<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
1-8979
(Commission File Number)
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Ave, Ste. 900, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The registrant has one class of common stock outstanding. As of May 18, 1998,
13,798,424 shares of registrant's $1 par value common stock were outstanding.
1
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED MARCH 31, 1998
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
March 31, 1998 and September 30, 1997 3
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 4
Consolidated Statements of Operations for the six
months ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the six
months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 30
Item 6 Exhibits and Reports on Form 8-K 30
SIGNATURES 31
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
March 31, September 30,
1998 1997
------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $717 $1,019
Accounts receivable 1,435 296
Prepaid expenses and other 127 1
------------- -------------
Total current assets 2,279 1,316
Properties, net (Notes 1 and 3) 40,728 40,612
Net assets of discontinued operations (Note 8) 2,280 2,137
Other assets 1,569 865
------------- -------------
$46,856 $44,930
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $7,751 $3,464
Accrued expenses and other, including $3,868
in 1998 due to a related party (Note 4) 9,866 3,421
Current portion of long-term debt, including
$101,217 in 1998 due to a related 101,497 265
party (Notes 1 and 5)
Funding agreement (Notes 1 and 6) 25,843 --
------------- -------------
Total current liabilities 144,957 7,150
Long-term debt, including $7,433 and $99,943,
respectively, due to a related party
(Notes 1 and 5) 10,113 102,903
Funding agreement (Notes 1 and 6) -- 22,788
Other liabilities, including $3,407 in 1997
due to a related party (Note 7) -- 5,262
------------- -------------
155,070 138,103
Contingencies (Notes 1 and 8)
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000 shares
authorized; shares issued and outstanding:
13,798,424 and 13,788,424, respectively 13,798 13,788
Additional paid-in capital 53,737 53,675
Accumulated deficit (175,749) (160,636)
------------- -------------
(108,214) (93,173)
------------- -------------
$46,856 $44,930
============= =============
The accompanying notes are an integral part of these financial statements.
3
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
March 31,
----------------------------
1998 1997
------------- -------------
REVENUES
Sales and operating revenue $1,721 $1
Other income 4 4
------------- -------------
1,725 5
------------- -------------
COSTS AND EXPENSES
Operating costs 334 390
Depreciation, depletion, and amortization 559 57
Overhead, Colombian operations 501 511
General and administrative 769 598
Costs of exploration and dry holes 8,452 2
Interest on indebtedness including $1,947
and $1,450, respectively, to a
related party 3,010 1,456
------------- -------------
13,625 3,014
------------- -------------
Loss from continuing operations
before income tax expense (11,900) (3,009)
Income tax expense -- --
------------- -------------
Loss from continuing operations (11,900) (3,009)
Loss from discontinued operations (Note 8) -- --
------------- -------------
Net Loss $(11,900) $(3,009)
============= =============
Loss per share:
Continuing operations $(0.87) $(0.22)
Discontinued operations -- --
------------- -------------
Net loss per share $(0.87) $(0.22)
============= =============
Weighted average common shares outstanding 13,798,424 13,781,194
The accompanying notes are an integral part of these financial statements.
4
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the six months ended
March 31,
----------------------------
1998 1997
------------- -------------
REVENUES
Sales and operating revenue $1,864 $1
Other income 8 19
------------- -------------
1,872 20
------------- -------------
COSTS AND EXPENSES
Operating costs 650 335
Depreciation, depletion, and amortization 655 115
Overhead, Colombian operations 976 1,127
General and administrative 1,233 996
Costs of exploration and dry holes 8,482 13
Interest on indebtedness including $3,868
and $2,823, respectively, to a
related party 4,989 2,878
------------- -------------
16,985 5,464
------------- -------------
Loss from continuing operations
before income tax expense (15,113) (5,444)
Income tax expense (benefit) -- (2)
------------- -------------
Loss from continuing operations (15,113) (5,442)
Loss from discontinued operations (Note 8) -- --
------------- -------------
Net Loss $(15,113) $(5,442)
============= =============
Loss per share:
Continuing operations $(1.10) $(0.40)
Discontinued operations -- --
------------- -------------
Net loss per share $(1.10) $(0.40)
============= =============
Weighted average common shares outstanding 13,793,424 13,779,527
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the six months ended
March 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations $(15,113) $(5,444)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Cost of dry holes 7,953 --
Depreciation, depletion and amortization 655 115
Capitalized interest (677) (300)
Accrued interest added to long-term debt 3,407 2,429
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (1,139) 17
Prepaid expenses and other (126) (43)
Other assets (753) (359)
Increase (decrease) in:
Accounts payable 236 160
Accrued expenses and other 6,445 2,187
Funding agreement 2,248 936
Other liabilities (5,190) (1,637)
------------- -------------
Net cash used by continuing operations (2,054) (1,939)
Net cash used by discontinued operations (143) (207)
Income taxes (paid) received -- 2
------------- -------------
Net cash used by operating activities (2,197) (2,144)
------------- -------------
Cash flows from investing activities:
Sale of assets 2 --
Capital expenditures (3,142) (4,994)
------------- -------------
Net cash used by investing activities (3,140) (4,994)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 5,300 7,200
Principal payments on long-term debt (265) (250)
------------- -------------
Net cash provided by financing activities 5,035 6,950
------------- -------------
Net increase (decrease) in cash and cash equivalents (302) (188)
Cash and cash equivalents at the beginning of the period 1,019 374
------------- -------------
Cash and cash equivalents at the end of the period $717 $186
============= =============
</TABLE>Refer to Notes 3, 5 and 6 for descriptions of non-cash transactions.
The accompanying notes are an integral part of these financial statements.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(All Dollar Amounts in Thousands)
1) Going Concern
-------------
The accompanying consolidated financial statements have been prepared on the
basis that the Company is a going-concern. During the quarter ended March
31, 1998, the Company encountered two important events whose consequences
may lead to the Company no longer being a going-concern:
- The Company's fourth well drilled at the Opon project, the Opon No. 14
well, was unsuccessful and did not discover significant quantities of
hydrocarbons.
- The Company began producing its two successful wells in December 1997.
Since production began, greater than expected decreases in the flowing
pressure of both wells have occurred.
The associate parties to the Opon Contract have commenced a new analysis of
the Opon structure, reservoir, and reserves. Initially, the analysis will
focus on the drop in pressure and production of the producing wells and
should be completed by early June. The analysis of the entire Opon Contract
area should be completed by the end of July.
As more fully described in Note 5, the Company's debts to Lonrho Plc include
an event of default which is triggered if the Company does not increase its
reserves by October 1, 1998. The failure of the Opon No. 14 well to find
additional reserves makes it unlikely the Company will be able to avoid the
event of default on October 1, 1998. The failure of the Opon No. 14 well
makes it unlikely that the Company will be able to obtain third-party
financing of its obligations under the Funding Agreement (see Note 6). It is
reasonably possible that the Company will incur the Funding Agreement's 100%
penalty in January 1999. If incurred, management estimates the penalty
would be a minimum of $18,246 (the current principal balance) and would be
charged to income. The declines in pressure and production from the Opon
No. 3 and No. 4 wells cause uncertainty as to whether the Company's reported
proved reserves are accurate. If the results of the analysis described
above lead to the conclusion that the Company's proved reserve estimates
need to be revised downward, it is likely the Company will incur additional
charges to income as it writes down its assets. The magnitude of such
write-downs cannot presently be estimated.
As more fully described under the caption Liquidity and Capital Resources in
Item 2, the Company has made arrangements with its two primary creditors,
Lonrho Plc and Amoco Colombia, to prevent actions on their part which could
lead to the Company's bankruptcy or impairment of its rights under the Opon
Association Contract until at least October 15, 1998. This should allow the
Company to continue as a going concern until the value of the Opon project
has been determined and acted upon. Under the circumstances, there can be
no assurances if, or how long, the Company will remain a going concern.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an independent oil
and gas exploration and development company. The consolidated financial
statements of Hondo Oil include the accounts of all subsidiaries, all of
which are wholly owned. All significant intercompany transactions have been
eliminated. The Hondo Company owns 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.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. There has not been any change in the
Company's significant accounting policies for the periods presented. There
have not been any significant developments or changes in contingent
liabilities and commitments since September 30, 1997. Certain
reclassifications have been made to the prior year's amounts to make them
comparable to the current presentation. These changes had no impact on
previously reported results of operations or shareholders' equity (deficit).
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results for this interim period are not necessarily
indicative of results for the entire year. These statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1997.
(b) Earnings Per Share
------------------
The Company implemented SFAS No. 128, Earnings per Share, beginning with the
quarter ended December 31, 1997. The Company has incurred losses in each of
the periods presented in these financial statements, thereby making the
inclusion of stock options in the basic earnings per share computation
antidilutive. Accordingly, stock options have not been included in the
present, or previously reported, basic earnings per share computations and
restatement of previously reported amounts is not necessary. Diluted per
share amounts are the same as basic per share amounts and, accordingly,
are not presented.
(c) 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.
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(d) Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes". Under Statement 109, the liability method is
used in accounting for income taxes. Deferred tax assets and liabilities
are determined based on reversals of differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted
effective tax rates and laws that will be in effect when the differences are
expected to reverse.
The Company provides for income taxes in interim periods based on estimated
annual effective rates. The Company records current income tax expense to
the extent that federal, state or alternative minimum tax is projected to be
owed. The Company has investment tax credit carryforwards of $428 which
are accounted for by the flow-through method.
3) Properties
----------
Properties, at cost, consist of the following:
March 31, September 30,
1998 1997
------------- -------------
(Unaudited)
Oil and gas properties - Colombia:
Proved $12,019 $11,923
Accumulated depletion, depreciation
and amortization (285) --
------------- -------------
11,734 11,923
------------- -------------
Other properties - Colombia:
Wellsite facilities 4,671 4,689
Pipelines 12,891 12,061
Accumulated depreciation (302) --
Drilling in progress 11,637 11,821
------------- -------------
28,897 28,571
------------- -------------
Other properties - domestic
Other fixed assets 309 323
Accumulated depreciation (212) (205)
------------- -------------
$40,728 $40,612
============= =============
The balances of wellsite facilities and pipelines include non-cash increases
of $184 and $4,042 for the six months ended March 31, 1998 and 1997,
respectively, which were charged to the Funding Agreement (Note 6).
Additions to drilling in progress of $5,800 and $929 for the six months
ended March 31, 1998 and 1997, respectively, were unpaid and
are reflected in the balance of accounts payable.
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(All Dollar Amounts in Thousands)
4) Accrued expenses
----------------
Accrued expenses consist of the following:
March 31, September 30,
1998 1997
------------- -------------
(Unaudited)
Refining and marketing costs (Note 8) $3,197 $3,198
Interest payable to Lonrho Plc (Note 5) 3,868 --
City of Long Beach 1,642 --
Accrued dry hole costs 500 --
Unearned tariff revenue 377 --
Other 282 223
------------- -------------
$9,866 $3,421
============= =============
5) Long-Term Debt
--------------
Long-term debt consists of the following:
March 31, September 30,
1998 1997
------------- -------------
Notes payable to Lonrho Plc (a),(b): (Unaudited)
Note A (c) $3,585 $3,479
Note B (c) 4,673 4,535
Note C (a),(d) 39,734 38,577
Note D (d) 34,137 33,126
Note E (e) 5,455 5,294
Note F (f) 21,066 14,932
Pollution Control Revenue Bonds (g) 1,960 2,225
Industrial Development Revenue Bonds (g) 1,000 1,000
------------- -------------
111,610 103,168
Less current maturities (101,497) (265)
------------- -------------
$10,113 $102,903
============= =============
Maturities are as follows for the years ending March 31:
1999 $101,497
2000 1,947
2001 1,967
2002 1,987
2003 2,007
Thereafter 2,205
-------------
$111,610
=============
10
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(a) 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 on
May 13, 1997. 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 $7,000 of Note C into the
Company's common stock at a rate of $7.70 per share. The debt is
convertible at Lonrho's option at any time prior to maturity. The
option to convert the debt into common stock given in 1997 was
approved at the Company's 1998 annual meeting.
(b) The following terms apply to Notes A through F:
(1) Interest is payable semiannually on October 1 and April 1 at a
rate of 6% (except Note F which is 13%).
(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 $3,868, $3,407, $2,823 and $2,411 has been
added to the outstanding debt as of April 1, 1998, October 1, 1997,
April 1, 1997, and October 1, 1996, respectively. Accrued interest
has not been paid by the issuance of common stock since fiscal 1996.
(4) As consideration for past deferrals of interest and principal
payments due under the terms of the first four notes, the Company
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 F 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.
(e) In October 1994, the Company received $4,800, net of withholding
taxes, from Amoco Colombia under the terms of a Farmout Agreement.
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.
11
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(f) In June 1996, Lonrho Plc agreed to provide the Company a 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. In December 1997, the loan
was again amended to revise the amount available to $27,500. The loan
is secured by free cash flow, as defined, from Hondo Magdalena's
operations. The Company drew $14,600 during fiscal 1997 and has drawn
$5,300 during the six months ended March 31, 1998.
(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.
Cash interest expense, all of which arises from discontinued operations, was
$105 and $113 for the six months ended March 31, 1998 and 1997,
respectively.
6) Funding Agreement
-----------------
In May 1995, the Company's wholly-owned subsidiary, Hondo Magdalena Oil &
Gas Limited ("Hondo Magdalena"), Amoco Colombia Petroleum Company ("Amoco
Colombia"), and Opon Development Company entered into a Funding Agreement
for Tier I Development Project costs (the "Funding Agreement") to finance
costs associated with the construction of a pipeline from the Opon Contract
area, certain wellsite facilities, a geological and geophysical work
program, and for related overheads. The Funding Agreement provides that
Hondo Magdalena may repay the amounts financed up to 365 days after the date
of first production and sales, 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 and sales 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 and sales, an additional penalty of 100% of the
amount then due would be recovered out of Hondo Magdalena's revenues.
12
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(All Dollar Amounts in Thousands)
6) Funding Agreement (continued)
-----------------------------
The associate parties have agreed that the date of first production for
purposes of this agreement is January 30, 1998. Hondo Magdalena was not
able to avail itself of the 125% option. Subsequent to the end of the
365-day option period, Hondo Magdalena's revenues from production of the
first 80 million cubic feet of natural gas and related condensate and
natural gas liquids are pledged to secure its obligations under the Funding
Agreement.
The balance of the Funding Agreement consists of the following:
March 31, September 30,
1998 1997
------------- -------------
(Unaudited)
Outstanding principal $18,246 $17,566
Equity premiums 7,597 5,222
------------- -------------
$25,843 $22,788
============= =============
The Company has accrued equity premiums computed in accordance with the 22%
annualized interest rate option. Equity premiums related to the financed
pipeline and wellsite facilities costs were capitalized until the
commencement of production (December 1997), including $624 and $1,174 for
the six months ended March 31, 1998 and 1997, respectively. The remainder
of the equity premiums accrued, relating to the financed geological and
geophysical work, overheads, and pipeline and wellsite costs subsequent to
the commencement of production, have been expensed.
7) Other Liabilities
-----------------
Other liabilities consist of the following:
March 31, September 30,
1998 1997
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc (Note 5) $-- $3,407
City of Long Beach -- 1,594
Other -- 261
------------- -------------
$-- $5,262
============= =============
13
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(All Dollar Amounts in Thousands)
8) Discontinued Operations
-----------------------
In 1991, the Company adopted plans of disposal for its refining and
marketing and real estate segments. In September 1993, the Company executed
an agreement for the sale of its Fletcher refinery and its asphalt terminal
in Hilo, Hawaii. These assets represented the material portion of the
Company's refining and marketing segment.
Operating losses of discontinued operations for the quarters ended March 31,
1998 and 1997 were $70 and $79, respectively. Corresponding amounts for
the six months ended March 31, 1998 and 1997 were $143 and $191,
respectively, and were charged against loss provisions established in
earlier periods. The Company recorded no loss provisions for discontinued
operations for the six months ended March 31, 1998 and 1997.
The balance of net assets of discontinued operations is comprised solely of
two parcels of land in the real estate segment. Changes in this balance for
the six months ended March 31, 1998 are as follows:
Balance as of September 30, 1997 $2,137
Valuation provisions established --
Valuation provisions used 143
-------------
Balance at March 31, 1998 (Unaudited) $2,280
=============
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 $49 and $62 for
the quarters ended March 31, 1998 and 1997, respectively. Comparable
amounts for the six-month periods were $99 and $125, respectively.
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 trial is scheduled to commence on
August 26, 1998. 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.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL DISCUSSION
Introduction
------------
Hondo Oil & Gas Company is an independent oil and gas company focusing
on international oil and gas exploration and development. The Company's
principal asset is its interest in the Opon Association Contract (the
"Opon Contract"), an exploration concession for an area in the Middle
Magdalena Valley of Colombia, South America. Significant reserves of
natural gas and condensate were shown to exist in the Opon Contract area
by two discovery wells drilled during 1994 and 1995. In accordance with
the terms of the Opon Contract, Empresa Colombiana de Petroleos
("Ecopetrol") declared a portion of the area 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, but were suspended at the end
of March 1998 due to unanticipated drops in pressure and corresponding
production from the Opon No. 3 and No. 4 wells. The Company continues
to supply gas and liquids to Ecopetrol at production levels less than
required under the contracts. The Company is not incurring any
penalties under the contracts. During 1997, the Opon No. 6 well
encountered mechanical problems during completion operations and was
temporarily suspended to evaluate information and develop plans for
further operations on the well.* The associate parties have deferred
commencing production of the Opon No. 6 well until they have completed a
review and analysis of the reservoir and reserves. Drilling of the Opon
No. 14 well began in October 1997 and has been completed and tested.
The Opon No. 14 well did not produce any hydrocarbons and has been
temporarily suspended. The Company will require additional financing to
continue development of the Opon project.*
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
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
15
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 have approached Ecopetrol for
clarification of its 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 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 $30.6 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
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
16
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 recently decided to connect the well in its present
condition and commence production in hopes debris from past mechanical
problems will be evacuated. However, this decision has been suspended
and is under review pending completion of the analysis of the unexpected
drops in pressure and production from the Opon No. 3 and No. 4 wells.
Further workover alternatives will be evaluated after a production
history has been accumulated.*
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. The claims relate to the failure of
perforating guns, problems with the installation of the production
tubing and failure of a downhole safety valve provided by Colombian
branches of U.S. and multinational oil service companies. The claims
are based upon contract and purchase order terms providing for
warranties, adequate supervision of assembly of components and other
work, equipment to be in good working order, and work to be performed in
a workmanlike manner. The disputed charges aggregate approximately $4.9
million, of which Hondo Magdalena's share is approximately $1.5 million.
Consequential losses, depending on how measured, could make the claims
larger. If a settlement is not reached, the next step will be either
non-binding mediation or 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 $26.3 million, of which Hondo Magdalena will bear
30.9%.* The well was planned and intended to confirm the existence of
the La Paz gas and condensate reservoir in the south of the Opon
Contract area.* The well has been drilled to a depth of 12,200 feet.
The associate parties have completed testing of both the La Paz
formation and the deeper Lisama formation. The results were
unsuccessful and the well did not flow any significant hydrocarbons and
has been plugged and temporarily suspended in such a manner that it may
be re-entered in the future. The adverse results of the Opon No. 14
well have caused Amoco Colombia and the other associate parties to
commence a new analysis of the Opon structure, reservoir, and reserves.
The initial part of the analysis will focus on the drop in pressure and
production of the producing wells and should be completed in early
June.* The analysis of the entire Opon Contract Area should be
completed by the end of July.* In the interim, the associate parties
have released the Parker 216 drilling rig and have not budgeted any
additional wells.*
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 the
pipeline is to be recovered through a pipeline tariff, but see the
discussion in the next paragraph concerning the action of the
governmental agency on the associate parties' tariff application.*
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
17
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 pipeline tariff of 60.4 cents per
thousand cubic feet of gas; CREG has responded by rejecting the proposed
tariff, instead approving a tariff of 25.0 cents per thousand cubic feet
of gas. Amoco Colombia has appealed this decision. In the interim, the
associate parties are charging (and through March production, Ecopetrol
has paid) the higher 60.4 cents tariff. The Company is recognizing
revenue using the 25.0 cent rate, the remainder of the cash being
received is recorded as a liability.
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$1.15 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. 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 its electric generation plant at the Opon
Contract area. Under the contract, that is not yet in effect, 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 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 January 1, 1999. The gas
sales price under the interim agreement is equivalent to the price,
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
18
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 associate parties have not supplied gas to Termo
Santander since March 31, 1998. The power plant has not been able to
locate another supply of gas and has temporarily ceased operation. The
associate parties have no liability for failing to supply gas to the
power plant under the interim agreement.
The pipeline and wellsite facilities were completed in June 1997.
Ecopetrol completed the improvements to the El Centro gas processing
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 occurred on December 5, 1997.
The associate parties have submitted invoices to Ecopetrol under the gas
sales agreement for payments under the take-or-pay clause, which
provides that Ecopetrol will pay 200% of the gas price for the Company's
share of 100 million cubic feet per day if the gas pipeline is completed
and ready and the El Centro gas plant improvements have not been
completed. The associate parties believe the pipeline was complete on
June 25, 1997, and submitted invoices accordingly. Ecopetrol has
indicated that it will not pay these invoices. The Company has not
accrued its $5.2 million invoice in its financial statements. The
associate parties are reviewing their legal options to pursue the
collection of these invoices, which could include negotiation of a
settlement and arbitration in a Colombian forum.*
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 for 1998. Pursuant to a Stand-Still Agreement reached
with Amoco Colombia on May 19, 1998, and further described under
Liquidity and Capital Resources, Hondo Magdalena has agreed to approve
the original 1996 and 1997 budgets in their entirety at the next
scheduled operating committee meeting. Hondo Magdalena has paid
invoices from Amoco Colombia, including disputed overhead and has
charged the full overhead amount to expense for 1998. 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 for calendar year 1998, the joint operating agreement among
Amoco Colombia, Hondo Magdalena and ODC provides for arbitration of
disputes.
Hondo Magdalena, on behalf of itself and ODC, has conducted audits of
the joint account with Amoco Colombia for 1994, 1995, and 1996. Attempts
to resolve the audit exceptions for 1994 and 1995 have been ineffective.
In March 1998, the Company submitted audit exceptions of $1.9 million
(gross charges to the joint account) to arbitration. The report for the
1996 audit was submitted to Amoco Colombia in March 1998. The Company
has not accrued in its financial statements any potential recoveries
which may arise from these audits.
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
19
American Stock Exchange Listing
-------------------------------
The Company has been informed of a decision by the American Stock
Exchange to remove the Company's stock from listing on the Exchange.
The Exchange has advised the Company that this action is necessary
because the Company no longer satisfies all the guidelines of the
American Stock Exchange for continued listing. The Company is appealing
this decision and has been advised by the Exchange that during the
pendency of the appeal, which could take several months, the Exchange
will continue the current halt in trading. There can be no assurances
that the appeal will be successful. For additional information, see
Item 5, Market For Registrant's Equity and Related Shareholder Matters
in the Company's 1997 Annual Report on Form 10-K.
