<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: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
1-8979
(Commission File Number)
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Ave, Ste. 900, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The registrant has one class of common stock outstanding. As of February 13,
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 THREE MONTHS ENDED DECEMBER 31, 1997
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1997 3
Consolidated Statements of Operations for the three
months ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three
months ended December 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 23
SIGNATURES 23
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
December 31, September 30,
1997 1997
------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $62 $1,019
Accounts receivable 439 296
Prepaid expenses and other 190 1
------------- -------------
Total current assets 691 1,316
Properties, net (Note 2) 44,114 40,612
Net assets of discontinued operations (Note 7) 2,210 2,137
Other assets 1,298 865
------------- -------------
$48,313 $44,930
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $3,624 $3,464
Current portion of long-term debt 280 265
Accrued expenses and other (Note 3) 3,330 3,421
------------- -------------
Total current liabilities 7,234 7,150
Long-term debt, including $106,450 and $99,943,
respectively, due to a related party 109,130 102,903
Funding agreement (Note 4) 24,547 22,788
Other liabilities, including $1,921 and $3,407,
respectively, due to a related party (Note 5) 3,788 5,262
------------- -------------
144,699 138,103
Contingent liabilities (Note 7)
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000 shares
authorized; shares issued and outstanding:
13,788,424 and 13,788,424, respectively 13,788 13,788
Additional paid-in capital 53,675 53,675
Accumulated deficit (163,849) (160,636)
------------- -------------
(96,386) (93,173)
------------- -------------
$48,313 $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
December 31,
----------------------------
1997 1996
------------- -------------
REVENUES
Sales and operating revenue $143 $--
Other income 4 15
------------- -------------
147 15
------------- -------------
COSTS AND EXPENSES
Operating costs (reimbursements) 316 (55)
Depreciation, depletion, and amortization 96 58
Overhead, Colombian operations 475 616
General and administrative 464 398
Exploration costs 30 11
Interest on indebtedness including $1,921
and $1,373, respectively, to a
related party 1,979 1,422
------------- -------------
3,360 2,450
------------- -------------
Loss from continuing operations
before income taxes (3,213) (2,435)
Income tax expense (benefit) -- (2)
------------- -------------
Loss from continuing operations (3,213) (2,433)
Loss from discontinued operations (Note 7) -- --
------------- -------------
Net Loss $(3,213) $(2,433)
============= =============
Loss per share:
Continuing operations $(0.23) $(0.18)
Discontinued operations -- --
------------- -------------
Net loss per share $(0.23) $(0.18)
============= =============
Weighted average common shares outstanding 13,788,424 13,777,861
The accompanying notes are an integral part of these financial statements.
4
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the three months ended
December 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations $(3,213) $(2,435)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation, depletion and amortization 96 58
Capitalized interest (491) (112)
Accrued interest added to long-term debt 3,407 2,420
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (143) (4)
Prepaid expenses and other (189) (108)
Other assets (482) (164)
Increase (decrease) in:
Accounts payable 67 (668)
Accrued expenses and other (91) 93
Funding agreement 993 550
Other liabilities (1,474) (1,054)
------------- -------------
Net cash used by continuing operations (1,520) (1,424)
Net cash used by discontinued operations (73) (119)
Income taxes (paid) received -- 2
------------- -------------
Net cash used by operating activities (1,593) (1,541)
------------- -------------
Cash flows from investing activities:
Sale of assets 2 --
Capital expenditures (2,201) (3,472)
------------- -------------
Net cash used by investing activities (2,199) (3,472)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 3,100 6,000
Principal payments on long-term debt (265) (250)
------------- -------------
Net cash provided by financing activities 2,835 5,750
------------- -------------
Net increase (decrease) in cash and cash equivalents (957) 737
Cash and cash equivalents at the beginning of the period 1,019 374
------------- -------------
Cash and cash equivalents at the end of the period $62 $1,111
============= =============
</TABLE>Refer to Notes 2 and 4 for descriptions of non-cash transactions.
The accompanying notes are an integral part of these financial statements.
5
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an independent oil
and gas exploration and development company. The consolidated financial
statements of Hondo Oil include the accounts of all subsidiaries, all of
which are wholly owned. All significant intercompany transactions have been
eliminated. The Hondo Company owns 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.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All Dollar Amounts in Thousands)
1) 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.
2) Properties
----------
Properties, at cost, consist of the following:
December 31, September 30,
1997 1997
------------- -------------
(Unaudited)
Oil and gas properties - Colombia:
Proved $12,019 $11,923
Accumulated depletion, depreciation
and amortization (18) --
------------- -------------
12,001 11,923
------------- -------------
Other properties - Colombia:
Wellsite facilities 4,654 4,689
Pipelines 12,863 12,061
Accumulated depreciation (19) --
Drilling in progress 14,509 11,821
------------- -------------
32,007 28,571
------------- -------------
Other properties - domestic
Other fixed assets 323 323
Accumulated depreciation (217) (205)
------------- -------------
$44,114 $40,612
============= =============
The balances of wellsite facilities and pipelines include non-cash increases
of $143 and $2,571 for the three months ended December 31, 1997 and 1996,
respectively, which were charged to the Funding Agreement (Note 4).
