, 1994, filed with the Securities
and Exchange Commission on November 29, 1994).
**10.11 Letter Agreement dated December 22, 1995, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., Lonrho Plc
and Thamesedge Ltd. and Note Amendments amending prior loan agreements
and notes (Exhibits 10.1 through 10.10, above),(incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1995, filed with the Securities and
Exchange Commission on December 28, 1995).
**10.12 Letter Agreement dated December 13, 1996, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., and
Thamesedge Ltd. and Note Amendments amending prior loan agreements and
notes (Exhibits 10.1 through 10.11, above), (incorporated by reference
to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
year ended September 30, 1996, filed with the Securities and Exchange
Commission on December 30, 1996).
**10.13 Security Interest Agreement dated as of May 13, 1997 by and between
the Company, Thamesedge Ltd., Folio Trust Company Limited and Folio
Nominees Limited, (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1997, filed with the Securities and Exchange Commission on August 14,
1997).
**10.14 Amended and Restated Revolving Credit Agreement dated as of July 2,
1997 by and between the Company and Thamesedge Ltd., (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997, filed with the Securities and
Exchange Commission on August 14, 1997).
**10.15 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 10.14, above),
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1997, filed with the
Securities and Exchange Commission on August 14, 1997).
**10.16 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 10.14,
above), (incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1997,
filed with the Securities and Exchange Commission on August 14, 1997).
64
EXHIBIT INDEX (continued)
Exhibit
Number Subject
- ------- ---------------------------------------------------------------------
10.17 Letter Agreement dated December 18, 1997, by and among the Company,
Via Verde Development Company, Newhall Refining Co., Inc., and Lonrho
Australian Land & General Property Company Limited and Note
Amendments amending prior loan agreements and notes (Exhibits 10.1
through 10.15, above).
* 10.18 Employee Capital Appreciation Savings Plan, effective January 1, 1985.
* 10.19 Form of Indemnity Agreement between Pauley and its directors and
officers, approved January 27, 1987.
* 10.20 Opon Association Contract (translation) dated July 15, 1987, between
Ecopetrol and Opon Development Company, excluding exhibits and
attachments.
**10.21 Farmout Agreement dated August 9, 1993, among Hondo Magdalena Oil &
Gas Limited, Opon Development Company and Amoco Colombia Petroleum
Company, excluding exhibits (incorporated by reference to Exhibit 19.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993, filed with the Securities and Exchange Commission on
August 16, 1993).
**10.22 New Operating Agreement dated as of August 9, 1993, among Hondo
Magdalena Oil & Gas Limited, Amoco Colombia Petroleum Company, and
Opon Development Company (incorporated by reference to Exhibit 10.15
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993, filed with Securities and Exchange Commission on
December 28, 1993).
**10.23 Stock and Asset Purchase Agreement dated September 15, 1993, between
Signal Oil & Refining Company, Inc. and the Company and Pauley Pacific
Inc., excluding exhibits (incorporated by reference to Exhibit 99.1 to
the Company's Current Report on Form 8- K dated October 12, 1993,
filed with the Securities and Exchange Commission on October 12,
1993).
**10.24 Letter Agreement dated February 2, 1994 between the Company and the
City of Long Beach, excluding exhibits (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1993, filed with the Securities and
Exchange Commission on February 14, 1994).
**10.25 Amendment to Letter Agreement dated November 26, 1996 between the
Company and the City of Long Beach, excluding exhibits, (incorporated
by reference to Exhibit 10.23 to the Company's Annual Report on Form
10-K for the year ended September 30, 1996, filed with the Securities
and Exchange Commission on December 30, 1996).
**10.26 Hondo Oil & Gas Company 1993 Stock Incentive Plan as amended,
excluding exhibits (incorporated by reference to Exhibit A to the
Company's Proxy Statement on Schedule 14A filed with the Securities
and Exchange Commission on February 10, 1997).
65
EXHIBIT INDEX (continued)
Exhibit
Number Subject
- ------- ---------------------------------------------------------------------
**10.27 Funding Agreement for Tier 1 Development Project dated May 5, 1995,
among Hondo Magdalena Oil & Gas Limited, Amoco Colombia Petroleum
Company and Opon Development Company, excluding exhibits (except
exhibit A) (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995,
filed with the Securities and Exchange Commission on July 28, 1995).
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedules.
- --------------------------------------
* These exhibits, previously incorporated by reference to the Company's
reports under file number 1-8979, have now been on file with the Commission
for more than 5 years and are not filed with this Annual Report. The
Company agrees to furnish these documents to the Commission upon request.
** Incorporated by reference
66
RESTATED CERTIFICATE OF INCORPORATION OF
HONDO OIL & GAS COMPANY
Hondo Oil & Gas Company, a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of corporation is Hondo Oil & Gas Company and the name
under which the corporation was originally incorporated is Pauley
Petroleum Inc. The date of filing of its original Certificate of
Incorporation was June 2, 1958.
2. This Restated Certificate of Incorporation only restates and
integrates and does not further amend the provisions of the
Certificate of Incorporation of this corporation as heretofore
amended or supplemented; there is no discrepancy between those
provisions and the provisions of this Restated Certificate of
Incorporation. The restatement of the articles of incorporation
does not contain an amendment of the articles of incorporation that
requires shareholder approval.
3. The text of the Certificate of Incorporation as amended or
supplemented heretofore is hereby restated, without further
amendments or changes, to read as set forth in Exhibit A hereto.
4. This Restated Certificate of Incorporation was duly adopted by the
Board of Directors of the corporation in accordance with Section
245 of the Delaware General Corporation Law.
Dated: November 10, 1994 Hondo Oil & Gas Company
By:/s/ John J. Hoey
--------------------------
John J. Hoey
President and Chief Executive Officer
By:/s/ C.B. McDaniel
---------------------------
C.B. McDaniel
Secretary
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Exhibit A
RESTATED
CERTIFICATE OF INCORPORATION
OF
HONDO OIL & GAS COMPANY
FIRST: The name of the corporation is Hondo Oil & Gas Company.
SECOND: Its principal office in the State of Delaware is located at
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801. The name and address of its resident agent is The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801.
THIRD: The nature of the business, or objects or purposes to be
transacted, promoted or carried on are:
To purchase, or otherwise acquire or invest in, own, mortgage,
pledge, sell, assign, transfer, or otherwise dispose of, in whole
or in part, oil, gas and mineral leases; oil, gas and mineral
concessions, rights or interests granted or created by any
government or any subdivision thereof; oil, gas and mineral rights;
any interest of any type in any of the foregoing, including
expressly interests known as oil payments, gas payments and
production payments; fee lands; mineral interests in lands; mining
claims; applications or options to acquire oil, gas or mineral
leases, concessions or rights; royalty interests; overriding
royalty interests; net profits interests and any other interest in
lands or any rights or interests created by contract or otherwise
which entitle the owner or owners thereof to participate in any way
in, or obtain any advantage from, the production or sale of oil,
gas or other minerals.
To operate, maintain, improve and develop oil, gas or other
mineral properties, to explore for oil, gas or other minerals by
any means, including the drilling of wells for such purposes, and
to purchase and sell oil, gas or other minerals and all products
and by-products thereof.
To enter into, maintain, operate or carry on in any or all of
its branches the business of exploring for, producing, developing,
mining, processing, refining, treating, handling, marketing or
dealing in, petroleum, oil, natural gas, asphalt, bituminous rock
and any and all other mineral and hydrocarbon substances, and any
and all products or by-products which may be derived from such
substances, or any of them; and for all or any of such purposes to
acquire, own, lease, operate or otherwise deal in or with oil or
gas wells, tanks, storage facilities, gathering systems, pipelines,
processing plants, mines, refineries, smelters, crushers, mills,
wharves, watercraft, aircraft, tank cars, communication systems,
machinery, equipment and any and all other kinds and types of real
or personal property that may in anywise be deemed necessary,
convenient or advisable in connection with the carrying on of such
business or any branch thereof.
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To acquire, own, store, transport, buy and sell salt brine and
other mineral solutions and sand and clay for the manufacture and
sale of clay products.