Discontinued Operations
-----------------------
Two of the Company's former business segments, refining and marketing
operations and real estate operations were discontinued in 1991. No
change in the status of these discontinued operations from that reported
in the Company's 1997 Annual Report on Form 10-K occurred during the
current period except that Via Verde Development Company, a wholly-owned
subsidiary of the Company, entered into a contract for sale of one of
the Company's two real estate tracts in May 1998. The contract for the
Via Verde property, consisting of 11.5 acres of undeveloped land, is for
$3.13 million and is expected to close in October 1998.
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
20
RESULTS OF OPERATIONS
Quarters Ended March 31, 1998 and 1997
--------------------------------------
Results of continuing operations for the quarter ended March 31, 1998
amounted to a net loss of $11.9 million, or 87 cents per share. The
Company reported a net loss from continuing operations of $3.0 million,
or 22 cents per share, for the quarter ended March 31, 1997. No losses
from discontinued operations were reported for either period.
In the current period, the Company reported a full quarter of operating
revenue for the first time since 1993. The Company's Colombian
operations began delivering gas to Ecopetrol in December 1997. The
Company's share of Opon production amounted to 913,131 mmbtu sold for an
average price of $1.16 per mmbtu and 34,211 barrels of condensate and
natural gas liquids sold for an average price of $12.66 per barrel. In
addition, the Company recorded tariff revenues on 880,689 mcf at an
average price of $28.5 cents per mcf. Due to an unexpected drop in
pressure and related production from the Opon No. 3 and No. 4 wells
during the second quarter, the revenue was considerably lower than
planned and anticipated.
Net operating profit (defined as operating revenue less operating
expenses, depreciation, depletion, and amortization, and overhead,
Colombian operations) improved by $1.3 million between the periods as a
result of the commencement of production this year.
The Company has charged its entire cost of $8.5 million for the
unsuccessful Opon No. 14 well to costs of exploration and dry holes
during the current period. No comparable expense was incurred in the
prior period.
The level of the Company's debts to Lonrho Plc and to Amoco Colombia
under the Funding Agreement have increased by approximately $27.1
million between March 31, 1997 and March 31, 1998. Interest expense
increased by $1.6 million between the quarters because of the increased
debt levels and because interest is no longer being capitalized for the
pipeline construction.
Six months ended March 31, 1998 and 1997
----------------------------------------
Results of continuing operations for the six months ended March 31, 1998
amounted to a net loss of $15.1 million, or $1.10 per share. The
Company reported a net loss from continuing operations of $5.4 million,
or 40 cents per share, for the six months ended March 31, 1997. No
losses from discontinued operations were reported for either period.
Net operating profit (defined as operating revenue less operating
expenses, depreciation, depletion, and amortization, and overhead,
Colombian operations) improved by $1.2 million between the periods as a
result of the commencement of production in December 1997.
The Company has charged its entire cost of $8.5 million for the
unsuccessful Opon No. 14 well to costs of exploration and dry holes
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
21
during the current period. No comparable expense was incurred in the
prior period.
The level of the Company's debts to Lonrho Plc and to Amoco Colombia
under the Funding Agreement have increased by approximately $27.1
million between March 31, 1997 and March 31, 1998. Interest expense
increased by $2.1 million between the six-month periods because of the
increased debt levels and because interest is no longer being
capitalized for the pipeline construction.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 1998, cash inflows of $5.3 million
arose from borrowings from Lonrho Plc. The Company utilized cash of
$2.1 million and $0.1 million to finance continuing and discontinued
operations, respectively, $3.1 million for capital expenditures, and
made scheduled debt repayments of $0.3 million. At March 31, 1998, the
Company had cash balances of $0.7 million.
The Company has had an obligation to Phillips Petroleum arising from a
1992 decision to plug and abandon certain California offshore wells in
which the Company owns a working interest. In December 1997, the
Company entered into an agreement to settle the $1.1 million obligation
(included in accounts payable on the balance sheet) by issuing 178,848
shares of common stock valued at a price of $6.91 per share (the average
closing price for the ten days prior to filing of a registration
statement and provided for) a warrant to purchase 29,808 additional
shares from the Company at a price of $1.00 per share if the price of
the Company's common stock was below $5.415 per share for 20 consecutive
business days. A registration statement on Form S-3 was filed on
January 7, 1998, but has subsequently been withdrawn. This agreement
was terminated in May 1998 by mutual consent, the shares and warrants
were not issued, and the Company has acknowledged in writing its debt to
Phillips of $1.1 million with interest to be accrued at 10% per annum
from April 28, 1998.
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. 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.
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,
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
22
making the total amount of the loan $20.5 million. The interest rate
remains 13%, due semi-annually; as provided in other debts to Thamesedge
and described above, the Company may make interest payments in shares of
its common stock. The loan now matures January 1, 1999. As additional
consideration for the loan, the Company 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 was approved by the Company's
shareholders at its annual meeting in March 1998. As of March 31, 1998,
$19.9 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, bringing
the total commitment under the Revolving Credit Agreement to $27.5
million. Also in December 1997, Lonrho Plc committed to provide $3.2
million to the Company in fiscal 1998 for payment of a contingent
liability arising from the 1993 sale of the Company's Fletcher refinery,
should the contingency become payable in 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. Based on advice of the Company's engineering
consultants given at the time the loan amendments were executed,
management believed the results of drilling the Opon No. 14 well would
be sufficient to meet this requirement.* Since the Opon No. 14 well was
unsuccessful and no additional well can be drilled before October 1,
1998, and because the analysis of the pressure and production declines
in the Opon No. 3 and No. 4 wells could reduce the 1997 proved reserve
figure, the Company is of the opinion that it will not meet the required
reserve increase by October 1, 1998 and it will not be able to avoid an
event of default.* The Company presently owes Lonrho Plc $108.7
million, of which $101.2 million is due by January 15, 1999.
In May 1995, Hondo Magdalena, ODC and Amoco Colombia entered into a
Funding Agreement for Tier I Development Project costs (the "Funding
Agreement") to finance costs associated with the construction of a
pipeline from the Opon Contract area, certain wellsite facilities, a
geological and geophysical work program, and for related overheads.
The Funding Agreement provides that Hondo Magdalena may repay the
amounts financed up to 365 days after the date of first production and
sales, 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 and sales 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. The parties have agreed that
the date of first production for purposes of this agreement is January
30, 1998. The alternative repayment election expired on April 30, 1998,
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
23
unused by the Company. If the financed amounts are not repaid within
365 days after the date of first production and sales, 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 per day and corresponding
condensate and natural gas liquids subsequent to the end of the 365 day
option period are pledged to secure its obligations under the Funding
Agreement. The Company does not presently have commitments or funds to
repay the Funding Agreement within the 365 day period.* If the Company
does not secure financing to repay the Funding Agreement prior to 365
days after the date of first production and sales, it will incur the
100% penalty and will pay the increased amount out of production, as
described above.
The Company and Hondo Magdalena entered into a 150 day Stand-Still
Agreement with Amoco Colombia on May 19, 1998 whereby the Company's
obligation to pay cash calls and invoices is suspended from May 15, 1998
to October 15, 1998. The Company has agreed to assign all of its
revenue, net of processing costs and pipeline operating expenses, to
Amoco Colombia for the months of April, May, June, July and August 1998
and to assign the revenue due to Hondo Magdalena from Ecopetrol's
reimbursement of its share of pipeline and wellsite construction costs.
Hondo Magdalena will receive the net difference from Amoco Colombia at
any time the cumulative revenue exceeds the cumulative expenses during
this 150 day stand-still period. Lonrho, Plc has confirmed to Amoco
Colombia that it will not initiate any action to place the Company or
its subsidiary, Hondo Magdalena, into bankruptcy during this stand-still
period. The Company hopes to use the stand-still period to determine
the reasons for the decline in pressure and production from the
producing wells, and to review the analysis of Amoco Colombia and its
own technical advisor on the reservoir and reserve study currently in
progress.* The stand-still period should also allow the Company to
determine Amoco Colombia's future development plans for the Opon
project.*
Based upon the Company's budget and current information, management
believes existing cash, the Stand-Still Agreement, and available
facilities will be sufficient to finance the Company's known obligations
during fiscal 1998.* However, management believes the Company will need
additional cash to repay obligations to third parties whose debts may
become accelerated.*
If the Company becomes obligated for the drilling of an additional well
in subsequent years, the Company has the option to not participate in
the drilling of wells under the sole risk provisions of the joint
operating agreement among Amoco Colombia, Hondo Magdalena and ODC. These
provisions provide for penalties of 200% to 1000% (depending on the
nature of the well) of the costs attributable to the Company. These sole
risk provisions do not apply to other capital projects if the projects
are approved in accordance with the operating agreement. In
management's view, use of this sole risk election would be a last resort
to preserve the Company's existing interest in the Opon Contract area
because of the substantial penalties that would be incurred by not
participating.
Cash flow from operations which commenced in December 1997 is not
expected to be a significant source of free funds in the near future
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
24
since, pursuant to the Stand-Still Agreement, Amoco Colombia receives
the proceeds from all revenue for the months of April, May, June, July
and August 1998.* Any additional free cash flow (as defined in the
Company's loan agreements with Lonrho Plc) 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.*
However, this alternative is now very difficult in view of the declines
in tariff and throughput rates. Any proceeds realized from a sale of
the pipeline must be applied first to repayment of the Funding
Agreement. Management has discontinued discussions with a number of
financial institutions regarding debt or equity financing of the
Company's future obligations for the Opon project in view of the current
uncertainty about the future of the Opon project.* Additional
deliverability from additional yet to be proposed drilling projects and
adequate production capability through the pipeline infrastructure are
important factors in obtaining third party financing.* In the interim,
the Company must continue to rely on the financial support of Lonrho.*
Recently, in its annual report, Lonrho stated that it intends to sell
its investment in the Company. The Company has relied upon Lonrho to
provide funds for capital investment and operations when such funds have
not been available from third parties. If and when Lonrho sells its
investment in the Company, the Company will need to find another source
of financing, from outside sources or a new controlling shareholder.
The Company cannot predict the effect that a sale of Lonrho's interest
to a third party will have on the Company's ability to secure financing
nor can the Company predict the success of a sale in view of the
unsuccessful results of the Opon No. 14 well and the production declines
from the Opon No. 3 and No. 4 wells. While the Company may 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, since the
success of the Opon No. 14 well was critical to obtaining third party
financing (either debt or equity) and for the decision by the associate
parties to continue the development of the Opon project, there can be no
assurances that the Opon project will be further developed or that Hondo
Oil will be a viable company.*
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
25
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, a oil and
gas exploration concession in Colombia, South America. The Opon project
began producing natural gas and condensate in December 1997 and is the
Company's only source of operating revenue.
Ecopetrol's Inherent Conflict of Interest and Role. Ecopetrol is a
quasi-governmental corporate organization wholly-owned by the Colombian
government, a party to the Opon Contract and a purchaser of natural gas
and liquid hydrocarbons under contracts for the sale of production from
the Opon field. At present, the price of natural gas is set by law
enacted by the legislature of Colombia in 1983. The regulated price of
natural gas could be changed in the future by governmental action. The
participation of Ecopetrol, a government-owned company, in the Opon
project as a producer and as a purchaser, and the power of the
government of Colombia to set the price of natural gas creates an
inherent conflict of interest in Ecopetrol and the government.
Disputes with Ecopetrol, including a recent disagreement about the
obligation to make take-or-pay payments under a gas sales agreement,
must be resolved in non-judicial or judicial proceedings in Colombia.
These conflicts may affect the value of the Company's interest in the
Opon project.
Under the terms of the Opon Contract, an application for commerciality
must be submitted to, and approved by, Ecopetrol before production of
the wells in that area can begin. Ecopetrol cannot prevent the other
contract parties from producing discovered hydrocarbons by disapproving
the application, but Ecopetrol can delay the commencement of production
for up to one year by requiring additional work (which can cost no more
than $1.0 million).
Marketing Of Natural Gas. The Company must secure additional markets
and sales contracts for natural gas in Colombia in order to increase
production and cash flow from the Opon project. This will depend on the
continued development of gas markets and an infrastructure for the
delivery of natural gas in Colombia. Also, other producers of natural
gas in Colombia will compete for the natural gas market and for access
to limited pipeline transportation facilities.
Foreign Operations. The Company's operations in Colombia are subject to
political risks inherent in all foreign operations, including: (i) loss
of revenue, property, and equipment as a result of unforeseen events
such as expropriation, nationalization, war and insurrection, (ii) risks
of increases in taxes and governmental royalties, (iii) renegotiation of
contracts with governmental entities, as well as, (iv) changes in laws
26
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 immediate area has been improved and the associate
parties have taken steps to enhance relations with the local population
through a community relations program. The government continues its
efforts through negotiation and legislation to reduce the problems and
effects of insurgent groups, including regulations containing sanctions
such as impairment or loss of contract rights on companies and
contractors if found to be giving aid to such groups.
Colombia is among several nations whose progress in stemming the
production and transit of illegal drugs is subject to annual
certification by the President of the United States. In February 1998,
the President of the United States announced that Colombia again would
not be certified but was granted a national interest waiver.
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 (there
are presently two producing wells), 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,
including blowouts, cratering, and fires, each of which could result in
damage to, or destruction of, the oil and gas wells, formations or
production facilities or properties. In addition, there are greater
than normal mechanical drilling risks at the Opon Contract area
associated with high pressures in the La Paz and other formations.
These pressures may: cause collapse of the well bore, impede the drill
string while drilling, or cause difficulty in completing a well with
casing and cement. These potential problems were substantially overcome
in the drilling of the Opon No. 3, No. 4, No. 6, and No. 14 wells by the
use of a top-drive drilling rig, heavy-weight and oil-based drilling
fluids and other technical drilling enhancements.
Acreage Relinquishments. The terms of the Opon Contract include
provisions which require the associate parties to relinquish portions of
the concession acreage which have not been found to contain hydrocarbons
in commercial quantities. Management believes the relinquishments of
acreage to date have not deprived the associate parties of significant
undiscovered reserves. Ecopetrol has agreed to extend contractual
relinquishment requirements in light of current exploration activity on
more than one occasion. Nonetheless, there can be no assurances that
Ecopetrol will agree to additional extensions in the future, or that
other factors (including for example: lack of capital, rig availability
or political unrest) will prevent the parties from completing assessment
of unproved acreage before the acreage must be released.
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.
The Colombian governmental agency responsible for setting pipeline
tariffs has set a tariff substantially lower than that requested by the
Company. This action has been appealed, but no prediction can be made
27
about the outcome and the final determination of the tariff. A
reduction of the tariff will impair the Company's ability to recover its
investment in the pipeline through tariff revenue and/or sale of the
pipeline. For additional information, see Other Factors Affecting the
Company's Business in Item 1, Business of the Company's 1997 Annual
Report on Form 10-K.
Highly Leveraged. As of March 31, 1998, the Company owed debts to its
principal shareholder, Lonrho Plc, of $108.7 million, of which $101.2
million is due by January 15, 1999. The terms of this debt require the
Company to increase its September 30, 1997 proved reserves of 52.5
billion cubic of gas by 13.0 billion cubic feet of gas by October 1,
1998 to avoid an acceleration of the maturity of all of the debt to that
date. Acquisition of the additional reserves was dependent on the
results of drilling of the Opon No. 14 well and additional work to be
performed on the Opon No. 6 well, if any. As described above, the
Company does not believe it will discover the reserves necessary to
prevent the debts from being accelerated if Lonrho Plc declares an event
of default. The Company does not have the resources to repay the
indebtedness when it is due. Over the past five years, Lonrho Plc has
demonstrated a willingness to extend the repayment terms of the
Company's debts. However, there can be no assurances that Lonrho Plc
will continue to extend the maturity of the Company's debts in the
future. See Limited Capital and Change of Control and Financial Support
Shareholder, below.
Limited Capital. At March 31, 1998, the Company had a deficiency in net
assets of $108.2 million. The Company's principal asset, its investment
in the Opon project, will require additional capital for further
exploration works (additional exploratory wells and the related surface
facilities to put newly discovered hydrocarbons into production) if the
associate parties elect to proceed with further development of the Opon
project. The Opon project commenced production in December 1997.
However, net revenue from the sale of the first 80 million cubic feet of
natural gas per day and associated condensate (estimated to be in excess
of the Company's net revenue) is pledged to repayment of amounts
advanced by the operator under a Funding Agreement. Cash from
operations after Funding Agreement repayments will not be sufficient to
fund Colombian operating costs and capital expenditures, and U.S.
overhead, during fiscal 1998. The Company has been unable to secure
financing from sources other than its principal shareholder. Management
believed successful completion of the Opon No. 14 well was critical to
obtaining third party financing and such efforts have now been suspended
pending the analysis and review of the Opon project described above.
See Highly Leveraged, above, and Change of Control and Financial Support
Shareholder, below.
Change of Control and Financial Support of Shareholder. 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). Recently, in its annual report, Lonrho stated that it
intends to sell its investment in the Company. The Company has relied
28
upon Lonrho to provide funds for capital investment and operations when
such funds have not been available from third parties, and at March 31,
1998, was indebted to Lonrho in the amount of $108.2 million. If and
when Lonrho sells its investment in the Company, the Company will need
to find another source of financing, from outside sources or a new
controlling shareholder. The Company cannot predict the effect that a
sale of Lonrho's interest to a third party will have on the Company's
ability to secure financing. See Highly Leveraged and Limited Capital,
above.
Limited Revenues and Losses From Operations. The Opon Project commenced
production in December 1997. The Company reported its first full
quarter operating revenue of $1.7 million for the quarter ended March
31, 1998. This is the only full quarter of operating revenue the
Company has had since it sold its domestic operations in 1992. The
Company experienced losses of $12,388,000, $12,657,000 and $11,906,000
for the years ended September 30, 1997, 1996 and 1995, respectively.
The Company anticipates continued losses through fiscal 1998.
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.
29
Part II
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on March 10, 1998,
during which the shareholders of the Company voted on and approved the
following proposals by the votes indicated.
The first proposal was the election of six directors to serve until the
next annual meeting of shareholders or until their respective successors
have been duly elected and qualified. The directors elected and the
votes cast for or withheld were as follows:
NAME FOR WITHHELD
-------------------- ---------- --------
JOHN J. HOEY 12,701,414 627,069
DOUGLAS G. MCNAIR 13,245,714 117,359
NICHOLAS J. MORRELL 13,244,694 118,379
JOHN F. PRICE 13,245,694 117,379
ROBERT K. STEER 13,245,714 117,359
R.E. WHITTEN 13,238,594 124,479
There were no abstentions or broker non-votes recorded in the election
of directors.
The other proposals were (1) approval of an option for London Australian
& General Property Company Limited to convert $7.0 million of the
Company's debt into shares of the Company's common stock; (2) approval
of grant, cancellation and regrant of stock options to certain directors
and employees during fiscal year 1997; and (3) approval of the
appointment of Ernst & Young LLP as independent auditors for fiscal year
1998. These proposals were approved by the following vote:
FOR AGAINST ABSTENTIONS
---------- --------- -----------
LAGP Conversion 7,485,502 4,300,647 15,917
Option Regrants 12,171,229 1,109,058 11,984
Ernst & Young LLP 13,335,426 12,597 6,050
There were no broker non-votes recorded in the above voting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-K are incorporated
by reference. Refer to Exhibit Index below.
(b) One report on Form 8-K was filed during the quarter ended March 31,
1998:
1) Form 8-K filed March 25, 1998 to report that preliminary results
from drilling of the Opon No. 14 well were disappointing.
SIGNATURES
30
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date: May 20, 1998 /s/ Stanton J. Urquhart
----------------- -----------------------
Stanton J. Urquhart
Vice President and Controller
The above officer of the registrant has signed this report as its duly
authorized representative and as its chief accounting officer.
EXHIBIT INDEX
Exhibit
Number Subject
------- --------------------------------------------
10.1 Amendment to Note Purchase Agreement dated December 18,
1997 between the Company and London Australian &
General Property Company Limited, amending Note
Purchase Agreement dated November 28, 1988, excluding
exhibits.
10.2 Amended and Restated $75,000,000 6% Senior Note due
January 15, 1999 dated December 18, 1997 between the
Company and London Australian & General Property
Company Limited, executed in conjunction with the
amendment in Exhibit 10.1.
10.3 Consolidated, Amended and Restated $40,000,000
Promissory Note dated December 18, 1997 between the
Company and London Australian & General Property
Company Limited, which replaces Promissory Notes
previously issued in conjunction with a loan agreement
dated December 20, 1991.
10.4 Amended and Restated $4,500,000 Promissory Note dated
December 18,1997 between Via Verde Development Company
and London Australian & General Property Company
Limited, which replaces a $3,000,000 note dated April
30, 1993.
10.5 First Guaranty Amendment dated December 18, 1997
between the Company and London Australian & General
Property Company Limited, in regard to Exhibit 10.4,
above.
10.6 Amended and Restated $5,500,000 Promissory Note dated
December 18,1997 between Newhall Refining Co., Inc. and
London Australian & General Property Company Limited,
which replaces a $4,000,000 note dated June 25,1993.
31
EXHIBIT INDEX (continued)
Exhibit
Number Subject
------- --------------------------------------------
10.7 Letter agreement dated December 18, 1997 between the
Company and London Australian & General Property
Company Limited, amending a letter agreement dated
December 17, 1993.
10.8 Amended and Restated $7,500,000 Promissory Note dated
December 18, 1997 between the Company and London
Australian & General Property Company Limited which
replaces a $5,000,000 note dated October 31, 1994.
10.9 First Amendment to Security Interest Agreement dated
March 18, 1998 between the Company, Folio Trust Company
Ltd., Folio Nominees Limited and London Australian &
General Property Company Limited, amending
Security Interest Agreement dated May 13, 1997.
10.10 First Amendment to Amended and Restated $35,000,000
Revolving Credit Agreement dated December 18, 1997
between the Company and London Australian & General
Property Company Limited, amending a revolving credit
agreement dated July 2, 1997.
10.11 First Guaranty Amendment dated December 18, 1997
between Hondo Magdalena Oil & Gas Limited and London
Australian & General Property Company Limited amending
a guaranty dated July 2, 1997.
10.12 Stand-Still Letter Agreement dated May 15, 1998 among
the Company (Hondo together with all of its
direct and indirect subsidiaries, which include
without limitation, Hondo Magdalena Oil and Gas
Limited, Newhall Refining Company, Inc., and Via
Verde Development Company), Lonrho Plc, Thamesedge,
Ltd., London Australian & General Property Company
Limited (collectively, together with any of their
respective affiliates, parent corporations and direct
and indirect subsidiaries that assert claims against
Hondo), and Amoco Colombia Petroleum Company.
27 Financial Data Schedule
32
AMENDMENT
TO
NOTE PURCHASE AGREEMENT
Introduction
This Agreement, dated as of December 18, 1997 (this
"Amendment"), is by and between HONDO OIL & GAS COMPANY (formerly known
as Pauley Petroleum Inc.), a Delaware corporation (the "Company"), and
LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED, a United Kingdom
corporation (the "Present Noteholder"), as assignee of Thamesedge, Ltd.
