SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14 (A) of the Securities
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
HONDO OIL & GAS COMPANY
- ------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- -------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
- --------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
______________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
______________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
______________________________________________________________________________
(5) Total fee paid:
______________________________________________________________________________
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number or the Form or Schedule and the date
of its filing.
(1) Amount Previously Paid: $100.00
______________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
Schedule 13E-3
______________________________________________________________________________
(3) Filing Party:
Hondo Oil & Gas Company, HOGC Acquisition Corporation and Lonrho Plc.
______________________________________________________________________________
(4) Date Filed:
October 13, 1998
HONDO OIL & GAS COMPANY
10375 Richmond Avenue, Suite 900
Houston, Texas 77042
(713) 954-4600
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 23, 1998
To the Stockholders of Hondo Oil & Gas Company:
A Special Meeting of Stockholders (the "Special Meeting") of
Hondo Oil & Gas Company, a Delaware corporation (the "Company"),
will be held on December 23, 1998 at 10:00 a.m., New York Time,
at the offices of Parker Chapin Flattau & Klimpl, 18th Floor,
1211 Avenue of the Americas, New York, New York 10036, for the
following purposes.
1. To consider and vote upon a proposal to adopt an
Agreement and Plan of Merger, dated October 12, 1998 (the "Merger
Agreement"), by and among the Company, HOGC Acquisition
Corporation (the "Purchaser"), a Delaware corporation and an
indirect wholly owned subsidiary of Lonrho Plc (the "Parent"), and
the Parent, and to approve the related proposed merger (the "Merger")
of the Purchaser with and into the Company. As a result of the
Merger, the Company will become a wholly owned subsidiary of the
Parent and each issued and outstanding share of Common Stock, par
value $1.00 per share (the "Shares"), of the Company (other than
Shares owned by the Parent or any subsidiary of the Parent,
Shares held in treasury by the Company and Shares held by
stockholders who perfect appraisal rights under Delaware law)
will be converted into the right to receive $0.05 per Share net
in cash, without interest thereon. The Merger and the Merger
Agreement are more fully described in the attached Proxy
Statement which forms a part of this Notice.
2. To transact such other business as may properly come
before the Special Meeting.
On October 9, 1998, a Special Committee of the Board of
Directors of the Company, consisting solely of Directors not
affiliated with Parent, and the entire Board of Directors of the
Company, unanimously determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are fair
to and in the best interests of the unaffiliated stockholders of
the Company, and approved the Merger Agreement and the transactions
contemplated thereby, including the Merger.
The meeting may be postponed or adjourned from time to time.
Only stockholders of record at the close of business on
November 18, 1998 will be entitled to notice of or to vote at the
Special Meeting or any adjournment or postponement of that
meeting.
Enclosed is a Proxy Statement describing the matters to be
voted upon at the Special Meeting. Please read it carefully and
then sign, complete and return your Proxy as promptly as
possible. If you receive more than one Proxy because your shares
are registered in different names or addresses, each Proxy should
be signed and returned to assure that all your shares will be
voted.
By Order of the Board of Directors,
John J. Hoey
President and Chief Executive
Officer
November __, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
PROMPTLY.
HONDO OIL & GAS COMPANY
10375 Richmond Avenue
Houston, Texas 77042, Suite 900
(713) 954-4600
PROXY STATEMENT
Special Meeting of Stockholders
to be Held December 23, 1998
This Proxy Statement is being furnished by the Board of
Directors (hereinafter the "Board" or "Board of Directors") of
Hondo Oil & Gas Company, a Delaware corporation (the "Company"),
to the holders of the outstanding shares of Common Stock, par
value $1.00 per share (the "Shares"), of the Company in
connection with the proposed merger (the "Merger") of HOGC
Acquisition Corporation (the "Purchaser"), a Delaware corporation
and an indirect wholly owned subsidiary of Lonrho Plc (the "Parent"),
with and into the Company pursuant to an Agreement and Plan of
Merger, dated October 12, 1998 (the "Merger Agreement"), by and
among the Company, the Purchaser and the Parent, a copy of which is
attached hereto as Annex A. As a result of the Merger, the
Company will become a wholly owned subsidiary of the Parent and
each issued and outstanding Share (other than Shares owned by the
Parent or any subsidiary of the Parent, Shares held in treasury
by the Company and Shares held by stockholders who perfect
appraisal rights under Delaware law) will be converted into the
right to receive $0.05 per Share net in cash, without interest
thereon (the "Merger Consideration").
This Proxy Statement accompanies a Notice of Special Meeting
of Stockholders (the "Special Meeting") of the Company to be held
on December 23, 1998, at which time the Company's stockholders
will be asked to consider and vote upon a proposal to approve the
Merger and adopt the Merger Agreement and such other business as
may properly come before the Special Meeting.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Votes cast by proxy or in person at the Special Meeting will
be counted by the persons appointed by the Company to act as
election inspectors for the meeting. The election inspectors
will treat shares represented by proxies that reflect abstentions
as shares that are present and entitled to vote, for purposes of
determining the presence of a quorum and for purposes of
determining the outcome of any matter submitted to the
stockholders for a vote. Abstentions, however, do not constitute
a vote "for" or "against" any matter.
The election inspectors will treat shares referred to as
"broker non-votes" (i.e., shares held by brokers or nominees as
to which instructions have not been received from the beneficial
owners or persons entitled to vote that the broker or nominee
does not have discretionary power to vote on a particular matter)
as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. However, for purposes of
determining the outcome of any matter as to which the broker has
physically indicated on the proxy that it does not have
discretionary authority to vote, those shares will be treated as
not present and not entitled to vote with respect to that matter
(even though those shares are considered entitled to vote for
quorum purposes and may be entitled to vote on other matters).
Therefore, like abstentions, they will have no impact on the outcome
of the vote on the proposal to approve the Merger and adopt the
Merger Agreement.
This Proxy Statement is dated November __, 1998 and is first
being mailed to stockholders on or about November __, 1998.
TABLE OF CONTENTS
Page
SUMMARY 1
The Companies 1
General 1
Special Meeting of Stockholders; Required Vote 1
Payment for Shares 2
The Merger 2
Selected Financial Information of the Company 4
Market Prices and Dividends 6
SPECIAL FACTORS 6
Background of the Merger; Recommendations of the Special
Committee and Board of Directors 6
Opinion of Financial Advisor 13
Plans of Parent for the Company 16
Certain Effects of the Merger 17
SPECIAL MEETING OF STOCKHOLDERS; REQUIRED VOTE 17
PAYMENT FOR SHARES 18
General 18
Letter Of Transmittal 18
Valid Surrender of Shares 19
Book-Entry Transfer 19
Signature Guarantees 19
Backup Federal Income Tax Withholding 19
APPRAISAL RIGHTS 20
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 21
CERTAIN RELATIONSHIPS AND RELATED MATTERS 23
CONTROLLING PERSONS, DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY, PARENT AND PURCHASER 25
THE MERGER AGREEMENT 26
SOURCES OF FUNDS 29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 29
AVAILABLE INFORMATION 31
FINANCIAL STATEMENTS AND INFORMATION INCORPORATED BY
REFERENCE 31
SUMMARY
The following is a summary of certain information
contained elsewhere in this Proxy Statement. Reference is made
to, and this summary is qualified in its entirety by, the more
detailed information contained, or incorporated by reference, in
this Proxy Statement and the annexes hereto. Unless otherwise
defined herein, capitalized terms used in this summary have the
respective meanings ascribed to them elsewhere in this Proxy
Statement.
STOCKHOLDERS OF THE COMPANY ARE URGED TO READ THIS
PROXY STATEMENT AND THE ANNEXES HERETO IN THEIR ENTIRETY.
The Companies
The Company. Hondo Oil & Gas Company is an independent
oil and gas company that, until recently, was focused on
international oil and gas development in Colombia, South America.
The principal executive offices of the Company are located at
10375 Richmond Avenue, Suite 900, Houston, Texas 77042 and its
telephone number is (713) 954-4600.
The Purchaser. HOGC Acquisition Corporation is an indirect
newly incorporated Delaware corporation and a wholly owned subsidiary
of the Parent. To date, the Purchaser has not conducted any
business other than in connection with the Merger. The principal
executive offices of the Purchaser are located at 1211 Avenue of the
Americas, 18th Floor, New York, New York 10036 and its telephone
number is (212) 704-6000.
The Parent. Lonhro Plc is a public company formed
under the laws of England. Lonhro Plc and its subsidiaries are
engaged principally in mining, but also other activities, such as
ownership and management of property and hotels. The principal
executive offices of the Parent are located at Four Grosvenor
Place, London SWIX 7DL, England and its telephone number
is 44-171-201-6000.
General
This Proxy Statement is being delivered in connection
with the proposed Merger of the Purchaser with and into the
Company pursuant to the Merger Agreement. As a result of the
Merger, the Company will become a wholly owned subsidiary of the
Parent, each issued and outstanding Share (other than Shares
owned by the Parent or any subsidiary of the Parent, Shares held
in treasury by the Company and Shares held by stockholders who
perfect appraisal rights under Delaware law) will be converted
into the right to receive the Merger Consideration (i.e., $0.05
net in cash), and the equity interest of all pre-Merger
stockholders in the Company will be terminated. See "THE MERGER
AGREEMENT - The Merger."
Special Meeting of Stockholders; Required Vote
A Special Meeting of Stockholders will be held on
December 23, 1998, at 10:00 a.m., New York Time, at the offices
of Parker Chapin Flattau & Klimpl, 18th Floor, 1211 Avenue of the
Americas, New York, New York. At the Special Meeting,
stockholders will be asked to consider and vote upon a proposal
to approve the Merger and adopt the Merger Agreement and such
other proposals as may properly come before the Special Meeting.
Under Delaware law, the affirmative vote of a majority
of the issued and outstanding Shares is required to approve the
Merger and adopt the Merger Agreement at the Special Meeting.
Only holders of record of Shares at the close of business on
November 18, 1998 (the "Record Date") are entitled to notice of
and to vote at the Special Meeting. At such date there were
13,798,424 Shares outstanding, each of which will be entitled to
one vote on each matter to be acted upon or which may properly
come before the Special Meeting.
On the Record Date, Parent and its subsidiaries owned
of record 9,434,596 Shares, constituting approximately 68.4% of
the outstanding Shares. Pursuant to the terms of the Merger
Agreement, on the proposal to approve the Merger and adopt the
Merger Agreement, Parent is obligated to vote, or cause to be
voted, all such Shares in the manner voted by the majority of the
other stockholders of the Company voting at the Special Meeting.
Directors and officers of the Company individually owned in the
aggregate 30,768 Shares (or 0.2% of the outstanding Shares) on
the Record Date and have stated they will vote FOR the approval
of the Merger and the adoption of the Merger Agreement. Adoption
of the proposal to approve the Merger and adopt the Merger
Agreement is not conditioned upon the approval of a majority of
the non-affiliated stockholders.
Payment for Shares
Upon consummation of the Merger, the Purchaser will
make available to Chase Mellon Shareholder Services LLC, as
paying agent (the "Paying Agent") for the holders of record of
Shares, as needed, the amount of cash to be paid in respect of
the Shares converted into the right to receive the Merger
Consideration pursuant to the Merger. Holders of record should
use the Letter of Transmittal to be provided under separate cover
after the consummation of the Merger to effect the surrender of
certificates evidencing Shares in exchange for the Merger
Consideration. All certificates so surrendered will be
cancelled. Upon consummation of the Merger and surrender of a
certificate evidencing Shares, together with a duly executed
Letter of Transmittal, the holder thereof will receive in
exchange for each Share surrendered the Merger Consideration.
Any cash held by the Paying Agent that remains unclaimed by
stockholders for six months after the effective time of the
Merger will be returned to the Company, as the Surviving
Corporation in the Merger, upon demand and thereafter
stockholders may look, subject to applicable abandoned property,
escheat and other similar laws, only to the Company for payment
thereof.
A Letter of Transmittal will be sent to all
stockholders of the Company under separate cover after the
consummation of the Merger. The Letter of Transmittal will
advise each stockholder of the procedures for surrendering to the
Paying Agent certificates evidencing Shares in exchange for the
Merger Consideration. See "PAYMENT FOR SHARES."
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES
WITH THEIR PROXY CARD.
The Merger
Background of the Merger. For a description of the
events leading up to the approval of the Merger Agreement by the
Special Committee of the Board of Directors consisting solely of
directors not affiliated with Parent (the "Special Committee")
and the entire Board of Directors of the Company, see "SPECIAL
FACTORS - Background of the Merger; Recommendations of the
Special Committee and Board of Directors."
Approval of the Special Committee and Board of
Directors of the Company. The Special Committee and the Board of
Directors of the Company as a whole, on October 9, 1998,
unanimously determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are fair
to the unaffiliated stockholders of the Company, approved the
Merger Agreement and recommended that the Company's stockholders
approve the Merger and adopt the Merger Agreement. See "SPECIAL
FACTORS - Background of the Merger; Recommendations of the Special
Committee and Board of Directors."
The Special Committee believes that, in view of the
Company's financial situation, including the uneconomic nature of
the Company's interest in the Opon Association Contract (the
"Opon Contract"), the Company's major asset, and the significant
debt owed to Parent and its affiliates, the Company is no longer
viable as a separate entity. Accordingly, the Special Committee
believes the Merger offers the only means for the unaffiliated
stockholders of the Company to receive any value for their Shares.
Opinion of Financial Advisor. On October 9, 1998, Houlihan
Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey")
delivered to the Special Committee its opinion to the effect
that, as of such date, the Merger Consideration to be received by
the stockholders of the Company (other than Parent and its
subsidiaries) is fair to such stockholders from a financial point
of view. The full text of the opinion of Houlihan Lokey, which
sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached hereto as Annex
B. Stockholders are urged to read the opinion of Houlihan Lokey
carefully and in its entirety. See "SPECIAL FACTORS - Opinion of
Financial Advisor."
Interests of Certain Persons in the Merger. If the Merger
is consummated, Parent and the Surviving Corporation will jointly
and severally indemnify, defend and hold harmless the present and
former directors and officers of the Company to the fullest
extent that the Company would have been permitted to indemnify
such persons under applicable law and the Certificate of
Incorporation and Bylaws of the Company and any other agreements
in effect. Parent has also agreed to provide directors' and
officers' insurance for the present and former directors and
officers of the Company after consummation of the Merger. See
"THE MERGER AGREEMENT - Directors' and Officers' Indemnification
and Insurance."
Purpose of the Merger. The purpose of the Merger is to
enable the Parent, through the Purchaser, to acquire the
remaining equity interest in the Company not currently owned by
the Parent.
Plans of Parent for the Company. If the Merger is
consummated, Parent intends to continue to attempt to resolve the
Company's outstanding liabilities at minimum cost and expense.
Parent has no present plans to conduct operations or to make any
material additional investments in the Company. However, if an
opportunity arises to utilize the existing net operating losses
of the Company, Parent would consider the opportunity, although
Parent has no current plans, understandings or agreements to use
the net operating losses. At September 30, 1997, the net
operating losses of the Company were approximately $138.9
million. If the Merger is not approved by the stockholders,
Parent does not intend to invest or lend any additional funds to
the Company. The Company would then be required to obtain funds
from other sources to continue as a business. The Company
believes it is unlikely that any other financing could be
obtained and, therefore, the Company may need to seek protection
from its creditors under the applicable bankruptcy laws if the
Merger is not consummated. See "SPECIAL FACTORS - Plans of
Parent for the Company."
Conditions to the Merger. The Merger is subject to the
satisfaction of certain conditions, including that stockholders
holding no more than 100,000 shares demand appraisal rights with
respect to their Shares. See "THE MERGER AGREEMENT - Conditions
to the Merger." Assuming the satisfaction of such conditions, it
is expected that the Merger will be consummated on December 23,
1998, or as promptly as practicable thereafter.