To buy, exchange, contract for, lease, and in any and all
other ways, acquire, take, hold and own, and to deal in, sell,
mortgage, lease or otherwise dispose of real property, and rights
and interests in and to real property, and to manage, operate,
maintain, improve, and develop the same.
To manufacture, purchase or otherwise acquire, invest in, own,
mortgage, pledge, sell, assign and transfer or otherwise dispose
of, trade, deal in and deal with machinery, equipment, pipe,
appliances, building materials, goods, wares and merchandise and
personal property of every class and description.
To acquire, and pay for in cash, stock, or bonds of the
corporation or otherwise, the good will, rights, assets and
property, and to undertake or assume the whole or any part of the
obligations or liabilities, of any person, firm, association or
corporation.
To acquire, hold, use, sell, assign, lease, grant licenses in
respect of, mortgage or otherwise dispose of letters patent of the
United States or any foreign country, patent rights, licenses and
privileges, inventions, improvements and processes, copyrights,
trademarks and trade-names, relating to or useful in connection
with any business of this corporation.
To acquire by purchase, subscription or otherwise, and to
receive, hold, own, guarantee, sell, assign, exchange, transfer,
mortgage, pledge or otherwise dispose of or deal in or with any of
the shares of capital stock, or any voting trust certificates in
respect of shares of capital stock, or any scrip, warrants, rights,
bonds, debentures, notes, trust receipts, obligations, evidences of
indebtedness or interest or other securities or choses in action,
issued or created by any corporations, joint stock companies,
syndicates, associations, firms, trusts or persons, public or
private, or by the government of the United States of America, or
by any foreign government, or by any state, territory, province,
municipality or other political subdivision or by any governmental
agency, and as owner thereof to possess and exercise all the
rights, powers and privileges of ownership, including the right to
execute consents and vote thereon, and to do any and all acts and
things necessary or advisable for the preservation, protection,
improvement and enhancement in value thereof.
To enter into, make and perform contracts of every kind and
description with any person, firm, association, corporation,
municipality, county, state, body politic or government or colony
or dependency thereof.
To borrow or raise moneys for any of the purposes of the
corporation and, from time to time, without limit as to amount, to
draw, make, accept, endorse, execute and issue promissory notes,
drafts, bills of exchange, warrants, bonds, debentures and other
negotiable or non-negotiable instruments and evidences of
indebtedness, and to secure the payment of any thereof and of the
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interest thereon by mortgage upon or pledge, conveyance or
assignment in trust of the whole or any part of the property of the
corporation, whether at the time owned or thereafter acquired, or
by assignment of the proceeds, applicable to the corporation's
interest, in any and all oil, gas and other hydrocarbons or
minerals produced from any properties in which the corporation may
own any interest, or by assignment of any moneys owing or to be
owing to the corporation, or otherwise and to sell, pledge or
otherwise dispose of such bonds or other obligations of the
corporation for its corporate purposes.
To buy, sell or otherwise deal in notes, open accounts, and
other similar evidences of debt, or to loan money and take notes,
open accounts, and other similar evidences of debt as collateral
security therefor.
To purchase, hold, sell and transfer the shares of its own
capital stock; provided it shall not use its funds or property for
the purchase of its own shares of capital stock when such use would
cause any impairment of its capital except as otherwise permitted
by law, and provided further that shares of its own capital stock
belonging to it shall not be voted upon directly or indirectly.
To have one or more offices, to carry on all or any of its
operations and business and, without restriction or limit as to
amount, to purchase or otherwise acquire, hold, own, mortgage,
sell, convey or otherwise dispose of real and personal property of
every class and description in any of the States, Districts,
Territories or Colonies of the United States, and in any and all
foreign countries, subject to the laws of such State, District,
Territory, Colony or Country.
In general, to carry on any other business in connection with
the foregoing, and to have and exercise all the powers conferred by
the laws of Delaware upon corporations formed under the act
hereinafter referred to, and to do any or all of the things
hereinbefore set forth to the same extent as natural persons might
or could do; provided, however, that nothing herein contained shall
be deemed to authorize this corporation to carry on within the
State of Delaware any public utility business.
The objects and purposes specified in the foregoing clauses
shall, except where otherwise expressed, be in nowise limited or
restricted by reference to, or inference from, the terms of any
other clause in this certificate of incorporation, but the objects
and purposes specified in each of the foregoing clauses of this
article shall be regarded as independent objects and purposes.
FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is forty million (40,000,000)
shares, divided into ten million (10,000,000) shares of Preferred Stock,
of the par value of one dollar ($1.00) per share (herein called
"Preferred Stock"), and thirty million (30,000,000) shares of Common
Stock, of the par value of one dollar per share (herein called "Common
Stock").
The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or
restrictions thereof, of the classes of stock of the corporation:
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I.
1. The Preferred Stock may be issued in one or more series.
The designations, powers, preferences and relative, participating,
optional, and other special rights, and the qualifications,
limitations and restrictions thereof, of the Preferred Stock of
each series shall be such as are stated and expressed herein and to
the extent not stated and expressed herein, shall be such as may be
fixed by the Board of Directors (authority so to do being hereby
expressly granted) and stated and expressed in a resolution or
resolutions adopted by the Board of Directors providing for the
issue of Preferred Stock of such series. Such resolution or
resolutions shall (a) specify the series to which such Preferred
Stock shall belong, (b) fix the dividend rate therefor, (c) fix the
amount which the holders of the Preferred Stock of such series
shall be entitled to be paid in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the
corporation, (d) state whether or not the Preferred Stock of such
series shall be redeemable and at what times and under what
conditions and the amount or amounts payable thereon in the event
of redemption; and may, in a manner not inconsistent with the
provisions of this Article Fourth, (i) limit the number of shares
of such series which may be issued, (ii) provide for a sinking fund
for the purchase or redemption or a purchase fund for the purchase
of shares of such series and the terms and provisions governing the
operation of any such fund and the status as to reissuance of
shares of Preferred Stock purchased or otherwise re-acquired or
redeemed or retired through the operation thereof, (iii) grant
voting rights to the holders of shares of such series, (iv) impose
conditions or restrictions upon the creation of indebtedness of the
corporation or upon the issue of additional Preferred Stock or
other capital stock ranking equally therewith or prior thereto as
to dividends or distributions of assets on liquidation, (v) impose
conditions or restrictions upon the payment of dividends upon, or
the making of other distributions to, or the redemption, purchase
or acquisition of shares of capital stock ranking junior to the
Preferred Stock as to dividends or distribution of assets upon
liquidation (referred to in this Article Fourth as "junior stock"),
(vi) grant to the holders of the Preferred Stock of such series the
right to convert such stock into other shares of the corporation,
and (vii) grant such other special rights to the holders of shares
of such series as the directors may determine. The term "fixed for
such series" and similar terms shall mean stated and expressed in
this Article Fourth or in a resolution or resolutions adopted by
the Board of Directors providing for the issue of Preferred Stock
of the series referred to.
2. The holders of the Preferred Stock of the respective
series shall be entitled to receive, when and as declared by the
Board of Directors, out of any funds legally available therefor,
cumulative preferential dividends in cash, at the rate per annum
fixed for such series, and no more, payable quarter-yearly on the
first days of February, May, August and November to stockholders of
record on a date, not exceeding fifty days preceding each such
dividend payment date fixed for the purpose by the Board of
Directors in advance of payment of each particular dividend.
Dividends on shares of the Preferred Stock shall accrue from the
dividend payment date immediately preceding the date of issuance
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(unless the date of issuance shall be a dividend payment date, in
which case they shall accrue from that date), or from such other
date or dates as may be fixed by the Board of Directors for any
series, and shall be cumulative.
3. Except as by law expressly provided and except as may be
provided for any series of Preferred Stock by the resolution of the
Board of Directors providing for the issuance thereof as herein
permitted, the Preferred Stock shall have no right or power to vote
on any question or in any proceeding or to be represented at or to
receive notice of any meeting of stockholders.
4. Preferred Stock redeemed or otherwise retired by the
corporation shall assume the status of authorized but unissued
preferred stock and may thereafter, subject to the provisions of
this Article Fourth and of any restrictions contained in any
resolution of the Board of Directors providing for the issue of any
particular series of Preferred Stock, be reissued in the same
manner as other authorized but unissued Preferred Stock:
II.