Recitals
The Company and the Present Noteholder (as assignee of
Thamesedge Ltd.), being the sole Noteholder, are parties to a Note
Purchase Agreement dated November 28, 1988, as amended by letter
agreements December 17, 1993, November 10, 1994, December 22, 1995,
December 13, 1996 and December 18, 1997 (collectively, the "Existing
Note Purchase Agreement"), pursuant to which there is outstanding at
December 18, 1997 $39,733,394.28, including $9,233,394.28 of interest
which has been added to principal in accordance with the terms of said
letter agreements. Capitalized terms used and not otherwise defined or
amended in this Amendment shall have the meanings respectively assigned
to them in the Existing Note Purchase Agreement.
The Company has requested that the Noteholder (a) extend the
mandatory redemption date of the Notes from January 1, 1998 (as same has
heretofore been extended pursuant to said letter agreements) to January
15, 1999 and (b) consent to the past and future incurrence of additional
Indebtedness (and extensions to the maturity of such Indebtedness) from
Lonrho Plc and its wholly-owned subsidiaries. The Noteholder is willing
to so extend the mandatory redemption date of the Notes and consent to
the incurrence of such Indebtedness and maturity extensions based on (a)
the Company's representation that by October 1, 1998 the Noteholders
shall have received a report that the Company's proved reserves will
have increased to a minimum of 65,475,554 mcf and the Company's
agreement that if its proved reserves fail to reach such level, an Event
of Default will occur, (b) the Company's agreement to delete the
subordination provisions contained in Section 9 of the Existing Note
Purchase Agreement and (c) the Company's agreement to conform certain
default provisions contained in Section 8.01 of the Existing Note
Purchase Agreement to cross default provisions contained in the
Company's other loan and credit arrangements with the Present
Noteholder.
The Company has requested that the Present Noteholder enter
into this Amendment in order to reflect the foregoing, and the
Noteholder has agreed to do so, all upon the terms and provisions and
subject to the conditions hereinafter set forth.
Agreement
In consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth, the parties hereto hereby agree as
follows:
1
1. Amendment to Existing Note Purchase Agreement. The Existing Note
Purchase Agreement is hereby amended as of the date first written
above as follows:
(A) In Section 1.01 of the Existing Note Purchase Agreement,
the definition of "Agreement" is hereby deleted in its entirety, and the
following new definition is hereby inserted in its place:
""Agreement" shall mean this Note Purchase Agreement dated
November 28, 1988 between the Company and Thamesedge Ltd., together
with all exhibits thereto, as amended by letter agreements December
17, 1993, November 10, 1994, December 22, 1995, December 13, 1996
and December 18, 1997 among the Company and the then sole
Noteholder and the First Amendment, and as the same may be
supplemented, modified, amended or restated from time to time."
(B) In Section 1.01 of the Existing Note Purchase Agreement,
the following new definition of "First Amendment" is hereby inserted in
its proper alphabetical position without the deletion or modification of
any other material:
""First Amendment" shall mean the First Amendment dated as of
December 18, 1997 to Agreement."
(C) In Section 1.01 of the Existing Note Purchase Agreement,
the following definitions of the following existing terms are deleted in
their entirety:
"Bank Agreements"
"Senior Debt"
(D) In Section 1.02 of the Existing Note Purchase Agreement,
the following "Other Definitions" are hereby inserted in their
respective proper alphabetical positions without the deletion or
modification of any other material:
"Term Defined in Section
Act 2.01
Hondo Magdalena 8.01(4)"
(E) Section 2.01 of the Existing Note Purchase Agreement is
amended to delete same in its entirety and to substitute the following
in its place:
"Section 2.01 Issue of Notes. The Company has authorized the
issuance of $75,000,000 in aggregate principal amount of its 6%
Senior Notes due January 15, 1999 (the "Notes", the term "Notes"
including the singular number as well as the plural and the term
"Note" including the plural number as well as the singular). The
Notes shall be substantially in the form of Exhibit A attached to
the First Amendment. The terms and provisions in the Notes shall
constitute, and are hereby expressly made, a part of this
Agreement. The Notes may have notations, legends or endorsements
required by law or usage. Each Note will be dated its date of
authentication.
Notwithstanding anything in the foregoing to the contrary, if,
in the opinion of its Board of Directors, the Company does not have
sufficient cash resources to pay interest on the Notes when due,
2
then the Company may offer to the Noteholder a payment of the
interest in shares of the Company's common stock, valued at (i) the
last reported sales price regular way on the interest due day or,
in case no such reported sale takes place on such day, the average
of the reported closing bid and asked prices regular way on such
day, in either case on the American Stock Exchange or other
principal national securities exchange on which the Company's
common stock is listed or, if not listed on any national securities
exchange, on The Nasdaq Stock Market's National Market System or,
(ii) if (i) is not applicable, the average of the bid and asked
prices at the end of the interest due day in the over-the-counter
market as furnished by any New York Stock Exchange member firm
selected by the Noteholder in good faith for that purpose. In
making this determination, the Company's management will not,
without the consent of the Noteholder, allocate cash resources to
new capital projects not related to the Op\n Association Contract
dated July 15, 1987 between Empressa Colombiana de Petroleos and
Opon Development Company. The Noteholder will then notify the
Company whether it will either accept the payment of interest in
the Company's common stock or add the amount of interest due to the
principal of the Notes. If the Noteholder accepts the payment of
interest in the Company's common stock, the Company will issue the
requisite number of shares to Noteholder within ten business days
after the Company receives notice of acceptance from Noteholder.
The Noteholder recognizes that any shares of the Company's common
stock that it may acquire by the payment of interest in the
Company's common stock will not have been registered under the
Securities Act of 1933, as amended (the "Act"), and may not be sold
in the absence of an effective registration under the Act or an
exemption from the registration requirements of the Act. If the
Noteholder so requests at any time and from time to time after the
date shares of he Company's common stock are issued to the
Noteholder pursuant to this provision, the Company will use its
best efforts to effect registration under the Act of the shares so
issued."
(F) Section 6.05(b) of the Existing Note Purchase Agreement
is amended to delete existing clause (xiii) thereof in its entirety and
to substitute the following therefor:
"(xii) Indebtedness to Lonrho Plc. or to any direct or
indirect wholly-owned Subsidiary of Lonrho Plc., including any
and all deferrals, renewals, extensions, refundings of, or
amendments, modifications or supplements to, any such
Indebtedness."
(G) Section 6.06 of the Existing Agreement is hereby deleted
in its entirety.
(H) Section 6.07 of the Existing Agreement is amended to
substitute the word "the" at the beginning thereof for the word "The"
and to add the following before the new word "the" at the beginning of
Section 6.07:
"Except with respect to transactions with Lonrho Plc. or any
direct or indirect wholly-owned Subsidiary of Lonrho Plc., "
3
(I) Section 8.01 of the Existing Agreement is amended to
delete existing clauses (1) and (4) thereof and to substitute the
following therefor:
"(1) the Company defaults in the payment of interest on
any Note when the same becomes due and payable and the Default
continues for a period of three (3) days;
"(4) the Company, Hondo Magdalena Oil & Gas Limited,
presently a wholly-owned subsidiary of the Company ("Hondo
Magdalena"), and any of their respective subsidiaries shall
(i) fail to pay any Indebtedness (but excluding Indebtedness
evidenced by this Note) of the Company, Hondo Magdalena or
such subsidiary (as the case may be), or any interest or
premium thereon, when due (whether upon scheduled maturity,
required prepayment, acceleration, demand or other notice or
formality of any kind) and such failure shall continue after
the applicable grace period, if any, specified in the
agreement or instrument relating to such Indebtedness or (ii)
fail to perform or observe any term, covenant or condition on
its part to be performed or observed under any agreement or
instrument relating to any such Indebtedness, when required to
be performed or observed, and such failure shall continue
after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such failure to
perform or observe is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness; or any
such Indebtedness shall be declared to be due and payable, or
required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof."
(J) At the conclusion of clause (7) of Section 8.01 of the
Existing Note Purchase Agreement, the following is hereby inserted:
"; or"
(K) In Section 8.01 of the Existing Note Purchase Agreement,
the following new subsection (8) is hereby inserted at the end thereof:
"(8) the Company shall have failed to furnish to Lender,
by October 1, 1998, a proved gas reserve report of Netherland,
Sewell & Associates that shows that a minimum of 13,000,000
mcf (25%) of proved gas reserve exists, which are subject to
the Opon Association Contract in which Hondo Magdalena then
participates, above the proved gas reserve of 52,475,554 mcf
at September 30, 1997;"
(L) Section 9 of the Existing Note Purchase Agreement is
amended to deleted same in its entirety and substitute the following
thereof:
"SECTION 9. CONVERSION
9.01 Right to Convert. Certain of the Notes are
convertible into shares of the Company's Common Stock,
$1.00 par value per share, to the extent indicated on the
face of such Notes and in accordance with the specific
terms of such Notes."
4
(M) In Section 11.01 of the Existing Note Purchase Agreement,
the addresses to which notices and other communications are to be given
are amended to read as follows (with the rest of such Section 11.01
remaining unchanged)
"If to the Company:
Hondo Oil & Gas Company
10375 Richmond Avenue, Suite 900
Houston, Texas 77042
Attention: John J. Hoey
If to you:
London Australian & General Property Company Limited
4 Grovesnor Place
London, SW1X 7DL, England
Attention: R. E. Whitten
If to any other Noteholder at such address as such other
Noteholder may designate by notice to the Company."
(N) Section 11.05 of the Existing Note Purchase Agreement is
amended to delete same in its entirety and to substitute the following
in its place:
"Section 1.05 Governing Law. This Agreement and the Notes
shall be governed by the laws of the State of New York (other
than those that would defer to the substantive laws of another
jurisdiction). Without in any way limiting the preceding
choice of law, the parties intend (among other things) to
thereby avail themselves of the benefit of Section 5-1401 of
the General Obligations Law of the State of New York."
1. Acknowledgment of Outstanding Loans. The Company hereby
acknowledges, certifies and agrees that: (a) pursuant to the
Existing Note Purchase Agreement, the Noteholder has made loans to
the Company that are outstanding as of the date of this Amendment
in the aggregate principal amount of $39,733,394.28 (including
interest of $9,233,394.28 which has been added to principal); and
(b) the obligations of the Company to repay those loans (with
interest) to the Noteholder and to perform or otherwise satisfy its
other obligations: (i) remain and shall continue in full force and
effect, both before and after giving effect to this Amendment, (ii)
are not subject to any defense, counterclaim, setoff, right of
recoupment, abatement, reduction or other claim or determination,
and (iii) are and shall continue to be governed by the terms and
provisions of the Existing Note Purchase Agreement as supplemented,
modified and amended by this Amendment.
2. Bringdown of Representations, Etc. As of the date of this
Amendment, both before and after giving effect to the terms and
provisions of this Amendment: (a) the representations and
warranties of the Company set forth in the Existing Note Purchase
Agreement (except Sections 3.11, 3.12 and 3.13) are true and
correct in all material respects with the same effect as though
those representations and warranties had been made on and as of the
date hereof; (b) no Event of Default or Default has occurred and
is continuing; (c) the Board of Directors of the Company has duly
5
authorized the execution and delivery by the Company of the
Existing Note Purchase Agreement and this Amendment; and (d) there
are no actions, suits or proceedings pending or, to the best
knowledge of the undersigned, threatened or contemplated by any
person for the liquidation, dissolution or bankruptcy of the
Company or otherwise threatening its existence or challenging or
calling into question the power or authority of the Company to
execute or deliver the Existing Note Purchase Agreement or this
Amendment or to perform any of its obligations hereunder or
thereunder.
3. Counterparts. This Amendment may be signed in two or more
counterpart copies of the entire document or of signature pages to
the document, each of which may be executed by one or more of the
parties hereto, but all of which, when taken together, shall
constitute a single agreement binding upon all of the parties
hereto.
4. Governing Law, Etc. Sections 11.05 ("Governing Law"), as amended
hereby, 11.06 ("Successors"), 11.07 ("No Adverse Interpretation of
Other Agreements"), 11.08 ("Severability") and 11.10 ("Amendment
and Waiver") of the Existing Note Purchase Agreement are
incorporated herein by reference and shall pertain separately to
this Amendment as well as the Existing Note Purchase Agreement.
5. Agreement to Continue as Amended. The Existing Note Purchase
Agreement, as supplemented, modified and amended by this Amend-
ment, shall remain and continue in full force and effect after the
date hereof.
6. Entire Agreement. This Amendment contains the entire agreement of
the parties and supersedes all other representations, warranties,
agreements and understandings, oral or otherwise, among the parties
with respect to the matters contained in this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective officers
thereunto duly authorized. as of the date first above written.
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
-------------------------------
John J. Hoey; President
LONDON AUSTRALIAN & GENERAL
PROPERTY COMPANY LIMITED
By: /s/ R. E. Whitten
-------------------------------
R.E. Whitten; Director
6
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE LAWS OF ANY STATE OR OF ENGLAND, AND NO TRANSFER HEREOF
MAY BE EFFECTED UNLESS SUCH TRANSFER SHALL BE REGISTERED UNDER OR
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND ANY APPLICABLE LAWS OF ANY STATE OR OF ENGLAND.
No. 1 $75,000,000
HONDO OIL & GAS COMPANY
(FORMERLY PAULEY PETROLEUM INC.)
Amended and Restated 6% Senior Note due January 15, 1999
Hondo Oil & Gas Company (formerly known as Pauley Petroleum Inc.),
a Delaware corporation (the "Company"), promises to pay to London
Australian & General Property Company Limited or registered assigns, the
principal sum of SEVENTY-FIVE MILLION Dollars (or so much as may be
advanced, including the addition of interest to principal, and
outstanding hereunder) on January 15, 1999.
Interest Payment Dates: April 1 and October 1
Record Dates: March 15 and September 15
This Note has been issued by the Company to renew, extend,
consolidate, amend, restate and replace that certain 13-1/2% Senior
Subordinated Note due 1998 (the "Prior Note") (in order to, among other
things, implement an Amendment to the Note Purchase Agreement (as
defined on the next page hereof) pursuant to which the Prior Note was
issued), to evidence all indebtedness and other amounts outstanding
under the Prior Note, and to evidence any further interest that may be
added to principal pursuant to the terms of this Note. All additions to
principal (including the addition of interest to principal) and payments
made pursuant to this Note may be recorded by the Noteholder on its
books and records, and such books and records (or any statement or
certificate of the Noteholder based thereon) shall be conclusive as to
the existence and amounts thereof absent manifest error. Although
issued in substitution for and restatement of the Prior Note, this Note
shall not be deemed to have been issued in payment, satisfaction,
cancellation or novation of any of the Prior Note.
Additional provisions of this Note are set forth on the other side
of this Note.
The portion of principal amount of this Note set forth below
(subject to approval by the Company's stockholders at their 1998 Annual
Meeting) is convertible in accordance with Section 5 of this Note at the
Conversion Price set forth below (subject to adjustment if certain
events set forth in Section 5 of this Note occur after the date hereof):
Conversion Box
--------------
Principal Conversion
Amount Price
$7,000,000 $7.70
Dated: As of December 18, 1997
HONDO OIL & GAS COMPANY
1
By: /s/ John J. Hoey
------------------------------
President
By: /s/ Stanton J. Urquhart
----------------------------
Secretary
[END OF PAGE]
HONDO OIL & GAS COMPANY
(Formerly PAULEY PETROLEUM INC.)
6% Senior Notes Due January 15, 1999
1. Interest. Hondo Oil & Gas Company (formerly Pauley Petroleum
Inc.), a Delaware corporation ("Company"), promises to pay interest on
the principal amount of this Note at the rate per annum shown above
(provided, however, that if the Company's stockholders shall fail to
approve the right of the Holders to convert $7,000,000 principal amount
of the Note at a conversion price of $7.70 per share at their 1998
Annual Meeting, the interest rate applicable to the portion of this Note
that would have otherwise been so convertible shall be 13.5% per annum).
The Company will pay interest semiannually on April 1 and October 1 of
each year, commencing May 1, 1989. Interest on the Notes will accrue
from the most recent date to which interest has been paid or , if no
interest has been paid, from November 4, 1988, in any case to (but
excluding) the applicable interest payment date. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
Notwithstanding anything in the foregoing to the contrary, if, in
the opinion of its Board of Directors, the Company does not have
sufficient cash resources to pay interest on the Notes when due, then
the Company may offer to the Noteholder a payment of the interest in
shares of the Company's common stock, valued at (i) the last reported
sales price regular way on the interest due day or, in case no such
reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way on such day, in either case on
the American Stock Exchange or other principal national securities
exchange on which the Company's common stock is listed or, if not listed
on any national securities exchange, on The Nasdaq Stock Market's
National Market System or, (ii) if (i) is not applicable, the average of
the bid and asked prices at the end of the interest due day in the over-
the-counter market as furnished by any New York Stock Exchange member
firm selected by the Noteholder in good faith for that purpose. In
making this determination, the Company's management will not, without
the consent of the Noteholder, allocate cash resources to new capital
projects not related to the Opon Association Contract dated July 15,
1987 between Empressa Colombiana de Petroleos and Opon Development
Company. The Noteholder will then notify the Company whether it will
either accept the payment of interest in the Company's common stock or
add the amount of interest due to the principal of the Notes. If the
Noteholder accepts the payment of interest in the Company's common
stock, the Company will issue the requisite number of shares to
Noteholder within ten business days after the Company receives notice of
acceptance from Noteholder. The Noteholder recognizes that any shares
of the Company's common stock that it may acquire by the payment of
interest in the Company's common stock will not have been registered
under the Securities Act of 1933, as amended (the "Act"), and may not be
2
sold in the absence of an effective registration under the Act or an
exemption from the registration requirements of the Act. If the
Noteholder so requests at any time and from time to time after the date
shares of he Company's common stock are issued to the Noteholder
pursuant to this provision, the Company will use its best efforts to
effect registration under the Act of the shares so issued.
2. Method of Payment. The Company will pay interest on the Notes
(except defaulted interest) to the persons who are registered Holders of
Notes at the close of business on the record date for the next interest
payment date even though Notes are canceled after the record date and on
or before the interest payment date. Holders must surrender Notes to
the Company to collect principal payments. The Company will pay
principal and interest in money of the United States of America that at
the time of payment is legal tender for payment of public and private
debts, which may include a check payable in such money. It may mail an
interest check to a Holder's registered address.
3. Note Purchase Agreement. The Notes are issued under a Note
Purchase Agreement dated as of November 1, 1988 (as same may be
supplemented, modified, amended or restated from time to time, the "Note
Purchase Agreement") between the Company and Lonrho Plc. The Notes are
subject to all of the terms of the Note Purchase Agreement, and
Noteholders are referred to the Note Purchase Agreement for a statement
of such terms. The Notes are unsecured general obligations of the
Company limited to $75,000,000 in aggregate principal amount.
4. Optional Redemption. The Company at its option may redeem all
the Notes at any time or some of them from time to time on or after
November 1, 1991 at the following redemption prices (expressed in
percentages of principal amount), plus accrued interest to the
redemption date:
If redeemed during the 12-month period beginning November 1:
Year Percentage Year Percentage
---- ---------- ---- ----------
1991 107.714% 1994 101.928%
1992 105.786% 1995 and
1993 103.857% thereafter 100.000%
provided, however, that none of the Notes will be redeemed prior to
November 1, 1993, directly or indirectly from or in anticipation of
funds borrowed by the Company at an effective interest cost to the
Company of less than 13-1/2% per annum.
5. Conversion. Subject to approval by the stockholders of the
Company at the Company's 1998 Annual Meeting of Stockholders, the
Noteholder may, at its option, at any time prior to the payment in full
of this Note, elect to convert up to the principal amount of this Note
set forth in the Conversion Box on page 1 of this Note (or any portion
thereof) into a number of fully paid and non-assessable shares of the
Company's common stock, $1.00 par value per share (the "Common Stock"),
determined by dividing the principal amount to be so converted by the
Conversion Price per share set forth in the Conversion Box on page 1 of
this Note (as adjusted as set forth below if certain events set forth
below occur after the date set forth on page 1 of this Note).
3
Upon any transfer, each Note issued shall reflect on it the portion
of the principal amount of the Note being transferred that is
convertible, with the remaining balance of such conversion privileges
being retained by the transferee. Absent any such instruction to the
Company, such conversion privileges shall be transferred pro rata to the
portion of the Note being transferred and the portion of the Note being
retained.
The exercise of such conversion privilege shall be made by giving
notice thereof to the Company (specifying the principal amount and at
the Conversion Price) and surrendering the Note being converted to the
Company. The balance of any such Note surrendered which is not
converted shall be reissued to the Noteholder exercising such conversion
privilege with appropriate adjustments to reflect the remaining
principal amount convertible. The portion of any Note converted shall
bear interest only to (but excluding) the date the Company issues a
stock certificate representing the shares of Common Stock being issued
to the Noteholder upon such conversion. No fractional shares of Common
Stock shall be issued upon conversion of any Note. In lieu of any such
fractional shares, the Noteholder, upon conversion, shall be entitled to
the cash equivalent of such fractional share of Common Stock based upon
the market price therefor (determined as of the date the Company issues
such Common Stock to the Noteholder utilizing a similar method of
determining such market price as that set forth in Section 2.01 of this
Note Purchase Agreement).
If the Company at any time subdivides (by any stock split, stock
dividend, recapitalization or otherwise) its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision will be proportionately
reduced. If the Company at any time combines (by combination, reverse
stock split or otherwise) its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately
prior to such combination will be proportionately increased.
If the Company consolidates or merges into or sells, leases,
transfers or otherwise disposes of all or substantially all of its
assets, or if there occurs any recapitalization, reorganization,
reclassification in such a way that holders of Common Stock are entitled
to receive securities, cash or other assets with respect to or in
exchange for Common Stock, the portion of the Notes then convertible
will become convertible into the kind and amount of securities, cash or
other assets which the Holder would have received immediately after the
transaction as if the Holder had converted the portion of this Note then
convertible immediately before the effective date of the transaction at
the applicable Conversion Prices in effect immediately prior to such
effective date.
6. Denominations, Transfer, Exchange. The Notes are in
registered form without coupons in denominations of $1,000 and whole
multiples of $1,000. The transfer of Notes may be registered and Notes
may be exchanged as provided in the Note Purchase Agreement. The
Company need not exchange or register the transfer of any Note or
portion of a Note selected for redemption. Also, it need not exchange
or register the transfer of any Notes for a period of 15 days before a
selection of Notes to be redeemed.
7. Persons Deemed Owners. The registered holder of a Note may be
treated as its owner for all purposes.
4
8. No Recourse Against Others. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for
any obligations of the Company under the Notes or the Note Purchase
Agreement or for any claim based on, in respect of or by reason of such
obligations or their creation. Each Noteholder by accepting a Note
waives and releases all such liability. The waiver and release are part
of the consideration for the issue of the Notes.
The Company will furnish to any Noteholder upon written request and
without charge a copy of the Note Purchase Agreement. Requests may be
made to: Secretary, Hondo Oil & Gas Company, Enserch Tower, 10375
Richmond Avenue, Suite 900, Houston, Texas 77042.