Certain Effects of the Merger. Following the consummation
of the Merger, Parent will own 100% of the Company's outstanding
capital stock and the holders of Shares immediately prior to the
Merger, other than Parent, will cease to have ownership interests
in the Company or rights as stockholders of the Company (other
than statutory appraisal rights, in the case of those
stockholders who perfect such rights under the Delaware General
Corporation Law. See "APPRAISAL RIGHTS.") The sole right of
holders of Shares immediately prior to the Merger will be to
receive the Merger Consideration. As a result of the Merger, the
Shares will no longer be quoted on the Nasdaq "OTC Bulletin
Board" and the Company will no longer file periodic reports with
the Securities and Exchange Commission (the "Commission"). See
"SPECIAL FACTORS - Certain Effects of the Merger."
Accounting Treatment. The Merger will be accounted for by
Parent under the purchase method of accounting in accordance with
generally accepted accounting principles.
Appraisal Rights. Stockholders of the Company are entitled
to appraisal rights under Section 262 of the Delaware General
Corporation Law as to Shares owned by them in connection with
the Merger. See "APPRAISAL RIGHTS."
Regulatory Matters. The Company is not aware of any
federal, state or foreign regulatory requirements that are
required in order to consummate the Merger.
Certain Federal Income Tax Consequences of the Merger. The
receipt of cash pursuant to the Merger Agreement or the exercise
of appraisal rights will be a taxable transaction to stockholders
for federal income tax purposes. See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER." Stockholders are urged to
consult their own tax advisors as to the particular tax
consequences of the Merger to them, including the applicability
and the effect of federal, state, local, foreign and other tax
laws.
Selected Financial Information of the Company
The selected financial information of the Company set forth
below has been derived from the audited financial statements of
the Company for the five fiscal years ended September 30, 1997
and from the unaudited financial statements of the Company for
the nine months ended June 30, 1998. Such information should be
read in conjunction with the financial statements and other
financial information of the Company included elsewhere herein or
incorporated by reference.
Nine Months
Ended June 30, Fiscal Year Ended September 30,
1998(a) 1997 1997(b) 1996(b) 1995(b) 1994(b) 1993
(In thousands, except per share data)
OPERATING DATA
Revenue $ 3,069 $ 23 $ 29 $ 112 $ 46 $ 728 $ 980
Gain (loss) on sales of assets - - - (6) - (1,240) (8)
Operating costs and expenses 12,970 3,534 4,367 6,293 1,943 2,880 5,910
Depreciation, depletion and
amortization 1,072 172 230 156 266 220 365
Interest expense 8,395 4,480 6,222 5,009 4,680 4,605 3,411
Provision for income tax - (2) (2) 5 113 (199) (46)
------------ ---------- ----------- ----------- ------------ ------------ ---------
Loss from continuing operations (19,368) (8,161) (10,788) (11,357) (6,956) (8,018) (8,668)
Loss from discontinued
operations - - (1,600)(c) (1,300)(d) (4,950)(c) (3,038)(c) (15,176)(e)
Extraordinary items (36,428)(f) - - - - - -
------------ ---------- ----------- ----------- ------------ ------------ ---------
Net loss $(55,796) $(8,161) $(12,388) $(12,657) $(11,906) $(11,056) $(23,844)
============ ========== =========== =========== ============ ============ =========
Earnings (loss) per share
Continuing operations $ (1.41) $ (0.59) $(0.78) $(0.83) $(0.53) $(0.62) $(0.67)
Discontinued operations - - (0.12) (0.10) (0.37) (0.23) (1.16)
Extraordinary items (2.64) - - - - - -
------------ ---------- ----------- ----------- ------------ ------------ ---------
$ (4.05) $ (0.59) $(0.90) $(0.93) $(0.90) $(0.85) $(1.83)
============ ========== =========== =========== ============ ============ =========
Weighted average common shares
outstanding 13,795 13,780 13,781 13,673 13,171 13,009 13,007
============ ========== =========== =========== ============ ============ =========
At June 30, At September 30,
1998 1997(b) 1996(b) 1995(b) 1994(b) 1993(b)
(In thousands)
OTHER FINANCIAL DATA
Working capital (deficit) $(151,303)(f) $(5,834) $(5,109) $(1,077) $2,413 $1,729
Properties, net $20(f) $40,612 $21,248 $12,777 $10,855 $15,910
Net assets of discontinued
operations $2,344 $2,137(b) $2,202(c) $2,978(b) $6,851(b) $7,750(d)
Total assets $6,111 $44,930 $24,540 $18,398 $24,908 $30,142
Total debt $114,578 $102,903 $83,334 $82,213 $81,888 $78,828
Shareholders' deficit $(148,897) $(93,173) $(80,891) $(73,364) $(66,681) $(55,815)
Net tangible book value
per share $(10.79) $(6.76) $(5.91) $(5.57) $(5.13) $(4.29)
(a) The Company's Colombian properties began operations in December
1997. Dry hole costs of $8,576,000 from the failed Opon 14 well
were recorded in the quarter ended June 30, 1998.
(b) Under the terms of a Farmout Agreement between the Company and
Amoco Colombia Petroleum Company relating to the Opon Contract,
Amoco Colombia Petroleum Company paid for most costs incurred
(both capitalized and expensed) in Colombia in 1995 and 1994.
The Company became responsible for its share of costs in
Colombia in 1996.
(c) The Company recorded valuation provisions against the carrying
value of its discontinued real estate operations and accrued for
a contingent liability arising from its discontinued refining
and marketing operations in 1997, 1995 and 1994.
(d) The Company recorded valuation provisions against the carrying
value of its discontinued real estate operations in 1996.
(e) The Company completed the sale of substantially all of its
discontinued refining and marketing segment and recorded
valuation provisions against the carrying value of its
discontinued real estate segment in 1993.
(f) In June 1998, the Company wrote off its investment in Colombia,
recorded $3,554,000 from forgiveness of debt, and reclassified
all of its long-term debt as current liabilities, all due to
insufficient oil and gas reserves in Colombia.
Market Prices and Dividends
The Shares were traded on the American Stock Exchange until
May 15, 1998 (trading was suspended during the period May 15,
1998 to July 2, 1998) and have been quoted on the Nasdaq "OTC
Bulletin Board" from July 2, 1998. The following table sets
forth the high and low closing sales prices per Share until
May 15, 1998 and the high and low bid price for periods from
July 2, 1998.
High Low
Year Ended September 30, 1997
First Quarter $15.00 $10.75
Second Quarter 14.00 10.50
Third Quarter 10.75 6.44
Fourth Quarter 7.25 5.88
Year Ended September 30, 1998
First Quarter $ 9.75 $ 6.13
Second Quarter 8.13 1.50
Third Quarter 2.25 0.63
Fourth Quarter 0.13 0.04
On October 9, 1998, the last full trading day prior to the
public announcement of the execution of the Merger Agreement, the
last reported trade for the Shares was $0.036 per Share. On
November __, 1998, the latest practicable trading day prior to
the commencement of mailing of this Proxy Statement, the last
reported trade for the Shares was $____ per Share.
The number of stockholders of record at the Record Date was
709.
The Company has not paid a dividend on the Shares in the two
most recent fiscal years, nor has it ever done so. The Company's
loan agreement with London Australian and General Property
Company Limited, a subsidiary of Parent ("LAGP"), restricts the
payment of dividends to 35% of the Company's Consolidated Net
Adjusted Income (as defined in the loan agreement) plus $2.0
million. Since the Company has incurred net losses during this
fiscal year and prior years, the payment of dividends is
prohibited.
SPECIAL FACTORS
Stockholders should consider carefully the following matters
in deciding how to vote on the proposal to approve the Merger and
adopt the Merger Agreement.
Background of the Merger; Recommendations of the Special
Committee and Board of Directors
Prior to 1989, the Company was involved in domestic oil and
gas operations and owned a refinery, an asphalt paving materials
company, a packaged concrete manufacturing company and other
assets. In late 1989 and 1990, the Company suspended operations
and closed its refinery. Also in 1990, the Company sold its
asphalt paving materials company and its packaged concrete
company. In 1992, the Company completed a sale of substantially
all of its domestic oil and gas assets. The Company then focused
on international oil and gas exploration and development.
Since 1992, the Company's principal asset has been its
interest in 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 believed
to exist in the Opon Contract area as a result of two discovery
wells drilled during 1994 and 1995. In accordance with the terms
of the Opon Contract, in May 1996 Empresa Colombiana de Petroleos
("Ecopetrol") declared a portion of the area commercial. A
pipeline and related wellsite facilities to deliver natural gas
and condensate to a market were completed, and production began
in December 1997. Deliveries of natural gas to a power plant
located at the Opon Contract area also began in December 1997,
but were suspended at the end of March 1998 due to unanticipated
drops in pressure and corresponding production from the Opon No.
3 and No. 4 wells. During 1997, the Opon No. 6 well encountered
mechanical problems during completion operations and was
temporarily suspended to evaluate information and develop plans
for further operations on the well. The associate parties
deferred commencing production of the Opon No. 6 well until they
completed a review and analysis of the reservoir and reserves.
Drilling of the Opon No. 14 well began in October 1997 and has
been completed and tested. The Opon No. 14 well did not produce
any hydrocarbons and has been suspended.
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.
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 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 perforating 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 made a number of claims against
suppliers of services and equipment related to the problems
encountered during completion operations on the Opon No. 6 well.
The claims relate to the failure of perforating guns, problems
with the installation of the production tubing and failure of a
downhole safety valve provided by Colombian branches of U.S. and
multinational oil service companies. The claims are based upon
contract and purchase order terms providing for warranties,
adequate supervision of assembly of components and other work,
equipment to be in good working order, and work to be performed
in a workmanlike manner. The disputed charges aggregate
approximately $4.9 million, of which Hondo Magdalena's share is
approximately $1.5 million. Consequential losses, depending on
how measured, could make the claims larger. The Company has
agreed with Amoco Colombia on a settlement of all claims related
to equipment failure with suppliers to the Opon No. 6 well.
The settlements have already resulted, and will result, in
partial payments of outstanding invoices to several suppliers
and will further increase the amount the Company owes Amoco
Colombia but will reduce the Company's accrued liabilities.
The Opon No. 14 well, approximately four kilometers south of
the Opon No. 4 well, commenced drilling in October 1997. The
total cost of the well is estimated to be $26.3 million, of which
Hondo Magdalena was required to bear 30.9%. The well was planned
and intended to confirm the existence of the La Paz gas and
condensate reservoir in the south of the Opon Contract area.
The well has been drilled to a depth of 12,200 feet. The
associate parties have completed testing of both the La Paz
formation and the deeper Lisama formation. The results were
unsuccessful and the well did not flow any significant
hydrocarbons and has been plugged and temporarily suspended in
such a manner that it may be re-entered in the future.
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.
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 26.4 cents per
thousand cubic feet of gas. Amoco Colombia appealed this
decision, but the appeal was denied. Through August 1998 production,
the associate parties charged (and Ecopetrol has paid) the higher
60.4 cents tariff. The Company is recognizing revenue using the
26.4 cent rate, the remainder of the cash being received is recorded
as a liability. The associate parties have charged the lower 26.4
cent rate beginning with September 1998 production.
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$0.846 per million
British Thermal Units); (ii) the sale of condensate and natural
gas liquids at market-related and market-indexed prices; and
(iii) the processing of the gas stream at Ecopetrol's El Centro
gas processing plant for a fee of $0.159 per thousand cubic feet
of gas. Ecopetrol, as purchaser, pays the pipeline tariff for
the natural gas sold by the associate parties.
In March 1997, Hondo Magdalena, ODC, Amoco Colombia and
Ecopetrol, as sellers, signed a contract with Termo Santander de
Colombia E.S.P., as purchaser ("Termo Santander"), to supply,
subject to the conditions noted below, natural gas to its
electric generation plant at the Opon Contract area. Under the
contract, that is not in effect, the sellers were required to
supply natural gas requested by the purchaser up to 60 million
cubic feet per day. The sellers were to receive $4.2 million per
year for making the gas available for purchaser's call.
Purchaser was to pay 60% of the government-regulated price
(described above) for the natural gas it takes. The sellers also
were to receive additional bonus payments if the power plant
achieves a price for its electrical power in excess of certain
target rates. 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 was
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 could
be satisfied, an interim agreement for the sale of gas to Termo
Santander was signed on November 20, 1997. The interim agreement
was to be effective until January 1, 1999. The gas sales price
under the interim agreement was 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 associate parties have not supplied
gas to Termo Santander since March 31, 1998. The power plant has
not been able to locate another supply of gas and has permanently
ceased operation. It is currently being dismantled for export.
The associate parties have no liability for failing to supply gas
to the power plant under the interim agreement.
The pipeline and wellsite facilities were completed in June
1997. Ecopetrol completed the improvements to the El Centro gas
processing plant in November 1997. Production from the Opon
field began on December 1, 1997, with gas supplied to Termo
Santander for testing the first of two turbines at the power
plant. The first shipment of gas through the pipeline occurred
on December 5, 1997.
The associate parties have submitted invoices to Ecopetrol
under the gas sales agreement for payments under the take-or-pay
clause, which provides that Ecopetrol will pay 200% of the gas
price for the Company's share of 100 million cubic feet per day
if the gas pipeline is completed and ready and the El Centro gas
plant improvements have not been completed. The associate
parties believe the pipeline was complete on June 25, 1997, and
submitted invoices accordingly. Ecopetrol has indicated that it
will not pay these invoices. The Company has not accrued its
$5.2 million invoice in its financial statements. The associate
parties are reviewing their legal options to pursue the
collection of these invoices, which could include negotiation of
a settlement and arbitration in a Colombian forum.
Amoco Colombia has submitted budgets to Hondo Magdalena and
ODC for calendar years 1996, 1997 and 1998. Hondo Magdalena
approved capital expenditures for wells and the pipeline
projects, and certain other expenditures, but did not approve the
proposed overhead. Pursuant to a Stand-Still Agreement reached
with Amoco Colombia on May 19, 1998, Hondo Magdalena has approved
the original 1996 and 1997 budgets in their entirety and no
longer has any disputes regarding overhead operating expenses.
This has not resulted in any adjustments to the Company's
financial statements since the Company had previously expensed
all disputed overhead operating expenses as incurred.
The Company and Amoco Colombia have had a dispute regarding
audit exceptions for the Opon project for 1994, 1995 and 1996.
The dispute as to 1994 and 1995 was submitted to arbitration in
January 1998. The parties met in July 1998 and subsequently
resolved all matters on which they disagreed.
In April 1998, the Company announced that the rate of
decline in production from its Opon No. 3 and Opon No. 4 gas
wells in Colombia had been higher than expected during the first
five months of production. Testing of the wells is complete. An
analysis of the test results by the Company's independent reserve
engineers concluded that it will become uneconomic (operating
costs will exceed operating revenues) to produce the wells before
the end of fiscal 1998 and that the drilling of additional wells
would be uneconomic (net profit over the life of a new well would
be less than the cost to drill it). As a result of the
significant declines in production observed since December 1997
and the recently completed testing, proved reserves as of
June 30, 1998 were estimated to be 0.4 billion cubic feet of
natural gas and 0.02 million barrels of associated liquids, for
which the present value of net cash flows is less than $0.1
million.
The current production revenue from the Opon Nos. 3 and 4
wells continues to decline and net cash flow to the Company's
interest turned negative before the end of fiscal 1998. No
additional wells are planned to be drilled by Amoco Colombia in
the Opon Contract area. In November 1998, the Company completed
negotiations with Amoco Colombia for a voluntary surrender of
its working interest in the Opon Contract pursuant to the joint
operating agreement in exchange for a release of the Company's
liabilities to Amoco Colombia, which include $5.5 million in
current charges and $27.1 million under the Funding Agreement
as of June 30, 1998. The settlement with Amoco Colombia requires
the approval of Ecopetrol and the Colombian Ministry of Mines and
Energy for the assignment of Hondo Magdalena's interest in the Opon
Contract to Amoco Colombia. In July 1998, Amoco Colombia announced
that it would write off a significant amount of its Opon investment.