Subject to and on the conditions set forth in any resolution
of the Board of Directors providing for the issuance of any
particular series of Preferred Stock, and not otherwise, such
dividends (payable in cash, stock or otherwise) as may be
determined by the Board of Directors may be declared and paid on
the Common Stock from time to time out of any funds legally
available therefor.
The holders of the Common Stock shall be entitled to one vote
for each share held at all meetings of the stockholders of the
corporation.
FIFTH: The minimum amount of capital with which the corporation will
commence business is $1,000.
SIXTH: The names and places of residence of the incorporators are as
follows:
Names Residences
H. K. Webb Wilmington, Delaware
H. C. Broadt Wilmington, Delaware
A. D. Atwell Wilmington, Delaware
SEVENTH: The corporation is to have perpetual existence.
EIGHTH: The private property of the stockholders shall not be subject
to the payment of corporate debts to any extent whatever.
NINTH: No holder of stock of the corporation of any class authorized
hereby or which may hereafter be authorized, or any series of any such
class, shall as such holder and because of his ownership of such stock
have any preemptive or other right to purchase or subscribe for any
shares of stock of the corporation of any class, or of any series of any
class, or for any notes, debentures, bonds, obligations or instruments
which the corporation may issue or sell that are convertible into or
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exchangeable for or entitle the holders thereof to subscribe for or
purchase any shares of stock of the corporation of any class, or of any
series of any class. Any part of the stock of the corporation and any
part of any notes, debentures, bonds, obligations, or instruments
convertible into or carrying options or warrants to purchase stock of
the corporation of any class authorized hereby, or which may hereafter
be authorized, may at any time be issued, optioned for sale and sold or
otherwise disposed of pursuant to resolutions of the Board of Directors
to such persons, upon such terms and conditions and for such lawful
consideration, as may to the Board of Directors seem proper and
advisable, without first offering said stock or such other securities,
or any part thereof, to any holders of stock of the corporation.
TENTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
To make, alter or repeal the by-laws of the corporation.
To authorize and cause to be executed mortgages and liens upon
the real and personal property of the corporation.
To set apart out of any of the funds of the corporation
available for dividends a reserve or reserves for any proper
purpose and to abolish any such reserve in the manner in which it
was created.
By resolution or resolutions passed by a majority of the whole
Board to designate one or more committees, each committee to
consist of two or more of the directors of the corporation, which,
to the extent provided in said resolution or resolutions or in the
by-laws of the corporation, shall have and may exercise the powers
of the Board of Directors in the management of the business and
affairs of the corporation, and may have power to authorize the
seal of the corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name or
names as may be stated in the by-laws of the corporation or as may
be determined from time to time by resolution adopted by the Board
of Directors.
When and as authorized by the affirmative vote of the holders
of a majority of the stock issued and outstanding having voting
power given at a stockholders' meeting duly called for that
purpose, or when authorized by the written consent of the holders
of a majority of the voting stock issued and outstanding, to sell,
lease or exchange all of the property and assets of the
corporation, including its good will and its corporate franchises,
upon such terms and conditions and for such consideration, which
may be in whole or in part shares of stock in, and/or other
securities of, any other corporation or corporations, as its Board
of Directors shall deem expedient and for the best interests of the
corporation.
ELEVENTH: No contract or other transaction between the corporation and
any other corporation shall be affected or invalidated by the fact that
any one or more of the directors of this corporation is or are
interested in or is or are a director or directors or officer or
officers of such other corporation, and no contract or other transaction
between the corporation and any other person or firm shall be affected
or invalidated by the fact that any one or more directors of this
7
corporation is a party to, or are parties to, or interested in, such
contract or transaction; provided that in each such case the nature and
extent of the interest of such director or directors in such contract or
other transaction and/or the fact that such director or directors is or
are a director or directors or officer or officers of such other
corporation is disclosed at the meeting of the Board of Directors at
which such contract or other transaction is authorized.
TWELFTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the
application in a summary way of this corporation or of any creditors or
stockholders thereof, or on the application of any receiver or receivers
appointed for this corporation under the provisions of section 291 of
Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this
corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation,
as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of
the creditors or class of creditors, and/or of the stockholders or class
of stockholders of this corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this corporation
as consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the
court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class
of stockholders, of this corporation, as the case may be, and also on
this corporation.
THIRTEENTH: Meetings of stockholders may be held without the State of
Delaware, if the by-laws so provide. The books of the corporation may
be kept (subject to any provision contained in the statutes) outside of
the State of Delaware at such place or places as may be from time to
time designated by the Board of Directors or in the by-laws of the
corporation.
FOURTEENTH: The corporation reserves the right to amend, alter, change
or repeal any provision contained in this certificate of incorporation,
in the manner now or hereafter prescribed by statute, and all rights
conferred upon stockholders herein are granted subject to this
reservation.
FIFTEENTH: To the fullest extent permitted by the General Corporation
Law of the State of Delaware as the same exists or may hereafter be
amended, a director of the corporation shall not be liable to the
corporation or its stockholders for monetary damages for breach of
fiduciary duty as director. Any repeal or modification of this Article
shall not result in any liability for a director with respect to any
action or omission occurring prior to such repeal or modification.
8
HONDO OIL & GAS COMPANY
BYLAWS
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the
Corporation shall be located in the City of Wilmington, County of New
Castle, State of Delaware, and the name of the resident agent in charge
thereof shall be The Corporation Trust Company.
Section 2. Other Offices. The Corporation may also have
offices at such other places, within or without the State of Delaware,
as the Board of Directors may from time to time appoint or the business
of the Corporation may require.
ARTICLE II
Seal
The corporate seal shall be circular in form and shall
contain the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware".
ARTICLE III
Meeting of Stockholders
Section 1. Place of Meeting. Meetings of the stockholders
for the selection of directors shall be held at such place within the
State of New Mexico, or such other place, as the Board of Directors may
fix, provided that at least ten (10) days' notice be given to
stockholders entitled to vote thereat of the place so fixed. Each other
meeting of the stockholders may be held at such place, either within or
without the State of Delaware, as may be stated in the notice or waiver
of notice of such meeting.
Section 2. Annual Meetings. The Annual Meeting of
Stockholders shall be held on such date and at such time each year as
shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting, at which meeting the stockholders
shall elect directors by a plurality vote and shall transact such other
business as may properly be brought before the meeting.
Section 3. Special Meeting. Special meetings of the
stockholders for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorporation, may be called by the
Chairman of the Board of Directors, the President or by the Board of
Directors (either by written instrument signed by a majority or by
resolution adopted by a vote of the majority), and special meetings
shall be called by the Chairman, the President or the Secretary whenever
stockholder owning a majority of the capital stock issued, outstanding
and entitled to vote so request in writing. Such request shall state
the purpose or purposes of the proposed meeting.
Section 4. Notice. Written or printed notice of every
meeting of stockholders, annual or special, stating the time and place
thereof, and, if a special meeting, the purpose or purposes in general
terms for which the meeting is called shall not less than ten (10) days
1
before such meeting be served upon or mailed to each stockholder
entitled to vote thereat, at his address as it appears upon the stock
records of the Corporation or, if such stockholder shall have filed with
the Secretary of the Corporation a written request that notices intended
for him be mailed to some other address, then to the address designated
in such request.
Notice of the time, place and/or purpose of any meeting of
stockholders may be dispensed with if every stockholder entitled to vote
thereat shall attend either in person or by proxy, or if every absent
stockholder entitled to such notice shall in writing, filed with the
records of the meeting, either before or after the holding thereof,
waive such notice.
SECTION 5. Quorum. Except as otherwise provided by law or
by the Certificate of Incorporation, the presence in person or by proxy
at any meeting of stockholders of the holders of a majority of the
shares of the capital stock of the Corporation issued and outstanding
and entitled to vote thereat, shall be requisite and shall constitute a
quorum. If, however, such majority shall not be present or represented
at any meeting of the stockholders regularly called, the holders of a
majority of the shares present or represented and entitled to vote
thereat shall have power to adjourn the meeting to another time, or to
another time and place, without notice other than announcement of
adjournment at the meeting, and there may be successive adjournment for
like cause and in like manner until the requisite amount of shares
entitled to vote at such meeting shall be represented. At such
adjourned meeting at which the requisite amount of shares entitled to
vote thereat shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified.