5
[1991 Notes]
CONSOLIDATED, AMENDED AND RESTATED
PROMISSORY NOTE
US $40,000,000.00 As of December 18, 1997
FOR VALUE RECEIVED, Hondo Oil & Gas Company, a Delaware corporation
("Borrower"), hereby promises to pay to the order of London Australian &
General Property Company Limited, a United Kingdom corporation
("Lender"), the principal sum of FORTY MILLION AND 00/100 DOLLARS (US
$40,000,000.00) or so much as may be advanced (including the addition of
interest to principal) and outstanding hereunder (the "Loans"), on
January 15, 1999 (the "Maturity Date"). Borrower promises to pay
interest on the unpaid principal balance hereof from (and including)
October 1, 1997 to (but excluding) the date of payment in full of such
amount at a rate per annum equal at all times to six percent (6%) per
annum (or the maximum interest rate permitted by law, whichever is
less). Interest shall be payable on each April 1 (for the period
through March 31) and October 1 (for the period through September 30)
until maturity; provided, however, that any amount of principal that is
not paid when due (whether at stated maturity, by acceleration or
otherwise) shall bear interest from (and including) the date on which
such amount is due until (but excluding) the date such amount is paid in
full on demand, at a rate per annum equal at all times to eleven percent
(11%) per annum (or the maximum interest rate permitted by law,
whichever is less). Both interest and principal as herein provided
shall be payable in lawful money of the United States of America at the
offices of Lender, 4 Grosvenor Place, London SW1X 7DL England, or at
such other place as from time to time may be designated in writing by
Lender.
Notwithstanding anything in the foregoing to the contrary, if, in
the opinion of its Board of Directors, Borrower does not have sufficient
cash resources to pay interest on this Note when due, then Borrower may
offer to Lender a payment of the interest in shares of Borrower's common
stock, valued at (i) the last reported sales price regular way on the
interest due day or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices regular
way on such day, in either case on the American Stock Exchange or other
principal national securities exchange on which Borrower's common stock
is listed or, if not listed on any national securities exchange, on The
Nasdaq Stock Market's National Market System or, (ii) if (i) is not
applicable, the average of the bid and asked prices at the end of the
interest due day in the over-the-counter market as furnished by any New
York Stock Exchange member firm selected by Lender in good faith for
that purpose. In making this determination, Borrower's management will
not, without the consent of Lender, allocate cash resources to new
capital projects not related to the Opon Association Contract dated July
15, 1987 between Empressa Colombiana de Petroleos and Opon Development
Company. Lender will then notify Borrower whether it will either accept
the payment of interest in Borrower's common stock or add the amount of
interest due to the principal of this Note. If Lender accepts the
payment of interest in Borrower's common stock, Borrower will issue the
requisite number of shares to Lender within ten business days after
Borrower receives notice of acceptance from Lender. Lender recognizes
that any shares of Borrower's common stock that it may acquire by the
payment of interest in Borrower's common stock will not have been
1
registered under the Securities Act of 1933, as amended (the "Act"), and
may not be sold in the absence of an effective registration under the
Act or an exemption from the registration requirements of the Act. If
Lender so requests at any time and from time to time after the date
shares of Borrower's common stock are issued to Lender pursuant to this
provision, Borrower will use its best efforts to effect registration
under the Act of the shares so issued.
No borrowings may be made by Borrower under this Note after the
date hereof, except pursuant to the immediately preceding paragraph.
All additions to principal (including the addition of interest to
principal) and payments made pursuant to this Note may be recorded by
Lender on its books and records or any Grid attached hereto, and such
books and records and any Grid attached hereto (or any statement or
certificate of Lender based thereon) shall be conclusive as to existence
and amounts thereof absent manifest error.
This Note is secured under, and entitled to the benefits of, that
certain Security Interest Agreement dated May 13, 1997 among the Lender,
the Borrower, Folio Trust Company Limited and Folio Nominees Limited (as
same has been and may be supplemented, modified, amended or restated
from time to time, the "Security Interest Agreement").
Borrower and Lender, as assignee of Thamesedge Ltd., in turn
assignee of Lonrho Plc ("Original Lender"), are parties to those certain
letter agreements dated May 20, 1991, June 20, 1991, July 19, 1991,
September 1, 1991, November 1, 1991, and December 20, 1991
(collectively, the "1991 Letter Agreements") by and between Borrower and
Original Lender (as amended by letter agreements dated December 18,
1992, December 17, 1993, November 10, 1994, December 22, 1995, December
13, 1996 and December 18, 1997, and as same may be from time to time
further supplemented, amended or restated, collectively, the "Letter
Agreements") pursuant to which 1991 Letter Agreements Lender made loans
to Borrower in the total amount of US $32,000,000, and to which there
has been added to principal, pursuant to the Letter Agreements, accrued
but unpaid interest in the total amount of $7,137,048.86 through October
1, 1997 and against which a payment of $5,000,000 of principal was made
on October 18, 1994.
Borrower hereby acknowledges, certifies and agrees that: (a)
pursuant to the Letter Agreements, Borrower has issued the following
promissory notes to Lender (collectively, the "Prior Notes"): Promissory
Notes dated (i) September 1, 1991, in the original principal amount of
$10,000,000 (which, in turn, consolidated, renewed and replaced those
certain three Promissory Notes, being the Note dated May 20, 1991, in
the original principal amount of US $5,000,000, the Note dated June 20,
1991, in the original principal amount of US $3,000,000, and the Note
dated July 19, 1991, in the original principal amount of US $2,000,000),
(ii) November 1, 1991, in the original principal amount of US $9,000,000
and (iii) December 20, 1991, in the original principal amount of US
$13,000,000; (b) pursuant to the Prior Notes, Lender has made loans to
Borrower that are outstanding as of the date hereof in the aggregate
principal amount of U.S.$34,137,048.86, after giving effect to the
aforesaid payment of $5,000,000 of principal paid against the Note
issued on September 1, 1991 and interest added to principal of the Prior
Notes as hereinabove provided; (c) this Note has been issued by Borrower
to renew, extend, consolidate, amend, restate and replace the Prior
Notes (in order to, among other things, implement the aforesaid December
18, 1997 letter agreement), to evidence all indebtedness and other
2
amounts outstanding under the Prior Note, and to evidence any further
interest that may be added to principal pursuant to the terms of this
Note; (d) although issued in substitution for and restatement of the
Prior Notes, this Note shall not be deemed to have been issued in
payment, satisfaction, cancellation or novation of any of the Prior
Notes; and (e) Borrower's obligations to repay those loans (with
interest) to Lender and to perform or otherwise satisfy Borrower's other
obligations, as well as the security interests granted to Lender by
Borrower under the Security Interest Agreement, and any other related
loan documents (i) each remain and shall continue in full force and
effect, both before and after giving effect to this renewal and
extension, (ii) are not subject as of the date of this renewal and
extension to any defense, counterclaim, setoff, right of recoupment,
abatement, reduction or other claim or determination, and (iii) are and
shall be governed by the terms and provisions of this Note, the Letter
Agreements and the Security Interest Agreement.
Notwithstanding the foregoing, the Lender may, by notice to the
Borrower at any time thereafter, declare all or any portion of the
principal amount of this Note, all or any part of the then accrued but
unpaid interest thereon, and any or all other amounts payable hereunder
to be forthwith due and payable at any time after:
(a) the Borrower shall fail to pay any installment of
principal of, or interest on, this Note when due and such
failure shall remain unremedied for three (3) days;
(b) the Borrower, Hondo Magdalena Oil & Gas Limited,
presently a wholly-owned subsidiary of the Borrower ("Hondo
Magdalena"), and any of their respective subsidiaries shall
(i) fail to pay any Debt (but excluding indebtedness evidenced
by this Note) of the Borrower, Hondo Magdalena or such
subsidiary (as the case may be), or any interest or premium
thereon, when due (whether upon scheduled maturity, required
prepayment, acceleration, demand or other notice or formality
of any kind) and such failure shall continue after the
applicable grace period, if any, specified in the agreement or
instrument relating to such Debt or (ii) fail to perform or
observe any term, covenant or condition on its part to be
performed or observed under any agreement or instrument
relating to any such Debt, when required to be performed or
observed, and such failure shall continue after the applicable
grace period, if any, specified in such agreement or
instrument, if the effect of such failure to perform or
observe is to accelerate, or to permit the acceleration of,
the maturity of such Debt; or any such Debt shall be declared
to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the
stated maturity thereof. "Debt" means all (i) indebtedness
for borrowed money, (ii) obligations evidenced by bonds,
debentures, notes or other similar instruments, (iii)
obligations to pay the deferred purchase price of property or
services, (iv) obligations as lessee under leases that have
been or should be, in accordance with generally accepted
accounting principles, recorded as capital leases, (v)
obligations under direct or indirect guaranties in respect of,
and obligations (contingent or otherwise) to purchase or
otherwise acquire, or otherwise to assure a creditor against
loss in respect of, indebtedness or obligations of others of
3
the kinds referred to in clauses (i) through (v) above, and
(vi) liabilities in respect of unfunded vested benefits under
plans covered by Title IV of ERISA;
(c) the Borrower shall have failed to furnish to Lender, by
October 1, 1998, a proved gas reserve report of Netherland,
Sewell & Associates that shows that a minimum of 13,000,000
mcf (25%) of proved gas reserve exists, which are subject to
the Opon Association Contract in which Hondo Magdalena then
participates, above the proved gas reserve of 52,475,554 mcf
at September 30, 1997;
(d) the Borrower, Hondo Magdalena or any of their respective
subsidiaries shall generally not pay its debts as they become
due, shall admit in writing its inability to pay its debts or
shall make a general assignment for the benefit of creditors;
or any proceeding shall be instituted by or against the
Borrower, Hondo Magdalena or any of their respective
subsidiaries seeking to adjudicate it a bankrupt or insolvent,
or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of
it or its Debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking
the entry of an order for relief or the appointment of a
receiver, trustee, or other similar official for it or for any
substantial part of its property; or the Borrower, Hondo
Magdalena or any of their respective subsidiaries shall take
any corporate or other action to authorize any of the actions
set forth above in this paragraph (d); or
(e) a final judgment or order for the payment of money
in excess of $75,000 shall be rendered against the Borrower,
Hondo Magdalena or any of their respective subsidiaries, and
any such judgment or order shall continue unsatisfied and in
effect for a period of 60 consecutive days.
(f) any other default (whether in whole or in part) shall
occur in the due observance or performance of any other term
or provision of this Note, the Letter Agreements or the
Security Interest Agreement;
(g) This Note, the Letter Agreements, the Security
Interest Agreement (in whole or in part) shall cease to be in
full force or effect or shall be contested, challenged or
repudiated by the Borrower or any surety.
If this Note is placed in the hands of an attorney for collection
after default, or if all or any part of the indebtedness represented
hereby is proved, established or collected in any court or in any
bankruptcy, receivership, debtor relief, probate or other court
proceedings, Borrower and all endorsers, sureties and guarantors of this
Note jointly and severally agree to pay reasonable attorneys' fees and
collection costs to the holder hereof in addition to the principal and
interest payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note
hereby severally waive demand, presentment for payment, protest, notice
of protest, notice of intention to accelerate the maturity of this Note,
diligence in collection, the bringing of any suit against any party and
4
any notice of or defense on account of any extensions, renewals, partial
payments or changes in any manner of or in this Note or in any of its
terms, provisions and covenants, or any releases or substitutions of any
security, or any delay, indulgence or other act of any trustee or any
holder hereof, whether before or after maturity.
This Note and the rights and duties of the parties hereto shall be
governed by the laws of the State of New York (other than those that
would defer to the substantive laws of another jurisdiction). Without
in any way limiting the preceding choice of law, the parties intend
(among other things) to thereby avail themselves of the benefit of
Section 5-1401 of the General Obligations Law of the State of New York.
All notices and other communications provided for hereunder shall
be in writing and shall be delivered to the addressees at the applicable
addresses set forth below by mail, telecopy, Federal Express or other
equivalent overnight carrier or by telephone (confirmed in writing
within 24 hours) or telecopy or hand-delivered, if to Borrower, to it at
Hondo Oil & Gas Company, 10375 Richmond Avenue, Suite 900, Houston, TX
77042, telephone (713) 954-4600, telecopier (713) 954-4601, Attention:
John J. Hoey; if to Lender, to it at London Australian & General
Property Company, 4 Grosvenor Place, London, SW1X 7DL England, telephone
011-44-171-201-6000, telecopier 011-44-171-201-6100, Attention R. E.
Whitten with a copy to Rudolph H. Funke, Esq. at 805 Third Avenue, 18th
Floor, New York, NY 10022, telephone 212-715-7001, telecopy 212-838-
8141; or, as to each party, to it at such other address as shall be
designated by such party in a written notice to the other party. All
such notices and communications shall not be effective until received by
Lender.
Borrower hereby irrevocably submits to the jurisdiction of any New
York State or United States Federal court sitting in New York City over
any action or proceeding arising out of or relating to the Letter
Agreements, this Note or the Security Interest Agreement, and hereby
irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such New York State or Federal
court. Borrower irrevocably consents to the service of any and all
process in any such action or proceeding by sending copies of such
process to it at its address and in the manner determined under the
immediately preceding paragraph hereof. Borrower agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. Borrower further waives any objections to venue
in such State and any objection to an action or proceeding in such State
on the basis of forum non conveniens. Borrower further agrees that any
action or proceeding brought by it against Lender shall be brought only
in New York State or United States Federal court sitting in New York
County, New York. Borrower and Lender waive any right it may have to
jury trial. Nothing in this paragraph shall affect the right of Lender
to serve legal process in any other manner permitted by law or affect
the right of Lender to bring any action or proceeding against Borrower
or any of its properties in the courts of any other jurisdictions. To
the extent that Borrower has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether from
service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its
property, Borrower hereby irrevocable waives such immunity in respect of
its obligations under the Letter Agreements, this Note and the Security
Interest Agreement.
5
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
-------------------------------
John J. Hoey, President
[END OF PAGE]
SCHEDULE TO NOTE
Amount of Principal Principal Notation
Date Advance Paid Outstanding Made By
---- --------- --------- ----------- --------
Carryover
12/18/97 from Prior -- $34,137,048.86
Note
6
[Via Verde Note]
AMENDED AND RESTATED
PROMISSORY NOTE
US $4,500,000.00
As of December 18, 1997
FOR VALUE RECEIVED, Via Verde Development Company, a California
corporation ("Borrower"), hereby promises to pay to the order of London
Australian & General Property Company Limited, a United Kingdom
corporation ("Lender"), the principal sum of FOUR MILLION FIVE HUNDRED
THOUSAND AND 00/100 DOLLARS (US $4,500,000.00) or so much as may be
advanced (including the addition of interest to principal) and
outstanding hereunder (the "Loans"), in ten (10) semi-annual
installments, commencing January 15, 1999, the amount of each payment to
equal the amount then outstanding on this Note divided by the number of
then remaining installments, including the installment to be made on
such date (the "Maturity Date"). Borrower promises to pay interest on
the unpaid principal balance hereof from (and including) October 1, 1997
to (but excluding) the date of payment in full of such amount at a rate
per annum equal at all times to six percent (6%) per annum (or the
maximum interest rate permitted by law, whichever is less). Interest
shall be payable on each April 1 (for the period through March 31) and
October 1 (for the period through September 30) until maturity;
provided, however, that any amount of principal that is not paid when
due (whether at stated maturity, by acceleration or otherwise) shall
bear interest from (and including) the date on which such amount is due
until (but excluding) the date such amount is paid in full on demand, at
a rate per annum equal at all times to eleven percent (11%) per annum
(or the maximum interest rate permitted by law, whichever is less).
Both interest and principal as herein provided shall be payable in
lawful money of the United States of America at the offices of Lender, 4
Grosvenor Place, London SW1X 7DL England, or at such other place as from
time to time may be designated in writing by Lender.
Notwithstanding anything in the foregoing to the contrary, if, in
the opinion of its Board of Directors, Borrower does not have sufficient
cash resources to pay interest on this Note when due, then Hondo Oil &
Gas Company, a Delaware corporation and the owner of all of the capital
stock of Borrower ("Hondo"), may offer to Lender, on behalf of Borrower,
a payment of the interest in shares of Hondo's common stock, valued at
(i) the last reported sales price regular way on the interest due day
or, in case no such reported sale takes place on such day, the average
of the reported closing bid and asked prices regular way on such day, in
either case on the American Stock Exchange or other principal national
securities exchange on which Hondo's common stock is listed or, if not
listed on any national securities exchange, on The Nasdaq Stock Market's
National Market System or, (ii) if (i) is not applicable, the average of
the bid and asked prices at the end of the interest due day in the over-
the-counter market as furnished by any New York Stock Exchange member
firm selected by Lender in good faith for that purpose. In making this
determination, Hondo's management will not, without the consent of
Lender, allocate cash resources to new capital projects not related to
the Opon Association Contract dated July 15, 1987 between Empressa
Colombiana de Petroleos and Opon Development Company. Lender will then
notify Hondo whether it will either accept the payment of interest in
Hondo's common stock or add the amount of interest due to the principal
1
of this Note. If Lender accepts the payment of interest in Hondo's
common stock, Hondo will issue the requisite number of shares to Lender
within ten business days after Hondo receives notice of acceptance from
Lender. Lender recognizes that any shares of Hondo's common stock that
it may acquire by the payment of interest in Hondo's common stock will
not have been registered under the Securities Act of 1933, as amended
(the "Act"), and may not be sold in the absence of an effective
registration under the Act or an exemption from the registration
requirements of the Act. If Lender so requests at any time and from
time to time after the date shares of Hondo's common stock are issued to
Lender pursuant to this provision, Hondo will use its best efforts to
effect registration under the Act of the shares so issued.
No borrowing may be made by Borrower under this Note after the date
hereof, except pursuant to the immediately preceding paragraph. All
additions to principal (including the addition of interest to principal)
and payments made pursuant to this Note may be recorded by Lender on its
books and records or any Grid attached hereto, and such books and
records and any Grid attached hereto (or any statement or certificate of
Lender based thereon) shall be conclusive as to existence and amounts
thereof absent manifest error.
This Note is secured under, and entitled to the benefits of, that
certain Deed of Trust dated April 30, 1993, recorded as Instrument No.
93-840817 in the Real Property Records of Los Angeles County, California
and an Assignment of Rents dated April 30, 1993 by Borrower, as Trustor,
to Chicago Title Company as Trustee, as same has been, and as same may
be, supplemented, modified, amended or restated from time to time
(collectively, the "Via Verde Mortgage"), and is supported by a Guaranty
dated April 30, 1993 from Hondo Oil & Gas Company as same has been, and
as same may be, supplemented, modified, amended or restated from time to
time (the "Hondo Guaranty");
Borrower and Lender, as assignee of Thamesedge Ltd., in turn
assignee of Lonrho Plc ("Original Lender"), are parties to those certain
letter agreements dated December 17, 1993, November 10, 1994, December
22, 1995, December 13, 1996 and December 18, 1997, and as same may be
from time to time further supplemented, amended or restated,
collectively, the "Letter Agreements") pursuant to which 1994 Letter
Agreement Lender made loans to Borrower in the total amount of
US $3,000,000 and to which there has been added to principal, pursuant
to the Letter Agreements, accrued but unpaid interest in the total
amount of $585,680.86 through October 1, 1997.
Borrower hereby acknowledges, certifies and agrees that: (a)
pursuant to the Letter Agreements, Borrower has issued a Promissory Note
dated April 30, 1993 in the original principal amount of $3,000,000 (the
"Prior Note"); (b) pursuant to the Prior Note, Lender has made loans to
Borrower that are outstanding as of the date hereof in the aggregate
principal amount of U.S.$3,585,680.86, after giving effect to interest
added to principal of the Prior Note as hereinabove provided; (c) this
Note has been issued by Borrower to renew, extend, amend, restate and
replace the Prior Note (in order to, among other things, implement the
aforesaid December 18, 1997 letter agreement), to evidence all
indebtedness and other amounts outstanding under the Prior Note, and to
evidence any further advances of interest that may be added to principal
pursuant to the terms of this Note; (d) although issued in substitution
for and restatement of the Prior Note, this Note shall not be deemed to
have been issued in payment, satisfaction, cancellation or novation of
2
the Prior Note; and (e) Borrower's obligations to repay those loans
(with interest) to Lender and to perform or otherwise satisfy Borrower's
other obligations, as well as the security interests granted to Lender
by Borrower under the Via Verde Mortgage, and any other related loan
documents (i) each remain and shall continue in full force and effect,
both before and after giving effect to this renewal and extension, (ii)
are not subject as of the date of this renewal and extension to any
defense, counterclaim, setoff, right of recoupment, abatement, reduction
or other claim or determination, and (iii) are and shall be governed by
the terms and provisions of this Note, the Letter Agreements and the Via
Verde Mortgage.
Notwithstanding the foregoing, the Lender may, by notice to the
Borrower at any time thereafter, declare all or any portion of the
principal amount of this Note, all or any part of the then accrued but
unpaid interest thereon, and any or all other amounts payable hereunder
to be forthwith due and payable at any time after:
(a) the Borrower shall fail to pay any installment of
principal of, or interest on, this Note when due and such
failure shall remain unremedied for three (3) days;
(b) the Borrower, Hondo Magdalena Oil & Gas Limited,
presently a wholly-owned subsidiary of the Borrower ("Hondo
Magdalena"), and any of their respective subsidiaries shall
(i) fail to pay any Debt (but excluding indebtedness evidenced
by this Note) of the Borrower, Hondo Magdalena or such
subsidiary (as the case may be), or any interest or premium
thereon, when due (whether upon scheduled maturity, required
prepayment, acceleration, demand or other notice or formality
of any kind) and such failure shall continue after the
applicable grace period, if any, specified in the agreement or
instrument relating to such Debt or (ii) fail to perform or
observe any term, covenant or condition on its part to be
performed or observed under any agreement or instrument
relating to any such Debt, when required to be performed or
observed, and such failure shall continue after the applicable
grace period, if any, specified in such agreement or
instrument, if the effect of such failure to perform or
observe is to accelerate, or to permit the acceleration of,
the maturity of such Debt; or any such Debt shall be declared
to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the
stated maturity thereof. "Debt" means all (i) indebtedness
for borrowed money, (ii) obligations evidenced by bonds,
debentures, notes or other similar instruments, (iii)
obligations to pay the deferred purchase price of property or
services, (iv) obligations as lessee under leases that have
been or should be, in accordance with generally accepted
accounting principles, recorded as capital leases, (v)
obligations under direct or indirect guaranties in respect of,
and obligations (contingent or otherwise) to purchase or
otherwise acquire, or otherwise to assure a creditor against
loss in respect of, indebtedness or obligations of others of
the kinds referred to in clauses (i) through (v) above, and
(vi) liabilities in respect of unfunded vested benefits under
plans covered by Title IV of ERISA;
3
(c) the Borrower shall have failed to furnish to Lender, by
October 1, 1998, a proved gas reserve report of Netherland,
Sewell & Associates that shows that a minimum of 13,000,000
mcf (25%) of proved gas reserve exists, which are subject to
the Opon Association Contract in which Hondo Magdalena then
participates, above the proved gas reserve of 52,475,554 mcf
at September 30, 1997;
(d) the Borrower, Hondo Magdalena or any of their respective
subsidiaries shall generally not pay its debts as they become
due, shall admit in writing its inability to pay its debts or
shall make a general assignment for the benefit of creditors;
or any proceeding shall be instituted by or against the
Borrower, Hondo Magdalena or any of their respective
subsidiaries seeking to adjudicate it a bankrupt or insolvent,
or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of
it or its Debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking
the entry of an order for relief or the appointment of a
receiver, trustee, or other similar official for it or for any
substantial part of its property; or the Borrower, Hondo
Magdalena or any of their respective subsidiaries shall take
any corporate or other action to authorize any of the actions
set forth above in this paragraph (d); or
(e) a final judgment or order for the payment of money
in excess of $75,000 shall be rendered against the Borrower,
Hondo Magdalena or any of their respective subsidiaries, and
any such judgment or order shall continue unsatisfied and in
effect for a period of 60 consecutive days.