Additions to drilling in progress of $1,308 and ($176) for the three months
ended Decmeber 31, 1997 and 1996, respectively, were unpaid (prepaid) and
were reflected in the balance of accounts payable.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All Dollar Amounts in Thousands)
3) Accrued expenses
----------------
Accrued expenses consist of the following:
December 31, September 30,
1997 1997
------------- -------------
(Unaudited)
Refining and marketing costs (Note 7) $3,197 $3,198
Other 133 223
------------- -------------
$3,330 $3,421
============= =============
4) 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. 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:
December 31, September 30,
1997 1997
------------- -------------
(Unaudited)
Outstanding principal $18,175 $17,566
Equity premiums 6,372 5,222
------------- -------------
$24,547 $22,788
============= =============
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All Dollar Amounts in Thousands)
4) Funding Agreement (continued)
-----------------------------
The Company has accrued equity premiums computed in accordance with the 22%
annualized interest rate option. Equity premiums related to the financed
pipeline and wellsite facilities costs were capitalized until the
commencement of production (December 1997), including $624 and $538 for the
three months ended December 31, 1997 and 1996, 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.
5) Other Liabilities
-----------------
Other liabilities consist of the following:
December 31, September 30,
1997 1997
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc $1,921 $3,407
City of Long Beach 1,617 1,594
Other 250 261
------------- -------------
$3,788 $5,262
============= =============
In accordance with the terms of the Company's debts to Lonrho Plc, accrued
interest is either added to the outstanding principal or paid by issuance of
the Company's common stock on the interest due date, at the option of Lonrho
Plc. Accrued interest of $3,407 and $2,411 has been added to the
outstanding debt as of October 1, 1997 and 1996, respectively.
6) Cash Flow Information
---------------------
Cash interest expense, all of which arises from discontinued operations, was
$68 and $76 for the three months ended December 31, 1997 and 1996,
respectively.
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All Dollar Amounts in Thousands)
7) Discontinued Operations
-----------------------
In 1991, the Company adopted plans of disposal for its refining and
marketing and real estate segments. In September 1993, the Company executed
an agreement for the sale of its Fletcher refinery and its asphalt terminal
in Hilo, Hawaii. These assets represented the material portion of the
Company's refining and marketing segment.
Operating losses of discontinued operations for the quarters ended December
31, 1997 and 1996 were $73 and $112, respectively, and were charged against
loss provisions established in earlier periods. The Company recorded no
loss provisions for discontinued operations for the three months ended
December 31, 1997 or 1996.
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 three months ended December 31, 1997 are as follows:
Balance as of September 30, 1997 $2,137
Valuation provisions established --
Valuation provisions used 73
-------------
Balance at December 31, 1997 (Unaudited) $2,210
=============
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 $50 and $63 for
the quarters ended December 31, 1997 and 1996, 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 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.
10
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. During 1997, the Opon No. 6
well encountered mechanical problems during completion operations and
has been temporarily suspended to evaluate information and develop plans
for further operations on the well, including workover of the well.*
Drilling of the Opon No. 14 well began in October 1997 and has been
completed. If no problems are encountered, the Opon No. 14 well should
be tested in the Spring of 1998.* 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
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.
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
11
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
in April 1997, a second set of perforating guns were fired. Cleanup and
testing on the second set of perforations commenced in May 1997 and,
while all the guns fired, the well has not flowed as anticipated. The
associate parties have suspended operations on the well in order to
fully evaluate all data from the well and prepare a plan for further
actions. Amoco Colombia has recently proposed a workover of the Opon
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
12
No. 6 well using propellant stimulation technology. A decision on the
proposal will be made in the Spring of 1998 following an economic and
technical analysis.* The associate parties are attempting to negotiate
a settlement of claims against suppliers of services and equipment
related to the problems encountered during completion operations on the
Opon No. 6 well, but no settlement has been reached. If a settlement is
not reached, the next step will be arbitration.* No prediction of the
outcome of these matters can be made at this time.
The Opon No. 14 well, approximately 4 kilometers south of the Opon No. 4
well, commenced drilling in October 1997. The total cost of the well is
estimated to be $23.5 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 commenced testing of both the La Paz
formation and the deeper Lisama formation. The associate parties will
review and analyze the results of the Opon No. 14 well prior to making
any decisions about further drilling.*
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.*
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 can charge a provisional tariff for shipments to
Ecopetrol, but are precluded from making shipments to buyers on the
national gas grid.
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
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
13
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, 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, or until sufficient reserves are
determined through additional work on the Opon No. 6 well or the
successful completion of the Opon No. 14 well.* The gas sales price
under the interim agreement will be equivalent to the price, including
pipeline tariff, that would have been received if the same gas were sold
under the contract with Ecopetrol described in the preceding paragraph.
The pipeline and wellsite facilities were completed in June 1997.
Ecopetrol completed the improvements to the El Centro gas 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.*
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
14
Amoco Colombia has submitted budgets to Hondo Magdalena and ODC for
calendar years 1996, 1997 and 1998. Hondo Magdalena approved capital
expenditures for wells and the pipeline projects, and certain other
expenditures, but did not approve the proposed overhead. As of this
date, no final budget has been approved for calendar years 1996, 1997 or
1998. The parties are currently at an impasse in resolving the dispute
about overhead. Hondo Magdalena has paid invoices from Amoco Colombia,
including disputed overhead and has charged the full overhead amount to
expense. It is management's opinion that the Company is not obligated
to pay for overhead unless charged pursuant to an approved budget;
however the Company has paid Amoco Colombia's invoices, under protest
and subject to audit, in the hope of resolving the dispute. If the
dispute cannot be resolved, the joint operating agreement among Amoco
Colombia, Hondo Magdalena and ODC provides for arbitration of disputes.
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 (aggregate gross
charges to the joint account of $11.0 million) have been fruitless and
arbitration is being considered. The report for the 1996 audit has not
yet been submitted to Amoco Colombia. The Company has not accrued in
its financial statements any potential recoveries which may arise from
these audits.
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.