SECTION 6. Votes. Proxies. At each meeting of
stockholders, every stockholder shall have one vote for each share of
capital stock entitled to vote which is registered in his name on the
books of the Corporation on the date on which the transfer books were
closed, if closed, or on the date set by the Board of Directors for the
determination of stockholders entitled to vote at such meeting. At each
such meeting every stockholder shall be entitled to vote in person, or
by proxy appointed by an instrument in writing subscribed by such
stockholder and bearing a date not more than three years prior to the
meeting in question, unless said instrument provides for a longer period
during which it is to remain in force.
All elections of directors shall be held by ballot. If the
Chairman of the meeting shall so determine, a vote may be taken upon any
other matter by ballot, and shall be so taken upon the request of any
stockholder entitled to vote on such matter.
At elections of directors, the Chairman shall appoint two
inspectors of election, who shall first take and subscribe an oath or
affirmation faithfully to execute the duties of inspector at such
meeting with strict impartiality and according to the best of their
ability and who shall take charge of the polls and after the balloting
shall make a certificate of the result of the vote taken; but no
director or candidate for the office of director shall be appointed as
such inspector.
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A nomination for the position of director shall be accepted,
and votes cast for a proposed nominee shall be counted, by the
inspectors of election only if the Secretary of the Company has received
at least 30 days prior to the meeting a statement over the signature of
the proposed nominee that he consents to being a nominee and, if
elected, intends to serve as a director. Such statement shall also
contain the number of shares of stock of the Corporation held by the
nominee, occupations and business history for the previous five years,
other directorships, names of business entities in which the proposed
nominee owns a 10 percent or more equity interest, listing of any
criminal convictions including federal or state securities violations,
and all other information required by the federal proxy rules in effect
at the time the proposed nominee submits said statement.
SECTION 7. Organization. The Chairman of the Board, if
there be one, or in his absence the President, or in the absence of both
the Chairman of the Board and the President, a Vice President, shall
call meetings of the stockholders to order and shall act as chairman
thereof. The Secretary of the Corporation, if present, shall act as
secretary of all meetings of stockholders and, in his absence, the
presiding officer may appoint a secretary.
ARTICLE IV
Directors
SECTION 1. Number. The business and property of the
Corporation shall be conducted and managed by a Board of Directors
consisting of not less than three (3) nor more than eleven (11)
directors, none of whom need be a stockholder. The Board of Directors
of the Corporation shall initially be composed of five (5) directors,
but the Board may at any time by resolution increase or decrease the
number of directors to not more than eleven (11) or less than three (3),
and the vacancies resulting from any such increase shall be filled as
provided in Section 3 of this Article IV.
SECTION 2. Term of Office. Each director shall hold office
until the next annual meeting of stockholders and until his successor is
duly elected and qualified or until his earlier death or resignation,
subject to the right of the stockholders at any time to remove any
director or directors as provided in Section 4 of this Article.
SECTION 3. Vacancies. If any vacancy shall occur among the
directors, or if the number of directors shall at any time be increased,
the directors in office, although less than a quorum, by a majority vote
may fill the vacancies or newly created directorships, or any such
vacancies or newly created directorships may be filled by the
stockholders at any meeting.
SECTION 4. Removal by Stockholders. The holders of record
of the capital stock of the Corporation entitled to vote for the
election of directors may in their discretion at any meeting duly called
for the purpose, by a majority vote, remove any director or directors
and elect a new director or directors in place thereof.
SECTION 5. Meetings. Meetings of the Board of Directors
shall be held at such place within or without the State of Delaware, as
may from time to time be fixed by resolution of the Board or as may be
specified in the notice or waiver of notice of any meeting. Meetings
may be held at any time upon the call of the Chairman, the President or
3
the Secretary or any two (2) or the directors by oral, telegraphic, or
written notice, duly served or sent or mailed to each director not less
than two (2) days before such meeting. Meetings may be held at any time
and place without notice if all the directors are present or if those
not present shall, in writing or by telegram, waive notice thereof. A
regular meeting of the Board may be held without notice immediately
following the annual meeting of stockholders at the place where such
annual meeting is held or at such other place, as determined by the
directors. Regular meetings of the Board may also be held without
notice at such time and place as shall from time to time be determined
by resolution of the Board.
SECTION 6. Action Without a Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these bylaws, any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting, if
all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
SECTION 7. Telephone Meetings. Subject to the provisions
of applicable law and these Bylaws regarding notice of meetings, members
of the Board of Directors or members of any committee designated by such
Board may, unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, participate in and hold a meeting of such
Board of Directors or committee by using conference telephone or similar
communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant
to this Section shall constitute presence in person at such meeting,
except when a person participates in the meeting for the express purpose
of objecting to the transaction of any business on the ground that the
meeting was not lawfully called or convened.
SECTION 8. Quorum. A majority of the directors shall
constitute a quorum for the transaction of business. If at any meeting
of the Board there shall be less than a quorum present, a majority of
those present may adjourn the meeting from time to time without notice
other than announcement of the adjournment at the meeting, and at such
adjourned meeting at which a quorum is present any business may be
transacted which might have been transacted at the meeting as originally
noticed.
SECTION 9. Compensation. Directors, as such, shall not
receive any stated compensation for their services, but by resolution of
the Board of Directors, a fixed sum, and expenses of attendance, if any,
may be allowed for attendance at each regular or special meeting
thereof. By resolution of the Board of Directors, outside directors who
do not receive compensation from the Corporation in any other capacity
may receive compensation for their services. Nothing in this Section
shall be construed to preclude a director from serving the Corporation
in any other capacity and receiving compensation therefor.
ARTICLE V
Executive Committee
SECTION 1. Executive Committee. The Board of Directors may
appoint an Executive Committee of three (3) or more members (with such
alternates, if any, as may be deemed desirable), to serve during the
pleasure of the Board, to consist of such directors as the Board may
4
from time to time designate. The Chairman of the Executive Committee
shall be designated by the Board of Directors.
SECTION 2. Procedure. The Executive Committee, by a vote
of a majority of its members, shall fix its own times and places of
meeting, shall determine the number of its members constituting a quorum
for the transaction of business, and shall prescribe its own rules or
procedure; no change in which shall be made save by a majority vote to
its members.
SECTION 3. Powers. During the intervals between the
meetings of the Board of Directors, the Executive Committee shall
possess and may exercise all the powers of the Board in the management
and direction of the business and affairs of the Corporation.
SECTION 4. Reports. The Executive Committee shall keep
regular minutes of its proceedings and all action by the Executive
Committee shall be reported promptly to the Board of Directors. Such
action shall be subject to review by the Board, provided that no rights
of third parties shall be affected by such review.
ARTICLE VI
Other Committee of the Board of Directors
The Board of Directors may designate one or more directors
(with such alternate, if any, as may be deemed desirable) to constitute
another committee or committees for any purpose, which shall have and
may exercise the powers of the Board of Directors in the management of
the business and affairs of the Corporation, and may have power to
authorize the seal of the Corporation to be affixed to all papers which
may require it.
ARTICLE VII
Officers
SECTION 1. Officers. The Board of Directors shall elect,
as executive officers, a Chairman of the Board of Directors (who may
also occupy the office of President), a President, a Secretary and a
Treasurer, one or more Vice Presidents (in the case of each such Vice
President, with such descriptive title, if any, as the Board of
Directors may deem appropriate), and one or more Assistant Secretaries
and Assistant Treasurers. The Chairman of the Board of Directors or the
President may also be the Chief Executive Officer, as designated by the
Board of Directors.
SECTION 2. Vacancies. Any vacancy in any office may be
filled for the unexpired portion of the term by the Board of Directors,
at any regular or special meeting.
SECTION 3. President. The President may be a member of the
Board of Directors and the chief operating officer of the Corporation.
Subject to the directions of the Board of Directors, he shall have any
exercise direct charge of and general supervision over the business and
affairs of the Corporation and shall perform all duties incident to the
office of a president of a corporation, and such other duties as from
time to time may be assigned to him by the Board of Directors.