(f) any other default (whether in whole or in part) shall
occur in the due observance or performance of any other term
or provision of this Note, the Letter Agreements or the Via
Verde Mortgage;
(g) This Note, the Letter Agreements, the Via Verde
Mortgage (in whole or in part) shall cease to be in full force
or effect or shall be contested, challenged or repudiated by
the Borrower or any surety.
If this Note is placed in the hands of an attorney for collection
after default, or if all or any part of the indebtedness represented
hereby is proved, established or collected in any court or in any
bankruptcy, receivership, debtor relief, probate or other court
proceedings, Borrower and all endorsers, sureties and guarantors of this
Note jointly and severally agree to pay reasonable attorneys' fees and
collection costs to the holder hereof in addition to the principal and
interest payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note
hereby severally waive demand, presentment for payment, protest, notice
of protest, notice of intention to accelerate the maturity of this Note,
diligence in collection, the bringing of any suit against any party and
any notice of or defense on account of any extensions, renewals, partial
payments or changes in any manner of or in this Note or in any of its
terms, provisions and covenants, or any releases or substitutions of any
4
security, or any delay, indulgence or other act of any trustee or any
holder hereof, whether before or after maturity.
This Note and the rights and duties of the parties hereto shall be
governed by the laws of the State of New York, (other than those that
would defer to the substantive laws of another jurisdiction). Without
in any way limiting the preceding choice of law, the parties intend
(among other things) to thereby avail themselves of the benefit of
Section 5-1401 of the General Obligations Law of the State of New York.
All notices and other communications provided for hereunder shall
be in writing and shall be delivered to the addressees at the applicable
addresses set forth below by mail, telecopy, Federal Express or other
equivalent overnight carrier or by telephone (confirmed in writing
within 24 hours) or telecopy or hand-delivered, if to Borrower, to it at
Hondo Oil & Gas Company, 10375 Richmond Avenue, Suite 900, Houston, TX
77042, telephone (713) 954-4600, telecopier (713) 954-4601, Attention:
John J. Hoey; if to Lender, to it at London Australian & General
Property Company, 4 Grosvenor Place, London, SW1X 7DL England, telephone
011-44-171-201-6000, telecopier 011-44-171-201-6100, Attention R. E.
Whitten with a copy to Rudolph H. Funke, Esq. at 805 Third Avenue, 18th
Floor, New York, NY 10022, telephone 212-715-7001, telecopy 212-838-
8141; or, as to each party, to it at such other address as shall be
designated by such party in a written notice to the other party. All
such notices and communications shall not be effective until received by
Lender.
Borrower hereby irrevocably submits to the jurisdiction of any New
York State or United States Federal court sitting in New York City over
any action or proceeding arising out of or relating to the Letter
Agreements, this Note or the Via Verde Mortgage, and hereby irrevocably
agrees that all claims in respect of such action or proceeding may be
heard and determined in such New York State or Federal court. Borrower
irrevocably consents to the service of any and all process in any such
action or proceeding by sending copies of such process to it at its
address and in the manner determined under the immediately preceding
paragraph hereof. Borrower agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law. Borrower further waives any objections to venue in such State and
any objection to an action or proceeding in such State on the basis of
forum non conveniens. Borrower further agrees that any action or
proceeding brought by it against Lender shall be brought only in New
York State or United States Federal court sitting in New York County,
New York. Borrower and Lender waive any right it may have to jury
trial. Nothing in this paragraph shall affect the right of Lender to
serve legal process in any other manner permitted by law or affect the
right of Lender to bring any action or proceeding against Borrower or
any of its properties in the courts of any other jurisdictions. To the
extent that Borrower has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether from
service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its
property, Borrower hereby irrevocable waives such immunity in respect of
its obligations under the Letter Agreements, this Note and the Via Verde
Mortgage.
5
VIA VERDE DEVELOPMENT COMPANY
By: /s/ John J. Hoey
John J. Hoey, President
[END OF PAGE]
SCHEDULE TO NOTE
Date Amount of Principal Principal Notation
Advance Paid Outstanding Made By
12/18/97 Carryover -- $3,585,680.86
from Prior
Note
6
[Via Verde Guaranty]
FIRST GUARANTY AMENDMENT
As of December 18, 1997
Hondo Oil & Gas Company
10375 Richmond Avenue, Suite 900
Houston, Texas 77042
Re: Guaranty
Gentlemen:
As you know, London Australian & General Property Company Limited
("Lender") is in the process of amending various of its credit
arrangements with you, including that certain Promissory Note dated
April 30, 1993 in the original principal amount of $3,000,000 issued by
your wholly-owned subsidiary, Via Verde Development Company (as
heretofore amended and as currently in effect, the "Existing Note"),
which you guarantied pursuant to your Guaranty executed and delivered as
of April 30, 1993 (as currently in effect, the "Existing Guaranty") in
our favor (as assignee of Thamesedge Ltd., which, in turn, was the
assignee of Lonrho Plc., the "Original Lender"). Under a proposed
Amended and Restated Note being executed and delivered contemporaneously
herewith by Borrower to us (the "Amended and Restated Note"), among
other things (a) the amount heretofore loaned and which may be loaned
(and, accordingly, the principal amount subject to the Guaranty), is
being increased to $4,500,000 (including $1,500,000 representing
interest added to principal), (b) the maturity date of the Existing Note
is being extended to January 15, 1999 and (c) various Events of Default
are being added to the Existing Note to provide, among other things,
that it shall be an Event of Default (i) if you shall have failed to
furnish to Lender, by October 1, 1998, a proved gas reserve report of
Netherland, Sewell & Associates that shows that a minimum of 13,000,000
mcf (25%) of proved gas reserve exists, which are subject to the Opon
Association Contract in which Hondo Magdalena then participates, above
the proved gas reserve of 52,475,554 mcf at September 30, 1997, (ii) if
you, your wholly-owned subsidiary, Hondo Magdalena Oil & Gas Limited, or
any of their respective subsidiaries default with respect to their Debt
(as defined) and (iii) to add certain other Events of Default similar to
those in your other loan instruments to us.
We understand that you have reviewed a copy of the final version of
the proposed Amended and Restated Promissory Note. For all purposes,
"Guaranty" means the Existing Guaranty, as modified by this letter, and
as the same may be further supplemented, modified, amended and restated
from time to time in the manner provided therein.
Please execute this letter to acknowledge your agreement to the
Amended and Restated Note and that your guarantee and other obligations
under the Guaranty remain and continue in full force and effect both
before and after giving effect to the Amended and Restated Note and
related documentation (including, without limitation, the matters set
forth in this letter). Our request to you in this instance does not
obligate us to notify you or seek your consent in the future as to any
amendment to the Amended and Restated Note or other matter where
1
(pursuant to your Guaranty, or otherwise) such notice or consent is not
required.
Your signature, where indicated below, also will constitute your
acknowledgment of and agreement to the following modifications to the
Existing Guaranty (without limiting the prior paragraph of this letter):
i. All references in the Existing Guaranty to "Lonrho Plc"
shall be to "London Australian & General Property Company
Limited (the "Lender")" and all references in the Existing
Guaranty to "Lonrho" shall be to "Lender" for all purposes
of the Guaranty;
ii. The Guaranty now includes, among other things, all amounts
borrowed and to be borrowed (and interest thereon) under the
Amended and Restated Note;
iii. Section 6 of the Existing Guaranty is deleted and the
following is substituted in its place:
"SECTION 6. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing
and mailed (certified mail, return receipt requested),
telecopied or delivered personally, if to the Guarantor, to
it at Hondo Oil & Gas Company ,10375 Richmond Avenue, Suite
900, Houston, TX 77042, telecopier (713) 954-4601, attention
John J. Hoey; if to Lender, to it at London Australia &
General Property Company, Four Grosvenor Place, London, SW1X
7DL, England, telecopier 011-44-171-201-6100, Attention: R.
E. Whitten, with a copy to Rudolph H. Funke, Esq. at 805
Third Avenue, 18th Floor, New York, NY 10022, telecopier
212-838-8141; or, as to each party, at such other address as
shall be designated by such party in a written notice to the
other party. All such notices and other communications
shall be effective, if mailed, 72 hours after being
deposited in the mails or, if telecopied or delivered, when
received.
iv. Section 9 of the Existing Guaranty is deleted and the
following is substituted in its place:
"SECTION 9. Governing Laws. This Guaranty shall be
governed by, and construed in accordance with, the laws of
the State of New York (other than those that would defer to
the substantive laws of another jurisdiction). Without in
any way limiting the preceding choice of law, the parties
intend (among other things) to thereby avail themselves of
the benefit of Section 5-1401 of the General Obligations Law
of the State of New York."
v. The following new Section 10 is hereby added to the Existing
Guaranty:
"SECTION 10. Consent to Jurisdiction; Waiver of Immunities.
(a) Guarantor hereby irrevocably submits to the jurisdiction
of any New York or federal court sitting in New York in any
action or proceeding arising out of or relating to this Guaranty,
and the Guarantor hereby irrevocably agrees that all claims in
2
respect of such action or proceeding may be heard and determined
in such New York or federal court. The Guarantor hereby
irrevocably waives, to the fullest extent they may effectively do
so, the defense of an inconvenient forum to the maintenance of
such action or proceeding. The Guarantor hereby irrevocably
appoints John J. Hoey (the "Process Agent"), with an office on
the date hereof at Hondo Oil & Gas Company, 10375 Richmond
Avenue, Suite 900, Houston, TX 77042, telephone (713) 954-4600,
telecopier (713) 954-4601, as its agent to receive, on behalf of
the Guarantor and its property, service of copies of the summons
and complaint and any other process that may be served in any
such action or proceeding. Such service may be made by mailing
or delivering a copy of such process to the Guarantor in care of
the Process Agent at the Process Agent's address above, and the
Guarantor hereby irrevocably authorizes and directs the Process
Agent to accept such service on its behalf. As an alternative
method of service, Guarantor also irrevocably consents to the
service of any and all process in any such action or proceeding
by the mailing of copies of such process to Guarantor at its
address specified in Section 10. Guarantor agrees that a final
judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.
(b) Nothing in this Section shall affect the right of the
Lender to serve legal process in any other manner permitted by
law or affect the right of the Lender to bring any action or
proceeding against Guarantor or its property in the courts of any
other jurisdictions.
(c) To the extent that Guarantor has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal
process (whether through service of notice, attachment prior to
judgment, attachment in aid of execution, execution or otherwise)
with respect to Guarantor or its property, Guarantor hereby
irrevocably waives such immunity in respect of its obligations
under this Guaranty."
Your signature, where indicated below, also will constitute your
acknowledgment of and agreement and certification that: (a) pursuant to
the existing Via Verde Note, the Lender has made loans to the Borrower
that are outstanding as of the date of this letter in the aggregate
principal amount of $3,479,554.45 (including $479,554.45 of interest
added to principal); (b) the obligations of the Borrower to repay all
loans (including those to be made pursuant to the Amended and Restated
Note) with interest, to the Lender and to perform or otherwise satisfy
all other obligations, (i) each remain and shall continue in full force
and effect, both before and after giving effect to the transactions
contemplated by this letter, (ii) are not subject to any defense,
counterclaim, setoff, right of recoupment, abatement, reduction or other
claim or determination, and (iii) are and shall continue to be governed
by the terms and provisions of the Amended and Restated Note as same may
be supplemented, modified, amended or restated in the future; (e) your
absolute, unconditional and irrevocable guarantee to the Lender of the
full and punctual payment and satisfaction of the foregoing and any and
all other obligations the Borrower (i) remains and shall continue in
full force and effect, both before and after giving effect to the
transactions contemplated by this letter, (ii) is not subject to any
defense, counterclaim, setoff, right of recoupment, abatement, reduction
3
or other claim or determination, and (iii) is and shall continue to be
governed by the terms and provisions of the Existing Guaranty as
supplemented, modified and amended.
Very truly yours,
LONDON AUSTRALIAN & GENERAL
PROPERTY COMPANY LIMITED
By: /s/ R.E. Whitten
-------------------------------
ACKNOWLEDGED AND AGREED:
HONDO OIL & GAS COMPANY
/s/ John J. Hoey
---------------------------------
4
[Newhall/Valley Gateway Note]
AMENDED AND RESTATED PROMISSORY NOTE
US $5,500,000.00 As of December 18, 1997
FOR VALUE RECEIVED, Hondo Oil & Gas Company, a Delaware corporation
("Borrower"), hereby promises to pay to the order of London Australian &
General Property Company Limited, a United Kingdom corporation
("Lender"), the principal sum of FIVE MILLION FIVE HUNDRED THOUSAND AND
00/100 DOLLARS (US $5,500,000.00) or so much as may be advanced
(including the addition of interest to principal) and outstanding
hereunder (the "Loans"), in ten (10) semi-annual installments,
commencing January 15, 1999, the amount of each payment to equal the
amount then outstanding on this Note divided by the number of then
remaining installments, including the installment to be made on such
date (the "Maturity Date"). Borrower promises to pay interest on the
unpaid principal balance hereof from (and including) October 1, 1997 to
(but excluding) the date of payment in full of such amount at a rate per
annum equal at all times to six percent (6%) per annum (or the maximum
interest rate permitted by law, whichever is less). Interest shall be
payable on each April 1 (for the period through March 31) and October 1
(for the period through September 30) until maturity; provided, however,
that any amount of principal that is not paid when due (whether at
stated maturity, by acceleration or otherwise) shall bear interest from
(and including) the date on which such amount is due until (but
excluding) the date such amount is paid in full on demand, at a rate per
annum equal at all times to eleven percent (11%) per annum (or the
maximum interest rate permitted by law, whichever is less). Both
interest and principal as herein provided shall be payable in lawful
money of the United States of America at the offices of Lender, 4
Grosvenor Place, London SW1X 7DL England, or at such other place as from
time to time may be designated in writing by Lender.
Notwithstanding anything in the foregoing to the contrary, if, in
the opinion of its Board of Directors, Borrower does not have sufficient
cash resources to pay interest on this Note when due, then Borrower may
offer to Lender a payment of the interest in shares of Borrower's common
stock, valued at (i) the last reported sales price regular way on the
interest due day or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices regular
way on such day, in either case on the American Stock Exchange or other
principal national securities exchange on which Borrower's common stock
is listed or, if not listed on any national securities exchange, on The
Nasdaq Stock Market's National Market System or, (ii) if (i) is not
applicable, the average of the bid and asked prices at the end of the
interest due day in the over-the-counter market as furnished by any New
York Stock Exchange member firm selected by Lender in good faith for
that purpose. In making this determination, Borrower's management will
not, without the consent of Lender, allocate cash resources to new
capital projects not related to the Opon Association Contract dated July
15, 1987 between Empressa Colombiana de Petroleos and Opon Development
Company. Lender will then notify Borrower whether it will either accept
the payment of interest in Borrower's common stock or add the amount of
interest due to the principal of this Note. If Lender accepts the
payment of interest in Borrower's common stock, Borrower will issue the
requisite number of shares to Lender within ten business days after
1
Borrower receives notice of acceptance from Lender. Lender recognizes
that any shares of Borrower's common stock that it may acquire by the
payment of interest in Borrower's common stock will not have been
registered under the Securities Act of 1933, as amended (the "Act"), and
may not be sold in the absence of an effective registration under the
Act or an exemption from the registration requirements of the Act. If
Lender so requests at any time and from time to time after the date
shares of Borrower's common stock are issued to Lender pursuant to this
provision, Borrower will use its best efforts to effect registration
under the Act of the shares so issued.
No borrowing may be made by Borrower under this Note after the date
hereof, except pursuant to the immediately preceding paragraph. All
additions to principal (including the addition of interest to principal)
and payments made pursuant to this Note may be recorded by Lender on its
books and records or any Grid attached hereto, and such books and
records and any Grid attached hereto (or any statement or certificate of
Lender based thereon) shall be conclusive as to existence and amounts
thereof absent manifest error.
This Note is secured under, and entitled to the benefits of, that
certain Deed of Trust dated August 30, 1993, granted by Borrower and
Newhall Refining Co., Inc. ("Newhall") recorded as Instrument No. 93-
2006475 in the Real Property Records of Los Angeles, California, as same
has been, and as same may be, supplemented, modified, amended or
restated from time to time (the "Valley Gateway Mortgage");
Borrower and Lender, as assignee of Thamesedge Ltd., in turn
assignee of Lonrho Plc ("Original Lender"), are parties to those certain
letter agreements dated December 17, 1993, November 10, 1994, December
22, 1995, December 13, 1996 and December 18, 1997, and as same may be
from time to time further supplemented, amended or restated,
collectively, the "Letter Agreements") pursuant to which 1994 Letter
Agreement Lender made loans to Borrower in the total amount of
US $4,000,000 and to which there has been added to principal, pursuant
to the Letter Agreements, accrued but unpaid interest in the total
amount of $672,858.12 through October 1, 1997.
Borrower hereby acknowledges, certifies and agrees that: (a)
pursuant to the Letter Agreements, Borrower has issued a Promissory Note
dated June 25, 1993 in the original principal amount of $4,000,000 (the
"Prior Note"); (b) pursuant to the Prior Note, Lender has made loans to
Borrower that are outstanding as of the date hereof in the aggregate
principal amount of U.S.$4,672,858.12, after giving effect to interest
added to principal of the Prior Note as hereinabove provided; (c) this
Note has been issued by Borrower to renew, extend, amend, restate and
replace the Prior Note (in order to, among other things, implement the
aforesaid December 18, 1997 letter agreement), to evidence all
indebtedness and other amounts outstanding under the Prior Note, and to
evidence any further advances of interest that may be added to principal
pursuant to the terms of this Note; (d) although issued in substitution
for and restatement of the Prior Note, this Note shall not be deemed to
have been issued in payment, satisfaction, cancellation or novation of
the Prior Note; and (e) Borrower's obligations to repay those loans
(with interest) to Lender and to perform or otherwise satisfy Borrower's
other obligations, as well as the security interests granted to Lender
by Borrower under the Valley Gateway Mortgage, and any other related
loan documents (i) each remain and shall continue in full force and
effect, both before and after giving effect to this renewal and
2
extension, (ii) are not subject as of the date of this renewal and
extension to any defense, counterclaim, setoff, right of recoupment,
abatement, reduction or other claim or determination, and (iii) are and
shall be governed by the terms and provisions of this Note, the Letter
Agreements and the Valley Gateway Mortgage.
Notwithstanding the foregoing, the Lender may, by notice to the
Borrower at any time thereafter, declare all or any portion of the
principal amount of this Note, all or any part of the then accrued but
unpaid interest thereon, and any or all other amounts payable hereunder
to be forthwith due and payable at any time after:
(a) the Borrower shall fail to pay any installment of
principal of, or interest on, this Note when due and such failure shall
remain unremedied for three (3) days;
(b) the Borrower, Hondo Magdalena Oil & Gas Limited,
presently a wholly-owned subsidiary of the Borrower ("Hondo Magdalena"),
and any of their respective subsidiaries shall (i) fail to pay any Debt
(but excluding indebtedness evidenced by this Note) of the Borrower,
Hondo Magdalena or such subsidiary (as the case may be), or any interest
or premium thereon, when due (whether upon scheduled maturity, required
prepayment, acceleration, demand or other notice or formality of any
kind) and such failure shall continue after the applicable grace period,
if any, specified in the agreement or instrument relating to such Debt
or (ii) fail to perform or observe any term, covenant or condition on
its part to be performed or observed under any agreement or instrument
relating to any such Debt, when required to be performed or observed,
and such failure shall continue after the applicable grace period, if
any, specified in such agreement or instrument, if the effect of such
failure to perform or observe is to accelerate, or to permit the
acceleration of, the maturity of such Debt; or any such Debt shall be
declared to be due and payable, or required to be prepaid (other than by
a regularly scheduled required prepayment), prior to the stated maturity
thereof. "Debt" means all (i) indebtedness for borrowed money, (ii)
obligations evidenced by bonds, debentures, notes or other similar
instruments, (iii) obligations to pay the deferred purchase price of
property or services, (iv) obligations as lessee under leases that have
been or should be, in accordance with generally accepted accounting
principles, recorded as capital leases, (v) obligations under direct or
indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to assure a
creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clauses (i) through (v) above, and
(vi) liabilities in respect of unfunded vested benefits under plans
covered by Title IV of ERISA;
(c) the Borrower shall have failed to furnish to Lender, by
October 1, 1998, a proved gas reserve report of Netherland, Sewell &
Associates that shows that a minimum of 13,000,000 mcf (25%) of proved
gas reserve exists, which are subject to the Opon Association Contract
in which Hondo Magdalena then participates, above the proved gas reserve
of 52,475,554 mcf at September 30, 1997;
(d) the Borrower, Hondo Magdalena or any of their respective
subsidiaries shall generally not pay its debts as they become due, shall
admit in writing its inability to pay its debts or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower, Hondo Magdalena or any of their
3
respective subsidiaries seeking to adjudicate it a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
Debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it or
for any substantial part of its property; or the Borrower, Hondo
Magdalena or any of their respective subsidiaries shall take any
corporate or other action to authorize any of the actions set forth
above in this paragraph (d); or
(e) a final judgment or order for the payment of money in
excess of $75,000 shall be rendered against the Borrower, Hondo
Magdalena or any of their respective subsidiaries, and any such judgment
or order shall continue unsatisfied and in effect for a period of 60
consecutive days.
(f) any other default (whether in whole or in part) shall
occur in the due observance or performance of any other term or
provision of this Note, the Letter Agreements or the Valley Gateway
Mortgage;
(g) This Note, the Letter Agreements, the Valley Gateway
Mortgage (in whole or in part) shall cease to be in full force or effect
or shall be contested, challenged or repudiated by the Borrower or any
surety.
If this Note is placed in the hands of an attorney for collection
after default, or if all or any part of the indebtedness represented
hereby is proved, established or collected in any court or in any
bankruptcy, receivership, debtor relief, probate or other court
proceedings, Borrower and all endorsers, sureties and guarantors of this
Note jointly and severally agree to pay reasonable attorneys' fees and
collection costs to the holder hereof in addition to the principal and
interest payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note
hereby severally waive demand, presentment for payment, protest, notice
of protest, notice of intention to accelerate the maturity of this Note,
diligence in collection, the bringing of any suit against any party and
any notice of or defense on account of any extensions, renewals, partial
payments or changes in any manner of or in this Note or in any of its
terms, provisions and covenants, or any releases or substitutions of any
security, or any delay, indulgence or other act of any trustee or any
holder hereof, whether before or after maturity.