RESULTS OF OPERATIONS
Results of continuing operations for the quarter ended December 31, 1997
amounted to a net loss of $3.2 million, or 23 cents per share. The
Company reported a net loss from continuing operations of $2.4 million,
or 18 cents per share, for the quarter ended December 31, 1996. No
losses from discontinued operations were reported for either period.
In the current period, the Company reported operating revenue for the
first time since 1993. The Company's Colombian operations began
delivering gas to Ecopetrol in December 1997. Due to a number of
startup operations, the revenue was considerably lower, and operating
expenses in relation to that revenue, were higher, than will be expected
in the future.
The level of the Company's debts to Lonrho Plc and to Amoco Colombia
under the Funding Agreement have increased by approximately $30.0
million between December 31, 1996 and December 31, 1997. Interest
expense increased by only $0.5 million between the quarters because the
majority of the charges from the Funding Agreement are capitalized.
Management expects results from continuing operations before interest
and income taxes to be approximately break-even for fiscal 1998.*
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
15
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended December 31, 1997, cash inflows of $3.1 million
arose from borrowings from Lonrho Plc. The Company utilized cash of
$1.5 million and $0.1 million to finance continuing and discontinued
operations, respectively, $2.2 million for capital expenditures, and
made scheduled debt repayments of $0.3 million. At December 31, 1997,
the Company had cash balances of $0.1 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
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 the
registration statement). In addition, the agreement granted 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 is below
$5.415 per share for 20 consecutive business days. A registration
statement on Form S-3 was filed on January 7, 1998, but is not effective
and closing will not occur until the registration statement has become
effective. Phillips has the right to terminate the agreement if the
registration statement has not been declared effective before February
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,
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 must be approved by the
Company's shareholders at the next annual meeting (March 1998). If the
option to convert is not approved by the shareholders, the interest rate
on $7.0 million of existing debt will increase to 13.5%. Lonrho has
further agreed to vote its shares on the matter of the option to convert
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
16
in proportion to the votes cast by disinterested shareholders. As of
December 31, 1997, $17.7 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. Also in
December 1997, Lonrho Plc committed to provide $3.2 million to the
Company for payment of a contingent liability arising from the 1993 sale
of the Company's Fletcher refinery, should the contingency become
payable. The Company extended all of the above described indebtedness
due on January 1, 1998 to January 15, 1999 and amended the notes by
adding a cross-default provision and a new event of default. The new
event of default requires the Company to furnish to LAGP by October 1,
1998 a reserve report that shows a minimum of 13 billion cubic feet of
gas increase over the 1997 proved reserve figure. In the event of a
default under this new provision, LAGP has the right to declare all the
loans in default and demand payment. The new $7.0 million commitment
from Lonrho Plc for fiscal 1998 will be added to the July 1997 Amended
and Restated Revolving Credit Agreement under the same terms and
conditions as the existing agreement explained above and is currently
being drafted and negotiated with execution anticipated in February
1998.* The Company presently owes Lonrho Plc $106.5 million, of which
$99.8 million is due 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. 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 and
corresponding condensate and natural gas liquids are pledged to secure
its obligations under the Funding Agreement. Production may be deemed
to have commenced in December 1997 and the Company does not presently
have commitments or funds to repay the Funding Agreement within either
the 90 or 365 day option periods.* If the Company does not secure
financing to 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 currently has a difference of opinion with Amoco on certain
aspects of the funding agreement and is reviewing its legal
alternatives.
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
17
Based upon the Company's budget and current information, management
believes existing cash, available facilities, Lonrho commitments, net
proceeds from the sale of Opon gas and the Funding Agreement will be
sufficient to finance the Company's known obligations (the pipeline and
related facilities, estimated completion expenses of the Opon No. 6
well, estimated drilling and completion expenses of the Opon No. 14
well, overhead obligations unrelated to capital projects and other
business activities), estimated to be $16.8 million, during fiscal
1998.* However, management believes the Company will need additional
cash to participate in the drilling of additional wells in Colombia
and/or to participate in other capital projects, that are not now
budgeted or committed.* If the Company becomes obligated for the
drilling of an additional well, 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 source of free funds since pursuant to the Funding
Agreement, Amoco receives the proceeds from the first 80 million cubic
feet of gas and associated liquids.* Any additional free cash flow is
committed to existing loan obligations. Management is reviewing several
options for raising funds including sale of the Company's 15.4% interest
in the pipeline.* Management continues to pursue discussions with a
number of financial institutions regarding debt or equity financing of
the Company's future obligations for the Opon project but has received
no commitments.* Additional deliverability from current drilling
projects and adequate production capability through the pipeline
infrastructure 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. While the Company will
continue to seek permanent financing in the near-term, there can be no
assurance that the Opon Project will be successfully developed or that
additional debt or equity funds will become available.* Furthermore,
the success of the Opon No. 14 well is critical to obtaining third
party financing (either debt or equity) and for the decision by the
associate parties to continue the development of the Opon project.*
____________________
* This statement may be considered to be forward-looking. See
Cautionary Statements following Liquidity and Capital Resources.
18
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.
19
Foreign Operations. The Company's operations in Colombia are subject to
political risks inherent in all foreign operations, including: (i) loss
of revenue, property, and equipment as a result of unforeseen events
such as expropriation, nationalization, war and insurrection, (ii) risks
of increases in taxes and governmental royalties, (iii) renegotiation of
contracts with governmental entities, as well as, (iv) changes in laws
and policies governing operations of foreign-based companies in
Colombia. Guerrilla activity in Colombia has disrupted the operation of
oil and gas projects, including those at the Opon Contract area.