5
SECTION 4. Chairman of the Board. The Chairman of the
Board, if elected, shall be a member of the Board of Directors and shall
preside at its meetings. He shall keep in close touch with the
administration of the affairs of the Corporation, shall advise and
counsel with the President, and, in his absence, with other executives
of the Corporation, and shall perform such other duties as may from time
to time be assigned to him by the Board of Directors.
SECTION 5. Vice Presidents. Each Vice President, if
elected, shall be and exercise such powers and shall perform such duties
as from time to time may be conferred upon or assigned to him by the
Board of Directors, or as may be delegated to him by the President.
SECTION 6. Secretary. The Secretary shall keep the minutes
of all meetings of the stockholders and of the Board of Directors in
books provided for the purpose; he shall see that all notices are duly
given in accordance with the provisions of law and these bylaws; he
shall be responsible for the custody and safekeeping of the records, and
of the corporate seal or seals of the Corporation; he shall see that the
corporate seal is affixed to all documents, the execution of which, on
behalf of the Corporation, under its seal, is duly authorized and when
the seal is so affixed he may attest the same; he may sign, with the
President or Vice President, certificates of stock of the Corporation;
and in general, he shall perform all duties incident to the office of a
secretary of a corporation, and such other duties as from time to time
may be assigned to him by the Board of Directors.
SECTION 7. Assistant Secretaries. The Assistant
Secretaries shall, in the absence or disability or at the direction of
the Secretary, perform the duties and exercise the powers of the
Secretary and shall perform such other duties as the Board of Directors
shall prescribe.
SECTION 8. Treasurer. The Treasurer shall have charge of
and be responsible for all funds, securities, receipts and disbursements
of the Corporation, and shall deposit, or cause to be deposited, in the
name of the Corporation, all moneys or other valuable effects in such
banks, trust companies or other depositaries as shall, from time to
time, be selected by the Board of Directors; he may indorse for
collection on behalf of the Corporation, checks, notes and other
obligations; he may sign receipts and vouchers for payments made to the
Corporation; singly or jointly with another person as the Board of
Directors may authorize, he may sign checks of the Corporation and pay
out and dispose of the proceeds under the direction of the Board; he
shall render to the President and to the Board of Directors, whenever
requested, an account of the financial condition of the Corporation; he
may sign, with the President or a Vice President, certificates of stock
of the Corporation; and in general, shall perform all the duties
incident to the office of a treasurer of a corporation, and such other
duties as from time to time may be assigned to him by the Board of
Directors.
SECTION 9. Assistant Treasurers. The Assistant Treasurers
shall, in the absence or disability or at the direction of the
Treasurer, perform the duties and exercise the powers of the Treasurer
and shall perform such other duties as the Board of Directors shall
prescribe.
6
SECTION 10. Subordinate Officers. The Board of Directors
may appoint such subordinate officers as it may deem desirable. Each
such officer shall hold office for such period, have such authority and
perform such duties as the Board of Directors may prescribe. The Board
of Directors may, from time to time, authorize any officer to appoint
and remove subordinate officers and to prescribe the powers and duties
thereof.
SECTION 11. Compensation. The Board of Directors shall
have power to fix the compensation of all officers of the Corporation.
It may authorize any officer, upon whom the power of appointing
subordinate officers may have been conferred, to fix the compensation of
such subordinate officers.
SECTION 12. Removal. Any officer of the Corporation may be
removed, with or without cause, by a majority vote of the Board of
Directors at a meeting called for that purpose.
SECTION 13. Bonds. The Board of Directors may require any
officer of the Corporation to give a bond to the Corporation,
conditional upon the faithful performance of his duties, with one or
more sureties and in such amount as may be satisfactory to the Board of
Directors.
ARTICLE VIII
Certificates of Stock
SECTION 1. Form and Execution of Certificates. The
interest of each stockholder of the Corporation shall be evidenced by a
certificate or certificates for shares of stock in such form as the
Board of Directors may from time to time prescribe. The certificates of
stock of each class and series shall be consecutively numbered and
signed by the President or Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation, and may be countersigned and registered in such manner as
the Board of Directors may by resolution prescribe, and shall bear the
corporate seal or a printed or engraved facsimile thereof. Where any
such certificate is signed by a transfer agent or transfer clerk acting
on behalf of the Corporation and by a registrar, the signatures of any
such President, Vice President, Treasurer, Assistant Treasurer,
Secretary or Assistant Secretary may be facsimiles, engraved or printed.
In case any officer or officers who shall have signed, or whose
facsimile signature or signatures shall have been used on, any such
facsimile signature or signature shall have been used on, any such
certificate or certificates shall cease to be such officer or officers,
whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the
Corporation, such certificate or certificates may nevertheless be issued
and delivered by the Corporation as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures shall have been used thereon had not ceased to be such
officer or officers.
SECTION 2. Transfer of Shares. Subject to any applicable
restrictions contained in the Certificate of Incorporation, the shares
of the stock of the Corporation shall be transferred on the books of the
Corporation by the holder thereof in person or by his attorney lawfully
constituted, upon surrender for cancellation of certificates for the
same number of shares, with an assignment and power of transfer endorsed
7
thereon or attached thereto, duly executed, with such proof or guaranty
of the authenticity of the signature as the Corporation or its agents
may reasonably require. The Corporation shall be entitled to treat the
holder of record of any share or shares of stock as the holder in fact
thereof and accordingly shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any
other person whether or not it shall have express or other notice
thereof, save as expressly provided by law or by the Certificate of
Incorporation.
SECTION 3. Closing of Transfer Books. The stock transfer
books of the Corporation may, if deemed expedient by the Board of
Directors, be closed for such length of time not exceeding sixty (60)
days as the Board may determine, preceding the date of any meeting of
stockholders or the date for the payment of any dividend or the date for
the allotment of rights or the date when any issuance, change,
conversion or exchange of capital stock shall go into effect, during
which time no transfer of stock on the books of the Corporation may be
made.
SECTION 4. Dates of Record. If deemed expedient, the Board
of Directors may fix in advance a date for such length of time not
exceeding sixty (60) days as the Board may determine, preceding the date
of any meeting of stockholders, or the date for the payment of any
dividend, or the date for the allotment of rights or the date when any
issuance, change, conversion or exchange or capital stock shall go into
effect, as a record date for the determination of the stockholders
entitled to notice of, and to vote at, any such meeting or entitled to
receive payment of any such dividend or to any such allotment of rights,
or to exercise the rights in respect of any such issuance, change,
conversion or exchange of capital stock, as the case may be, and in such
case only such stockholders as shall be stockholders of record on the
date so fixed shall be entitled to such notice of, and to vote at, such
meeting, or to receive payment of such dividend, or to receive such
allotment of rights, or to exercise such rights, as the case may be,
notwithstanding any transfer of any stock on the books of the
Corporation after any record date fixed as aforesaid; provided, however,
that no record date for the determination of the stockholders entitled
to notice of, and to vote at, any meeting of stockholders shall be fixed
on a date less than ten (10) days before the date of such meeting.
SECTION 5. Lost or Destroyed Certificates. In case of the
loss or destruction of any certificate of stock, a new certificate may
be issued upon the following conditions:
The owner of said certificate shall file with the Secretary
of the Corporation an affidavit giving the facts in relations to the
ownership, and in relation to the loss or destruction of said
certificate, stating its number and the number of shares represented
thereby; such affidavit to be in such form and contain such statements
as shall satisfy the President and Secretary that said certificate has
been accidentally destroyed or lost, and that a new certificate ought to
be issued in lieu thereof. Upon being so satisfied, the President and
Secretary shall require such owner to file with the Secretary a bond in
such penal sum and in such form as they may deem advisable, and with a
surety or sureties approved by them, to indemnify and save harmless the
Corporation from any claim, loss, damage or liability which may be
occasioned by the issuance of a new certificate in lieu thereof. Upon
such bond being so filed a new certificate for the same number of shares
8
shall be issued to the owner of the certificate so lost or destroyed;
and the transfer agent and registrar of stock shall countersign and
register such new certificate upon receipt of a written order signed by
the said President and Secretary, and thereupon the Corporation will
save harmless said transfer agent and registrar in the premise. A Vice
President may act hereunder in the stead of the President, and an
Assistant Secretary in the stead of the Secretary. In case of the
surrender of the original certificate, in lieu of which a new
certificate has been issued, or the surrender of such new certificate,
for cancellation, the bond or indemnity given as a condition of the
issue of such new certificate may be surrendered.