This Note and the rights and duties of the parties hereto shall be
governed by the laws of the State of New York (other than those that
would defer to the substantive laws of another jurisdiction). Without
in any way limiting the preceding choice of law, the parties intend
(among other things) to thereby avail themselves of the benefit of
Section 5-1401 of the General Obligations Law of the State of New York.
All notices and other communications provided for hereunder shall
be in writing and shall be delivered to the addressees at the applicable
addresses set forth below by mail, telecopy, Federal Express or other
equivalent overnight carrier or by telephone (confirmed in writing
within 24 hours) or telecopy or hand-delivered, if to Borrower, to it at
Hondo Oil & Gas Company, 10375 Richmond Avenue, Suite 900, Houston, TX
4
77042, telephone (713) 954-4600, telecopier (713) 954-4601, Attention:
John J. Hoey; if to Lender, to it at London Australian & General
Property Company, 4 Grosvenor Place, London, SW1X 7DL England, telephone
011-44-171-201-6000, telecopier 011-44-171-201-6100, Attention R. E.
Whitten with a copy to Rudolph H. Funke, Esq. at 805 Third Avenue, 18th
Floor, New York, NY 10022, telephone 212-715-7001, telecopy 212-838-
8141; or, as to each party, to it at such other address as shall be
designated by such party in a written notice to the other party. All
such notices and communications shall not be effective until received by
Lender.
Borrower hereby irrevocably submits to the jurisdiction of any New
York State or United States Federal court sitting in New York City over
any action or proceeding arising out of or relating to the Letter
Agreements, this Note or the Valley Gateway Mortgage, and hereby
irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such New York State or Federal
court. Borrower irrevocably consents to the service of any and all
process in any such action or proceeding by sending copies of such
process to it at its address and in the manner determined under the
immediately preceding paragraph hereof. Borrower agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. Borrower further waives any objections to venue
in such State and any objection to an action or proceeding in such State
on the basis of forum non conveniens. Borrower further agrees that any
action or proceeding brought by it against Lender shall be brought only
in New York State or United States Federal court sitting in New York
County, New York. Borrower and Lender waive any right it may have to
jury trial. Nothing in this paragraph shall affect the right of Lender
to serve legal process in any other manner permitted by law or affect
the right of Lender to bring any action or proceeding against Borrower
or any of its properties in the courts of any other jurisdictions. To
the extent that Borrower has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether from
service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its
property, Borrower hereby irrevocable waives such immunity in respect of
its obligations under the Letter Agreements, this Note and the Valley
Gateway Mortgage.
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
-------------------------------
John J. Hoey, President
[END OF PAGE]
SCHEDULE TO NOTE
Amount of Principal Principal Notation
Date Advance Paid Outstanding Made By
---- --------- --------- ----------- --------
Carryover
12/18/97 from Prior -- $4,672,858.12
Note
5
Hondo Oil & Gas Company
10375 Richmond Avenue
Houston, Texas 77042
As of 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"), Via Verde Development
Company, a California corporation, Newhall Refining Co., Inc., a
Delaware corporation, and London Australian & General Property Company
Limited, a United Kingdom corporation ("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"); and
(b) Amended and Restated Letter Agreement dated December 20, 1991,
between Hondo and Lonrho Plc ("Lonrho"), as amended (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 Plc (the "Lonrho Notes").
On December 17, 1993, Hondo and Thamesedge and Lonrho, predecessors
in interest to LAGP, entered into a Letter Agreement with respect to the
Thamesedge Note Purchase Agreement, the Thamesedge Note, the Lonrho Loan
Agreement and the Lonrho Notes. Pursuant to Section 7 of that Letter
Agreement, Thamesedge and Lonrho agreed that the Thamesedge Note and
Lonrho Notes would be subordinated in right of payment to the prior
payment in full of certain obligations of Hondo.
This letter will serve to confirm that Section 7 of said Letter
Agreement was inadvertently included in said Letter Agreement and in
consideration for the extension of certain credit and the extension of
the maturity of obligations of the undersigned to LAGP, Section 7 is
hereby terminated.
Very truly yours,
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
-------------------------------
John J. Hoey, President
VIA VERDE DEVELOPMENT COMPANY
1
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 first above written:
LONDON AUSTRALIAN & GENERAL
PROPERTY COMPANY LIMITED
By: /s/ R. E. Whiiten
--------------------------------
R. E. Whitten, Director
2
[Facility Note]
AMENDED AND RESTATED PROMISSORY NOTE
US $7,500,000.00 As of December 18, 1997
FOR VALUE RECEIVED, Hondo Oil & Gas Company, a Delaware corporation
("Borrower"), hereby promises to pay to the order of London Australian &
General Property Company Limited, a United Kingdom corporation
("Lender"), the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND AND
00/100 DOLLARS (US $7,500,000.00) or so much as may be advanced
(including the addition of interest to principal) and outstanding
hereunder (the "Loans"), on January 15, 1999 (the "Maturity Date").
Borrower promises to pay interest on the unpaid principal balance hereof
from (and including) October 1, 1997 to (but excluding) the date of
payment in full of such amount at a rate per annum equal at all times to
six percent (6%) per annum (or the maximum interest rate permitted by
law, whichever is less). Interest shall be payable on each April 1 (for
the period through March 31) and October 1 (for the period through
September 30) until maturity; provided, however, that any amount of
principal that is not paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest from (and including) the
date on which such amount is due until (but excluding) the date such
amount is paid in full on demand, at a rate per annum equal at all times
to eleven percent (11%) per annum (or the maximum interest rate
permitted by law, whichever is less). Both interest and principal as
herein provided shall be payable in lawful money of the United States of
America at the offices of Lender, 4 Grosvenor Place, London SW1X 7DL
England, or at such other place as from time to time may be designated
in writing by Lender.
Notwithstanding anything in the foregoing to the contrary, if, in the
opinion of its Board of Directors, Borrower does not have sufficient
cash resources to pay interest on this Note when due, then Borrower may
offer to Lender a payment of the interest in shares of Borrower's common
stock, valued at (i) the last reported sales price regular way on the
interest due day or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices regular
way on such day, in either case on the American Stock Exchange or other
principal national securities exchange on which Borrower's common stock
is listed or, if not listed on any national securities exchange, on The
Nasdaq Stock Market's National Market System or, (ii) if (i) is not
applicable, the average of the bid and asked prices at the end of the
interest due day in the over-the-counter market as furnished by any New
York Stock Exchange member firm selected by Lender in good faith for
that purpose. In making this determination, Borrower's management will
not, without the consent of Lender, allocate cash resources to new
capital projects not related to the Opon Association Contract dated July
15, 1987 between Empressa Colombiana de Petroleos and Opon Development
Company. Lender will then notify Borrower whether it will either accept
the payment of interest in Borrower's common stock or add the amount of
interest due to the principal of this Note. If Lender accepts the
payment of interest in Borrower's common stock, Borrower will issue the
requisite number of shares to Lender within ten business days after
Borrower receives notice of acceptance from Lender. Lender recognizes
that any shares of Borrower's common stock that it may acquire by the
payment of interest in Borrower's common stock will not have been
1
registered under the Securities Act of 1933, as amended (the "Act"), and
may not be sold in the absence of an effective registration under the
Act or an exemption from the registration requirements of the Act. If
Lender so requests at any time and from time to time after the date
shares of he Company's common stock are issued to Lender pursuant to
this provision, Borrower will use its best efforts to effect
registration under the Act of the shares so issued.
No borrowing may be made by Borrower under this Note after the date
hereof, except pursuant to the immediately preceding paragraph. All
additions to principal (including the addition of interest to principal)
and payments made pursuant to this Note may be recorded by Lender on its
books and records or any Grid attached hereto, and such books and
records and any Grid attached hereto (or any statement or certificate of
Lender based thereon) shall be conclusive as to existence and amounts
thereof absent manifest error.
This Note is secured under, and entitled to the benefits of, that
certain Security Interest Agreement dated May 13, 1997 among the Lender,
the Borrower, Folio Trust Company Limited and Folio Nominees Limited (as
same has been and may be supplemented, modified, amended or restated
from time to time, the "Security Interest Agreement").
Borrower and Lender, as assignee of Thamesedge Ltd., in turn assignee of
Lonrho Plc ("Original Lender"), are parties to those certain letter
agreements dated November 10, 1994, December 22, 1995, December 13, 1996
and December 18, 1997, and as same may be from time to time further
supplemented, amended or restated, collectively, the "Letter
Agreements") pursuant to which 1994 Credit Letter Lender made loans to
Borrower in the total amount of US $5,000,000 and to which there has
been added to principal, pursuant to the Letter Agreements, accrued but
unpaid interest in the total amount of $455,545.22 through October 1,
1997.
Borrower hereby acknowledges, certifies and agrees that: (a) pursuant to
the Letter Agreements, Borrower has issued a Promissory Note dated
October 31, 1994 in the original principal amount of $5,000,000 (the
"Prior Note"); (b) pursuant to the Prior Note, Lender has made loans to
Borrower that are outstanding as of the date hereof in the aggregate
principal amount of U.S.$5,455,545.22, after giving effect to interest
added to principal of the Prior Note as hereinabove provided; (c) this
Note has been issued by Borrower to renew, extend, amend, restate and
replace the Prior Note (in order to, among other things, implement the
aforesaid December 18, 1997 letter agreement), to evidence all
indebtedness and other amounts outstanding under the Prior Note, and to
evidence any further advances of interest that may be added to principal
pursuant to the terms of this Note; (d) although issued in substitution
for and restatement of the Prior Note, this Note shall not be deemed to
have been issued in payment, satisfaction, cancellation or novation of
the Prior Note; and (e) Borrower's obligations to repay those loans
(with interest) to Lender and to perform or otherwise satisfy Borrower's
other obligations, as well as the security interests granted to Lender
by Borrower under the Security Interest Agreement, and any other related
loan documents (i) each remain and shall continue in full force and
effect, both before and after giving effect to this renewal and
extension, (ii) are not subject as of the date of this renewal and
extension to any defense, counterclaim, setoff, right of recoupment,
abatement, reduction or other claim or determination, and (iii) are and
2
shall be governed by the terms and provisions of this Note, the Letter
Agreements and the Security Interest Agreement.
Notwithstanding the foregoing, the Lender may, by notice to the Borrower
at any time thereafter, declare all or any portion of the principal
amount of this Note, all or any part of the then accrued but unpaid
interest thereon, and any or all other amounts payable hereunder to be
forthwith due and payable at any time after:
(a) the Borrower shall fail to pay any installment of principal of, or
interest on, this Note when due and such failure shall remain unremedied
for three (3) days;
(b) the Borrower, Hondo Magdalena Oil & Gas Limited, presently a
wholly-owned subsidiary of the Borrower ("Hondo Magdalena"), and any of
their respective subsidiaries shall (i) fail to pay any Debt (but
excluding indebtedness evidenced by this Note) of the Borrower, Hondo
Magdalena or such subsidiary (as the case may be), or any interest or
premium thereon, when due (whether upon scheduled maturity, required
prepayment, acceleration, demand or other notice or formality of any
kind) and such failure shall continue after the applicable grace period,
if any, specified in the agreement or instrument relating to such Debt
or (ii) fail to perform or observe any term, covenant or condition on
its part to be performed or observed under any agreement or instrument
relating to any such Debt, when required to be performed or observed,
and such failure shall continue after the applicable grace period, if
any, specified in such agreement or instrument, if the effect of such
failure to perform or observe is to accelerate, or to permit the
acceleration of, the maturity of such Debt; or any such Debt shall be
declared to be due and payable, or required to be prepaid (other than by
a regularly scheduled required prepayment), prior to the stated maturity
thereof. "Debt" means all (i) indebtedness for borrowed money, (ii)
obligations evidenced by bonds, debentures, notes or other similar
instruments, (iii) obligations to pay the deferred purchase price of
property or services, (iv) obligations as lessee under leases that have
been or should be, in accordance with generally accepted accounting
principles, recorded as capital leases, (v) obligations under direct or
indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to assure a
creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clauses (i) through (v) above, and
(vi) liabilities in respect of unfunded vested benefits under plans
covered by Title IV of ERISA;
(c) the Borrower shall have failed to furnish to Lender, by October 1,
1998, a proved gas reserve report of Netherland, Sewell & Associates
that shows that a minimum of 13,000,000 mcf (25%) of proved gas reserve
exists, which are subject to the Opon Association Contract in which
Hondo Magdalena then participates, above the proved gas reserve of
52,475,554 mcf at September 30, 1997;
(d) the Borrower, Hondo Magdalena or any of their respective
subsidiaries shall generally not pay its debts as they become due, shall
admit in writing its inability to pay its debts or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower, Hondo Magdalena or any of their
respective subsidiaries seeking to adjudicate it a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
3
Debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it or
for any substantial part of its property; or the Borrower, Hondo
Magdalena or any of their respective subsidiaries shall take any
corporate or other action to authorize any of the actions set forth
above in this paragraph (d); or
(e) a final judgment or order for the payment of money in excess of
$75,000 shall be rendered against the Borrower, Hondo Magdalena or any
of their respective subsidiaries, and any such judgment or order shall
continue unsatisfied and in effect for a period of 60 consecutive days.
(f) any other default (whether in whole or in part) shall occur in the
due observance or performance of any other term or provision of this
Note, the Letter Agreements or the Security Interest Agreement;
(g) This Note, the Letter Agreements, the Security Interest Agreement
(in whole or in part) shall cease to be in full force or effect or shall
be contested, challenged or repudiated by the Borrower or any surety.
If this Note is placed in the hands of an attorney for collection after
default, or if all or any part of the indebtedness represented hereby
is proved, established or collected in any court or in any bankruptcy,
receivership, debtor relief, probate or other court proceedings,
Borrower and all endorsers, sureties and guarantors of this Note jointly
and severally agree to pay reasonable attorneys' fees and collection
costs to the holder hereof in addition to the principal and interest
payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note hereby
severally waive demand, presentment for payment, protest, notice of
protest, notice of intention to accelerate the maturity of this Note,
diligence in collection, the bringing of any suit against any party and
any notice of or defense on account of any extensions, renewals, partial
payments or changes in any manner of or in this Note or in any of its
terms, provisions and covenants, or any releases or substitutions of any
security, or any delay, indulgence or other act of any trustee or any
holder hereof, whether before or after maturity.
This Note and the rights and duties of the parties hereto shall be
governed by the laws of the State of New York (other than those that
would defer to the substantive laws of another jurisdiction). Without
in any way limiting the preceding choice of law, the parties intend
(among other things) to thereby avail themselves of the benefit of
Section 5-1401 of the General Obligations Law of the State of New York.
All notices and other communications provided for hereunder shall be in
writing and shall be delivered to the addressees at the applicable
addresses set forth below by mail, telecopy, Federal Express or other
equivalent overnight carrier or by telephone (confirmed in writing
within 24 hours) or telecopy or hand-delivered, if to Borrower, to it at
Hondo Oil & Gas Company, 10375 Richmond Avenue, Suite 900, Houston, TX
77042, telephone (713) 954-4600, telecopier (713) 954-4601, Attention:
John J. Hoey; if to Lender, to it at London Australian & General
Property Company, 4 Grosvenor Place, London, SW1X 7DL England, telephone
011-44-171-201-6000, telecopier 011-44-171-201-6100, Attention R. E.
Whitten with a copy to Rudolph H. Funke, Esq. at 805 Third Avenue, 18th
Floor, New York, NY 10022, telephone 212-715-7001, telecopy 212-838-
4
8141; or, as to each party, to it at such other address as shall be
designated by such party in a written notice to the other party. All
such notices and communications shall not be effective until received by
Lender.
Borrower hereby irrevocably submits to the jurisdiction of any New York
State or United States Federal court sitting in New York City over any
action or proceeding arising out of or relating to the Letter
Agreements, this Note or the Security Interest Agreement, and hereby
irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such New York State or Federal
court. Borrower irrevocably consents to the service of any and all
process in any such action or proceeding by sending copies of such
process to it at its address and in the manner determined under the
immediately preceding paragraph hereof. Borrower agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. Borrower further waives any objections to venue
in such State and any objection to an action or proceeding in such State
on the basis of forum non conveniens. Borrower further agrees that any
action or proceeding brought by it against Lender shall be brought only
in New York State or United States Federal court sitting in New York
County, New York. Borrower and Lender waive any right it may have to
jury trial. Nothing in this paragraph shall affect the right of Lender
to serve legal process in any other manner permitted by law or affect
the right of Lender to bring any action or proceeding against Borrower
or any of its properties in the courts of any other jurisdictions. To
the extent that Borrower has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether from
service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its
property, Borrower hereby irrevocable waives such immunity in respect of
its obligations under the Letter Agreements, this Note and the Security
Interest Agreement.
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
--------------------------
John J. Hoey, President
[END OF PAGE]
SCHEDULE TO NOTE
Amount of Principal Principal Notation
Date Advance Paid Outstanding Made By
---- --------- --------- ----------- --------
Carryover
12/18/97 from Prior -- $5,455,545.22
Note
5
FIRST AMENDMENT
TO
SECURITY INTEREST AGREEMENT
Security interest in Securities
DATED this 18th day of March 1998
BETWEEN:
(1) LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED, a company
incorporated in England whose registered office is a 4 Grosvenor
Place, London SW1X 7DL, England ("Lender"), as assignee of
THAMESEDGE LIMITED, a company incorporated in England whose
registered office is a 4 Grosvenor Place, London SW1X 7DL, England
("Original Lender")
AND
(2) HONDO OIL & GAS COMPANY, a Delaware corporation whose principal
office is at 10375 Richmond Avenue, Suite 900, Houston, Texas 77042
USA (the "Debtor")
AND
(3) FOLIO TRUST COMPANY LIMITED, a company incorporated in Jersey whose
registered office is at Westaway Chambers, 39 Don Street, St.
Helier, Jersey, Channel Islands ("Folio Trust")
AND
(4) FOLIO NOMINEES LIMITED, a company incorporated in the British
Virgin Islands whose administrative office is at Westaway Chambers,
39 Don Street, St. Helier, Jersey, Channel Islands ("Folio
Nominees")
WHEREAS
(A) The Debtor has entered into a certain Security Interest
Agreement, dated May 13, 1997 (the "Original Security Interest
Agreement"), in favor of the Original Lender, in which the Debtor (among
other things) granted a lien and security interest in certain Collateral
to the Original Lender;
(B) London Australian & General Property Company Limited has
received an assignment from Thamesedge Limited ("Thamesedge") of all of
the Obligations and all of Thamesedge's rights and duties under the
Original Security Interest Agreement;
(C) The Lender has agreed to extend additional credit to the
Debtor and to extend the maturity dates of the Obligations;
(D) As a condition thereto, the Lender has requested, and the
Debtor has agreed, to enter into this Amendment;
(E) Capitalized terms used and not otherwise defined or amended in
this Amendment shall have the meanings respectively assigned to them in
(or determined in accordance with) the Original Security Interest
Agreement.
1
In consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth, IT IS HEREBY AGREED AS FOLLOWS:
1. Amendment to Original Security Interest Agreement. The
Original Security Interest Agreement is hereby amended as of the date
first written above as follows:
(A) All references in the Original Security Interest
Agreement or in this Amendment to "this Agreement" or "this Security
Interest Agreement", or similar references, shall mean the Original
Security Interest Agreement, as amended by this Amendment, and as the
same may be further amended, restated or otherwise modified or
supplemented from time to time in accordance with the terms thereof.
This Amendment may be referred to in this Agreement as the "First
Security Interest Agreement Amendment".
(B) In Section 1 of the Original Security Interest Agreement,
clauses (i), (ii) and (iii) are amended to read:
"(i) all monies and liabilities payable under the credit
and loan facilities (as same has been and may be
supplemented, modified, amended or restated from
time to time) described in the First Schedule;
(ii) any other indebtedness or liabilities whatsoever of
the Debtor now existing or hereafter incurred on any
account or accounts in favor of the Lender; and
(iii) all other costs, charges, legal or other
expenses (incurred by the Lender in respect of the
facilities detailed in the First Schedule) on a full
and unqualified indemnity basis;
(collectively the "Obligations"):"
(C) In Section 8, the following new paragraph is added at
the end thereof without the deletion or modification of any other
material:
"With respect to any Collateral and subject to any contrary
requirement of applicable law, (x) the Lender shall collect
the cash proceeds received from any sale or other liquidation
or disposition or from any other source and (y) after
deducting all costs and expenses incurred by the Lender and
any person designated by the Lender to take any of the actions
in connection with such collection and sale or other
liquidation or disposition (including attorneys'
disbursements, expenses and fees), the Lender in its sole and
absolute discretion may retain the same as additional or
substitute Collateral or may apply the same (first to interest
then to principal) to the Obligations described in and in
direct order set forth on the First Schedule. In the event
any funds remain after satisfaction in full of all of the
Obligations, then the remainder shall be returned to the
Debtor, subject, however, to any other rights or interests the
Lender may have therein under any other instrument, agreement
or document or applicable law. If the amount of all proceeds
received with respect to and in liquidation of the Collateral
2
that shall be applied to payment of the Obligations shall be
insufficient to pay and satisfy all of the Obligations in
full, the Debtor acknowledges and agrees that the Debtor shall
remain and be jointly and severally liable for any deficiency.
(D) The First Schedule is amended to read as follows:
FIRST SCHEDULE
The Obligations
1. Amended and Restated Note dated as of 18th December, 1997
in the principal amount of US$7,500,000 (seven million
five hundred thousand United States dollars) which
amends, restates and replaces that certain Note dated
31st October, 1994, in the principal amount of
US$5,000,000.00 (five million United States dollars), as
assigned to Thamesedge and, in turn, to London Australian
& General Property Company ("LAGP"), as same may be
supplemented, modified, amended or restated from time to
time (the "Facility Note");
2. Amended and Restated Revolving Credit Agreement dated 2nd
July, 1997 between Debtor and Lender, as same has been,
and as same may be, supplemented, modified, amended or
restated from time to time, including any Promissory Note
or Notes issued thereunder, as same has been, and as same
may be, supplemented, modified, amended or restated from
time to time (the "Revolving Credit Note");
3. Amended and Restated Note dated as of 18th December, 1997
in the principal amount of US$4,500,000 (four million
five hundred thousand United States dollars) which
amends, restates and replaces that certain Note dated
30th April, 1993, in the principal amount of
US$3,000,000.00 (three million United States dollars)
from Via Verde Development Company ("Via Verde") to
Lonrho, as assigned to Thamesedge and, in turn, to LAGP,
as same may be supplemented, modified, amended or
restated from time to time, including to add unpaid
interest to principal (the "Via Verde Note"), secured by
a deed of trust recorded as Instrument No. 93-840817 in
the Real Property Records of Los Angeles County,
California as same has been, and as same may be,
supplemented, modified, amended or restated from time to
time (the "Via Verde Mortgage"), and guaranteed by Debtor
in a Guaranty dated 30th April, 1993 as same has been,
and as same may be, supplemented, modified, amended or
restated from time to time (the "Hondo Guaranty");
4. Amended and Restated Note dated as of 18th December, 1997
in the principal amount of US$5,500,000 (five million
five hundred thousand United States dollars) which
amends, restates and replaces that certain Note dated
25th June, 1993, in the principal amount of
US$4,000,000.00 (four million United States dollars) from
Hondo to Lonrho, as assigned to Thamesedge and, in turn,
to LAGP, as same may be supplemented, modified, amended
or restated from time to time, including to add unpaid
3
interest to principal (the "Valley Gateway Note"),
secured by a deed of trust dated 30th August, 1993,
granted by Borrower and Newhall Refining Co., Inc.