Security in the area has been improved and the associate parties have
taken steps to enhance relations with the local population through a
community relations program. The government continues its efforts
through negotiation and legislation to reduce the problems and effects
of insurgent groups, including regulations containing sanctions such as
impairment or loss of contract rights on companies and contractors if
found to be giving aid to such groups.
Colombia is among several nations whose progress in stemming the
production and transit of illegal drugs is subject to annual
certification by the President of the United States. In February 1997,
the President of the United States announced that Colombia again would
neither be certified nor granted a national interest waiver. The
consequences of the failure to receive certification generally include
the following: all bilateral aid, except anti-narcotics and humanitarian
aid, has been or will be suspended; the Export-Import Bank of the United
States and the Overseas Private Investment Corporation will not approve
financing for new projects in Colombia; U. S. representatives at
multilateral lending institutions will be required to vote against all
loan requests from Colombia, although such votes will not constitute
vetoes; and the President of the United States and Congress retain the
right to apply future trade sanctions. Each of these consequences of
the failure to receive such certification could result in adverse
economic consequences in Colombia and could further heighten the
political and economic risks associated with the Company's operations in
Colombia.
Risks Of Oil And Gas Exploration. Inherent to the oil and gas industry
is the risk that future wells will not find hydrocarbons where
information from prior wells and engineering and geological data
indicate hydrocarbons should be found. Further, existing wells can
deplete faster than anticipated, potentially causing revisions to
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.
20
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 will be appealed, but no prediction can be made
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 December 31, 1997, the Company owed debts to
its principal shareholder, Lonrho Plc, of $106.5 million, of which $99.8
million is due 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 is 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 more fully described above
under Risks of Oil and Gas Exploration, there can be no assurances that
the additional work will discover the reserves necessary to prevent the
debts from being accelerated. 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 December 31, 1997, the Company had a deficiency in
net assets of $96.4 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 beyond the works currently in
progress. 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
approximately 60% to 80% 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
21
secure financing from sources other than its principal shareholder.
Management believes successful completion of the Opon No. 14 well is
critical to obtaining third party financing. 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
upon Lonrho to provide funds for capital investment and operations when
such funds have not been available from third parties, and at December
31, 1997, was indebted to Lonrho in the amount of $106.5 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 operating
revenue of $0.1 million for the quarter ended December 31, 1997. This
is the only 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. See Results of Operations.
Continuation Of American Stock Exchange Listing. Because of continuing
losses and decreases in shareholders' equity, the Company does not fully
meet all of the guidelines of the American Stock Exchange for continued
listing of its shares. For additional information, see Item 5, Market
For Registrant's Equity and Related Shareholder Matters in the Company's
1997 Annual Report on Form 10-K. Management has kept the Exchange fully
informed regarding the Company's present status and future plans.
Although the Company does not or may not meet all of the guidelines, to
date, the American Stock Exchange has chosen to allow the Company's
shares to remain listed. However, no assurances can be given that the
Company's shares will remain listed on the Exchange in the future. If
the Company's shares are delisted from the Exchange, there may be
significantly reduced liquidity and a concomitant decrease in stock
price.
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.
22
Part II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-K are incorporated
by reference. Refer to Exhibit Index below.
(b) One report on Form 8-K was filed during the quarter ended December
31, 1997:
1) Form 8-K filed November 7, 1997 to report the commencement of
drilling of the Opon No. 14 well.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date: February 16, 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 Stock Purchase Agreement dated December 23, 1997
between Phillips Petroleum Company and the Company,
excluding exhibits.
27 Financial Data Schedule
23
STOCK PURCHASE AGREEMENT
------------------------
This Agreement is made and entered into as of the 23rd day of December,
1997, by and between HONDO OIL & GAS COMPANY (hereinafter referred to as
"Seller") and PHILLIPS PETROLEUM COMPANY (hereinafter referred to as
"Purchaser").
WITNESSETH:
Purchaser has performed plugging, abandonment and/or closing of the
Tajiguas Facility and the Molino Field facilities in or offshore
California and may hereafter conduct certain related limited
environmental monitoring activity that has been proposed by Purchaser in
plans currently under review by California governmental bodies or
agencies (hereinafter the entirety of the foregoing is referred to as
"the Work");
Purchaser has incurred costs and expenses for the portion of the Work
that has been performed and has authorized prior hereto expenditure for
the portion of the Work that has been proposed by Purchaser in plans
currently under review by such governmental bodies or agencies
(hereinafter all such costs, expenses and authorized expenditure are
referred to as "the Cost");
Seller is obligated to bear a portion of the Cost, its share being one
million one hundred thousand five hundred nineteen point seventy-one
Dollars ($1,100,519.71); and
In satisfaction of such obligation and payment for Seller's share of the
Cost, Seller wishes to sell, and Purchaser wishes to buy, shares of
Seller's common stock and warrants to purchase additional shares of such
common stock on the terms and conditions set forth in this Agreement.
The parties, intending to be legally bound, hereby agree as follows:
1. Sale and Purchase of Units
--------------------------
1.01 Agreement to Sell and Purchase. Subject to the terms,
provisions and conditions hereof, at Closing (as defined below) Seller
shall sell and deliver to Purchaser, and Purchaser shall buy and receive
from Seller, newly issued units of securities, the quantity thereof to
be determined pursuant to Section 1.03, with each unit consisting of six
(6) shares of Seller's common stock and a warrant to purchase one (1)
additional share of such common stock (hereinafter such units are
collectively referred to as "the Units").
1.02 Consideration. The sale and delivery of the Units at Closing
shall be in satisfaction and payment of, but only of, Seller's share of
the Cost. Delivery of the Units to Purchaser shall discharge Seller
from any further obligation to pay Purchaser for such share of the
Cost. Seller hereby waives any and all rights it has to audit the Work,
Cost and records of Purchaser related thereto.