At June 30, 1998, the Company was indebted to Parent and its
affiliates in the aggregate amount of $112.5 million. The
Company has failed to comply with an existing loan covenant to
increase reserves in the Opon area by 13 billion cubic feet of
gas by October 1, 1998. The Company has not received a notice of
default from Parent.
In various discussions between the Company and Parent,
Parent has expressed its preference that the Company not commence
a bankruptcy proceeding. Between July, 1998 and September, 1998,
the Company settled claims by the City of Long Beach, Phillips
Petroleum, the Small Business Administration and the trustee
under certain industrial development bonds of a subsidiary of
the Company against the Company totaling approximately $5,943,000
for approximately $578,000. The Company believes the claimants
agreed to settle their claims for approximately ten cents on the
dollar due to the financial condition of the Company.
As noted above, Parent and its affiliates continue to be the
Company's principal creditor and stockholder. The Special
Committee does not believe that the Company has or can obtain the
funds to repay the amounts owed to Parent and its affiliates or
that the Company can refinance such indebtedness.
On August 24 1998, the Board of Directors met to discuss the
Company's financial situation. The Board of Directors appointed
a Special Committee of the Board consisting of John J. Hoey,
Douglas G. McNair and Robert K. Steer, none of whom are officers
or directors of Parent. Mr. Hoey is an officer of the Company.
Neither Mr. McNair nor Mr. Steer is an officer of the Company.
The Special Committee was empowered to consider various
alternatives and determined that the only practicable
alternatives available to the Company were bankruptcy,
liquidation and a possible transaction with Parent. The Special
Committee believed that continuing as an operating entity or a
sale to a third party were not realistic alternatives based upon
the Company's financial situation. John J. Hoey then approached
Parent regarding a possible merger of the Company with a wholly
owned subsidiary of Parent and the payment of an amount in cash
to the stockholders of the Company. On August 31, 1998, the
Special Committee engaged Houlihan Lokey as its financial advisor
to render an opinion regarding the consideration to be received
by stockholders of the Company if an agreement was reached with
Parent.
Parent proposed the Merger Consideration based upon its
belief that the Shares had little or no value and the Merger
Consideration offered the stockholders of the Company an
opportunity to receive a nominal amount for their Shares. Parent
concluded that it would not pay more than a nominal amount for
the Shares.
On September 16, 1998, O'Melveny & Myers LLP, counsel for
the Company, distributed to the directors and officers of the
Company and to representatives of Parent and Parker Chapin
Flattau & Klimpl, counsel to Parent, a draft of the Merger
Agreement.
On September 25, 1998, the Special Committee had a
telephonic meeting. Mr. Hoey described the current financial
situation and his efforts to settle several of the claims against
the Company. A representative of Houlihan Lokey then gave a
presentation regarding Houlihan Lokey's preliminary analysis of
the consideration proposed to be given to the stockholders of the
Company in the proposed Merger and Houlihan Lokey's preliminary
indication that such consideration was fair to the stockholders
of the Company (other than Parent) from a financial point of
view. The representative of Houlihan Lokey answered questions
from the members of the Special Committee. Counsel for the
Company then described in detail the terms of the proposed Merger
Agreement and answered questions from the members of the Special
Committee
On October 6, 1998, counsel for the Company and counsel for
Parent discussed the terms of the proposed Merger and the
provisions of the draft Merger Agreement.
On October 7, 1998, the Special Committee met by telephone
to discuss the continuing analysis by Houlihan Lokey.
On October 9, 1998, the Merger Agreement was presented to
the Special Committee. Counsel to the Company described in detail
the provisions of the Merger Agreement and answered any questions
from the members of the Special Committee. Representatives of
Houlihan Lokey made a presentation to the Special Committee and,
after the presentation, delivered its opinion to the Special
Committee to the effect that the Merger Consideration was fair to
the stockholders of the Company (other than Parent) from a
financial point of view. The Special Committee then unanimously
determined that the Merger should be approved and the Merger
Agreement should be executed and delivered, and that the terms of
the Merger Agreement are fair to the unaffiliated stockholders of
the Company. The entire Board of Directors then met and
unanimously approved the Merger and the Merger Agreement.
On October 12, 1998, the Merger Agreement was executed by
all parties thereto.
The Special Committee and the Board of Directors as a whole
recommend a vote FOR the approval of the Merger and the adoption
of the Merger Agreement.
In reaching the determination and recommendation described
above, the Special Committee and the Board of Directors
considered a number of factors, including the following:
(1) The financial condition and results of operations
of the Company.
(2) The fact that independent petroleum consultants
had estimated that the present value of net cash flows from
proved reserves as of June 30, 1998 was less than $100,000.
(3) The fact that the Company's working interest in
the Opon Contract has become uneconomical, Amoco Colombia
has ceased new additional work on the Opon Project and the
Company's interest in the Opon Contract is the only
operating asset of the Company.
(4) The fact that the Company owes Parent and its
affiliates approximately $112.5 million and the Company has
no prospects of being able to repay the debt.
(5) The fact that the Company liabilities total
approximately $148.7 million, far in excess of its assets of
approximately $1.7 million.
(6) The fact that Parent, as the majority stockholder
and major lender of the Company, does not intend to provide
any further funds to the Company.
(7) The fact that, without additional funding, the
Company will be unable to meet its obligations as a public
company, including filing reports under the Securities
Exchange Act of 1934.
(8) The belief of the Special Committee and the Board
of Directors that a bankruptcy filing by the Company is the
only alternative to the Merger and, in a bankruptcy
proceeding, the stockholders of the Company will likely
receive nothing.
(9) The belief by the Special Committee that many
stockholders have a tax basis greater than $0.05 per share
and, therefore, could recognize a tax loss in calendar 1998
if the Merger is consummated in calendar 1998.
(10) The presentation to the Special Committee by
representatives of Houlihan Lokey and the opinion of
Houlihan Lokey that the Merger Consideration to be received
by the stockholders of the Company (other than Parent and
its subsidiaries) pursuant to the Merger Agreement is fair
to such stockholders from a financial point of view. The
full text of the written opinion of Houlihan Lokey, which
sets forth assumptions made, procedures followed, matters
considered and limits on the review undertaken, is attached
as Annex B to this Proxy Statement. THE COMPANY'S
STOCKHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY.
The opinion of Houlihan Lokey was presented for the
information of the Special Committee in connection with
their consideration of the Merger Agreement and is directed
only to the fairness of the aggregate consideration to be
received by the stockholders of the Company (other than
Parent and its subsidiaries) pursuant to the Merger
Agreement. The opinion does not constitute a recommendation
to any stockholder as to how to vote with respect to the
Merger.
(11) The availability of appraisal rights under Section
262 of Delaware Law for dissenting Shares.
(12) The terms and conditions of the Merger
Agreement.
The members of the Special Committee and the Board
of Directors evaluated the factors listed above in light of
their knowledge of the business and operations of the Company
and their business judgment. In view of the wide variety of
factors considered in connection with its evaluation of the
Merger, neither the Special Committee nor the Board of Directors
fund it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors
considered in reaching its determination.
Parent and Purchaser also believe that the Merger
Consideration is fair to the unaffiliated stockholders of the
Company. In reaching their determination, Parent and Purchaser
considered a number of factors, including those considered by
the Special Committee and Board of Directors and identified in
clauses (1) through (9), (11) and (12) of the preceding
paragraph. In view of the wide variety of factors considered,
neither Parent nor Purchaser found it practicable to, and did
not, quantify or otherwise attempt to assign relative weights to
the specific factors considered in reaching its determination.
However, neither Parent nor Purchaser is making any
recommendation to the stockholders of the Company as to how they
should vote on the proposal to approve the Merger and adopt the
Merger Agreement.
Opinion of Financial Advisor
The preparation of a fairness opinion is a complex process
and is not necessarily susceptible to partial analysis or summary
description. The following is a brief summary and general
description of the valuation methodologies followed by Houlihan
Lokey. The summary does not purport to be a complete statement
of the analyses and procedures applied, the judgments made or the
conclusion reach by Houlihan Lokey or a complete description of
its presentation. Houlihan Lokey believes that its analyses must
be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering
all factors and analyses, could create an incomplete view of the
process underlying its analyses and opinions.
Houlihan Lokey delivered a written opinion to the Special
Committee on October 9, 1998 to the effect that, as of such date,
and based upon the assumptions made, general procedures followed,
factors considered and limitations on the review undertaken as
set forth in such opinion, the Merger Consideration to be
received by the stockholders of the Company, other than Parent
and its subsidiaries (the "Public Stockholders"), pursuant to the
Merger is fair to the Public Stockholders from a financial point
of view. References herein to the "Opinion" refer to the written
opinion of Houlihan Lokey dated October 9, 1998.
The full text of the Opinion, which sets forth the
assumptions made, general procedures followed, matters considered
and limitations on the review undertaken by Houlihan Lokey in
rendering its Opinion, is attached as Annex B and is incorporated
herein by reference. The Opinion is directed only to the
fairness, from a financial point of view, of the Merger
Consideration to be received by the Public Stockholders in
connection with the Merger and does not constitute a
recommendation to the Public Stockholders as to how such should
vote with respect to the Merger. The summary of the Opinion set
forth in this Proxy Statement is qualified in its entirety by
reference to the full text of the Opinion. The Public
Stockholders are urged to, and should, read the Opinion in its
entirety.
In connection with the Opinion, Houlihan Lokey made such
reviews, analyses and inquires as it deemed necessary and
appropriate under the circumstances. Among other things,
Houlihan Lokey: (i) reviewed the Company's audited financial
statements for the five fiscal years ended September 30, 1997 and
the unaudited financial statements for the nine months ended
June 30, 1998, which the Company's management has identified as
being the most currently available financial statements available
as of the valuation date; (ii) reviewed the audited financial
statements for Hondo Magdalena Oil & Gas Limited Colombian Branch
for the fiscal years ended December 31, 1997 and December 31,
1996; (iii) reviewed the Merger Agreement; (iv) met and had
discussions with certain members of the senior management of the
Company to discuss the operations, financial condition, future
prospects and projected operations and historical performance of
the Company; (v) reviewed the estimation of proven reserves and
future revenue, dated June 30, 1998, prepared by Netherland,
Sewell and Associates; (vi) reviewed the Second Amendment to the
Agreement between the City of Long Beach and the Company, dated
July 1998; (vii) reviewed the release of liability granted the
Company by Phillips Petroleum Company, dated July 16, 1998;
(viii) reviewed the petition of U.S. Bank Trust National
Association, the order for hearing on the petition and the
proposed order for settlement between Newhall Refining Co., Inc.
and the Company, dated August 12, 1998; and (ix) conducted such
other studies, analyses, and inquires as it has deemed
appropriate.
Net Asset Value Approach
Houlihan Lokey relied primarily upon a "Net Asset Value"
approach to assess the fairness of the Merger Consideration to be
received by the Public Stockholders in the Merger from a
financial point of view. The following is a summary of the
financial analyses utilized by Houlihan Lokey, and does not
purport to be a complete description of the analyses performed by
Houlihan Lokey.
In the "Net Asset Value" approach, Houlihan Lokey performed
an analysis of the value of the Company's underlying assets and
liabilities under a sale/liquidation scenario. This approach is
reasonable to use in situations where the business is no longer
considered to be a going concern as is the situation with the
Company. In these situations, the other general approaches to
valuation, such as the market multiple approach and the income
(or discounted cash flow) approach, are not applicable as the
Company will not be operating and therefore not generating future
earnings or cash flows. The Net Asset Value approach determined
the net equity value of the business by first determining the
value of the Company's assets and then subtracting the value of
its liabilities.
The Company's principal asset is its interest in the Opon
Contract, an exploration concession for an area in the middle
Magdalena Valley of Colombia, South America. This area currently
includes four non-performing wells. The value of the proved
reserves and future reserves resulting from those four wells in
the Opon Field was determined by an independent firm of
international petroleum consultants to be approximately $70,000
as of April 30, 1998. The Company has informed Houlihan Lokey
that there has been no material change in the value of the wells
since that date. The Company's remaining assets include cash and
receivables of approximately $1,670,000, and certain other assets
with a value of approximately $20,000. The Company is in the
process of selling its remaining real estate for approximately
$3,100,000, the proceeds of which will be used to repay a portion
of the mortgage on this real estate. The Company will receive no
proceeds from the sale of this real estate. Based upon the
above, the value of the Company's assets is approximately
$1,700,000.
The Company's liabilities total approximately $148,651,000
and consisted of the following: accrued expenses of $6,087,000
(which includes $2,094,000 due to Parent and its affiliates as
interest on outstanding obligations); accounts payable of
$6,478,000; and amounts due to Amoco of $27,058,000 and Parent
and its affiliates of $109,418,000 (after deducting the proceeds
from the sale of the real estate mentioned above). The Company
has recently reached settlement with certain creditors (other
than Parent and Amoco) due approximately $5,943,000 in aggregate,
for $578,000. Further, the Company was unable to satisfy certain
conditions to the notes payable to Parent and its affiliates.
The Company has not received a notice of default with respect to
those notes payable. Based on the above, it is reasonable to
assume that the equity of the Company has no value.
Analysis of Company Stock Price
Houlihan Lokey also considered the current and recent
trading price of the Company's stock. The Company's Common Stock
was traded on the American Stock Exchange until May 15, 1998
(trading was suspended during the period May 15, 1998 to July 2,
1998) and began trading on the Nasdaq "OTC Bulletin Board" on
July 2, 1998. From July 2, 1998 to October 9, 1998, an average
of approximately 11,000 shares of the Company's Common Stock
traded per day, which is approximately 0.3% of the public float.
In addition, the Company's Common Stock did not trade on a number
of days. The Company's stock price fluctuated over this period,
reaching a high of 15.6 cents on July 16, 1998 and then declining
steadily to a low of 2.6 cents on October 8, 1998, and closing at
3.6 cents on October 9, 1998, the date of the Opinion. Further,
as of the date of the Opinion, the Company was not covered by any
financial analyst.
Given the above information and Houlihan Lokey's other
analyses described above, Houlihan Lokey concluded that it was
reasonable to assume that the market price of the Company's
Common Stock reflected speculative value only, and was therefore
supportive of its fairness determination.
Preparation of Opinion
In preparing the Opinion, Houlihan Lokey relied and assumed,
without independent verification, that the information provided
to it by the Company was reasonably prepared and reflected the
best currently available estimates of the future financial
results and conditions of the Company and that there had been no
material change in the assets, financial condition, business or
prospects of the Company since the date of the most recent
financial statements provided to Houlihan Lokey. Houlihan Lokey
did not make an independent appraisal of any of the assets of the
Company. Houlihan Lokey's Opinion is necessarily based on
business, economic, market and other conditions as they existed
and could be evaluated by them at the date of their Opinion.
Houlihan Lokey did not and was not engaged or requested
to initiate any discussions with third parties or to solicit any
third-party indications with respect to a possible acquisition of
the Company or its assets. Furthermore, Houlihan Lokey did not
and was not requested to negotiate the terms of the Merger or to
advise the Special Committee with respect to alternatives with
respect to the Merger.
In the Opinion, Houlihan Lokey made its determination as to
the fairness, from a financial point of view, of the Merger
Consideration on the basis of the analyses described above. No
restrictions or limitations were imposed by the Company upon
Houlihan Lokey with respect to the investigation made or the
procedures followed in rendering its Opinion. Houlihan Lokey's
Opinion is not intended to be and does not constitute a
recommendation to any of the Public Stockholders as to whether to
accept the Merger Consideration to be received in connection with
the Merger.
Houlihan Lokey has advised the Company of the methodology
used to assess the fairness, from a financial point of view, of
the Merger Consideration. As the Merger Consideration to be
received by Public Stockholders is greater than the net value of
the Company's assets, Houlihan Lokey was able to conclude that
the Merger Consideration to be received by the Public
Stockholders in the Merger is fair to the Public Stockholders
from a financial point of view.