ARTICLE IX
Checks, Notes, Etc.
SECTION 1. Execution of Checks, Notes Etc. All checks and
drafts on the Corporation's bank accounts and all bills of exchange and
promissory notes, and all acceptances, obligations and other instruments
for the payment of money, shall be signed by such officer or officers,
agent or agents, as shall be thereunto authorized from time to time by
the Board of Directors.
SECTION 2. Execution of Contracts, Assignments, Etc. All
contracts, agreements, endorsements, assignments, transfers, stock
powers, or other instruments shall be signed by the President, the
Chairman of the Board, or any Vice President or by such other officer of
officers, agent or agents, as shall be thereunto authorized from time to
time by the Board of Directors; and, when necessary or appropriate,
shall be attested by the Secretary or any Assistant Secretary or the
Treasurer or any Assistant Treasurer.
SECTION 3. Execution of Proxies. The President or the
Chairman of the Board or, in their absence or disability, a Vice
President, may authorize from time to time the signature and issuance of
proxies to vote shares of stock of other companies standing in the name
of the Corporation. All such proxies shall be signed in the name of
the Corporation by the President, the Chairman of the Board or a Vice
President and by the Secretary or an Assistant Secretary.
ARTICLE X
Waivers and Consents
Whenever any notice is required to be given by law, or under
the provisions of the Certificate of Incorporation, or of these bylaws,
such notice may be waived, in writing, signed by the person or persons
entitled to such notice, or by his attorney or attorneys thereunto
authorized, whether before or after the event or action to which such
notice relates.
Whenever the vote of stockholders at a meeting thereof is
required or permitted to be taken in connection with any corporate
action by any provision of law or of the Certificate of Incorporation or
of these bylaws, the meeting and vote of stockholders may be dispensed
with if all the stockholders who would have been entitled to vote upon
the action if such meeting were held shall consent in writing to such
action being taken.
9
Any action required or permitted to be taken at any meeting
of the Board of Directors or of any Committee of the Board of Directors
may be taken without a meeting, if prior to such action a written
consent thereto is signed by all members of the Board of Directors or of
such Committee as the case may be, and such written consent is filed
with the minutes of proceedings of the Board of Directors or of such
Committee.
ARTICLE XI
Dividends
Except as otherwise provided by law or by the Certificate of
Incorporation, the Board of Directors may declare dividends out of the
surplus of the Corporation at such times and in such amounts as it may
from time to time designate.
Before crediting net profits to surplus in any year, there
may be set aside out of the net profits of the Corporation for that year
such sum or sums as the Board of Directors from time to time in its
absolute discretion may deem proper as a reserve fund or funds to meet
contingencies or for equalizing dividends or for repairing or
maintaining any property of the Corporation or for such other purpose as
the Board of Directors shall deem conducive to the interests of the
Corporation.
ARTICLE XII
Indemnification and Insurance
SECTION 1. Right to Indemnification. Each person who was
or is a party or is threatened to be made a party to or is involved in
any action, suit or proceeding, whether civil, criminal, administrative
or investigative (hereinafter a "proceeding"), by reason of the fact
that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action or inaction in an official capacity or in any other capacity
while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
permitted by the laws of Delaware, as the same exist or may hereafter be
amended, against all costs, charges, expenses, liabilities and losses
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that,
except as provided in Section 2 hereof, the Corporation shall indemnify
any such person seeking indemnification in connection with a proceeding
(or part thereof) initiated by such person only if such proceeding (or
part thereof) was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, the payment of such expenses
incurred by a director or officer in his or her capacity as a director
10
or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director of
officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be
indemnified under this Section or otherwise. The Corporation may, by
action of its Board of Directors, provide indemnification to employees
and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
SECTION 2. Right of Claimant to Bring Suit. If a claim
under Section 1 of this Article is not paid in full by the Corporation
within thirty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be
paid also the expense of prosecuting such claim. It shall be a defense
to any such action (other than an action brought to enforce a claim for
expenses incurred in defending and proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has failed to meet a
standard of conduct which makes it permissible under Delaware law for
the Corporation to indemnify the claimant for the amount claimed.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made
a determination prior to the commencement of such action that
indemnification of the claimant is permissible in the circumstances
because he or she has met such standard or conduct, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholder) that the claimant has not
met such standard or conduct, shall be a defense to the action or create
a presumption that the claimant has failed to meet such standard of
conduct.
SECTION 3. Non-Exclusivity or Rights. The right to
indemnification and the payment of expenses incurred in defending a
proceeding in advance of its final disposition conferred in this Article
shall not be exclusive or any other right which any person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
SECTION 4. Insurance. The Corporation may maintain
insurance, at its expense, to protect itself and any director, officer,
employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such
expense, liability or loss, whether or not the Corporation would have
the power to indemnify such person against such expense, liability or
loss under Delaware law.
SECTION 5. Expenses as a Witness. To the extent that any
director, officer, employee or agent of the Corporation is by reason of
such position, or a position with another entity at the request of the
Corporation, a witness in any action, suit or proceeding, he shall be
indemnified against all costs and expenses actually and reasonably
incurred by him or her or on his or her behalf in connection therewith.
11
SECTION 6. Indemnity Agreements. The Corporation may enter
into agreements with any director, officer, employee or agent of the
Corporation providing for indemnification to the full extent permitted
by Delaware law.
ARTICLE XIII
Inspection of Books
The Board of Directors shall determine from time to time
whether, and if allowed, when and under what conditions and regulations,
the accounts and books of the Corporation (except such as may be
specifically open to inspection) or any of them, shall be open to the
inspection of the stockholders and the stockholders' rights in this
respect are and shall be restricted and limited accordingly.
ARTICLE XIV
Fiscal Year
The fiscal year of the Corporation shall end on such dates
as the Board of Directors may by resolution specify and the Board of
Directors may by resolution change such date for future fiscal years at
any time or from time to time.
ARTICLE XV
Amendments
These Bylaws may be altered, amended or repealed and new
Bylaws adopted by the stockholders or by the Board of Directors by a
majority vote at any meeting called for that purpose.
12
[LETTERHEAD OF HONDO OIL & GAS COMPANY APPEARS HERE]
December 18, 1997
London Australian & General Property Company Limited
4 Grosvenor Place
London, England SW1X 7DL
Dear Sirs:
This Agreement is entered into by and among Hondo Oil & Gas
Company, a Delaware corporation ("Hondo"), and its wholly-owned
subsidiaries, Via Verde Development Company, a California corporation
("Via Verde"), and Newhall Refining Co., Inc., a Delaware corporation
("Newhall"), and London Australian & General Property Company Limited
("LAGP"), with reference to:
a) Note Purchase Agreement dated November 28, 1988, between Pauley
Petroleum Inc. (now Hondo) and Thamesedge, Ltd. ("Thamesedge"), as
amended (the "Thamesedge Note Purchase Agreement"), and Note dated
November 30, 1988, for $75,000,000 from Pauley Petroleum Inc. to
Thamesedge (the "Thamesedge Note");
b) Letter agreements dated November 28, 1988 and December 18,
1992, between Hondo and Thamesedge referring to and amending the
Thamesedge Note Purchase Agreement and the Thamesedge Note;
c) Net Profits Share Agreement dated December 18, 1992, by and
among Hondo, Lonrho Plc ("Lonrho") and Thamesedge (the "Net Profits
Share Agreement");
d) Amended and Restated Letter Agreement dated December 20, 1991,
between Hondo and Lonrho (the "Lonrho Loan Agreement") and Notes
dated September 1, 1991, for $10,000,000, dated November 1, 1991,
for $9,000,000, and dated December 20, 1991, for $13,000,000, from
Hondo to Lonrho (the "Lonrho Notes");
e) Letter Agreement dated December 18, 1992, between Hondo and
Lonrho referring to and amending the Lonrho Loan Agreement and the
Lonrho Notes;
f) Note dated April 30, 1993, for $3,000,000 from Via Verde to
Lonrho (the "Via Verde Note"), secured by Deed of Trust dated
recorded as Instrument No. 93-840817 in the Real Property Records
of Los Angeles County, California, (the "Via Verde Mortgage"),
guaranteed by Hondo in Guaranty dated April 30, 1993 (the "Hondo
Guaranty"), and subject to a letter agreement dated April 30, 1993;
1
g) Note dated June 25, 1993, for $4,000,000 from Hondo to Lonrho
(the "Valley Gateway Note"), secured by Deed of Trust dated August
30, 1993, granted by Hondo and Newhall, recorded as Instrument No.