1
1.03 Determination of Quantity. The number of Units to be sold and
delivered by Seller hereunder shall be determined based upon the
formula:
N = 1.1 x C , where
-------
6 x A
N = the total number of Units to be sold, rounded as required below;
C = Seller's share of the Cost which shall be satisfied and paid by such
sale; and
A = the average closing price of Seller's common stock on the American
Stock Exchange for the ten (10) days such exchange is open for the
transaction of business immediately preceding the date the Registration
Statement (as defined below) is filed by Seller with the United States
Securities and Exchange Commission (hereinafter "the SEC").
If the sum derived from this formula is not an integer, the parties
agree to round such sum to the nearest whole number greater thereof and
such whole number will be deemed to be "N" for purposes of this
Agreement.
2. Closing
-------
2.01 Closing Date. The sale of the Units shall be closed at ten
(10) o'clock a.m., or such other time agreed by the parties, on the
first day the American Stock Exchange is open for the transaction of
business following the date each of the conditions stipulated in
Sections 3.01 and 3.02 has occurred or, at the parties' respective
elections, been specifically waived (hereinafter such day is referred to
as "the Closing Date" and such closing is referred to herein as
"Closing"). Closing shall take place in the Bellaire, Texas offices of
Purchaser.
2.02 Seller's Deliveries at Closing. On the Closing Date, Seller
shall deliver to Purchaser:
(i) a stock certificate or certificates, registered in the
Purchaser's name, for and evidencing the number of shares of the common
stock sold to Purchaser;
(ii) a warrant, in the form of Exhibit A hereto (revised and
changed only as, and to the extent, agreed by the parties hereafter),
that grants Purchaser the right to buy, under the terms and conditions
stipulated therein, one (1) additional share of Seller's common stock
for each Unit sold hereunder;
(iii) a certificate, executed by an officer of Seller,
confirming to Purchaser that (a) the Registration Statement has been
declared effective by the SEC and remains in effect as of the Closing
Date, (b) the shares of Seller's common stock to be acquired by
Purchaser hereunder have been approved for listing, subject to
notification of issuance, on the American Stock Exchange on the Closing
Date, and (c) each of Seller's representations and warranties in this
Agreement was accurate in all material respects as of the date hereof
and is accurate in all material respects as of the Closing Date; and
2
(iv) an opinion of C. B. McDaniel, counsel for Seller, dated
the Closing Date and addressed to Purchaser, the substance of which is
as stated in Exhibit B hereto.
2.03 Purchaser's Deliveries at Closing. On the Closing Date,
Purchaser shall deliver to Seller a certificate, executed by an officer
of Purchaser, confirming that each of Purchaser's representations and
warranties in this Agreement was accurate in all material respects as of
the date hereof and is accurate in all material respects as of the
Closing Date.
3. Conditions to Closing
---------------------
3.01 Conditions Precedent to Purchaser's Obligation to Close.
Purchaser's obligations to buy and receive the Units, discharge Seller
from further obligation to pay its share of the Cost, and to take the
other actions required to be taken by Purchaser at the Closing are
subject to the occurrence (or, at its election, the waiver thereof), at
or prior to Closing, of each of the following:
(i) The Registration Statement being declared effective by the
SEC and remaining in effect as of the Closing Date;
(ii) Seller's common stock being listed and admitted for
trading on the American Stock Exchange on the Closing Date and on each
of the days included in the averaging period used in determining "A" in
the formula stipulated in Section 1.03 ;
(iii) The shares of Seller's common stock to be acquired by
Purchaser hereunder being approved for listing, subject to notification
of issuance, on the American Stock Exchange on the Closing Date;
(iv) All of Seller's representations and warranties in this
Agreement (considered collectively), and each of these representations
and warranties (considered individually), having been accurate in all
material respects as of the date hereof and being accurate in all
material respects as of the Closing Date as if made on the Closing Date;
(v) All of the covenants and obligations that Seller is
required to perform or to comply with pursuant to this Agreement at or
prior to Closing (considered collectively), and each of these covenants
and obligations (considered individually), having been duly performed
and complied with in all material respects;
(vi) There having not been any subdivision or combination of
Seller's common stock, any distribution on such common stock payable in
shares of such common stock or other securities, the issuance of rights
or warrants to purchase such common stock, sale or distribution of a
significant portion of Seller's assets, or a consolidation or merger of
Seller, with effect on or from the date hereof; and
(vii) Seller having delivered each document required to be
delivered by Seller pursuant to Section 2.02.
3.02 Conditions Precedent to Seller's Obligation to Close.
Seller's obligations to sell and deliver the Units, deliver the stock
certificate(s) and warrant referred to in Sections 2.02 (i) and (ii),
3
and to take the other actions required to be taken by Seller at Closing
are subject to the occurrence (or, at its election, the waiver thereof),
at or prior to Closing, of each of the following:
(i) All of Purchaser's representations and warranties in this
Agreement (considered collectively), and each of these representations
and warranties (considered individually), having been accurate in all
material respects as of the date hereof and being accurate in all
material respects as of the Closing Date as if made on the Closing Date;
(ii) All of the covenants and obligations that Purchaser is
required to perform or to comply with pursuant to this Agreement at or
prior to Closing (considered collectively), and each of these covenants
and obligations (considered individually), having been performed and
complied with in all material respects; and
(iii) Purchaser having delivered each document required to be
delivered by Purchaser pursuant to Section 2.03.