Compensation of Houlihan Lokey
Houlihan Lokey was retained pursuant to an engagement letter
dated August 31, 1998 to act as financial advisor to the Special
Committee to render an opinion as to the fairness, from a
financial point of view, to the Public Stockholders of the Merger
Consideration. Houlihan Lokey is a nationally recognized
investment banking firm that is continually engaged in providing
financial advisory services in connection with mergers and
acquisitions, leveraged buyouts, business valuations for a
variety of regulatory and planning purposes, recapitalizations,
financial restructurings, and private placements of debt and
equity securities. Houlihan Lokey has no material prior
relationship with the Company.
As compensation to Houlihan Lokey for its services, the
Company has agreed to pay Houlihan Lokey a fee of $150,000 plus
reasonable out-of-pocket expenses. No portion of Houlihan
Lokey's fees were contingent upon the successful completion of
the Merger. The Company has also agreed to indemnify Houlihan
Lokey and related persons against certain liabilities, including
liabilities under Federal securities laws, arising out of the
engagement of Houlihan Lokey, and reimburse Houlihan Lokey for
certain expenses.
Plans of Parent for the Company
If the Merger is consummated, Parent intends to continue to
attempt to resolve the Company's outstanding liabilities at
minimum cost and expense. Parent has no present plans to conduct
operations or to make any material additional investments in the
Company. However if an opportunity arises to utilize the
existing net operating losses of the Company, Parent would
consider the opportunity, although Parent has no current plans,
understandings or agreements to use the net operating losses. At
September 30, 1997, the net operating losses of the Company were
approximately $138.9 million. If the Merger is not approved by
the stockholders, Parent does not intend to invest or lend any
additional funds to the Company. The Company would then be
required to obtain funds from other sources to continue as a
business. The Company believes it is unlikely that any other
financing could be obtained and, therefore, the Company may need
to seek protection from its creditors under the applicable
bankruptcy laws if the Merger is not consummated.
Certain Effects of the Merger
If the Merger is consummated, the stockholders of the
Company, other than Parent, will cease to have ownership
interests in the Company or rights as stockholders of the
Company. A former holder of Shares will only have the right to
receive the Merger Consideration or, if the former stockholder
has duly demanded appraisal rights as described under "Appraisal
Rights," the fair value of the Shares of that stockholder. In
addition, if the Merger is consummated, the Company will no
longer file periodic reports under the Securities Exchange Act of
1934 (the "Exchange Act"), the Shares will no longer be quoted on
the OTC Bulletin Board, and the "short swing profit" rules, proxy
rules and "going private" rules under the Exchange Act will no
longer be applicable.
SPECIAL MEETING OF STOCKHOLDERS; REQUIRED VOTE
The Special Meeting will be held on December 23, 1998 at
10:00 A.M., New York Time, at the offices of Parker Chapin
Flattau & Klimpl, 18th Floor, 1211 Avenue of the Americas, New
York, New York. At the Special Meeting, stockholders will be
asked to consider and vote upon a proposal to approve the Merger
and adopt the Merger Agreement and such other proposals as may
properly come before the Special Meeting.
Under Delaware law, the affirmative vote of a majority of
the issued and outstanding Shares is required to approve the
Merger and adopt the Merger Agreement at the Special Meeting.
Only holders of record of Shares at the close of business on the
Record Date are entitled to notice of and to vote at the Special
Meeting. At such date there were 13,798,424 Shares outstanding,
each of which will be entitled to one vote on each matter to be
acted upon or which may properly come before the Special Meeting.
On the Record Date, Parent and its subsidiaries owned of
record 9,434,596 Shares, constituting approximately 68.4% of the
Shares outstanding. Pursuant to the terms of the Merger
Agreement, on the proposal to approve the Merger and adopt the
Merger Agreement, Parent is obligated to vote, or cause to be
voted, all such Shares in the manner voted by a majority of the
other stockholders of the Company voting at the Special Meeting.
Directors and officers of the Company individually owned in the
aggregate 30,768 Shares (or 0.2% of the outstanding Shares) on
the Record Date and have stated that they intend to vote FOR the
approval of the Merger and adoption of the Merger Agreement.
Adoption of the proposal to approve the Merger and adopt the
Merger Agreement is not conditioned upon the approval of a
majority of the non-affiliated stockholders.
Directors, officers and employees of the Company may solicit
proxies from stockholders by personal interview, special letter,
telephone or facsimile transmission. The Company will bear the
expenses of any such solicitation. Directors, officers and other
employees of the Company will not be specifically compensated for
the solicitation of proxies. Brokerage houses and other
custodians, nominees and fiduciaries will be requested to forward
soliciting materials to the beneficial owners of Shares owned of
record by those organizations, and the Company will pay the
reasonable expenses of forwarding the materials.
A proxy relating to the Special Meeting may be revoked by
the stockholder at any time before it is voted. However, mere
attendance at the Special Meeting will not itself have the effect
of revoking the proxy. A stockholder may revoke a proxy at any
time before it is voted by delivery of a written instrument of
revocation to the Secretary of the Company at the principal
executive offices of the Company prior to the Special Meeting, or
in open meeting, without, however, affecting any vote previously
taken, or by casting a ballot in person at the Special Meeting.
A proxy will not be revoked by the death or incapacity of a
stockholder, unless written notice of the death or incapacity is
given to the Company by the fiduciary having control of the
shares represented by the proxy.
A proxy in the accompanying form, when properly executed and
returned, will be voted in accordance with the instructions shown
on it. A proxy on which no instruction has been indicated will
be voted FOR approval of the Merger and adoption of the Merger
Agreement.
At the date of this Proxy Statement, the Board of Directors
does not know of any business to be presented at the Special
Meeting other than the proposal to approve the Merger and adopt
the Merger Agreement. If any other matters properly come before
the Special Meeting, the Shares represented by proxies will be
voted with respect to those matters in accordance with the
judgment of the persons voting the proxies.
PAYMENT FOR SHARES
General
If the Merger is consummated, the Purchaser will make
available to the Paying Agent for the holders of record of
Shares, as needed, the amount of cash to be paid in respect of
the portions of Shares converted into the right to receive the
Merger Consideration pursuant to the Merger. Holders of record
should use the Letter of Transmittal to be provided under
separate cover after the consummation of the Merger to effect the
surrender of certificates evidencing Shares in exchange for the
Merger Consideration. All certificates so surrendered will be
cancelled. Upon consummation of the Merger and surrender of
certificates evidencing Shares, together with a duly executed
Letter of Transmittal, the holder of record thereof will receive
in exchange for each Share surrendered the Merger Consideration.
Any cash held by the Paying Agent that remains unclaimed by
stockholders for six months after the Effective Time will be
returned to the Company, as the Surviving Corporation in the
Merger, upon demand and thereafter stockholders may look, subject
to applicable abandoned property, escheat and other similar laws,
only to the Company for payment thereof.
Letter Of Transmittal
If the Merger is consummated, a Letter of Transmittal will
be sent to all stockholders of the Company under separate cover.
The Letter of Transmittal will advise each stockholder of the
procedures for surrendering to the Paying Agent certificates
evidencing Shares in exchange for the Merger consideration.
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES WITH
THEIR PROXY CARD.
Valid Surrender of Shares
For Shares to be validly surrendered pursuant to the Merger,
a Letter of Transmittal (or a manually signed facsimile thereof),
properly completed and duly executed, with any required signature
guarantees, must be received by the Paying Agent, at one of its
addresses set forth in the Letter of Transmittal and either (i)
certificates representing Shares must be received by the Paying
Agent or (ii) Shares must be delivered by book-entry transfer.
Book-Entry Transfer
The Paying Agent will establish an account with respect to
the Shares at The Depositary Trust Company (the "Book-Entry
Transfer Facility") for purposes of the Merger. Any financial
institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Shares by
causing the Book-Entry Facility to transfer such Shares into the
Paying Agent's account at the Book-Entry Transfer Facility in
accordance with the procedures for such transfer.
Signature Guarantees
Unless the Shares delivered therewith are delivered (i) by a
registered holder of Shares who has not completed either the box
entitled "Special Delivery Instructions" or the box entitled
"Special Payment Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution (as defined
below), signatures on Letters of Transmittal must be guaranteed
by a member firm of a registered national securities exchange
(registered under Section 6 of the Securities Exchange Act of
1934 (the "Exchange Act")) or of the National Association of
Securities Dealers, Inc., or by a commercial bank or trust
company having an office or correspondent in the United States or
by any other "Eligible Guarantor Institution" (as defined in
Rule 17Ad-15 under the Exchange Act) (each of the foregoing
constituting an "Eligible Institution"). If the certificates
representing Shares are registered in the name of a person other
than the signer of the Letter of Transmittal or if payment is to
be made to a person other than the registered holder, then the
certificates representing Shares must be endorsed or accompanied
by appropriate stock powers, in each case signed exactly as the
name or names of the registered holder or holders appear on the
certificates, with the signatures on the certificates or stock
powers guaranteed as described above and as provided in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE
LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS IS AT THE
OPTION AND RISK OF THE STOCKHOLDER. IF DELIVERY IS MADE BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
IS RECOMMENDED.
Backup Federal Income Tax Withholding
To prevent backup federal income tax withholding of 31% of
the aggregate Merger Consideration payable to a stockholder,
stockholders must provide the Paying Agent with his or her
correct taxpayer identification number and certify that such
number is correct and that he or she is not subject to backup
withholding of federal income tax by completing the substitute
Form W-9 included in the Letter of Transmittal.
APPRAISAL RIGHTS
Stockholders of the Company are entitled to appraisal rights
under Section 262 of the Delaware General Corporation Law
("Section 262") as to Shares owned by them. Set forth below is a
summary description of Section 262. Section 262 is reprinted in
its entirety as Annex C to this Proxy Statement. All references
in Section 262 and in this summary to a "stockholder" are to the
record holder of the Shares as to which appraisal rights are
asserted. A person having a beneficial interest in Shares that
are held of record in the name of another person, such as a
broker or nominee, must cause the record holder to follow the
steps summarized below properly and in a timely manner to perfect
whatever appraisal rights the beneficial owner may have.
THE FOLLOWING SUMMARY IS NOT A COMPLETE STATEMENT OF THE LAW
RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO ANNEX C. THIS SUMMARY AND ANNEX C SHOULD BE REVIEWED
CAREFULLY BY ANY HOLDER WHO WISHES TO EXERCISE STATUTORY
APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO
SINCE FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH IN
SECTION 262 WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
In accordance with Section 262, any stockholder entitled to
appraisal rights may, prior to the Special Meeting, demand in
writing from the Company the appraisal of the fair value of such
stockholder's Shares. Such demand must reasonably inform the
Company of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of the fair
value of such stockholder's Shares. A vote against the Merger
does not constitute such a demand. A stockholder who elects to
exercise appraisal rights must mail or deliver such stockholder's
written demand to the Secretary of the Company at Hondo Oil & Gas
Company, 10375 Richmond Avenue, Suite 900, Houston, Texas 77042.
A demand for appraisal must be executed by or for the
stockholder of record, fully and correctly, as the stockholder's
name appears on the certificate or certificates representing his
or her Shares. If the Shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, the demand
must be executed by the fiduciary. If the Shares are owned of
record by more than one person, as in a joint tenancy or tenancy
in common, the demand must be executed by all joint owners. An
authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, such
person is acting as agent for the record owner.
A record owner, such as a broker, who holds Shares as a
nominee for others, may exercise appraisal rights with respect to
the Shares held for all or less than all beneficial owners of
Shares as to which such person is the record owner. In such case,
the written demand must set forth the number of Shares covered by
such demand. Where the number of Shares is not expressly stated,
the demand will be presumed to cover all Shares outstanding in
the name of such record owner. Beneficial owners who are not
record owners and who intend to exercise appraisal rights should
instruct the record owner to comply strictly with the statutory
requirements with respect to the exercise of appraisal rights.
To comply with Section 262, any stockholder seeking
appraisal rights under Section 262 must not vote in favor of the
proposal to approve the Merger and adopt the Merger Agreement.
Within 120 days after the Effective Time (as defined below
under "THE MERGER AGREEMENT - The Merger"), either the Surviving
Corporation or any stockholder who has complied with the required
conditions of Section 262 may file a petition in the Delaware
Court of Chancery (the "Delaware Chancery Court") demanding a
determination of the fair value of the Shares of the dissenting
stockholders. If a petition for an appraisal is timely filed,
after a hearing on such petition, the Delaware Chancery Court
will determine which stockholders are entitled to appraisal
rights and will appraise the Shares formerly owned by such
stockholders, determining the fair value of such Shares exclusive
of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest,
if any, to be paid upon the amount determined to be the fair
value. In determining such fair value, the Delaware Chancery
Court is to take into account all relevant factors.
Stockholders considering seeking appraisal should note that
the "fair value" of their Shares determined under Section 262
could be more than, the same as or less than $0.05 per Share, and
that opinions of investment banking firms as to fairness, from a
financial point of view, are not opinions as to fair value under
Section 262. The cost of the appraisal proceeding may be
determined by the Delaware Chancery Court and taxed against the
parties as the Delaware Chancery Court deems equitable in the
circumstances. Upon application of a dissenting stockholder, the
Delaware Chancery Court may order that all or a portion of the
expenses incurred by any dissenting stockholder in connection
with the appraisal proceeding, including without limitation,
reasonable attorneys' fees and the fees and expenses of experts,
be charged pro rata against the value of all Shares entitled to
appraisal.
From and after the Effective Time, no stockholder who has
duly demanded appraisal in compliance with Section 262 will be
entitled to vote for any purpose the Shares subject to such
demand or to receive payment of dividends or other distributions
on such Shares, except for dividends or distributions payable to
stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any
stockholder shall have the right to withdraw the stockholder's
demand for appraisal and to accept the terms offered in the
Merger Agreement; after this period, a stockholder may withdraw a
demand for appraisal only with the consent of the Surviving
Corporation. If no petition for appraisal is filed with the
Delaware Chancery Court within 120 days after the Effective Time,
stockholders' rights to appraisal shall cease, and all
stockholders who had previously demanded appraisal (but did not
file a petition) shall thereafter be entitled to receive the
Merger Consideration in cash, without interest thereon, upon
surrender of the certificates that formerly represented their
Shares. Inasmuch as the Company has no obligation to file such a
petition, and has no present intention to do so, any stockholder
who desires such a petition to be filed is advised to file it on
a timely basis. However, no petition timely filed in the Delaware
Chancery Court demanding appraisal shall be dismissed as to any
stockholder without the approval of the Delaware Chancery Court,
and such approval may be conditioned upon such terms as the
Delaware Chancery Court deems just.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the material federal income
tax consequences of the Merger to stockholders of the Company
whose Shares are converted into the right to receive the Merger
Consideration in the Merger (as well as any cash amounts received
by dissenting stockholders pursuant to the exercise of appraisal
rights). The discussion applies only to stockholders of the
Company holding Shares as capital assets and may not apply to
stockholders who received their Shares pursuant to the exercise
of employee stock options or otherwise as compensation, or who
are not citizens or residents of the United States.
The federal income tax consequences set forth below are
based upon present law. Because individual circumstances may
differ, each stockholder should consult the stockholder's own tax
advisor to determine the applicability of the rules discussed
below to the stockholder and the particular tax effects of the
Merger, including the application and effect of state, local,
foreign and other tax laws.
Receipt of the Merger Consideration
The receipt by a stockholder of the Merger Consideration
(including any cash amounts received by dissenting stockholders
pursuant to the exercise of appraisal rights) in exchange for
Shares will be a taxable transaction for federal income tax
purposes. In general, for federal income tax purposes, a
stockholder will recognize gain or loss equal to the difference
between such stockholder's adjusted tax basis in the Shares
exchanged for cash in the Merger and the amount realized in such
exchange (i.e., generally the amount of cash received therefor).