("Newhall") recorded as Instrument No. 93-2006475 in the
Real Property Records of Los Angeles, California, as same
has been, and as same may be, supplemented, modified,
amended or restated from time to time (the "Valley
Gateway Mortgage");
5. Consolidated, Amended and Restated Note dated 18th
December, 1997 in the principal amount of US$40,000,000
(forty million United States dollars) which consolidates,
amends, restates and replaces that certain Notes dated
1st September, 1991, in the original principal amount of
US$10,000,000.00 (ten million United States dollars);
dated 1st November, 1991 in the original principal amount
of US$9,000,000.00 (nine million United States dollars);
and dated 20th December, 1991, in the original principal
amount of US$13,000,000.00 (thirteen million United
States dollars) from Debtor to Lonrho Plc ("Lonrho"), as
assigned to Thamesedge and, in turn, to LAGP, as each has
been, and as each may be, supplemented, modified,
amended, consolidated and/or restated from time to time,
including to add unpaid interest to principal (the
"Lonrho Notes");
6. Note Purchase Agreement dated 28th November, 1988,
between Debtor (formerly known as Pauley Petroleum Inc.)
and Thamesedge Limited ("Thamesedge"), as same has been,
and as same may be, supplemented, modified amended or
restated from time to time (the "Thamesedge Note Purchase
Agreement") and an Amended and Restated Note dated as of
18th December, 1997 in the principal amount of
US$75,000,000 (seventy-five million United States
dollars) which amends, restates and replaces that certain
Note dated 30th November, 1988, for US$75,000,000.00
(seventy-five million United States dollars) from Debtor
to Thamesedge, as same may be supplemented, modified,
amended or restated from time to time, including to add
unpaid interest to principal (the "Thamesedge Note");
The Thamesedge Note, the Lonrho Notes, the Via Verde
Notes, the Valley Gateway Note, the Facility Note and the
Revolving Credit Note, are collectively referred to as
the "Indebtedness";
By assignment dated 29th March, 1996, between Lonrho and
Thamesedge, Lonrho assigned all of its interests in any
Indebtedness owed to it to Thamesedge; and
By assignment dated 29th August, 1997, between Thamesedge
and LAGP, Thamesedge assigned all of its interest in any
Indebtedness owed to it to LAGP.
2. Acknowledgment. The Debtor hereby acknowledges and certifies
and agrees that: (a) the pledge and security interest granted by the
Debtor to the Lender under this Agreement as Collateral for the
Obligations (i) remains and shall continue in full force and effect,
both before and after giving effect to this Amendment, (ii) is not
4
subject to any defence, counterclaim, set off, right of recoupment,
abatement, reduction or other claim or determination, and (iii) is and
shall continue to be governed by the terms and provisions of the
Original Security Interest Agreement, as amended by this Amendment and
as the same may be further amended or otherwise modified from time to
time in accordance with the terms thereof.
3. Representations and Warranties. To induce the Lender to enter
into this Amendment and consummate the transactions contemplated hereby,
the Debtor hereby represents and warrants to the Lender that as of the
date of this Amendment the representations and warranties set forth in
the Agreement are true and correct in all material respects with the
same effect as though those representations and warranties had been made
on and as of the date hereof.
4. Counterparts. This Amendment may be signed in two or more
counterpart copies, each of which may be executed by one or more of the
parties hereto, but all of which, when taken together, shall constitute
a single agreement binding upon all of the parties hereto.
5. Governing Law, Etc. This Amendment shall be governed by and
construed in accordance with the applicable terms and provisions of the
Original Security Interest Agreement (as amended hereby), which terms
and provisions are incorporated herein by reference.
[END OF PAGE]
6. Agreement to Continue as Amended. The Original Security
Interest Agreement, as amended by this Amendment, shall remain and
continue in full force and effect from and after the date hereof.
IN WITNESS whereof the parties hereto have hereunto set their hands and
seals the day and year first above written.
The Common Seal of
LONDON AUSTRALIAN & GENERAL PROPERTY
COMPANY LIMITED
was hereunto affixed
in the presence of:
/s/ R.E. Whitten Director
-------------------------------
/s/ N. J. Morrell Director
-------------------------------
Signed by
duly authorized
for and on behalf of:
HONDO OIL & GAS
COMPANY
/s/ John J. Hoey President
-------------------------------
The Common Seal of
FOLIO TRUST COMPANY
LIMITED
5
was hereunto affixed
in the presence of:
/s/ R. David Johnson Director
-------------------------------
/s/ Nicholas St. Clair Morgan Director
-------------------------------
The Common Seal of
FOLIO NOMINEES LIMITED
was hereunto affixed
in the presence of:
/s/ R. David Johnson Director
-------------------------------
/s/ Nicholas St. Clair Morgan Director
-------------------------------
6
FIRST AMENDMENT
TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
Introduction
This FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT
AGREEMENT (this "Amendment"), is dated as of December 18, 1997 and is
entered into by and between HONDO OIL & GAS COMPANY, a Delaware
corporation (the "Borrower"), and LONDON AUSTRALIAN & GENERAL PROPERTY
COMPANY LIMITED, a United Kingdom corporation (the "Lender"), as
assignee of Thamesedge, Ltd.
Recitals
The Borrower and the Lender (as assignee of Thamesedge Ltd.)
are parties to a Revolving Credit Agreement dated as of June 28, 1996,
as same has been amended and restated pursuant to an Amended and
Restated Revolving Credit Agreement dated as of July 2, 1997 (the
"Existing Loan Agreement"), pursuant to which there has been established
a $20,500,000 revolving credit facility in favor of the Borrower.
Capitalized terms used and not otherwise defined or amended in this
Amendment shall have the meanings respectively assigned to them in the
Existing Loan Agreement.
The Borrower has requested that the Lender increase the
Lender's Commitment to $27,500,000 and $7,500,000 to cover potential
interest that may be added to principal pursuant to Section 2.05 of the
Existing Loan Agreement. The Lender is willing to so increase the
Commitment based on the Borrower's representation that, by October 1,
1998, the Lender shall have received a report that Borrower's proved
reserves will have increased to a minimum of 65,475,554 mcf and the
Borrower's agreement that if its proved reserves fail to reach such
level, an Event of Default will occur.
The Borrower has requested that the Lender enter into this
Amendment in order to reflect the foregoing and certain other amendments
to the Existing Loan Agreement, and the Lender has agreed to do so, all
upon the terms and provisions and subject to the conditions hereinafter
set forth.
Agreement
In consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth, the parties hereto hereby agree as
follows:
Section 1. Amendment to Existing Loan Agreement. The
Existing Loan Agreement is hereby amended as of the date first written
above as follows:
(A) The definition of the terms "Agreement" , "this
Agreement" and "Lender" in the introductory paragraph are hereby amended
to read as follows:
"Agreement" and "this Agreement" shall mean the Amended and
Restated Revolving Credit Agreement, together with all schedules
1
and exhibits thereto, as amended by the First Loan Amendment, and
as the same may be supplemented, modified, amended or restated from
time to time.
"Lender" shall mean London Australian & General Property
Company Limited, a United Kingdom corporation.
(B) In Section 1.01 of the Existing Loan Agreement, the
definitions of "Credit Documents" , "Guaranty" and "Note" are hereby
deleted in their entirety, and the following new definitions are hereby
inserted in their respective places:
"Credit Documents" means the Agreement, the Note, the Guaranty
and the Security Agreement.
"Guaranty" shall mean the Guaranty from the Guarantor to the
Original Lender dated as of July 2, 1997, as assigned by the
Original Lender to the Lender, as amended by the First Guaranty
Amendment and as the same may be supplemented, modified, amended or
restated from time to time.
"Note" shall mean the Amended and Restated Promissory Note of
the Borrower substantially in the form of Exhibit A to the First
Loan Amendment.
(C) In Section 1.01 of the Existing Loan Agreement, the
following new definitions of "First Guaranty Amendment", "First Loan
Amendment", "First Security Agreement Amendment", "Interest Advance",
"Original Lender" and "Security Agreement" are hereby inserted in their
respective proper alphabetical positions without the deletion or
modification of any other material:
"First Guaranty Amendment" shall mean the First Amendment
dated as of December 18, 1997 to the Guaranty in substantially the
form of Exhibit B to the First Loan Amendment.
"First Loan Amendment" shall mean the First Amendment dated as
of December 18, 1997 to Amended and Restated Revolving Credit
Agreement between the Borrower and the Lender.
"First Security Agreement Amendment" shall mean the First
Amendment dated December 18, 1997 to the Security Agreement in
substantially the form of Exhibit C to the First Loan Amendment.
"Interest Advances" has the meaning set forth in Section 2.01.
"Original Lender" shall mean Thamesedge Ltd.
"Security Agreement" shall mean the Security Interest
Agreement dated May 13, 1997 between the Original Lender (and
assigned to Lender), the Borrower, Folio Trust Company Limited, a
Jersey company, and Folio Nominees Limited, a British Virgin
Islands company, as mended by the First Security Agreement
Amendment and as the same may be supplemented, modified, amended or
restated from time to time.
(D) Section 2.01 of the Existing Loan Agreement is hereby
deleted in its entirety, and the following new section is hereby
inserted in its place:
2
"SECTION 2.01 The Advances. The Lender agrees, on and
subject to the terms and conditions hereinafter set forth and
provided no Event of Default has occurred and is continuing,
to make advances (the "Advances") to the Borrower from time to
time during the period from the date hereof until the
Termination Date in an aggregate amount not to exceed at any
time outstanding $35,000,000, as such amount is reduced from
time to time pursuant to Section 2.03 (the "Commitment");
provided, however, that $7,500,000 of the Commitment may only
be used to fund interest added to principal of the note
pursuant to Section 2.05 (the "Interest Advances"). Each
Advance shall be in an amount not less than $100,000. Within
the limits of the Commitment, the Borrower may borrow, prepay
pursuant to Section 2.04(a) and reborrow under this Section
2.01."
(E) Section 2.02 of the Existing Loan Agreement is hereby
deleted in its entirety, and the following new section is hereby
inserted in its place:
"SECTION 2.02 Making the Advances. Each Advance (other
than an Interest Advance which shall be made by book entry)
shall be made on at least three Business Days notice from the
Borrower to the Lender specifying the date and amount thereof.
Not later than 10:00 a.m., London time, on the date of such
Advance and upon fulfillment of the applicable conditions set
forth in Article III, the Lender will make such Advance
available to the Borrower in immediately available funds at
such account and location as Borrower may designate in
writing."
(F) Section 2.03 of the Existing Loan Agreement is hereby
deleted in its entirety, and the following new section is hereby
inserted in its place:
"SECTION 2.03 Optional and Mandatory Reductions of
Commitment. Without any notice to the Borrower or any other
action by an Person, the Commitment shall be automatically and
permanently reduced (i) by an amount equal to the aggregate
principal amount of the Advances repaid (or due but not
repaid) pursuant to Section 2.04(c); and (ii) in accordance
with Section 6.01."
(G) At the conclusion of Section 6.01(g) of the Existing
Loan Agreement, the following is hereby inserted:
"; and"
(H) In Section 6.01 of the Existing Loan Agreement, the
following new subsection (h) is hereby inserted at the end thereof
without deletion or (except as provided in clause (E) above)
modification of any other material:
"(h) the Borrower shall have failed to furnish to Lender, by
October 1, 1998, a proved gas reserve report of Netherland,
Sewell & Associates that shows that a minimum of 13,000,000
mcf (25%) of proved gas reserve exists, which are subject to
the Opon Association Contract in which Hondo Magdalena then
3
participates, above the proved gas reserve of 52,475,554 mcf
at September 30, 1997."
(I) In Section 7.02 of the Existing Loan Agreement, the
address of the Lender is amended by deleting the present address and
inserting the following:
"if to the Lender, to it at London Australian & General
Property Company Limited, 4 Grosvenor Place, London, SW1X 7DL,
England, telephone 011-44-171-201-600, telecopier 011-44-171-
201-6100, Attention Robin Whitten with a copy to Rudolph H.
Funke, Esq. at 805 Third Avenue, 18th Floor, New York, NY
10022, telephone 212-715-7001, telecopy 212-838-8141;"
(J) Exhibit A to the Existing Loan Agreement is hereby
deleted in its entirety, and Exhibit A to this Amendment is hereby
inserted in its place.
Section 2. Acknowledgment of Outstanding Loans. The
Borrower hereby acknowledges, certifies and agrees that: (a) pursuant
to the Existing Loan Agreement, the Lender has made loans to the
Borrower that are outstanding as of the date of this Amendment in the
aggregate principal amount of $18,866,026.56 (including interest of
$1,166,026.56 that has been added to principal in accordance with
Section 2.05 of the Agreement); and (b) the obligations of the Borrower
to repay those loans (with interest) to the Lender and to perform or
otherwise satisfy its other obligations, as well as the security
interests in the Collateral (as defined in the Security Agreement)
granted by the Borrower to the Lender in the Security Agreement and the
obligations of the Guarantor in the Guaranty: (i) each remain and shall
continue in full force and effect, both before and after giving effect
to this Amendment, (ii) are not subject to any defense, counterclaim,
setoff, right of recoupment, abatement, reduction or other claim or
determination, and (iii) are and shall continue to be governed by the
terms and provisions of the Existing Loan Agreement and other Credit
Documents as supplemented, modified and amended by this Amendment.
Section 3. Bringdown of Representations, Etc. As of the
date of this Amendment, both before and after giving effect to the terms
and provisions of this Amendment, and both prior to and after giving
effect to any requested Advance: (a) the representations and warranties
of the Borrower set forth in the Existing Loan Agreement and in the
Security Agreement and of the Guarantor set forth in the Guaranty are
true and correct in all material respects with the same effect as though
those representations and warranties had been made on and as of the date
hereof; (b) no Event of Default or Default has occurred and is
continuing; (c) the Board of Directors of the Borrower has duly
authorized the execution and delivery by the Borrower of the Existing
Loan Agreement, the First Loan Amendment and the First Security
Agreement Amendment by the Borrower; (d) the Board of Directors of the
Guarantor and the Borrower, as sole shareholder of the Guarantor (with
authorization by the Board of Directors of the Borrower), has authorized
the execution and delivery by the Guarantor of the Guaranty and the
First Guaranty Amendment; and (e) there are no actions, suits or
proceedings pending or, to the best knowledge of the undersigned,
threatened or contemplated by any person for the liquidation,
dissolution or bankruptcy of the Borrower or the Guarantor or otherwise
threatening their respective existences or challenging or calling into
question the power or authority of the Borrower or the Guarantor to
4
execute or deliver any Credit Document to which it is or will be a party
or to perform any of its obligations thereunder.
Section 4. Counterparts. This Amendment may be signed in
two or more counterpart copies of the entire document or of signature
pages to the document, each of which may be executed by one or more of
the parties hereto, but all of which, when taken together, shall
constitute a single agreement binding upon all of the parties hereto.
Section 5. Governing Law, Etc. Sections 7.06 ("Binding
Effect"; Governing Law") and 7.09 ("Jurisdiction") of the Existing Loan
Agreement are incorporated herein by reference and shall pertain
separately to this First Loan Amendment as well as the Existing Loan
Agreement and the Agreement.
Section 6. Agreement to Continue as Amended. The Existing
Loan Agreement, as supplemented, modified and amended by this Amend-
ment, and the other Credit Documents, as amended pursuant to the
amendments and/or restatements thereto being entered into
contemporaneously herewith, shall remain and continue in full force and
effect after the date hereof.
Section 7. Entire Agreement. This Amendment contains the
entire agreement of the parties and supersedes all other repre-
sentations, warranties, agreements and understandings, oral or
otherwise, among the parties with respect to the matters contained in
this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective officers
thereunto duly authorized. as of the date first above written.
HONDO OIL &GAS COMPANY
By: /s/ John J. Hoey
-------------------------------
John J. Hoey; President
LONDON AUSTRALIAN & GENERAL
PROPERTY COMPANY LIMITED
By: /s/ R. E. Whitten
-------------------------------
R. E. Whitten; Director
[END OF PAGE]
EXHIBIT A
AMENDED AND RESTATED PROMISSORY NOTE
As of December 18, 1997 $35,000,000
FOR VALUE RECEIVED, the undersigned, HONDO OIL & GAS COMPANY, a
Delaware corporation (the "Borrower"), hereby promises to pay to the
order of LONDON AUSTRALIAN & GENERAL PROPERTY COMPANY LIMITED, a United
Kingdom corporation (the "Lender"), on January 1, 1999 the principal sum
5
of $35,000,000 or, if less than $35,000,000, the aggregate unpaid
principal amount of all Advances (as defined below) made by the Lender
to the Borrower pursuant to the Agreement (as defined below), together
with all accrued but unpaid interest and all interest added to the
principal of this Note (as such has been and may be supplemented,
modified, amended or restated from time to time, "this Note").
The Borrower promises to pay interest on the unpaid principal
amount of each Advance from the date of such Advance until such
principal amount is paid in full, at the rate per annum equal at all
times to 13% (or the maximum interest rate permitted by law, whichever
is less) on each October 1 and April 1 until maturity; provided,
however, that any amount of principal on Advances that are not paid when
due (whether at stated maturity, by acceleration or otherwise) shall
bear interest from the date on which such amount is due until such
amount is paid in full, payable on demand, at a rate per annum equal at
all time to 18% (or the maximum interest rate permitted by law,
whichever is less).
As used herein, "Business Day" means any day of the year on which
banks are not required or authorized to close in London or Houston,
Texas. All computations of interest shall be made by the Lender on the
basis of a year of 360 days and the actual number of days occurring in
the period from which such interest is payable. Whenever any payment
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of payment of
interest.
Both principal and interest are payable not later than 12:00 noon
London time on the day when due in lawful money of the United States of
America to the Lender at such account and place as Lender shall
designate in immediately available funds. Each Advance made by the
Lender to the Borrower pursuant to the Agreement, and all payments made
on account of principal thereof, may, but need not be recorded by the
Lender on its books and records on the grid attached hereto and such
books and records shall be conclusive as to the existence and amounts
thereof absent manifest error. Failure to make any such entry or
endorsement shall not effect the actual principal amount outstanding or
the enforceability of this Note.
This Amended and Restated Note (i) has been issued by Borrower to
renew, extend, amend, restate and replace the Note dated July 2, 1997
issued by Borrower in the principal amount of $20,500,000 (the "Prior
Note"), (ii) is the "Note" referred to in, and is entitled to the
benefits of, the Amended and Restated Revolving Credit Agreement between
the Borrower and the Lender dated as of July 2, 1997 (as same has been
and may be supplemented, modified, amended or restated from time to
time, the "Agreement"), (iii) evidences all indebtedness and other
amounts outstanding from time to time under the Agreement and (iv)
although issued in substitution for and restatement of the Prior Note,
this Note shall not be deemed to have been issued in payment,
satisfaction, cancellation or novation of the Prior Note. The
Agreement, among other things: (1) provides for the making of advances
(the "Advances") by the Lender to the Borrower and (2) contains
provisions for acceleration of the maturity hereof upon the happening of
certain stated events and also for prepayments an account of principal
hereof prior to the maturity hereof upon the terms and conditions
specified therein.
6
This Note is a renewal and replacement of that certain other note
in the amount of $20,500,000 from Borrower to Lender dated as of July 2,
1997 which, in turn, replaced a note in the amount of $13,500,000 from
Borrower to Lender dated June 28, 1996.
This Note is guaranteed by the Amended and Restated Guaranty of
Hondo Magdalena Oil & Gas Limited dated July 2, 1997 (as the same has
been and may be supplemented, modified, amended or restated from time to
time, the "Guaranty").
Payment of this note is secured pursuant to the Security Agreement
dated May 13, 1997 between the Lender, the Borrower, Folio Trust Company
Limited, a Jersey company, and Folio Nominees Limited, a British Virgin
Islands company (as the same has been and may be supplemented, modified,
amended or restated from time to time, the "Security Agreement").
This Note shall be governed by, and construed in accordance with,
the laws of the State of New York (other than those that would defer to
the substantive laws of another jurisdiction). Without in any way
limiting the preceding choice of law, the parties intend (among other
things) to thereby avail themselves of the benefit of Section 5-1401 of
the General Obligations Law of the State of New York.
The Borrower hereby irrevocably submits to the jurisdiction of any
New York State or United States Federal court sitting in New York City
over any action or proceeding arising out of or relating to this Note or
the Agreement, and hereby irrevocably agrees that all claims in respect
of such action or proceeding may be heard and determined in such New
York State or Federal court. The Borrower irrevocably consents to the
service of any and all process in any such action or proceeding by
sending copies of such process to it at its address and in the manner
determined under Section 7.02 of the Agreement. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. The Borrower further
waives any objections to venue in such State and any objection to an
action or proceeding in such State on the basis of forum non conveniens.
The Borrower further agrees that any action or proceeding brought by it
against the Lender shall be brought only in New York State or United
States Federal court sitting in New York County, New York. The Borrower
and the Lender waive any right it may have to jury trial.
Nothing herein shall affect the right of the Lender to serve legal
process in any other manner permitted by law or affect the right of the
Lender to bring any action or proceeding against the Borrower or any of
its properties in the courts of any other jurisdictions.
To the extent that the Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process
(whether from service or notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise) with respect to
itself or its property, the Borrower hereby irrevocable waives such
immunity in respect of its obligations under the Credit this Note, the
Agreement and the Guaranty.
HONDO OIL & GAS COMPANY
7
By:
-------------------------------
John J. Hoey; President
[END OF PAGE]
SCHEDULE TO NOTE
Amount of Principal Principal Notation
Date Advance Paid Outstanding Made By
---- --------- --------- ----------- --------
Carryover
12/18/97 from Prior -- $18,866,026.56
Note
[END OF PAGE]
EXHIBIT B
FIRST GUARANTY AMENDMENT
As of December 18, 1997
Hondo Magdalena Oil & Gas Limited
c/o Hondo Oil & Gas Company
10375 Richmond Avenue, Suite 900
Houston, Texas 77042
Re: Guaranty
Gentlemen:
As you know, London Australian & General Property Company Limited is
in the process of amending its existing Amended and Restated Revolving
Credit Agreement, dated as of July 2, 1997 (as currently in effect, the
"Existing Loan Agreement"), with Hondo Oil & Gas Company (the
"Borrower"), which you guarantied pursuant to your Guaranty executed and
delivered as of July 2, 1997 (as currently in effect, the "Existing
Guaranty") in our favor (as assignee of Thamesedge Ltd., the "Original
Lender"). Under the proposed amendment, among other things (a) the
Commitment and, accordingly, the principal amount subject to the
Guaranty, is being increased to $35,000,000 (including $7,500,000 that
may represent interest added to principal), (b) an Event of Default is
being added to the Existing Loan Agreement to the effect that it shall
be an Event of Default if the Borrower shall have failed to furnish to
Lender, by October 1, 1998, a proved gas reserve report of Netherland,
Sewell & Associates that shows that a minimum of 13,000,000 mcf (25%) of
proved gas reserve exists, which are subject to the Opon Association
Contract in which Hondo Magdalena then participates, above the proved
gas reserve of 52,475,554 mcf at September 30, 1997 and (c) the
definition of the term "Credit Documents" is being amended to include
that certain Security Agreement dated May 13, 1997, as amended as of the
date hereof (as same may be supplemented, modified, amended or restated
from time to time).