4. Registration
------------
4.01 Seller's Undertaking to File Registration Statement. Seller,
as soon as practicable after execution hereof and in no event later than
January 7, 1998, shall prepare and file with the SEC a registration
statement on Form S-3 which provides for the resale of (i) the shares of
Seller's common stock that are to be delivered to Purchaser at Closing
and (ii) the shares of Seller's common stock that are to be delivered to
Purchaser upon its exercise of the warrants provided pursuant hereto
(such registration statement, together with all amendments and
supplements thereto, in each case including any prospectus and all
materials incorporated by reference therein, being referred to herein as
"the Registration Statement"). The Registration Statement so filed
shall be substantially in the form of the draft registration statement
attached as Exhibit C hereto. Seller shall obtain Purchaser's approval
on the final form of the Registration Statement prior to its filing, and
Purchaser's approval thereof shall not be unreasonably withheld. Seller
will use its reasonable best efforts to cause the Registration Statement
to be declared effective by the SEC as soon as practicable after the
filing thereof and any necessary or appropriate qualification or
compliance (including, without limitation, appropriate qualification
under applicable "Blue Sky" or other state securities laws and
appropriate compliance with any governmental requirements or
regulations).
4.02 Seller's Undertaking to Keep the Registration Statement
Effective. Seller shall use its reasonable best efforts to keep the
Registration Statement continuously effective for a period of two (2)
years from the Closing Date or, if earlier, until all shares delivered
at Closing and any shares received by Purchaser upon its exercise of the
warrants delivered hereunder are sold by Purchaser.
4.03 Amendments. Seller shall use its reasonable best efforts to
prepare and file with the SEC such amendments and supplements to the
Registration Statement as may be necessary to keep such Registration
Statement effective for the period contemplated in Section 4.02. Seller
shall notify Purchaser of all such amendments and supplements and shall
advise Purchaser forthwith when the same have become effective.
4
4.04 Prospectuses. Seller shall furnish Purchaser with the number
of copies of a prospectus, including a preliminary prospectus in
conformity with the requirements of the Securities Act of 1933, as
amended (hereinafter "the Securities Act"), and such other documents as
Purchaser may reasonably request, in order to facilitate the public sale
or other disposition of the shares of Seller's common stock acquired
pursuant hereto. Seller shall immediately notify Purchaser of the
occurrence of any event as a result of which a prospectus in or provided
pursuant to the Registration Statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing.
Upon receipt of such a notice Purchaser shall immediately discontinue
sales or other dispositions of shares of Seller's common stock pursuant
to the Registration Statement. Seller shall forthwith amend such
prospectus immediately after giving such notice so that it is true and
correct in all material respects, and Purchaser may resume such sales or
other disposition thereafter.
4.05 Listing. Seller, concurrently with its preparation and filing
of the Registration Statement, shall cause the shares of its common
stock that are the subject thereof to be approved for listing, subject
to notification of issuance, on the American Stock Exchange. Seller
shall use its reasonable best efforts to have its common stock listed
and admitted for trading on the American Stock Exchange throughout the
period contemplated in Section 4.02.
4.06 State Securities Law Compliance. Seller shall use its
reasonable best efforts to register or qualify the shares sold hereunder
under the securities laws of such states as Purchaser may reasonably
request in light of the costs of such registration or qualification for
Seller (provided, however, that Seller shall not be required to consent
to the general service of process for all purposes in any jurisdiction
where it is not then qualified to do business or to qualify to do
business) and to do any and all other acts or things that may be
reasonably necessary or advisable to enable Purchaser to consummate
public sale or other disposition of such shares in such states.
4.07 Compliance with Laws. Effective from the date hereof and
throughout the period contemplated in Section 4.02, Seller shall use its
reasonable best efforts to comply with and to make all filings,
registrations and disclosures required of it pursuant to the Securities
Act and the Securities and Exchange Act of 1934, as amended.
4.08 Registration Expenses. Seller agrees to pay all registration
expenses in connection with the registrations and other activities
contemplated in this Section 4. "Registration expenses", for this
purpose, means any and all expenses incident to performance of or
compliance with the provisions of this Section 4 by Seller, including,
without limitation: (i) all SEC and National Association of Securities
Dealers, Inc. ("NASD") registration and filing fees, (ii) all fees and
expenses incurred in connection with compliance with state securities or
"Blue Sky" laws and compliance with the rules of the NASD, (iii) all
filing, listing or other fees for the American Stock Exchange related to
listing of Seller's common stock, (iv) all expenses in preparing,
printing and distributing the Registration Statement and other documents
related to the performance of and compliance with this Agreement by
Seller, and (v) all fees and disbursements of counsel and independent
certified public accountants for Seller related to the same or
5
preparation and execution of this Agreement. Purchaser shall pay any
brokerage fees, transfer taxes (if any) and the fees and expenses of its
legal counsel in connection with the registration and sale by it of
shares of Seller's common stock.
5. Purchaser's Resale of Shares
----------------------------
5.01 Limitations on Resale. Any resale by Purchaser of the shares
of Seller's common stock pursuant to the Registration Statement shall be
subject to the following:
(i) The volume of such shares sold by Purchaser on any day
shall not exceed the greater of (a) fifty percent (50%) of the average
daily trading volume of all shares of Seller's common stock during the
ten (10) day period immediately preceding such sale, and (b) three
thousand (3,000).
(ii) Notwithstanding (i) above, Purchaser on any day may sell
to any one transferee pursuant to the Registration Statement no less
than twenty percent (20%) of the shares then held by it, provided such
transferee agrees to cause subsequent resales to comply with the daily
volume limitation included in (i) above.