93-2006475 in the Real Property Records of Los Angeles County,
California, (the "Valley Gateway Mortgage");
h) Letter Agreement dated December 17, 1993, between Hondo, Via
Verde, Newhall, and Lonrho and Thamesedge, restructuring the above-
described indebtedness and amending the Thamesedge Note, the Lonrho
Notes, the Via Verde Note and the Valley Gateway Note;
i) Letter Agreement dated November 10, 1994, between Hondo, Via
Verde, Newhall, and Lonrho and Thamesedge, restructuring the above-
described indebtedness and amending the Thamesedge Note, the Lonrho
Notes, the Via Verde Note and the Valley Gateway Note, and creating
a new $5,000,000 loan facility and a Note therefor dated October
31, 1994 (the "Facility Note");
j) Letter Agreement dated December 22, 1995, between Hondo, Via
Verde, Newhall, and Lonrho and Thamesedge, restructuring the above-
described indebtedness and amending the Thamesedge Note, the Lonrho
Notes, the Via Verde Note, the Valley Gateway Note and the Facility
Note; and
k) Letter Agreement dated December 13, 1996, between Hondo, Via
Verde, Newhall, and Lonrho and Thamesedge, restructuring the above-
described indebtedness and amending the Thamesedge Note, the Lonrho
Notes, the Via Verde Note, the Valley Gateway Note and the Facility
Note.
On March 29, 1996, Lonrho assigned to Thamesedge all of its
interest in the above-described agreements and notes. On August 29,
1997, Thamesedge assigned to LAGP all of its interest in the above-
described agreements and notes. The Thamesedge Note, the Lonrho Notes,
the Via Verde Note, the Valley Gateway Note, and the Facility Note, each
as amended, are collectively referred to herein as the "Indebtedness".
Hondo and LAGP have agreed to extend the date of repayment for the
Indebtedness (i) by changing the mandatory redemption date on the
Thamesedge Note from January 1, 1998 to January 15, 1999; and (ii) by
extending the principal repayment date of each of the Lonrho Notes, the
Via Verde Note, the Valley Gateway Note, and the Facility Note from
January 1, 1998 to January 15, 1999.
2
Hondo, Via Verde and Newhall, and Lonrho and LAGP hereby agree, as
follows:
1. This Agreement shall be effective for all purposes on
September 30, 1997.
2. Amendment of Notes. The Thamesedge Note, the Lonrho Notes
(collectively), the Via Verde Note, the Valley Gateway Note,
and the Facility Note, each will be amended as provided,
respectively, in Exhibits A, B, C, D, and E to this Agreement.
Hondo and Via Verde, as applicable, will execute the note
amendments, LAGP will execute them to acknowledge consent
thereto, and the note amendments will be attached to the
original notes held by LAGP.
3. Event of Default. If the borrower does not furnish to the
lender by October 1, 1998 a Netherland, Sewell & Associates
proved reserve report that shows a minimum of 13,000,000 mcf
(25%) increase in the 1997 proved reserve figure of 52,475,554
mcf then the lender has the right to declare all the loans in
default and demand payment.
4. Cross-default Provision. Each of the notes will have a cross-
default provision whereby a default in any other note will
trigger a default in the note in question whereby the effect
will be that all notes of the lender to the borrower will be
in default and the payments of principal and interest will be
accelerated and immediately due and payable.
5. Effect on Other Agreements. Except as amended by the note
amendments, the terms and provisions of the above-described
agreements relating to the Lonrho Indebtedness shall remain in
full force and effect, including, without limiting the
generality of the foregoing, the Letter Agreements dated
December 17, 1993, November 10, 1994, December 22, 1995 and
December 13, 1996. The parties agree to execute such other
and further documents as may be necessary to effect the
understandings of this letter agreement. Nothing in this
letter agreement shall be construed as an agreement on the
part of LAGP to provide extensions of the maturity or other
restructuring of the Indebtedness in the future.
3
Please confirm that the foregoing correctly sets forth the
agreement between us.
Very truly yours,
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
-----------------
John J. Hoey, President
VIA VERDE DEVELOPMENT COMPANY
By: /s/ John J. Hoey
-----------------
John J. Hoey, President
NEWHALL REFINING CO., INC.
By: /s/ John J. Hoey
-----------------
John J. Hoey, President
Confirmed and accepted as of the date of first above written:
LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED
By: /s/ R.E. Whitten
----------------
R.E. Whitten, Director
4
Exhibit A
Thamesedge Note
This Note Amendment dated September 30, 1997 amends that certain
13/% Senior Subordinated Note due 1998 dated November 28, 1988 in the
original principal amount of US$75,000,000, from Pauley Petroleum Inc.
(now Hondo Oil & Gas Company), to Thamesedge, Ltd., as amended by Note
Amendments dated September 30, 1993, September 30, 1994, September 30,
1995 and September 30, 1996 (the "Original Note"), and is attached to
the Original Note. On August 29, 1997, Thamesedge, Ltd. assigned to
London Australian & General Property Company Limited all of its interest
in the Original Note. Effective on September 30, 1997, the Original
Note is amended as follows:
1. Principal Amount. As of September 30, 1997, the principal amount
of the Original Note owing is US$38,576,110.98, and interest
accrued thereon is US$1,157,283.30.
2. Principal Repayment. The mandatory Redemption dates on the
Original Note are amended to January 15, 1999, with the aggregate
principal of the Original Note then outstanding, plus accrued
interest, being payable on such date.
3. Event of Default. If the borrower does not furnish to the lender
by October 1, 1998 a Netherland, Sewell & Associates proved
reserve report that shows a minimum of 13,000,000 mcf (25%)
increase in the 1997 proved reserve figure of 52,475,554 mcf then
the lender has the right to declare all the loans in default and
demand payment.
4. Cross-default Provision. Each of the notes will have a cross-
default provision whereby a default in any other note will
trigger a default in the note in question whereby the effect will
be that all notes of the lender to the borrower will be in
default and the payments of principal and interest will be
accelerated and immediately due and payable.
5. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 18, 1997 by
and among Hondo Oil & Gas Company, Via Verde Development Company,
and Newhall Refining Co., Inc., and London Australian & General
Property Company Limited.
HONDO OIL & GAS COMPANY
By:
----------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note Amendment.
LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED
By:
----------------
Name:
----------------
Title:
----------------
5
Exhibit B
Lonrho Notes
This Note Amendment dated September 30, 1997 amends those certain
Promissory Notes dated September 1, 1991, in the original principal
amount of US$10,000,000, dated November 1, 1991, in the original
principal amount of US$9,000,000, and dated December 20, 1991, in the
original principal amount of US$13,000,000, each from Hondo Oil & Gas
Company, to Lonrho Plc, as amended by Note Amendments dated September
30, 1993, September 30, 1994, September 30, 1995 and September 30, 1996
(the "Original Notes"), and is attached to the Original Notes. On March
29, 1996, Lonrho Plc assigned to Thamesedge, Ltd. all of its interest in
the Original Notes. On August 29, 1997, Thamesedge, Ltd. assigned to
London Australian & General Property Company Limited all of its interest
in the Original Notes. Effective on September 30, 1997, the Original
Notes are amended as follows:
1. Principal Amount. As of September 30, 1997, the principal amount
of the Original Notes owing is US$33,126,684.98, and interest
accrued thereon is US$1,010,363.88.
2. Principal Repayment. The principal of the Original Notes,
together with all accrued interest to such date, is payable on
January 15, 1999.
3. Event of Default. If the borrower does not furnish to the lender
by October 1, 1998 a Netherland, Sewell & Associates proved
reserve report that shows a minimum of 13,000,000 mcf (25%)
increase in the 1997 proved reserve figure of 52,475,554 mcf then
the lender has the right to declare all the loans in default and
demand payment.