We understand that you have reviewed a copy of the final version of
the proposed First Amendment to the Existing Loan Agreement, including,
without limitation, the proposed Amended and Restated Promissory Note
relating thereto and the Security Agreement (collectively, the "Loan
Agreement Amendments"). Capitalized terms used but not defined in this
letter are used as they are defined in the Existing Guaranty. For all
8
purposes, "Guaranty" means the Existing Guaranty, as modified by this
letter, and as the same may be further supplemented, modified, amended
and restated from time to time in the manner provided therein.
Please execute this letter to acknowledge your agreement to the Loan
Agreement Amendments and that your guarantee and other obligations under
the Guaranty remain and continue in full force and effect both before
and after giving effect to the Loan Agreement Amendments and related
documentation (including, without limitation, the matters set forth in
this letter). Our request to you in this instance does not obligate us
to notify you or seek your consent in the future as to any amendment or
other matter where (pursuant to your Guaranty, or otherwise) such notice
or consent is not required.
Your signature, where indicated below, also will constitute your
acknowledgment of and agreement to the following modifications to the
Existing Guaranty (without limiting the prior paragraph of this letter):
i. London Australian & General Property Company Limited has
become the "Lender" for purposes of the Existing Loan
Agreement, as amended by the Loan Agreement Amendments, the
Guaranty and the other Credit Documents;
ii. The Guaranty now covers, among other things, all amounts
borrowed and to be borrowed (and interest thereon) under the
Existing Loan Agreement, as amended by the Loan Agreement
Amendments;
iii. You represent and warrant that your representations and
warranties set forth in the Existing Guaranty are true and
correct in all material respects on and as of the date of
this letter, after giving effect hereto, with the same
effect as though those representations and warranties had
been made on and as of the date hereof; and
iv. Section 7 of the Existing Guaranty is amended to read as
follows:
"SECTION 7. Consent to Jurisdiction; Waiver of Immunities.
(a) Guarantor hereby irrevocably submits to the jurisdiction
of any New York or federal court sitting in New York in any
action or proceeding arising out of or relating to this Guaranty,
and the Guarantor hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined
in such New York or federal court. The Guarantor hereby
irrevocably waives, to the fullest extent they may effectively do
so, the defense of an inconvenient forum to the maintenance of
such action or proceeding. The Guarantor hereby irrevocably
appoints John J. Hoey (the "Process Agent"), with an office on
the date hereof at Hondo Oil & Gas Company, 10375 Richmond
Avenue, Suite 900, Houston, TX 77042, telephone (713) 954-4600,
telecopier (713) 954-4601, as its agent to receive, on behalf of
the Guarantor and its property, service of copies of the summons
and complaint and any other process that may be served in any
such action or proceeding. Such service may be made by mailing
or delivering a copy of such process to the Guarantor in care of
the Process Agent at the Process Agent's address above, and the
Guarantor hereby irrevocably authorizes and directs the Process
9
Agent to accept such service on its behalf. As an alternative
method of service, Guarantor also irrevocably consents to the
service of any and all process in any such action or proceeding
by the mailing of copies of such process to Guarantor at its
address specified in Section 11. Guarantor agrees that a final
judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.
(b) Nothing in this Section shall affect the right of the
Lender to serve legal process in any other manner permitted by
law or affect the right of the Lender to bring any action or
proceeding against Guarantor or its property in the courts of any
other jurisdictions.
(c) To the extent that Guarantor has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal
process (whether through service of notice, attachment prior to
judgment, attachment in aid of execution, execution or otherwise)
with respect to Guarantor or its property, Guarantor hereby
irrevocably waives such immunity in respect of its obligations
under this Guaranty."
v. Notices, requests and demands to the Lender, as set forth in
Section 11 of the Existing Guaranty, shall be in writing and
shall be effective when delivered to the Lender at London
Australia & General Property Company, Four Grosvenor Place,
London, SW1X 7DL, England, telephone 011-44-171-201-6000,
telecopier 011-44-171-201-6100, Attention: R. E. Whitten,
with a copy to Rudolph H. Funke, Esq. at 805 Third Avenue,
18th Floor, New York, NY 10022, telephone 212-715-7001,
telecopier 212-838-8141.
vi. This Guaranty shall be governed by the laws of the State
of New York (other than those that would defer to the
substantive laws of another jurisdiction). Without in any way
limiting the preceding choice of law, the parties intend
(among other things) to thereby avail themselves of the
benefit of Section 5-1401 of the General Obligations Law of
the State of New York.
Your signature, where indicated below, also will constitute your
acknowledgment of and agreement and certification that: (a) pursuant to
the Existing Loan Agreement, the Lender has made Advances (as defined)
to the Borrower that are outstanding as of the date of this letter in
the aggregate principal amount of $18,866,026.56 (including
$1,166,026.56 of interest added to principal); (b) the obligations of
the Borrower to repay all Advances (including those to be made pursuant
to the Loan Agreement Amendments) with interest, to the Lender and to
perform or otherwise satisfy all other obligations, as well as the
security interests in the Collateral (as defined in the Security
Agreement) granted by the Borrower to the Lender, (i) each remain and
shall continue in full force and effect, both before and after giving
effect to the transactions contemplated by this letter, (ii) are not
subject to any defense, counterclaim, setoff, right of recoupment,
abatement, reduction or other claim or determination, and (iii) are and
shall continue to be governed by the terms and provisions of the
Existing Loan Agreement and other Credit Documents, as amended by the
Loan Agreement Amendments and as same may be supplemented, modified,
10
amended or restated in the future; (e) your absolute, unconditional and
irrevocable guarantee to the Lender of the full and punctual payment and
satisfaction of the foregoing and any and all other obligations the
Borrower (i) remains and shall continue in full force and effect, both
before and after giving effect to the transactions contemplated by this
letter, (ii) is not subject to any defense, counterclaim, setoff, right
of recoupment, abatement, reduction or other claim or determination, and
(iii) is and shall continue to be governed by the terms and provisions
of the Existing Guaranty and other Credit Documents as supplemented,
modified and amended.
Very truly yours,
LONDON AUSTRALIAN & GENERAL
PROPERTY COMPANY LIMITED
By:
-------------------------------
ACKNOWLEDGED AND AGREED:
HONDO MAGDALENA OIL & GAS LIMITED
----------------------------------
11
FIRST GUARANTY AMENDMENT
As of December 18, 1997
Hondo Magdalena Oil & Gas Limited
c/o Hondo Oil & Gas Company
10375 Richmond Avenue, Suite 900
Houston, Texas 77042
Re: Guaranty
Gentlemen:
As you know, London Australian & General Property Company Limited is
in the process of amending its existing Amended and Restated Revolving
Credit Agreement, dated as of July 2, 1997 (as currently in effect, the
"Existing Loan Agreement"), with Hondo Oil & Gas Company (the
"Borrower"), which you guarantied pursuant to your Guaranty executed and
delivered as of July 2, 1997 (as currently in effect, the "Existing
Guaranty") in our favor (as assignee of Thamesedge Ltd., the "Original
Lender"). Under the proposed amendment, among other things (a) the
Commitment and, accordingly, the principal amount subject to the
Guaranty, is being increased to $35,000,000 (including $7,500,000 that
may represent interest added to principal), (b) an Event of Default is
being added to the Existing Loan Agreement to the effect that it shall
be an Event of Default if the Borrower shall have failed to furnish to
Lender, by October 1, 1998, a proved gas reserve report of Netherland,
Sewell & Associates that shows that a minimum of 13,000,000 mcf (25%) of
proved gas reserve exists, which are subject to the Opon Association
Contract in which Hondo Magdalena then participates, above the proved
gas reserve of 52,475,554 mcf at September 30, 1997 and (c) the
definition of the term "Credit Documents" is being amended to include
that certain Security Agreement dated May 13, 1997, as amended as of the
date hereof (as same may be supplemented, modified, amended or restated
from time to time).
We understand that you have reviewed a copy of the final version of
the proposed First Amendment to the Existing Loan Agreement, including,
without limitation, the proposed Amended and Restated Promissory Note
relating thereto and the Security Agreement (collectively, the "Loan
Agreement Amendments"). Capitalized terms used but not defined in this
letter are used as they are defined in the Existing Guaranty. For all
purposes, "Guaranty" means the Existing Guaranty, as modified by this
letter, and as the same may be further supplemented, modified, amended
and restated from time to time in the manner provided therein.
Please execute this letter to acknowledge your agreement to the Loan
Agreement Amendments and that your guarantee and other obligations under
the Guaranty remain and continue in full force and effect both before
and after giving effect to the Loan Agreement Amendments and related
documentation (including, without limitation, the matters set forth in
this letter). Our request to you in this instance does not obligate us
to notify you or seek your consent in the future as to any amendment or
other matter where (pursuant to your Guaranty, or otherwise) such notice
or consent is not required.
1
Your signature, where indicated below, also will constitute your
acknowledgment of and agreement to the following modifications to the
Existing Guaranty (without limiting the prior paragraph of this letter):
i. London Australian & General Property Company Limited has
become the "Lender" for purposes of the Existing Loan
Agreement, as amended by the Loan Agreement Amendments, the
Guaranty and the other Credit Documents;
ii. The Guaranty now covers, among other things, all amounts
borrowed and to be borrowed (and interest thereon) under the
Existing Loan Agreement, as amended by the Loan Agreement
Amendments;
iii. You represent and warrant that your representations and
warranties set forth in the Existing Guaranty are true and
correct in all material respects on and as of the date of
this letter, after giving effect hereto, with the same
effect as though those representations and warranties had
been made on and as of the date hereof; and
iv. Section 7 of the Existing Guaranty is amended to read as
follows:
"SECTION 7. Consent to Jurisdiction; Waiver of Immunities.
(a) Guarantor hereby irrevocably submits to the jurisdiction
of any New York or federal court sitting in New York in any
action or proceeding arising out of or relating to this Guaranty,
and the Guarantor hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined
in such New York or federal court. The Guarantor hereby
irrevocably waives, to the fullest extent they may effectively do
so, the defense of an inconvenient forum to the maintenance of
such action or proceeding. The Guarantor hereby irrevocably
appoints John J. Hoey (the "Process Agent"), with an office on
the date hereof at Hondo Oil & Gas Company, 10375 Richmond
Avenue, Suite 900, Houston, TX 77042, telephone (713) 954-4600,
telecopier (713) 954-4601, as its agent to receive, on behalf of
the Guarantor and its property, service of copies of the summons
and complaint and any other process that may be served in any
such action or proceeding. Such service may be made by mailing
or delivering a copy of such process to the Guarantor in care of
the Process Agent at the Process Agent's address above, and the
Guarantor hereby irrevocably authorizes and directs the Process
Agent to accept such service on its behalf. As an alternative
method of service, Guarantor also irrevocably consents to the
service of any and all process in any such action or proceeding
by the mailing of copies of such process to Guarantor at its
address specified in Section 11. Guarantor agrees that a final
judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.
(b) Nothing in this Section shall affect the right of the
Lender to serve legal process in any other manner permitted by
law or affect the right of the Lender to bring any action or
proceeding against Guarantor or its property in the courts of any
other jurisdictions.
2
(c) To the extent that Guarantor has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal
process (whether through service of notice, attachment prior to
judgment, attachment in aid of execution, execution or otherwise)
with respect to Guarantor or its property, Guarantor hereby
irrevocably waives such immunity in respect of its obligations
under this Guaranty."
v. Notices, requests and demands to the Lender, as set forth in
Section 11 of the Existing Guaranty, shall be in writing and
shall be effective when delivered to the Lender at London
Australia & General Property Company, Four Grosvenor Place,
London, SW1X 7DL, England, telephone 011-44-171-201-6000,
telecopier 011-44-171-201-6100, Attention: R. E. Whitten,
with a copy to Rudolph H. Funke, Esq. at 805 Third Avenue,
18th Floor, New York, NY 10022, telephone 212-715-7001,
telecopier 212-838-8141.
vi. This Guaranty shall be governed by the laws of the State
of New York (other than those that would defer to the
substantive laws of another jurisdiction). Without in any way
limiting the preceding choice of law, the parties intend
(among other things) to thereby avail themselves of the
benefit of Section 5-1401 of the General Obligations Law of
the State of New York.
Your signature, where indicated below, also will constitute your
acknowledgment of and agreement and certification that: (a) pursuant to
the Existing Loan Agreement, the Lender has made Advances (as defined)
to the Borrower that are outstanding as of the date of this letter in
the aggregate principal amount of $18,866,026.56 (including
$1,166,026.56 of interest added to principal); (b) the obligations of
the Borrower to repay all Advances (including those to be made pursuant
to the Loan Agreement Amendments) with interest, to the Lender and to
perform or otherwise satisfy all other obligations, as well as the
security interests in the Collateral (as defined in the Security
Agreement) granted by the Borrower to the Lender, (i) each remain and
shall continue in full force and effect, both before and after giving
effect to the transactions contemplated by this letter, (ii) are not
subject to any defense, counterclaim, setoff, right of recoupment,
abatement, reduction or other claim or determination, and (iii) are and
shall continue to be governed by the terms and provisions of the
Existing Loan Agreement and other Credit Documents, as amended by the
Loan Agreement Amendments and as same may be supplemented, modified,
amended or restated in the future; (e) your absolute, unconditional and
irrevocable guarantee to the Lender of the full and punctual payment and
satisfaction of the foregoing and any and all other obligations the
Borrower (i) remains and shall continue in full force and effect, both
before and after giving effect to the transactions contemplated by this
letter, (ii) is not subject to any defense, counterclaim, setoff, right
of recoupment, abatement, reduction or other claim or determination, and
(iii) is and shall continue to be governed by the terms and provisions
of the Existing Guaranty and other Credit Documents as supplemented,
modified and amended.
Very truly yours,
3
LONDON AUSTRALIAN & GENERAL
PROPERTY COMPANY LIMITED
By: /s/ R. E. Whitten
-------------------------------
ACKNOWLEDGED AND AGREED:
HONDO MAGDALENA OIL & GAS LIMITED
/s/ John J. Hoey
---------------------------------
4
Stand-Still Letter Agreement
This is a one hundred and fifty (150) day Stand-Still Agreement among
Hondo Oil & Gas Company ("Hondo") (Hondo together with all of its direct
and indirect subsidiaries, which include without limitation, Hondo
Magdalena Oil and Gas Limited ("Magdalena"), Newhall Refining Company,
Inc., and Via Verde Development Company, are collectively referred to
herein as "Hondo"), Lonrho PLC., Thamesedge, Ltd., London Australian &
General Property Company Limited (collectively, together with any of
their respective affiliates, parent corporations and direct and indirect
subsidiaries that assert claims against Hondo, "Lonrho"), and Amoco
Colombia Petroleum Company ("Amoco").
Amoco, Hondo and Lonrho agree to enter into a one hundred and fifty
(150) day Stand-Still Period from May 15, 1998 until October 15, 1998
(the "Stand-Still Period") for the benefit of Hondo and all of their
creditors in consideration of the following;
(1) Hondo hereby assigns to Amoco, as Operator of the Opon field: (I)
100% of all reimbursements due to Hondo by Ecopetrol for the Opon
Tier I Project well facilities and pipeline expenditures that will
be received during the Stand-Still Period, and; (II) The following
gas and liquids sale proceeds and tariff revenues attributable to
natural gas and liquids sold to Ecopetrol and/or Termo Santander,
S.C.A., E.S.P. during the months of April, May, June, July, and
August, 1998, independently of when they are received: (a) 100% of
Hondo's proceeds from the sales of natural gas and liquids to
Ecopetrol, (b) 100% of Hondo's proceeds from the sales of natural
gas to Termo Santander, S.C.A., E.S.P., and (c) 100% of Hondo's
tariff revenues from the Opon Tier 1 Pipeline; (all of the above
hereinafter the "Assigned Revenues").
Amoco shall remit to Hondo within five (5) days of receipt of the
Assigned Revenues the lesser of an amount equal to Hondo's share of
Ecopetrol's Tier 1 Pipeline operating expenses and El Centro gas
processing fee, or the Assigned Revenues. Any remaining Assigned
Revenues will be applied to cover Hondo's share of all current
operating expenses under the New Operating Agreement ("JOA") dated
August 9, 1993, in order to continue the normal operations of the
Opon Block in the Republic of Colombia during the term of this
Agreement, and thereafter, to any other amounts owed by Hondo with
respect to prior operating expenses incurred by Amoco under the
JOA. In the event that there are any amounts of the Assigned
Revenues left, after all amounts due by Hondo under the JOA are
paid, such amounts shall be remitted to Hondo immediately. For
purposes of this Agreement, the tariff shall be deemed to be US
$0.25 per MCF.
It is understood and agreed that Hondo shall continue paying its
share of Ecopetrol's Tier 1 Pipeline operating expenses and El
Centro gas processing fee during the Stand-Still Period.
Hondo shall immediately notify Ecopetrol and Termo Santander,
S.C.A., E.S.P. in writing in a form satisfactory to Amoco of the
assignment of funds to Amoco. If any of the Assigned Revenues are
received by Hondo, Hondo will within five (5) days of receipt of
said Assigned Revenues pay same to Amoco;
1
(2) Hondo shall cast its affirmative vote to approve pursuant to the
JOA all prior years' operating budgets presented by Amoco as
Operator of the Opon Block, included but not limited to the 1993,
1994, 1995, 1996 and 1997 budgets, in their entirety (as originally
presented) during the next Operating Committee Meeting called for
such purpose;
(3) Hondo represents and warrants hereby that Lonrho is the largest and
most significant creditor of Hondo and that Hondo owes $112,518,068
to Lonrho as of March 31, 1998;
(4) Lonrho hereby agrees to a one hundred and fifty (150) day Stand-
Still Agreement with respect to the foregoing amount owed by Hondo,
and agrees to be bound by the terms of this Agreement. Lonrho
further agrees, represents and warrants that it will not do
anything, directly or indirectly, in detriment of Hondo or that
would cause Hondo to file bankruptcy under the United States
Bankruptcy Code or the bankruptcy laws of any other jurisdiction or
to contest the validity and enforceability of the provisions
contained herein and shall be estopped from so doing. Amoco shall
have a claim and remedies under this Agreement against Lonrho if a
bankruptcy petition under the Bankruptcy Code is filed within the
one hundred and fifty (150) day Stand-Still Period, as a result of
Lonrho's breach of its undertaking under this paragraph. Without
limiting the generality of the foregoing, in the event of a breach
of this undertaking, Amoco shall be entitled to obtain seek money
damages, void agreements, avoid transfers or seek any other remedy
provided under the law;
(5) In consideration of the above Amoco agrees that during the Stand-
Still Period Amoco will:
(a) defer its right to cash call or invoice Hondo; and
(b) defer its right to exercise its default provisions under
the terms of the New Operating Agreement dated August 9, 1993.
It is accepted, agreed and understood that the foregoing Amoco's
obligations shall automatically terminate in the event of any
breach by any Party (other than Amoco) of any of their obligations
under this Agreement;
(6) It is not the intention of the Parties nor shall this Agreement be
construed as modifying, changing or superseding any of the
provisions contained in all prior agreements entered into by Amoco
and Hondo related to the Opon block in Colombia. In particular,
this Agreement does not modify, change or supersede any of the
provisions of the Farmout and new Operating Agreements dated August
9, 1993, and the Funding Agreement dated May 5, 1995;
(7) The Parties below represent and warrant that they have authority to
enter into this Agreement on behalf of the Parties for which they
sign;
(8) This Agreement constitutes the entire agreement of the Parties
concerning the matters addressed herein and supersedes any prior
discussions or communications whether written or oral related to
the subject matter hereof. This Agreement may only be amended or
modified in a writing that is signed by all the Parties hereto;
2
(9) This Agreement may be signed in counterparts, which together shall
constitute one and the same agreement. Counterparts may be
communicated by facsimile transmission and facsimiles and copies of
such counterparts shall be enforceable and admissible as evidence
of this Agreement;
(10) This Agreement shall be interpreted according to the laws of the
United States and the laws of the State of Texas, without
consideration of conflicts of law principles. Any disputes
hereunder shall be resolved in accordance with the following.:
(a) All disputes between two or more of the Parties in
connection with this Agreement whether arising during its term
or thereafter, shall be finally settled by arbitration under
the auspices and rules of the American Arbitration Association
to be held, unless otherwise agreed by the Parties, at
Houston, Texas, U.S.A. The arbitration shall be initiated by
any Party giving notice to the named respondent, with copies
to the other Parties, that it elects to refer the dispute to
arbitration, and that such Party (hereinafter referred to as
the "First Party") has so notified the American Arbitration
Association with the request that a panel of three arbitrators
be appointed in accordance with Rule 13 to hear the dispute.
Any Party not named in the notice who wishes to participate
shall promptly so notify the American Arbitration Association
and the other Parties so that it may participate in the
procedure provided for in Rule 13 if it wishes.
(b) Judgment on the award rendered may be entered in any
court having jurisdiction or application may be made for a
judicial acceptance of the award and an order for enforcement,
as the case may be. Neither the dispute nor any award may be
referred to courts of law for further adjudication on the
merits of the dispute.
(c) For the foregoing purposes, the Parties hereby consent to
the jurisdiction of the American Arbitration Association and
of the aforesaid tribunal, and agree that this Agreement may
be furnished to the Association to confirm the agreement of
the Parties.
IN WITNESS HEREOF, this Agreement has been executed by the duly
authorized representatives of the Parties as of this 8th 15th day of
May, 1998.
Amoco Colombia Petroleum Company
By: /s/ Alec Robinson
-------------------------------------------
Hondo Oil & Gas Company
By: /s/ John J. Hoey
-------------------------------------------
Hondo Magdalena Oil & Gas Limited
By: /s/ John J. Hoey
-------------------------------------------
Lonrho PLC.
3
By: /s/ Nicholas J. Morrell
-------------------------------------------
Thamesedge, Ltd.
By: /s/ Nicholas J. Morrell
---------------------------------------------
London Australian & General Property Company Limited
By: /s/ Nicholas J. Morrell
---------------------------------------------
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Hondo Oil & Gas
Company's Form 10-Q for the period identified
below. This information is qualified in its
entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<PERIOD-TYPE> 6-MOS
<CASH> 717
<SECURITIES> 0
<RECEIVABLES> 1,435
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,279
<PP&E> 40,728
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,856
<CURRENT-LIABILITIES> 144,957
<BONDS> 10,113
0
0
<COMMON> 13,798
<OTHER-SE> (122,012)
<TOTAL-LIABILITY-AND-EQUITY> 46,856
<SALES> 1,864
<TOTAL-REVENUES> 1,872
<CGS> 0
<TOTAL-COSTS> 650
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</TABLE>