Such gain or loss will be capital gain or loss. In the case of
non-corporate taxpayers, any such capital gain will be long-term
capital gain and subject to a maximum federal income tax rate of
20% if the stockholder's holding period for the Shares at the
Effective Time of the Merger is greater than eighteen months; if
such holding period is more than one year but not more than
eighteen months, then any such capital gain will be mid-term
capital gain and will be subject to a maximum federal income tax
rate of 28%. Any capital losses incurred will be subject to
limitations on their availability. Dissenting stockholders who
do not receive cash in the taxable year in which the Effective
Time of the Merger occurs (i.e., the year of the sale of Shares)
are urged to consult their own tax advisors regarding the amount
of their "amount realized" (and resulting amount of gain
recognized) in such taxable year and the potential application
(if at all) of the "open transaction doctrine" pending the
determination of the amount of cash to which dissenting
stockholders are entitled.
Backup Withholding
Payments in connection with the Merger may be subject to
"backup withholding" at a 31% rate. Backup withholding generally
applies if the stockholder (a) fails to furnish his or her social
security number or other taxpayer identification number ("TIN"),
(b) furnishes an incorrect TIN, (c) fails properly to report
interest or dividends, or (d) under certain circumstances, fails
to provide a certified statement, signed under penalties of
perjury, that the TIN provided is his or her correct number and
that he or she is not subject to backup withholding. Any amounts
withheld from a payment to a stockholder under the backup
withholding rules will be allowed as a credit against such
stockholder's federal income tax liability, provided that the
required information is provided to the Internal Revenue Service.
Certain persons generally are exempt from backup withholding,
including corporations and financial institutions. Certain
penalties apply for failure to furnish correct information and
for failure to include the reportable payments in income. Each
stockholder should consult with the stockholder's own tax advisor
as to the stockholder's qualification for exemption from
withholding and the procedure for obtaining such exemption.
CERTAIN RELATIONSHIPS AND RELATED MATTERS
Nicholas J. Morrell, John F. Price and R.E. Whitten,
directors of the Company, are also directors or officers of
Parent. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT." Messrs. Morrell, Price and Whitten constitute three
of the six members of the Board of Directors, but are not members
of the Special Committee.
If the Merger is consummated, Parent and the Surviving
Corporation will jointly and severally indemnify, defend and hold
harmless the present and former directors and officers of the
Company to the fullest extent that the Company would have been
permitted to indemnify such persons under applicable law and the
Certificate of Incorporation and Bylaws of the Company and any
other agreements in effect. Parent has also agreed to provide
directors' and officers' insurance for the present and former
directors and officers of Company after consummation of the
Merger. See "THE MERGER AGREEMENT - Directors' and Officers'
Indemnification and Insurance."
On November 30, 1988, the Company made a private placement
of $75,000,000 aggregate principal amount of 13.5% Senior
Subordinated Notes to Thamesedge Ltd. ("Thamesedge"), a wholly
owned subsidiary of Parent. The terms of the transaction were
approved by all of the disinterested directors of the Company
upon the recommendation of a special committee of the Board
appointed to review the transaction. The terms were
substantially the same as those which were under discussion and
negotiation with an underwriter for a public offering of a
similar debt instrument and were no less favorable to the Company
than could be obtained with non-affiliated parties.
During calendar year 1991, the Company entered into and
amended a loan agreement with Parent pursuant to which it
borrowed the sum of $32,000,000. At the time the loans were
made, the interest rates were similar to that in the Company's
former working capital loan with a bank for its refining and
marketing operations. The terms of the loan, and all amendments
thereto, were approved by all of the disinterested directors of
the Company and were no less favorable to the Company than could
be obtained with non-affiliated parties.
On December 18, 1992, the Company entered into an agreement
with Parent and Thamesedge to defer interest and principal
payments on the loans described above. As consideration for the
deferral of interest and principal payments, the Company granted
Parent a 5% share of the Company's net profits, as defined, under
the Opon Contract. On April 30, 1993, Parent loaned the Company
an additional $3,000,000, and as security the Company granted to
Parent a mortgage on certain real property. On June 25, 1993,
Parent loaned the Company an additional $4,000,000, and as
security the Company granted to Parent a mortgage on certain
other real property. The interest rate of the new loans was the
same as that for other loans from Parent. The terms of the
agreement to defer interest and principal payments and the terms
of the new loans were approved by all of the disinterested
directors of the Company and were no less favorable to the
Company than could be obtained with non-affiliated parties.
On December 17, 1993, Thamesedge and Parent agreed to add
interest accrued at September 30, 1993 to principal, to reduce
the annual interest rate on each of the foregoing loans to the
Company to 6% effective September 30, 1993, and to defer
principal payments on the loans. Parent and the Company further
agreed that, if the Company does not have sufficient cash
resources to pay interest on any of the foregoing indebtedness of
the Company when due, the Company may offer to pay such interest
in shares of its common stock valued at their market price on the
day the interest is due. Thereupon Parent could either accept
such offer or add the amount of interest then due to the
remaining outstanding principal balance of the applicable
obligation. The terms of these agreements were approved by all
of the disinterested directors of the Company and were no less
favorable to the Company than could be obtained with non-
affiliated parties.
On October 18, 1994, the Company paid to Parent $5,000,000
to repay a portion of the loans made in calendar 1991. At the
same time, Parent provided a $5,000,000 loan facility to the
Company. On November 10, 1994, Thamesedge and Parent agreed to
extend the maturities of all of the above debts to not earlier
than October 1, 1996. The terms of the loan facility and the
agreement to extend debt maturities were approved by all of the
disinterested directors of the Company and were not less
favorable to the Company than could be obtained with non-
affiliated parties.
On December 22, 1995, Thamesedge and Parent agreed to extend
the maturities of all the above debts to not earlier than
October 1, 1997.
On March 29, 1996, Parent assigned to Thamesedge all of its
interest in the above loans and indebtedness. On June 28, 1996,
the Company and Thamesedge entered into a Revolving Credit
Agreement under which Thamesedge agreed to loan to the Company
$13.5 million. The interest rate on this loan is 13%, and
interest is payable as provided in the December 17, 1993 letter
agreement described above. The terms of the Revolving Credit
Agreement were approved by all of the disinterested directors of
the Company and were no less favorable to the Company than could
be obtained with non-affiliated parties.
On December 13, 1996, Thamesedge and Parent agreed to extend
the maturities of all the above debts maturing on October 1, 1997
to not earlier than January 1, 1998. As consideration for the
extensions and certain other financial undertakings, the Company
granted to Parent a security interest in all of the shares of
Hondo Magdalena, and agreed to give Thamesedge an option to
convert $13.5 million of the November 1988 indebtedness to
Thamesedge into the Company's common stock. The Company signed a
Security Interest Agreement dated as of May 13, 1997 to document
the pledge of the Hondo Magdalena shares. The debt was
convertible at any time prior to January 1, 1998 at a rate of
$12.375 per share (110% of the closing price of the Company's
common stock on December 11, 1996) and was approved by the
Company's shareholders in the 1997 annual meeting. No debt was
converted prior to January 1, 1998. The portion of the debt that
was subject to the option is not secured by the pledge of the
Hondo Magdalena shares.
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 and, as described above, the Company may make interest
payments in shares of its common stock. The terms of the Amended
and Restated Revolving Credit Agreement were approved by all of
the disinterested directors of the Company. The Company was
unable to obtain any commitment or terms from a disinterested
third party. The loan now matures January 1, 1999. As
additional consideration for the loan, the Company agreed to give
Parent an option to convert $7.0 million of existing debt with an
interest rate of 6% into the Company's shares at $7.70 per share
(110% of the closing price on July 1, 1997). The option to
convert was approved by the Company's shareholders in the 1998
annual meeting.
In August 1997, Thamesedge assigned all of its interest in
the indebtedness of the Company to LAGP, a wholly-owned
subsidiary of Parent.
In a letter agreement dated December 18, 1997, LAGP agreed
to advance an additional $7.0 million to the Company during
fiscal 1998 and to extend the maturity of the above described
indebtedness due on January 1, 1998 to January 15, 1999. In
consideration for the additional advances and extension of
maturities, the notes have been amended 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 an increase of a minimum of 13 billion
cubic feet of gas over the report of proved reserves in the
Company's 1997 Annual Report on Form 10-K. In the event of a
default under this provision, LAGP has the right to declare all
the loans in default and demand payment. The Company was not
able to satisfy the new event of default. To date, LAGP has not
declared the loans in default or demanded payment.
F. E. Wright, a subsidiary of Parent, acts as the insurance
broker for the Company's directors' and officers' liability
insurance. The insurance companies which provide the policy are
those from whom coverage could be obtained by the use of other
insurance brokers. The terms of the policy are identical to the
ones which could be obtained through an independent broker.
Based upon quotes received from other brokers, management
believes that F. E. Wright is able to obtain more favorable
premiums for the insurance coverage by virtue of inclusion in the
larger, group-wide programs of Parent, and that the terms and
cost of the insurance coverage are no less favorable to the
Company than could be obtained with non-affiliated parties.
During the fiscal year ended September 30, 1997, F. E. Wright
received commissions of $33,040 in respect of policies issued to
the Company.
CONTROLLING PERSONS, DIRECTORS AND EXECUTIVE
OFFICERS OF THE COMPANY, PARENT AND PURCHASER
Background of Named Persons
The Company and Parent have jointly filed a Rule 13E-3
Transaction Statement with the Commission with respect to the
Merger.
Set forth on Annex D hereto for each controlling person,
director and executive officer of the Company, Parent and
Purchaser (collectively, the "Named Persons") is such person's:
(i) name; (ii) business address; (iii) present principal
occupation or employment and the name of the organization in
which such individual conducts such principal occupation or
employment; (iv) material occupation, positions, offices and
employments during the past five years and the name of the
organizations in which such individual conducted such material
occupations, positions, offices and employments; and
(v) citizenship.
During the past five years, neither the Company, Parent,
Purchaser nor any Named Person has been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors)
or was a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree, or final
order enjoining further violations of, or prohibiting activities
subject to, federal or state securities laws or finding any
violations of such laws.
All information in the Proxy Statement concerning the Named
Persons and any affiliates and associates referred to herein is
to the best knowledge of the Company.
Past Contacts, Transactions or Negotiations
Except as described in this Proxy Statement, since
September 30, 1996, neither Parent, Purchaser nor any Named
Person has had any contacts, negotiations or transactions with
the Company concerning any acquisition, acquisition of
securities, consolidation, election of directors, merger, tender
offer, or sale or other transfer of a material amount of assets.
Plans or Proposals
Except as described in this Proxy Statement, neither the
Company, Parent, Purchaser nor any Named Person has any plan or
proposal concerning any extraordinary corporate transaction
involving the Company, any sale or transfer of a material amount
of the Company's assets, any change in the Board of Directors of
the Company or management, any material change in the Company's
present dividend policy or the Company's present policy on
indebtedness or capitalization, or any other change in the
Company's corporate structure or business.
Interest in the Company's Securities
Except as described in this Proxy Statement, neither the
Company, Parent, Purchaser, any pension, profit sharing, or
similar plan of the Company, any Named Person, nor any associate
or majority owned subsidiary of the Company, Parent or Purchaser
beneficially owns any shares of the Common Stock or has engaged
in any transaction involving the shares of Common Stock of the
Company during the past 60 days.
Contracts, Arrangements or Understanding Concerning the Company's
Securities
Except as described in this Proxy Statement, neither the
Company, Parent, Purchaser nor any Named Person has any
arrangement, contract, relationship, or understanding with any
person with respect to any security of the Company, including any
arrangement, contract, relationship or understanding concerning
the transfer or the voting of any security of the Company, any
joint venture, any loan or option arrangement, any put or call,
any guarantee of a loan, any guarantee against loss, or any
giving or withholding of any authorization, consent, or proxy.
THE MERGER AGREEMENT
The following is a summary of the material terms of the
Merger Agreement. The summary is qualified in its entirety by
reference to the Merger Agreement, a copy of which is attached to
this Proxy Statement as Annex A.
The Merger
Pursuant to the terms of the Merger Agreement, the Purchaser
will be merged with and into the Company in accordance with the
Delaware General Corporate Law (the "DGCL"). As a result of the
Merger, the separate existence of the Purchaser will cease and
the Company will be the surviving corporation (the "Surviving
Corporation"). As soon as practicable after satisfaction or
waiver of all conditions to the Merger set forth in the Merger
Agreement, the parties will cause a certificate of merger to be
duly filed with the Delaware Secretary of State. The Merger will
become effective when the certificate of merger is so filed (the
"Effective Time").
By virtue of the Merger, at the Effective Time: (i) each
share of common stock of the Purchaser then issued and
outstanding will be converted into one share of common stock of
the Surviving Corporation; and (ii) each Share then issued and
outstanding, except for Shares held by the Company as treasury
shares or owned by the Parent or any subsidiary of the Parent
(which Shares will be immediately canceled and no payment will be
made with respect thereto), will be converted, by virtue of the
Merger and without any action on the part of the holder thereof,
into the right to receive, without interest, the Merger
Consideration. Subject to the right of stockholders to dissent
from the Merger and require appraisal of their Shares pursuant to
the DGCL, from and after the Effective Time all Shares will be
canceled and retired and cease to exist and each holder of a
certificate representing any Shares immediately prior to the
Effective Time will thereafter cease to have any rights with
respect to such Shares, except the right to receive the Merger
Consideration therefor or payment from the Surviving Corporation
of the "fair value" of such Shares as determined under Section
262 of the DGCL.
Until amended in accordance with applicable law, the
Certificate of Incorporation and Bylaws of the Company in effect
immediately prior to the Effective Time will be the certificate
of incorporation and bylaws of the Surviving Corporation after
the consummation of the Merger. Until successors are duly elected
or appointed and qualified in accordance with applicable law,
from and after the Effective Time, the directors and officers of
the Purchaser immediately prior to the Effective Time will be the
directors and officers of the Surviving Corporation after the
consummation of the Merger.
Special Meeting; Proxy Statement
On the proposal to approve the Merger and adopt the Merger
Agreement, the Parent has agreed to vote, or cause to be voted,
all Shares owned by it or its subsidiaries in the manner voted by
the majority of the other stockholders of the Company voting at
the Special Meeting. The Company has agreed to take all action
necessary in accordance with the DGCL and with the Company's
Certificate of Incorporation and Bylaws to convene the Special
Meeting to approve the Merger and adopt the Merger Agreement. The
Company's Board of Directors has agreed to recommend that the
Company's stockholders approve the Merger and adopt the Merger
Agreement, and will cause the Company to use all reasonable
efforts to solicit from the stockholders proxies to vote
therefor, unless (i) in the good faith judgment of the Board of
Directors of the Company, after consultation with outside
counsel, such recommendation would not be consistent with the
fiduciary duties of the Board of Directors under applicable law
or (ii) the Merger Agreement is terminated in accordance with its
terms.
Directors' and Officers' Indemnification and Insurance
The Merger Agreement provides that, from and after the
Effective Time, the Parent and the Surviving Corporation will
jointly and severally indemnify, defend and hold harmless the
present and former directors and officers of the Company against
all losses, claims, damages and liabilities and amounts paid in
settlement in connection with any claim, action, suit, proceeding
or investigation, whether civil, criminal, administrative or
investigative, to which any of them was or is a party or is
threatened to be made a party by reason of the fact that he or
she was or is a director or officer of the Company in respect of
acts or omissions occurring at or prior to the Effective Time to
the fullest extent that the Company would have been permitted to
indemnify such person under applicable law and the certificate of
incorporation and bylaws of the Company or any other agreements
or commitments in effect on the date of the Merger Agreement. The
Parent will use all reasonable efforts to, without any lapse in
coverage, either (i) for at least six years after the Effective
Time, provide directors' and officers' liability insurance ("D&O
Insurance") in respect of acts or omissions occurring at or prior
to the Effective Time covering each such Person currently covered
by the Company's D&O Insurance policy on terms with respect to
coverage and amount no less favorable than those of such policy
in effect on the date of the Merger Agreement; provided that the
Parent will not be required to pay per annum more than 150% of
the last premium (annualized) paid by the Company for such policy
prior to the date of the Merger Agreement, (ii) purchase tail
insurance in respect of the Company's existing D&O Insurance for
six years for a premium not to exceed the present value
(discounted at the rate of 10% per annum) of the maximum annual
premiums payable under clause (i) above; or (iii) if such D&O
Insurance or tail insurance is only available at premiums in
excess of the maximum premiums set forth in clauses (i) or (ii),
as applicable, then purchase the highest level of D&O Insurance
or tail insurance available at such applicable premium.