4. Cross-default Provision. Each of the notes will have a cross-
default provision whereby a default in any other note will
trigger a default in the note in question whereby the effect will
be that all notes of the lender to the borrower will be in
default and the payments of principal and interest will be
accelerated and immediately due and payable.
5. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 18, 1997 by
and among Hondo Oil & Gas Company, Via Verde Development Company,
and Newhall Refining Co., Inc., and London Australian & General
Property Company Limited.
HONDO OIL & GAS COMPANY
By:
----------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note Amendment.
LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED
By:
----------------
Name:
----------------
Title:
----------------
6
Exhibit C
Via Verde Note
This Note Amendment dated September 30, 1997 amends that certain
Promissory Note dated April 30, 1993, in the original principal amount
of US$3,000,000, from Hondo Oil & Gas Company to Lonrho Plc, as amended
by Note Amendments dated September 30, 1993, September 30, 1994,
September 30, 1995 and September 30, 1996 (the "Original Note"), and is
attached to the Original Note. On March 29, 1996, Lonrho Plc assigned
to Thamesedge, Ltd. all of its interest in the Original Note. On August
29, 1997, Thamesedge, Ltd. assigned to London Australian & General
Property Company Limited all of its interest in the Original Note.
Effective on September 30, 1997, the Original Note is amended as
follows:
1. Principal Amount. As of September 30, 1997, the principal amount
of the Original Note owing is US$3,479,554.45, and interest
accrued thereon is US$106,126.41.
2. Principal Repayment. The principal of this note is payable on
the earlier of (i) the sale of the property securing the loan or
(ii) in ten (10) semi-annual installments, commencing on January
15, 1999.
3. Event of Default. If the borrower does not furnish to the lender
by October 1, 1998 a Netherland, Sewell & Associates proved
reserve report that shows a minimum of 13,000,000 mcf (25%)
increase in the 1997 proved reserve figure of 52,475,554 mcf then
the lender has the right to declare all the loans in default and
demand payment.
4. Cross-default Provision. Each of the notes will have a cross-
default provision whereby a default in any other note will
trigger a default in the note in question whereby the effect will
be that all notes of the lender to the borrower will be in
default and the payments of principal and interest will be
accelerated and immediately due and payable.
5. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 18, 1997 by
and among Hondo Oil & Gas Company, Via Verde Development Company,
and Newhall Refining Co., Inc., and London Australian & General
Property Company Limited.
VIA VERDE DEVELOPMENT COMPANY
By:
----------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note Amendment.
LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED
By:
----------------
Name:
----------------
Title:
----------------
7
Exhibit D
Valley Gateway Note
This Note Amendment dated September 30, 1997 amends that certain
Promissory Note dated June 25, 1993, in the original principal amount of
US$4,000,000, from Hondo Oil & Gas Company to Lonrho Plc, as amended by
Note Amendments dated September 30, 1993, September 30, 1994, September
30, 1995 and September 30, 1996 (the "Original Note"), and is attached
to the Original Note. On March 29, 1996, Lonrho Plc assigned to
Thamesedge, Ltd. all of its interest in the Original Note. On August
29, 1997, Thamesedge, Ltd. assigned to London Australian & General
Property Company Limited all of its interest in the Original Note.
Effective on September 30, 1997, the Original Note is amended as
follows:
1. Principal Amount. As of September 30, 1997, the principal amount
of the Original Note owing is US$4,534,554.22, and interest
accrued thereon is US$138,303.90.
2. Principal Repayment. The principal of this note is payable on
the earlier of (i) the sale of the property securing the loan or
(ii) in ten (10) semi-annual installments, commencing on January
15, 1999.
3. Event of Default. If the borrower does not furnish to the lender
by October 1, 1998 a Netherland, Sewell & Associates proved
reserve report that shows a minimum of 13,000,000 mcf (25%)
increase in the 1997 proved reserve figure of 52,475,554 mcf then
the lender has the right to declare all the loans in default and
demand payment.
4. Cross-default Provision. Each of the notes will have a cross-
default provision whereby a default in any other note will
trigger a default in the note in question whereby the effect will
be that all notes of the lender to the borrower will be in
default and the payments of principal and interest will be
accelerated and immediately due and payable.
5. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 18, 1997 by
and among Hondo Oil & Gas Company, Via Verde Development Company,
and Newhall Refining Co., Inc., and London Australian & General
Property Company Limited.
HONDO OIL & GAS COMPANY
By:
----------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note Amendment.
LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED
By:
----------------
Name:
----------------
Title:
----------------
8
Exhibit E
Facility Note
This Note Amendment dated September 30, 1997 amends that certain
Promissory Note dated October 31, 1994, in the original principal amount
of US$5,000,000, from Hondo Oil & Gas Company to Lonrho Plc, as amended
by Note Amendment dated September 30, 1995 and September 30, 1996 (the
"Original Note"), and is attached to the Original Note. On March 29,
1996, Lonrho Plc assigned to Thamesedge, Ltd. all of its interest in the
Original Note. On August 29, 1997, Thamesedge, Ltd. assigned to London
Australian & General Property Company Limited all of its interest in the
Original Note. Effective on September 30, 1997, the Original Note is
amended as follows:
1. Principal Amount. As of September 30, 1997, the principal amount
of the Original Note owing is US$5,294,075.89, and interest
accrued thereon is US$161,469.33.
2. Principal Repayment. The principal of the Original Note is
payable on January 15, 1999.
3. Event of Default. If the borrower does not furnish to the lender
by October 1, 1998 a Netherland, Sewell & Associates proved
reserve report that shows a minimum of 13,000,000 mcf (25%)
increase in the 1997 proved reserve figure of 52,475,554 mcf then
the lender has the right to declare all the loans in default and
demand payment.
4. Cross-default Provision. Each of the notes will have a cross-
default provision whereby a default in any other note will
trigger a default in the note in question whereby the effect will
be that all notes of the lender to the borrower will be in
default and the payments of principal and interest will be
accelerated and immediately due and payable.
5. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 18, 1997 by
and among Hondo Oil & Gas Company, Via Verde Development Company,
and Newhall Refining Co., Inc., and London Australian & General
Property Company Limited.
HONDO OIL & GAS COMPANY
By:
----------------
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note Amendment.
LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED
By:
----------------
Name:
----------------
Title:
----------------
9
SUBSIDIARIES OF THE COMPANY
State/Country
Name* of Incorporation
----- ----------------
Hondo Magdalena Oil & Gas Limited Jersey/UK
Newhall Refining Co., Inc. Delaware
Pauley Pacific Inc. Delaware
Via Verde Development Company California
* None of the Company's subsidiaries use trade or other names under
which the do business.
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements and related Prospectuses on:
Form S-3, File No. 33-52496, as amended on February 2, 1995
Form S-3, File No. 33-59197
Form S-3, File No. 33-64015
Form S-8, File No. 33-34833
Form S-8, File No. 33-53813
Form S-8, File No. 33-58517
of our report dated November 21, 1997, except for Note 5 as to which the
date is December 18, 1997, with respect to the consolidated financial
statements and schedule of Hondo Oil & Gas Company included in the
Annual Report on Form 10-K for the year ended September 30, 1997.
/s/ ERNST & YOUNG LLP
Denver, Colorado
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from Hondo Oil & Gas Company's Form 10-K for
the period identified below. This information is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<PERIOD-TYPE> YEAR
<CASH> 1,019
<SECURITIES> 0
<RECEIVABLES> 296
<ALLOWANCES> 44
<INVENTORY> 0
<CURRENT-ASSETS> 1,316
<PP&E> 40,612
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,930
<CURRENT-LIABILITIES> 7,150
<BONDS> 102,903
0
0
<COMMON> 13,788
<OTHER-SE> (106,961)
<TOTAL-LIABILITY-AND-EQUITY> 44,930
<SALES> 4
<TOTAL-REVENUES> 29
<CGS> 0
<TOTAL-COSTS> 575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,222
<INCOME-PRETAX> (10,790)
<INCOME-TAX> (2)
<INCOME-CONTINUING> (10,788)
<DISCONTINUED> (1,600)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,388)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