5.02 Stop Orders. Seller shall notify Purchaser forthwith upon
the issuance by the SEC, any other governmental agency, or a court of a
stop order, other order, or injunction which suspends the effectiveness
of the Registration Statement or the registration or qualification for
resale of the shares acquired hereunder. Upon receipt of such notice
Purchaser shall cease any sale or other disposition of such shares
affected thereby until Seller notifies it that such suspension has been
withdrawn. Seller shall use its reasonable best efforts to obtain
withdrawal of such suspension and to have the effectiveness of the
Registration Statement or registration or qualification restored at the
earliest possible time.
5.03 Black-Out Period. Without limiting Section 5.02, if Seller
notifies Purchaser that any sale pursuant to the Registration Statement
in its then current form would reasonably be expected to violate the
federal securities law, such notice to be in the form of a certification
by an officer of Seller, Purchaser shall cease making any such sale for
the period, stipulated by Seller, in which such sale would be expected
to so violate such law, such period not to exceed fifteen (15) days.
Seller may not issue any more than one (1) such notice during any one
hundred eighty (180) day period.
6. Representations and Warranties
------------------------------
6.01 Seller's Representations and Warranties. Seller represents
and warrants as follows:
(i) Seller is a corporation duly organized, existing and in
good standing under the laws of the State of Delaware, with total
authorized capital stock consisting of thirty million (30,000,000)
shares of common stock having a par value of one Dollar ($1.00) per
share, of which thirteen million seven hundred ninety-one thousand one
hundred ninety-four (13,791,194) shares have been subscribed, are fully
paid, nonassessable, duly and regularly issued and outstanding, and ten
6
million (10,000,000) shares of preferred stock having a par value of one
Dollar ($1.00) per share, of which no shares have been issued or
subscribed;
(ii) Seller has all requisite corporate power and authority to
carry on its business as now conducted, to enter into this Agreement and
to perform its obligations under this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby will not result in any breach of any of the terms or
conditions of any agreement, nor violate any law by which Seller is
bound, nor constitute a violation of the Certificate of Incorporation or
By-Laws of Seller;
(iii) The execution, delivery and performance of this
Agreement by Seller and the transactions contemplated hereby have been
duly and validly authorized by all requisite corporate action on the
part of Seller;
(iv) All shares of its common stock issued to Purchaser
pursuant hereto shall be fully paid and nonassessable;
(v) No registration or filing with, or consent or approval of
or other action by, any federal, state or other governmental agency or
instrumentality is or will be necessary for the valid execution,
delivery and performance by Seller of this Agreement or the issuance,
sale and delivery of its shares to Purchaser contemplated herein, other
than filings pursuant to federal and state securities laws (all of which
filings shall be duly made by or on behalf of Seller) in connection with
the issuance or sale of such shares;
(vi) Seller will give Purchaser and Purchaser's counsel,
accountants, engineers and other representatives access, during normal
business hours throughout the period from the date hereof to the Closing
Date, to all of Seller's properties, books, contracts, commitments and
records, and Seller will furnish Purchaser during such period with all
such information concerning Seller's affairs as Purchaser reasonably may
request; and
(vii) That at no time was Purchaser, in connection with the
transactions contemplated herein, presented with or solicited by or
through any public promotional meeting, advertisement or any other form
of general or public advertising or solicitation.
6.02 Purchaser's Representations and Warranties. Purchaser
represents and warrants as follows:
(i) Purchaser is a corporation duly organized, existing and in
good standing under the laws of the State of Delaware with full
corporate power and authority to execute and deliver this Agreement and
to perform its obligations hereunder;
(ii) The execution, delivery and performance of this Agreement
by Purchaser and the transactions contemplated hereby have been duly and
validly authorized by all requisite corporate action on the part of
Purchaser;
(iii) Purchaser has substantial knowledge, skill and
experience in making investment decisions of the type contemplated
herein, it is capable of evaluating the risk of its investment in the
7
Units being acquired hereby and is able to bear the economic risk of
such investment;
(iv) The Units are being acquired by Purchaser for its own
account and for investment and not with a view to any distribution
thereof in violation of applicable securities laws;
(v) That at no time was it, in connection with the
transactions contemplated herein, presented with or solicited by or
through any public promotional meeting, advertisement or any other form
of general or public advertising or solicitation; and
(vi) Purchaser has had an opportunity to discuss Seller's
business, management and financial affairs with Seller's management.
6.03 Private Placement. The parties acknowledge that the Units
have not been registered under the Securities Act but are intended to be
issued pursuant hereto in a private placement exempt from the Securities
Act registration requirements. Resale by Purchaser of all shares of
Seller's common stock acquired hereunder shall be pursuant to the
Registration Statement or as otherwise permitted under the Securities
Act.
7. Termination
-----------
7.01 Termination Events. This Agreement may be terminated, by
notice given in accordance with Section 9.01 and prior to Closing, by:
(i) either Purchaser or Seller if a material breach of any
provision of this Agreement has been committed by the other party and
such breach has not been waived or cured;
(ii) Purchaser if any of the conditions in Section 3.01 has
not been satisfied as of the Closing Date or if satisfaction of any of
those conditions is or becomes impossible (other than through the
failure of Purchaser to comply with its obligations under this
Agreement) and Purchaser has not waived such condition on or before the
Closing Date;
(iii) Seller if any of the conditions in Section 3.02 has not
been satisfied as of the Closing Date or if satisfaction of any of those
conditions is or becomes impossible (other than through the failure of
Seller to comply with its obligations under this Agreement) and Seller
has not waived such condition on or before the Closing Date;
(iv) Purchaser if the Registration Statement is not declared
effective by the SEC by February 27, 1998; or
(v) mutual consent of Purchaser and Seller.