Conditions to the Merger.
The obligations of the Company, the Parent and the Purchaser
to consummate the Merger are subject to the satisfaction of the
following conditions: (i) the Merger has been approved, and the
Merger Agreement has been adopted, by the requisite vote of the
Company's stockholders; (ii) no provision of any applicable
domestic law or regulation, and no judgment, injunction, order or
decree of a court or governmental agency or authority of
competent jurisdiction is in effect that has the effect of making
the Merger illegal or otherwise restrains or prohibits the
consummation of the Merger or has been threatened by any
governmental agency, commission, court, department or other
instrumentality of any government, and no action is pending seeking
such a judgment, injunction, order or decree; and (iii) demands for
appraisal rights by holders of an aggregate of more than 100,000
Shares shall not have been received by the Company pursuant to
Section 262.
Termination
The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time,
notwithstanding any prior approval of the Merger and adoption of
the Merger Agreement by the Company's stockholders, (i) by either
the Company or the Parent if the Merger has not been consummated
by March 31, 1999; (ii) by the mutual written consent of the
Company, the Parent and the Purchaser; (iii) by either the
Company or the Parent if any applicable domestic law, rule or
regulation makes consummation of the Merger illegal or if any
judgment, injunction, order or decree of a court or governmental
agency or authority of competent jurisdiction restrains or
prohibits the consummation of the Merger and such judgment,
injunction, order or decree has become final and nonappealable;
or (iv) by either the Company or the Parent if the requisite vote
of the Company's stockholders approving the Merger and adopting
the Merger Agreement has not been obtained at the Special
Meeting.
In the event of any such termination of the Merger Agreement
and abandonment of the Merger, no party to the Merger Agreement
(or any of its directors, officers, employees, agents or
advisors) will have any liability or further obligation to any
other party to the Merger Agreement except for liability for any
breach of covenants or agreements of the Merger Agreement.
Fees and Expenses
The Merger Agreement provides that all costs and expenses
incurred in connection with the Merger Agreement will be paid by
the party incurring the costs and expenses.
Waiver and Amendment
Subject to applicable law and the terms of the Merger
Agreement, any provision of the Merger Agreement may be amended
or waived prior to the Effective Time if, and only if, such
amendment or waiver is in writing and duly executed and
delivered, in the case of an amendment, by each of the parties to
the Merger Agreement or, in the case of a waiver, by the party
against whom the waiver is to be effective.
SOURCES OF FUNDS
The funds required to purchase all of the Shares tendered in
the Merger will be obtained by Purchaser through a capital
contribution from the Parent. Parent will obtain the funds for
such capital contribution from cash on hand. The Company
currently estimates that the total expenses for this transaction
to be paid by the Company will be $270,000, which includes
estimated legal fees of $100,000, estimated accounting fees
of $3,000, estimated printing and mailing costs of $10,000,
the fee and estimated expenses payable to Houlihan Lokey of
$150,000, filing fees of $100 and miscellaneous expenses of
$6,900. Parent currently estimates that its total expenses will
be $30,000, which includes estimated legal fees of $20,000,
estimated fees for the Paying Agent of $9,000 and miscellaneous
expenses of $1,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number of Shares
beneficially owned as of September 30, 1998 by (i) each
stockholder known to the Company to be a beneficial owner of more
than 5% of the Shares; (ii) each director of the Company; (iii)
the executive officers of the Company as of September 30, 1998;
and (iv) all directors and executive officers as a group. All
individuals listed in the table have sole voting and investment
power over the Shares reported as owned, except as otherwise
indicated.
Common Stock Percentage of
Beneficially Common Stock
Owned
The Hondo Company 10,343,686(1) 70.3%
Lonrho Plc 10,343,686(1) 70.3%
London Australian General &
Property Company Limited 10,343,686(1) 70.3%
John J. Hoey 134,500 *
Douglas G. McNair 25,750 *
Nicholas J. Morrell 0(2) --
John F. Price 0(2) --
Robert K. Steer 25,750 *
S. J. Urquhart 27,000 *
R. E. Whitten 0(2) --
All directors and current 213,000(2) 1.5%
executive officers as a group
__________________________
* less than 1%
(1) These 10,343,686 shares consist of 8,651,200 shares owned
by The Hondo Company, 410 East College Boulevard, Roswell, NM
88201, 783,396 shares owned by LAGP, Four Grosvenor Place,
London SWIX 7DL, England, and 909,090 shares which LAGP has
the right to acquire upon the conversion of certain debt.
The Hondo Company is wholly owned by LAGP. LAGP is wholly
owned by Lonrho Plc, Four Grosvenor Place, London SWIX 7DL,
England. Because they may be deemed a group, within the meaning
of Rule 13d-5 under the Exchange Act, each of The Hondo Company,
Lonrho Plc, and LAGP may be deemed to be the beneficial owner,
within the meaning of Rule 13d-3 under the Exchange Act, of
10,343,686 shares. Lonrho Plc, by virtue of its ownership
interest in each of The Hondo Company and LAGP, may be deemed
to share the right to direct the voting and disposition of
10,343,686 shares which (a) as to 8,651,200 shares, by virtue
of its ownership interest in The Hondo Company may also be
deemed to be the beneficial owner with shared voting and
dispositive power and (b) as to 1,692,486 owned by LAGP, LAGP
is also a beneficial owner.
(2) Nicholas J. Morrell is Managing Director and Chief
Executive of Lonrho Plc. John F. Price is an Associate
Director of Lonrho Plc and President and director of The Hondo
Company. R. E. Whitten is Finance Director of Lonrho Plc and
a director of LAGP and The Hondo Company. None of these
directors of the Company hold shares of the Company's common
stock individually.
AVAILABLE INFORMATION
The Company is subject to the information filing
requirements of the Exchange Act, and in accordance therewith
files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the
"SEC"). Such reports, proxy and information statements and other
information filed by the Company with the SEC may be inspected
and copied at the public reference facilities maintained by the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549-1004 and at the following regional offices
of the SEC: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such information may be obtained
by mail, upon payment of the SEC's customary charges, by writing
to the SEC's principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, DC 20549-1004. Such material
should also be available on-line through EDGAR, which is located
on the SEC's public access site at http://www.sec.gov.
Statements contained in this Proxy Statement or in any
document incorporated in this Proxy Statement by reference as to
the contents of any contract or other document referred to herein
or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document
filed as an annex to this Proxy Statement or such other document,
each such statement being qualified in all respects by such
reference.
Any report included in the Schedule 13E-3 filed jointly by
the Company, Parent and Purchaser and not included as an Annex to
this Proxy Statement will be made available for inspection and
copying at the principal executive offices of the Company during
its regular business hours by any interested equity security
holder of the Company or his, her or its representative who has
been so designated in writing. A copy of any such report will be
transmitted by the Company to any interested equity security
holder of the Company or his, her or its representative who has
been so designated in writing upon written request and at the
expense of the requesting security holder.
FINANCIAL STATEMENTS AND
INFORMATION INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 and the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 are included as
part of this Proxy Statement as Annexes E and F, respectively,
and are hereby incorporated by reference. Also incorporated by
reference in this Proxy Statement are the following documents
filed by the Company with the SEC: (i) the Company's Quarterly
Reports on Form 10-Q for the fiscal quarters ended December 31,
1997 (as amended by Form 10-Q/A dated March 23, 1998) and
March 31, 1998; and (ii) the Company's Current Reports on
Form 8-K filed November 7, 1997, March 25, 1998, April 14, 1998,
July 6, 1998 and October 13, 1998.
Stockholders may obtain a copy of any of the reports filed
by the Company with the SEC that are incorporated by reference
into this Proxy Statement free of charge upon oral or written
request to the Secretary of the Company at 10375 Richmond Avenue,
Houston, Texas, telephone number (713) 954-4600. The Company
will provide to the requesting stockholder by first class mail or
other equally prompt means within one business day of receipt of
the stockholder's request a copy of any and all requested
information (except for exhibits to the report that is
incorporated by reference unless such exhibits are specifically
incorporated by reference into the report).
By Order of the Board of
Directors
November __, 1998 John J. Hoey
President and Chief Executive
Officer
ANNEX A
AGREEMENT AND PLAN OF MERGER
dated as of
October 12, 1998
among
LONHRO PLC,
HOGC ACQUISITION CORPORATION
and
HONDO OIL & GAS COMPANY
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER
Section 1.01 The Merger. 1
Section 1.02 Conversion of Shares 1
Section 1.03 Surrender and Payment 2
Section 1.04 Shares of Dissenting Stockholders 3
ARTICLE II
THE SURVIVING CORPORATION
Section 2.01 Certificate of Incorporation. 4
Section 2.02 Bylaws. 4
Section 2.03 Directors and Officers. 4
ARTICLE III
COVENANTS OF THE COMPANY
Section 3.01 Access to Information. 4
Section 3.02 Merger Meeting; Proxy Statement. 4
ARTICLE IV
COVENANTS OF THE PARENT AND MERGER SUB
Section 4.01 Director and Officer Liability. 5
Section 4.02 Parent Vote at Merger Meeting 6
ARTICLE V
COVENANTS OF THE PARENT, MERGER SUB AND THE COMPANY
Section 5.01 Reasonable Efforts. 7
Section 5.02 Certain Filings and Consents. 7
Section 5.03 Public Announcements. 7
ARTICLE VI
CONDITIONS TO THE MERGER
Section 6.01 Conditions to the Obligations of Each Party. 7
ARTICLE VII
TERMINATION
Section 7.01 Termination 8
Section 7.02 Effect of Termination. 8
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Notices. 8
Section 8.02 Survival. 9
Section 8.03 Amendments; No Waivers 9
Section 8.04 Fees and Expenses. 10
Section 8.05 Successors and Assigns. 10
Section 8.06 Governing Law. 10
Section 8.07 Counterparts; Effectiveness. 10
Section 8.08 Entire Agreement. 10
Section 8.09 Headings. 10
Section 8.10 Severability. 11
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of October 12,
1998 (this "Agreement"), is among Lonhro Plc, a public company
formed under the laws of England (the "Parent") , HOGC
Acquisition Corporation, a Delaware corporation and an indirect
wholly owned subsidiary of Parent ("Merger Sub"), and Hondo Oil
& Gas Company, a Delaware corporation (the "Company").
In consideration of the respective agreements set forth
herein, the parties agree as follows:
ARTICLE I
The Merger
Section 1.01 The Merger.
(a) Upon the terms and subject to the conditions set
forth in this Agreement, at the Effective Time (as defined in
Section 1.01(b)), Merger Sub will be merged with and into the
Company in accordance with the Delaware General Corporation Law
(the "Delaware Law"). As a result of this merger (the "Merger"),
the separate existence of Merger Sub will cease and the Company
will be the surviving corporation (the "Surviving Corporation").
(b) As soon as practicable after satisfaction or,
to the extent permitted hereunder, waiver of all conditions to
the Merger set forth in Article VI, the parties will cause a
certificate of merger in such form as is required by, and
executed in accordance with, Delaware Law to be duly filed with
the
Secretary of State of the State of Delaware. The Merger will
become effective when the certificate of merger is so filed
(the "Effective Time").
(c) From and after the Effective Time, the Merger
will have the effects specified in Delaware Law.
(d) The closing of the Merger (the "Closing") will
take place (i) at the offices of Parker Chapin Flattau & Klimpl
LLP, 1211 Avenue of the Americas, New York, New York at 10:00 a.m.
as soon as practicable (and in no event later than the fifth
business
day) following the date on which the last to be fulfilled or
waived of the conditions set forth in Article VI (other than
those conditions that by their nature are to be satisfied at
the Closing, but subject to the fulfillment or waiver of those
conditions at the Closing) have been satisfied or waived in
accordance with this Agreement or (ii) at such other place and
time as the parties may agree.
Section 1.02 Conversion of Shares.
At the Effective Time:
(a) Each share of Common Stock, par value $1.00 per
share,
of the Company (the "Common Stock") issued and outstanding
immediately prior to the Effective Time will, except as
otherwise provided in Sections 1.02(c) and 1.04, be converted,
by virtue of the Merger and without any action on the part of
the holder thereof, into the right to receive, without
interest, an amount in cash equal to $0.05 per share (the
"Merger Consideration"). Subject to Section 1.04, from and
after the Effective Time, all shares of Common Stock, by
virtue of the Merger and without any action on the part of the
holders thereof, will be canceled, and each holder of a
certificate representing any shares of Common Stock
immediately prior to the Effective Time (a "Stock
Certificate") will thereafter cease to have any rights with
respect thereto except the right to receive (i) the Merger
Consideration therefor upon the surrender of the Stock
Certificate in accordance with Section 1.03 or (ii) payment
from the Surviving Corporation of the "fair value" of such
shares of Common Stock as determined under Section 262 of the
Delaware Law, subject to the conditions set forth therein and
in accordance with Section 1.04 of this Agreement.
(b) Each share of Common Stock of Merger Sub (a share
of "Merger Sub Common Stock") issued and outstanding immediately
prior to the Effective Time will be converted into one share of
Common Stock of the Surviving Corporation.
(c) Each outstanding share of Common Stock held by the
Company as a treasury share or owned by the Parent, Merger Sub or
any other subsidiary of the Parent immediately prior to the
Effective Time will be canceled, and no payment will be made with
respect thereto.
(d) Each option to purchase shares of Common Stock not
exercised prior to the Effective Time will be cancelled and no
payment will be made with respect thereto.
Section 1.03 Surrender and Payment.
(a) Prior to the Effective Time, the Parent will
appoint the transfer agent for the Common Stock of the Company
or a bank or trust company reasonably acceptable to the
Company (the "Paying Agent") for the purpose of exchanging Stock
Certificates. The Parent will make available to the Paying
Agent funds in amounts and at the times necessary for the
payment of the Merger Consideration in accordance with this
Section 1.03 (such cash is referred to as the "Exchange
Fund").
(b) Promptly, but in no event more than five business
days, after the Effective Time, the Parent will cause the
Surviving
Corporation to send, or will cause the Paying Agent to send,
to each holder of a Stock Certificate a letter of transmittal
and instructions for use in surrendering the Stock
Certificates for payment in accordance with this Section 1.03.
The agreement with the Paying Agent will provide that, upon
surrender to the Paying Agent of such Stock Certificates,
together with the letter of transmittal, duly executed and
completed in accordance with the instructions thereto and such
other documents as may be reasonably required by the Paying
Agent, the Paying Agent will promptly pay to the persons
entitled thereto, out of the Exchange Fund, a check in the
amount to which such persons are entitled pursuant to Section
1.02(a), after giving effect to any required tax withholdings,
and such Stock Certificate will forthwith be canceled.
(c) If any cash is to be paid to a Person other than
the registered holder of the Stock Certificates surrendered in
exchange therefor, it will be a condition to such payment that
the Stock Certificates so surrendered be properly endorsed or
otherwise in proper form for transfer and that the Person
requesting such payment pay to the Paying Agent any transfer
or other taxes required as a result of such issuance or
establish to the satisfaction of the Paying Agent that such
tax has been paid or is not applicable. For purposes of this
Agreement, "Person" means an individual, a corporation, a
partnership, a limited liability company, an association, a
trust, or any other entity or organization, including a
government or political subdivision or any agency or
instrumentality thereof.