7.02 Effect of Termination. Each party's right of termination
under Section 7.01 is in addition to any other rights it may have under
this Agreement or otherwise, and the exercise of a right of termination
will not be an election of remedies. If this Agreement is terminated
pursuant to Section 7.01, all further obligations of the parties under
this Agreement will terminate, except that the obligations in Sections
9.09 and 9.10 will survive; provided, however, that if this Agreement is
8
terminated by a party because of a breach of the Agreement by the other
party or because one or more of the conditions to the terminating
party's obligations under this Agreement is not satisfied as a result of
the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies
will survive such termination unimpaired.
8. Indemnification
---------------
8.01 Indemnification by Purchaser. Purchaser shall defend,
indemnify and hold harmless Seller, its directors, its officers and
persons controlling Seller within the meaning of the Securities Act from
and against any and all liabilities, claims, damages, loss, costs and
expenses, including reasonable legal fees and penalties, arising out of
(i) the inaccuracy or nonfulfillment of any representation or warranty,
or the breach of any covenant, expressly made by Purchaser in this
Agreement, or (ii) any untrue statement (or alleged untrue statement) of
a material fact contained in the Registration Statement, or any omission
(or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, but only to
the extent such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in the Registration Statement in
reliance upon and in conformity with written information furnished by
Purchaser and stated to be specifically for use therein or the
preparation thereof.
8.02 Indemnification by Seller. Seller shall defend, indemnify and
hold harmless Purchaser, its directors, its officers and persons
controlling Purchaser within the meaning of the Securities Act from and
against any and all liabilities, claims, damages, loss, costs and
expenses, including reasonable legal fees and penalties, arising out of
(i) the inaccuracy or nonfulfillment of any representation or warranty,
or the breach of any covenant, expressly made by Seller in this
Agreement, (ii) any untrue statement (or alleged untrue statement) of a
material fact contained in the Registration Statement or any other
document filed or submitted by Seller pursuant hereto, or any omission
(or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or (iii) any
violation by Seller of the Securities Act in connection herewith,
provided that Seller will not be liable to any such person under (ii)
above in any case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement
or omission (or alleged untrue statement or omission) made in reliance
upon and in conformity with written information furnished by Purchaser
and stated to be specifically for use therein or the preparation
thereof.
8.03 Liability for the Cost. Upon Closing, Purchaser shall hold
Seller harmless for any further claim against Seller for the Cost. This
Agreement and performance hereunder are not intended to and shall not
relieve or release Seller from any other obligation, claim or liability
that has accrued or may result arising from or related to the operation,
plugging, abandonment and closure of the Tajiguas Facility and the
Molino Field facilities.
9
9. General Provisions
------------------
9.01 Notices. Any and all notices or other communications required
or permitted to be given under any of the provisions of this Agreement
shall be in writing and shall be deemed to have been duly given when
personally delivered or mailed by first class registered mail, return
receipt requested, addressed to the other party at the address set forth
below or sent by telecopier (with written confirmation of receipt) to
the telefax number of such other party set forth below (or at such other
address or telefax number as any party may specify by notice to the
other given as aforesaid.)
If to Seller: Hondo Oil & Gas Company
10375 Richmond Avenue, Suite 900
Houston, TX 77042
Attn: C. B. McDaniel
Telefax: (713) 954-4601
If to Purchaser: Phillips Petroleum Company
P. O. Box 1967
Houston, TX 77251-1967
Attn: J. M. McKee
Telefax: (713) 669-7453
9.02 Integration; Amendment. This writing constitutes the entire
agreement of the parties with respect to the subject matter hereof and
may not be modified or amended except by a written agreement
specifically referring to this Agreement signed by the parties hereto.
9.03 Waiver. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such
waiver, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or similar nature.
9.04 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of each party hereto, its heirs, personal
representatives, successors and assigns.
9.05 Captions. The section headings contained herein are for the
purpose of convenience only and are not intended to define or limit the
contents of such sections.
9.06 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall be deemed one original.
9.07 Governing Law. This Agreement and all amendments thereof
shall be governed by and construed in accordance with the law of the
State of Oklahoma applicable to contracts made and to be performed
therein, without reference to its conflict of laws provisions.
9.08 Severability. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the
other provisions of this Agreement will remain in full force and effect.
Any provision of this Agreement held invalid or unenforceable only in
10
part or degree will remain in full force and effect to the extent not
held invalid or unenforceable.
9.09 Expenses. Purchaser and Seller shall each be responsible for
its own fees and expenses, including fees and expenses of legal counsel,
incurred in connection with the transactions contemplated herein.
9.10 Confidentiality. Any public announcement or similar publicity
with respect to this Agreement or the transactions contemplated hereby
will be issued, if at all, at such time and in such manner as the
parties may agree. Unless consented to by Purchaser, Seller shall keep
this Agreement strictly confidential.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first above written.
PURCHASER:
PHILLIPS PETROLEUM COMPANY
By: /s/J.L. Bowle
--------------------------------
Title: V.P. North American Prod.
--------------------------------
SELLER:
HONDO OIL & GAS COMPANY
By: /s/ John J. Hoey
--------------------------------
Title: President
--------------------------------
11
<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> DEC-31-1997
<PERIOD-TYPE> 3-MOS
<CASH> 62
<SECURITIES> 0
<RECEIVABLES> 439
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 691
<PP&E> 44,114
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,313
<CURRENT-LIABILITIES> 7,234
<BONDS> 109,130
0
0
<COMMON> 13,788
<OTHER-SE> (110,174)
<TOTAL-LIABILITY-AND-EQUITY> 48,313
<SALES> 143
<TOTAL-REVENUES> 147
<CGS> 0
<TOTAL-COSTS> 316
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,979
<INCOME-PRETAX> (3,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,213)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