(d) At and after the Effective Time, the stock
transfer books of the Company will be closed, and there will
be no further registration of transfers of shares of Common Stock
outstanding prior to the Effective Time. If, at or after the
Effective Time, Stock Certificates are presented to the
Surviving Corporation, they will be canceled and exchanged in
accordance with this Article I.
(e) Any cash in the Exchange Fund that remains
unclaimed by the holders of shares of Common Stock six months
after the Effective Time will be returned to the Surviving
Corporation, upon demand, and any such holder who has not
surrendered his shares of Common Stock in accordance with this
Section 1.03 prior to that time will thereafter look only to
the Surviving Corporation, as a general creditor thereof, to
pay the Merger Consideration to which such holder is entitled.
Notwithstanding the foregoing, the Surviving Corporation will
not be liable to any holder of shares of Common Stock for any
amount paid to a public official pursuant to applicable
abandoned property, escheat, or similar laws.
(f) If any Stock Certificate is lost, stolen or
destroyed, upon the making of an affidavit of that fact by the
Person claiming such Stock Certificate to be lost, stolen or
destroyed and, if required by the Surviving Corporation, the
posting by such Person of a bond in such reasonable amount as
the Parent may direct as indemnity against any claim that may
be made against it with respect to such Stock Certificate, the
Paying Agent will pay the Merger Consideration payable in
respect of such Stock Certificate pursuant to this Agreement.
Section 1.04 Shares of Dissenting Stockholders.
Notwithstanding anything in this Agreement to the contrary,
any outstanding shares of Common Stock held by a person (a
"Dissenting Stockholder") who objects to the Merger and complies
with all the provisions of Delaware Law concerning the right of
holders of shares of Common Stock to dissent from the Merger and
require appraisal of their shares will not be converted as
described in Section 1.02(a), but will be converted into the
right to receive such consideration as may be determined to be
due to such Dissenting Stockholder pursuant to Delaware Law. If,
after the Effective Time, such Dissenting Stockholder withdraws
his demand for appraisal, or fails to perfect or otherwise loses
his right to appraisal, in accordance with Delaware Law, his
shares of Common Stock will be deemed to have been converted as
of the Effective Time into the right to receive the Merger
Consideration. The Company will give the Parent (i) prompt
notice of any demands for appraisal of shares of Common Stock
received by the Company and (ii) the opportunity to participate
in all negotiations and proceedings with respect to any such
demands. The Surviving Corporation will not, without the prior
written consent of the Parent, make any payment with respect to,
or settle, offer to settle, or otherwise negotiate, any such
demands.
ARTICLE II
The Surviving Corporation
Section 2.01 Certificate of Incorporation.
The certificate of incorporation of the Company in effect
immediately prior to the Effective Time will be the certificate
of incorporation of the Surviving Corporation after the
consummation of the Merger until amended in accordance with
applicable law.
Section 2.02 Bylaws.
The bylaws of the Company in effect immediately prior to the
Effective Time will be the bylaws of the Surviving Corporation
after the consummation of the Merger until amended in accordance
with applicable law.
Section 2.03 Directors and Officers.
From and after the Effective Time, until successors are duly
elected or appointed and qualified in accordance with applicable
law, the directors and officers of Merger Sub immediately prior
to the Effective Time will be the directors and officers of the
Surviving Corporation after the consummation of the Merger.
ARTICLE III
Covenants of the Company
Section 3.01 Access to Information.
From the date hereof until the Effective Time or earlier
termination of this Agreement, the Company will, upon reasonable
notice, give the Parent, its counsel, financial advisors,
auditors, and other authorized representatives reasonable access
during regular business hours to the offices, properties, books,
and records of the Company, and will furnish to the Parent, its
counsel, financial advisors, auditors, and other authorized
representatives such financial and operating data and other
information as they may reasonably request, for the purpose of
evaluating the financial condition, results of operations,
business, and properties of the Company, and will instruct the
Company's employees, counsel, and financial advisors to cooperate
with the Parent in its evaluation.
Section 3.02 Merger Meeting; Proxy Statement.
(a) As soon as practicable following the date of this
Agreement, the Company will take all action necessary in
accordance
with Delaware Law and with the Company's certificate of
incorporation and bylaws to convene a meeting of its
stockholders to approve the Merger and adopt this Agreement
(the "Merger Meeting"). The Company's Board of Directors will
recommend that the Company's stockholders approve the Merger
and adopt this Agreement, and will cause the Company to use
all reasonable efforts to solicit from the stockholders
proxies to vote therefor, unless (i) in the good faith
judgment of the Board of Directors of the Company, after
consultation with outside counsel, such recommendation would
not be consistent with the fiduciary duties of the Board of
Directors under applicable law or (ii) this Agreement is
terminated in accordance with Article VII.
(b) The Company will prepare and file with the SEC
preliminary proxy materials relating to the approval of the
Merger and the adoption of this Agreement by the Company's
stockholders, and will file with the SEC revised preliminary
proxy materials, if appropriate, and definitive proxy materials
in a timely manner as required by the rules and regulations of
the SEC. Subject to the last sentence of Section 3.02(a), the
proxy materials relating to the Merger Meeting will include the
recommendation of the Company's Board of Directors.
ARTICLE IV
Covenants of the Parent and Merger Sub
The Parent and Merger Sub agree that:
Section 4.01 Director and Officer Liability.
(a) The certificate of incorporation and the bylaws
of the Surviving Corporation will contain the provisions with
respect to exculpation from liability and indemnification set
forth in the certificate of incorporation and bylaws of the
Company as of the date hereof, which provisions (together with
all provisions regarding indemnification or exculpation from
liability contained in any agreements or commitments of the
Company) will not be amended, repealed, or otherwise modified
in any manner that would adversely affect the rights
thereunder of individuals who at the Effective Time were
present or former directors, officers, employees, or agents of
the Company, unless such modification is required by law.
(b) From and after the Effective Time, the Parent and
the Surviving Corporation will, jointly and severally, indemnify,
defend, and hold harmless the present and former directors and
officers of the Company against all losses, claims, damages,
and liabilities and amounts paid in settlement in connection
with any claim, action, suit, proceeding, or investigation,
whether civil, criminal, administrative, or investigative, to
which any of them was or is a party or is threatened to be
made a party by reason of the fact that he or she was or is a
director or officer of the Company in respect of acts or
omissions occurring at or prior to the Effective Time to the
fullest extent that the Company would have been permitted to
indemnify such Person under applicable law and the certificate
of incorporation and bylaws of the Company or any other
agreements or commitments in effect on the date hereof. The
Parent will use all reasonable efforts to, without any lapse
in coverage, either (i) for at least six years after the
Effective Time, provide officers' and directors' liability
insurance ("D&O Insurance") in respect of acts or omissions
occurring at or prior to the Effective Time covering each such
Person currently covered by the Company's D&O Insurance policy
on terms with respect to coverage and amount no less favorable
than those of such policy in effect on the date hereof;
provided that, in no event will the Parent be required to pay
per annum more than 150% of the last premium (annualized) paid
by the Company for such policy prior to the date hereof, (ii)
purchase tail insurance in respect of the Company's existing
D&O Insurance for six years for a premium not to exceed the
present value (discounted at the rate of 10% per annum) of the
maximum annual premiums payable under clause (i) above, or
(iii) if such D&O Insurance or tail insurance is only
available at premiums in excess of the maximum premiums set
forth in clauses (i) or (ii), as applicable, then purchase the
highest level of D&O Insurance or tail insurance available for
such maximum premium.
(c) Any Person who is entitled to indemnification under
Section 4.01(b) (an "Indemnified Party") wishing to claim such
indemnification, upon learning of any such claim, action,
suit, proceeding, or investigation, will promptly notify the
Parent thereof, but failure to notify the Parent will not
relieve the Parent of liability except to the extent the
Parent is materially and adversely affected thereby. In the
event of any such claim, action, suit, proceeding, or
investigation (whether arising before or after the Effective
Time), (i) the Parent or the Surviving Corporation will have
the right to assume the defense, and the Parent will not be
liable to any of the Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently
incurred by them in connection with the defense, except that,
if the Parent or the Surviving Corporation elects not to
assume the defense or counsel for the Indemnified Parties
advises that, in such counsel's reasonable judgment, there are
issues that constitute conflicts of interest between the
Parent or the Surviving Corporation and the Indemnified
Parties, the Indemnified Parties may retain counsel
satisfactory to them, and the Parent or the Surviving
Corporation will pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements
therefor are received; provided that, the Parent will be
obligated pursuant to this paragraph (c) to pay for only one
firm of counsel for all Indemnified Parties in any
jurisdiction, (ii) the Indemnified Parties will cooperate in
the defense of any such matter, and (iii) the Parent will not
be liable for any settlement effected without its prior
written consent; and provided further that, the Parent will
not have any obligation hereunder to any Indemnified Party
when and if a court of competent jurisdiction ultimately
determines, and such determination becomes final and
nonappealable, that the indemnification of such Indemnified
Party in the manner contemplated hereby is prohibited by
applicable law.
(d) If the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into
any other Person and is not the continuing or surviving Person
in the consolidation or merger or (ii) transfers all or
substantially all of its assets to any Person, then and in each
such case, proper provisions will be made so that the successors
and assigns of the Surviving Corporation will assume all of the
obligations of the Surviving Corporation under this Article IV.
(e) The provisions of this Article IV are intended to
be for the benefit of, and will be enforceable by, each of the
present and former directors, officers, employees, and agents,
their heirs and their representatives.
Section 4.02 Parent Vote at Merger Meeting.
At the Merger Meeting, on the proposal to approve the Merger
and adopt this Agreement, the Parent will vote, or cause to be
voted, all shares of Common Stock beneficially owned by it in the
manner voted by a majority of the other stockholders of the
Company voting at the Merger Meeting.
ARTICLE V
Covenants of the Parent, Merger Sub and the Company
The Parent, Merger Sub and the Company agree that:
Section 5.01 Reasonable Efforts.
Subject to the terms and conditions of this Agreement, each
party will use its all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things
necessary or advisable under applicable laws and regulations to
satisfy the conditions to closing and consummate the transactions
contemplated by this Agreement as promptly as practicable.
Section 5.02 Certain Filings and Consents.
The Company and the Parent will cooperate with one another
(a) in determining whether any action by or in respect of, or
filing with, any governmental body, agency, official or authority
is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any Contracts ("Third
Party Consents"), in connection with the transactions
contemplated by this Agreement and (b) in attempting to take all
such actions, to make all such filings, and to obtain all such
consents, approvals and waivers.
Section 5.03 Public Announcements.
The Parent and the Company will consult with each other
before issuing any press release or making any public statement
with respect to this Agreement or the transactions contemplated
by it and, except as may be required by applicable law, will not
issue any such press release or make any such public statement
prior to such consultation.
ARTICLE VI
Conditions to the Merger
Section 6.01 Conditions to the Obligations of Each Party.
The obligations of the Company, the Parent and Merger Sub to
consummate the Merger are subject to the satisfaction of the
following conditions:
(a) the Merger has been approved, and this Agreement
has been adopted, by the requisite vote of the Company's
stockholders;
(b) no provision of any applicable domestic law or
regulation, and no judgment, injunction, order, or decree of a
court or governmental agency or authority of competent
jurisdiction, that has the effect of making the Merger illegal
or otherwise restrains or prohibits the consummation of the
Merger is in effect or has been threatened by any governmental
agency, commission, court, department or other instrumentality
of any government, and no action is pending seeking such a judgment,
injunction, order or decree; and
(c) demands for appraisal rights by stockholders of the
Company with respect to an aggregate of more than 100,000 shares
of Common Stock shall not have been received by the Company
pursuant to Section 262 of the Delaware Law.
ARTICLE VII
Termination
Section 7.01 Termination.
This Agreement may be terminated, and the Merger may be
abandoned at any time prior to the Effective Time
(notwithstanding any approval of the Merger and adoption of this
Agreement by the Company's stockholders):
(a) by either the Company or the Parent if the Merger
has not been consummated by March 31, 1999;
(b) by mutual written consent of the Company, the Parent
and Merger Sub;
(c) by either the Company or the Parent if any
applicable domestic law, rule, or regulation makes consummation
of the Merger illegal or if any judgment, injunction, order, or
decree of a court or governmental agency or authority of competent
jurisdiction restrains or prohibits the consummation of the
Merger, and such judgment, injunction, order or decree has
become final and nonappealable; or
(d) by either the Company or the Parent if the
stockholder approval referred to in Section 6.01(a) has not been
obtained at the Merger Meeting.
Section 7.02 Effect of Termination.
If this Agreement is terminated and the Merger is abandoned
pursuant to Section 7.01, no party to this Agreement (or any of
its directors, officers, employees, agents, or advisors) will
have any liability or further obligation to any other party
except (a) that the agreements contained in Section 8.04 will
survive the termination hereof and (b) that nothing herein will
relieve any party from liability for any breach of the covenants
made by it in this Agreement.
ARTICLE VIII
Miscellaneous
Section 8.01 Notices.
All notices, requests, and other communications to any party
hereunder will be in writing (including telecopy) and will be
given,
if to the Parent or Merger Sub, to:
Lonhro Plc
Four Grosvenor Place
London SW1X 7DL
England
Attention: Corporate Secretary
Fax: 44-171-201-6100
with a copy to:
Parker Chapin Flattau & Klimpl
1211 Avenue of the Americas
New York, New York 10036
Attention: Richard A. Rubin
Fax: (212) 704-6288
if to the Company, to:
Hondo Oil & Gas Company
10375 Richmond Avenue, Suite 900
Houston, Texas 77042
Attention: John J. Hoey
Fax: (713) 954-4601
with a copy to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071-2899
Attention: Richard A. Boehmer
Fax: (213) 430-6407
or to such other address or telecopy number as such party may
hereafter specify for the purpose by notice to the other parties.
Each such notice, request or other communication will be
effective upon receipt.
Section 8.02 Survival.
None of the agreements and other provisions contained in
this Agreement or in any certificate or other writing delivered
pursuant to this Agreement, other than Article I, Section 4.01
and Article 8, will survive the Effective Time.
Section 8.03 Amendments; No Waivers.
(a) Subject to the applicable provisions of Delaware
Law, any provision of this Agreement may be amended or waived
prior to the Effective Time if, and only if, such amendment or
waiver is in writing and duly executed and delivered, in the case
of an amendment, by the Company, the Parent and Merger Sub or, in
the case of a waiver, by the party against whom the waiver is
to be effective.
(b) No failure or delay by any party in exercising any
right, power, or privilege hereunder will operate as a waiver
thereof, nor will any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any other
right, power or privilege.
Section 8.04 Fees and Expenses.
All costs and expenses incurred in connection with this
Agreement will be paid by the party incurring the costs and
expenses.
Section 8.05 Successors and Assigns.
The provisions of this Agreement will be binding upon and
inure to the benefit of the parties hereto and their respective
successors and assigns, provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations
under this Agreement without the written consent of the other
parties.
Section 8.06 Governing Law.
The interpretation, validity and enforceability of this
Agreement will be governed by the law of the State of Delaware
without regard to principles of conflict of laws that would apply
the laws of any other jurisdiction.
Section 8.07 Counterparts; Effectiveness.
This Agreement may be signed in any number of counterparts,
each of which will be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
This Agreement will become effective when each party has received
counterparts hereof signed by all of the other parties.
Section 8.08 Entire Agreement.
This Agreement constitutes the entire agreement among the
parties with respect to the subject matter hereof and supersedes
all prior agreements, both written and oral, among the parties
with respect to the subject matter of this Agreement. No
representation, warranty or inducement not set forth herein has
been made or relied upon by any party. Neither this Agreement
nor any provision hereof is intended to confer upon any Person
other than the parties any rights or remedies, except that the
provisions of Section 4.01 are intended for the benefit of
present and former directors, officers, employees and agents of
the Company.
Section 8.09 Headings.
The headings contained in this Agreement are for reference
purposes only and will not in any way affect the meaning or
interpretation of this Agreement.
Section 8.10 Severability.
If any term or other provision of this Agreement is invalid,
illegal, or unenforceable, all other provisions of this Agreement
will remain in full force and effect so long as the economic and
legal substance of the transactions contemplated hereby is not
affected.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be duly executed by their respective authorized officers as of
the day and year first above written.
Lonhro Plc
By: /s/ R.E. WHITTEN
Name: R.E. Whitten
Title: Executive Director
HOGC Acquisition Corporation
By: /s/ R.E. WHITTEN
Name: R.E. Whitten
Title: Secretary
Hondo Oil & Gas Company
By: /s/ JOHN J. HOEY
Name: John J. Hoey
Title: President and Chief
Executive Office
ANNEX B
[HLHZ LETTERHEAD]
October 9, 1998
To the Special Committee of
the Board of Directors
Hondo Oil & Gas Company
Dear Sirs:
We understand that Hondo Oil & Gas Company ("Hondo" or the
"Company") is a publicly held oil and gas company that, until
recently, was focused on international oil and gas development in
Colombia, South America. The lack of success of the Company's
investment in the Opon Project has resulted in significant losses
for the Company in recent periods. The Company's common stock
was publicly traded on the American Stock Exchange until recently
when it was delisted. The Company's common stock is now traded
on the NASDAQ small capitalization "electronic bulletin board."
The Company's largest shareholder, Lonrho Plc ("Lonrho") is a
publicly traded English company which through wholly owned
subsidiaries, owns and controls 68.4 percent of the Company's
outstanding common stock. Moreover, Lonrho is the Company's
primary lender.
We further understand that the Company has entered into
discussions with Lonrho whereby Lonrho and the Company would
enter into a Merger Agreement dated October 9, 1998 (the "Merger
Agreement") pursuant to which a wholly owned Lonrho subsidiary
will be merged with and into the Company (the "Merger"). As part
of the Merger, the public stockholders of Hondo (other than
Lonrho and its subsidiaries) (the "Public Stockholders") will
receive an aggregate consideration of 5 cents per share (the
"Merger Consideration") for their equity investment in Hondo.
The Merger and other related transactions disclosed to Houlihan
Lokey are collectively referred to herein as the "Transaction."
Houlihan Lokey has been retained on behalf of, and will report
solely to, the Special Committee, notwithstanding that Houlihan
Lokey's fees and expenses will be paid by the Company.
You have requested our opinion (the "Opinion") as to the matters
set forth below. The Opinion does not address the Company's
underlying business decision to effect the Transaction. We have
not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of the
Company. Furthermore, at your request, we have not negotiated
the Transaction or advised you with respect to alternatives to
it.
In connection with this Opinion, we have made such reviews,
analyses and inquiries as we have deemed necessary and
appropriate under the circumstances. Among other things, we
have:
. reviewed the Company's audited financial statements for the
five fiscal years ended September 30, 1997 and the unaudited
financial statements for the nine months ended June 30, 1998,
which the Company's management has identified as being the most
currently available financial statements available as of the
valuation date;
. reviewed the audited financial statements for Hondo
Magdalena Oil & Gas Limited Colombian Branch for the fiscal
years
ended December 31, 1997 and December 31, 1996;
. reviewed the Merger Agreement;
. met and had discussions with certain members of the senior
management of the Company to discuss the operations, financial
condition, future prospects and projected operations and
historical performance of the Company;
. reviewed the estimation of proven reserves and future
revenue dated June 30, 1998 prepared by Netherland, Sewell and
Associates;
. reviewed the Second Amendment to the Agreement between the
City of Long Beach and Hondo Oil & Gas Company, dated July
1998;
. reviewed the release of liability granted Hondo Oil & Gas
Company by Phillips Petroleum Company, dated July 16, 1998;
. reviewed the petition of U.S. Bank Trust National
Association, the order for hearing on the petition and the
proposed order for settlement between Newhall Refining Co.,
Inc.
and Hondo Oil & Gas Company, dated August 12, 1998; and
. conducted such other studies, analyses, and inquiries as we
have deemed appropriate.
We have relied upon and assumed, without independent
verification, that the information provided to us has been
reasonably prepared and reflects the best currently available
estimate of the future financial results and condition of the
Company, and that there has been no material change in the
assets, financial condition, business or prospects of the Company
since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness
of the information supplied to us with respect to the Company and
do not assume any responsibility with respect to it. We have not
made any physical inspection or independent appraisal of any of
the properties or assets of the Company. Our opinion is
necessarily based on business, economic, market and other
conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our
opinion that the Merger Consideration to be received by the
Public Stockholders of the Company in connection with the
Transaction is fair to them from a financial point of view.
This Opinion is delivered to you subject to the conditions, scope
of engagement, limitations and understandings set forth in this
Opinion and our engagement letter, and subject to the
understanding that the obligations of Houlihan Lokey in the
Transaction are solely corporate obligations, and no officer,
director, employee, agent, shareholder or controlling person of
Houlihan Lokey shall be subjected to any personal liability
whatsoever to any person, nor will any such claim be asserted by
or on behalf of you or your affiliates.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
ANNEX C
SECTION 262 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
262 APPRAISAL RIGHTS. -- (a) Any stockholder of a
corporation of this State who holds shares of stock on the date
of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such
shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation
nor consented thereto in writing pursuant to Section 228 of this
title shall be entitled to an appraisal by the Court of Chancery
of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a
holder of record of stock in a stock corporation and also a
member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words
and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a
receipt or other instrument issued by a depository representing
an interest in one or more shares, or fractions thereof, solely
of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to Section 251
(other than a merger effected pursuant to Section 251(g) of this
title), Section 252, Section 254, Section 257, Section 258,
Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under
this Section shall be available for the shares of any class
or series of stock, which stock, or depository receipts in
respect thereof, at the record date fixed to determine the
stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national
market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or (ii)
held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for
the shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms
of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or
depository receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of
stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger
or consolidation will be either listed on a national
securities exchange or designated as a national market
system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or
held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional
shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under
Section 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as a
result of an amendment to its certificate of incorporation, any
merger or consolidation in which the corporation is a constituent
corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those
set forth in subsections (d) and (e) of this section, shall apply
as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections
(b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation,
before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor
of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved
pursuant to Section 228 or Section 253 of this title, each
constituent corporation, either before the effective date of
the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given
on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving
or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given
on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the
merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second
notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to
each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance
with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days
prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger
or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which
the notice is given.
(e) Within 120 days after the effective date of the merger
or consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof
and who is otherwise entitled to appraisal rights, may file a
petition in the Court of Chancery demanding a determination of
the value of the stock of all such stockholders. Notwithstanding
the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have
the right to withdraw such stockholder's demand for appraisal and
to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number
of holders of such shares. Such written statement shall be mailed
to the stockholder within 10 days after such stockholder's
written request for such a statement is received by the surviving
or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after such
service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names
and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting
corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such
a duly verified list. The Register in Chancery, if so ordered by
the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall
also be given by 1 or more publications at least 1 week before
the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication
as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for their
shares and who hold stock represented by certificates to submit
their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their
fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant
factors. In determining the fair rate of interest, the Court may
consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon
application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other
pretrial proceedings and may proceed to trial upon the appraisal
prior to the final determination of the stockholder entitled to
an appraisal. Any stockholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings
until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Interest may be simple or compound, as the Court may direct.
Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court
of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the
value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded such stockholder's
appraisal rights as provided in subsection (d) of this section
shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders
of record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written
withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days
after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the
written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall
be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall
have the status of authorized and unissued shares of the
surviving or resulting corporation.
ANNEX D
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
OF THE COMPANY, PARENT AND PURCHASER
Set forth below are the name, age, citizenship, business
address, position with the Company, Parent or Purchaser, as the
case may be, present principal occupation or employment and five-
year employment history of each director and executive officer of
the Company, Parent and Purchaser, as indicated. Directors are
indicated by asterisk.
Name (Age) Present Principal Occupation Of
Employment/Material Positions Held During
The Past Five Years
___________ __________________________________________
The Company
John J. Hoey (59)* Mr. Hoey became a director on June 2, 1993
and became President and Chief Executive
Officer of the Company on December 1, 1993.
He is a director and President or Managing
Director of each of the Company's
subsidiaries. He is also President and
sole shareholder of Beneficial Capital
Corp. of New York, an investment company
with ownership in a number of public and
private companies. From 1985 to 1992, he
was associated with Atlantic Petroleum
Corp. of Pennsylvania, including serving as
President of Atlantic Refining and
Marketing Corporation until its sale to Sun
Co. in November 1988. From 1972 to 1984,
Mr. Hoey held various executive positions
in international banking and investment
companies. From 1967 to 1971, he served in
the U.S. Department of State in Saigon,
South Vietnam. He is currently a director
of GVC Corp., a publicly-held corporation.
Mr. Hoey is a U.S. citizen and his business
address is 10375 Richmond Avenue, Suite
900, Houston, Texas 77042.
Douglas G. McNair Mr. McNair has been a director of the
(70)* Company since February 25, 1993. He was an
independent consultant for international
transactions, marketing and negotiations.
From 1985 to 1986 he was Vice President and
Assistant to the Chairman and Chief
Executive Officer of Atlantic Richfield
Company. From 1977 to 1985, he was Vice
President of Atlantic Richfield Company and
worked with that company's subsidiary,
Anaconda Cooper, in connection with
international operations. From 1972 to
1977, he was Vice President of Atlantic
Richfield Company in charge of
international marketing. From 1970 to
1972, he was President and Chief Executive
Officer of Atlantic Richfield Company's
Brazilian marketing subsidiary. Mr. McNair
is a Brazilian citizen and his business
address is 10375 Richmond Avenue, Suite
900, Houston, Texas.
Nicholas J. Morrell Mr. Morrell became a director of the
(51)* Company on November 21, 1996. He was
appointed a director of Lonrho Plc in 1992,
its Deputy Managing Director in 1994, and
became its Chief Executive in November
1996. In 1978, Mr. Morrell joined The
Observer newspaper which subsequently
became a member of the Lonrho group in
1981, becoming Managing Director in 1988
and, in 1989, was appointed Chief Executive
in charge of Lonrho's printing and
publishing operations. Mr. Morrell is a
U.K. citizen and his business address is
Four Grosvenor Place, London SW1X 7DL,
England.
John F. Price (57)* Mr. Price became a director of the Company
on November 16, 1992 and is a director of
Hondo Magdalena Oil & Gas Limited. He is
also President and a director of The Hondo
Company. He was President of Princess
Hotels International, Inc. (now known as
Bahamas Hotels, Inc.) and Executive
Vice President of Princess Properties
International Limited from March 1983 to
August 1998 when Lonrho Plc sold its
interest in those companies. He is
currently President of Bahamas Hotels, Inc.
He was appointed an Associate Director of
Lonrho Plc in 1991. He is a chartered
Accountant and joined the Lonrho group in
1969. He was appointed Managing Director
of Lonrho (Zambia) Ltd. in 1974 and was
Managing Director of Lonrho (Zimbabwe) Ltd.
from 1979 to 1983. Mr. Price is a U.S.
citizen and his business address is Bahamas
Hotels, Inc., 900 Third Street, New York,
New York 10022.
Robert K. Steer (67)* Mr. Steer became a director of the Company
on November 10, 1994. He has been an
independent consulting geologist since
1987. He retired from Exxon Corporation in
1986 where he served as Executive Vice
President of Esso Exploration, Inc. from
1982 to 1986. From 1978 to 1981, he was
Exploration Department Manager for Exxon
Corporation, and from 1974 to 1978, he was
President and Managing Director of Exxon
Malaysia Inc. Mr. Steer is a U.S. citizen
and his business address is 10375 Richmond
Avenue, Suite 900, Houston, Texas 77042.
R.E. Whitten (58)* Mr. Whitten has been a director of the
Company since January 19, 1988 and is
director of Hondo Magdalena Oil & Gas
Limited. He has been an Executive Director
of Lonrho Plc since July 1981 and became
Finance Director on January 1, 1995. He
joined the Lonrho group in 1978. He is
also a director of some 50 other companies
in the Lonrho group, including Princess
Hotels International, Inc. and The Hondo
Company. Mr. Whitten is a U.K. citizen and
his business address is Four Grosvenor
Place, London SW1X 7DL, England.
S.J. Urquhart (36) Mr. Urquhart joined the Company on May 15,
1988 as a Financial Analyst and became
Controller of the Company on August 1,
1992. He was appointed Vice President and
Controller on May 3, 1994. He is also a
director and Vice President of each of the
Company's subsidiaries and a director of
Hondo Magdalena Oil & Gas Limited.
Mr. Urquhart is a Certified Public
Accountant and was employed by Ernst &
Whinney (now Ernst & Young LLP) from 1984
to 1988. Mr. Urquhart is a U.S. citizen
and his business address is 10375 Richmond
Avenue, Suite 900, Houston, Texas 77042.
Parent
- ------
Sir John Craven (57) Sir Craven has been a non-Executive Director
of Lonhro Plc since March 7, 1997 and was
appointed Chariman on March 26, 1997. He
was Chairman of Deutsche Morgan Grenfell
from at least October 1993 until June 1997.
He is currently also a non-Executive Director
of Reuters Holdings Plc and Rothmans
International BV and a member of the Supervisory
Board of Societe Generale de Surveillance
Holdings S.A. He is a U.K. citizen and his
business address is Four Grosvenor Place,
SW1X 7DL, London.
S.E. Jonah (48)* Mr. Jonah has been an Executive Director of
Lonhro Plc since 1992. For at least the past
five years, he has been the Chief Executive
of Ashanti Goldfields Company Limited. He
joined Lonhro Plc in 1969. He is a citizen
of Ghana and his business address is Four
Grosvenor Place, SW1X 7DL, London.
Nicholas J. Morrell See his description above.
R.E. Whitten See his description above.
Terence Wilkinson Mr. Wilkinson has been an Executive Director
(52)* of Lonhro Plc since October 1993. He has
been Chief Operating Officer (Mining) of Lonhro
Plc since July 1997. For more than four years
prior to July 1997, he was responsible to Lonhro
Plc with respect to Lonhro's mining operations.
Mr. Wilkinson joined the Lonhro Group in South
Africa in 1973. He is a South
African citizen and his business address is
Four Grosvenor Place, SW1X 7DL, London.
M.J. Pearce (52) Mr. Pearce is and has been the Company Secretary
of Lonhro Plc since October 1979. He is a U.K.
citizen and his business address is Four Grosvenor
Place, SW1X 7DL, London.
Peter Harper (63)* Mr. Harper has been a non-Executive Director of
Lonhro Plc since October 1993 and was appointed
Deputy Chairman on July 3, 1998. He was Chairman
of Hanson Industrial Services Limited, the U.K.
industrial subsidiary of Hanson Plc, prior to
October 1993 and until September 1994. He is
currently also a non-Executive Director of John
Laing Plc and Deputy Chairman of Victrex Plc. He
is a U.K. citizen and his business address is
Four Grosvenor Place, SW1X 7DL, London.
J.R.B. Phillimore Mr. Phillimore has been a non-Executive Director
(49)* of Lonhro Plc since September 11, 1997. From
1992 to date, he has undertaken strategic advisory
work for U.K. and international companies. He is
currently also a non-Executive Director of Aber
Resources Limited. He is a U.K. citizen and his
business address is Four Grosvenor Place, SW1X 7DL,
London.
Sir Alastair Morton Sir Morton has been a non-Executive Director of
(60)* Lonhro Plc since March 12, 1998. Before October
1993 and until October 31, 1996, he was Executive
Co-Chairman of Eurotunnel. He is currently also
a non-Executive Director of National Power Plc and
of Brockbank Group and an adviser to the Group
Executive Board of ABB Daimler-Benz Transportation
and to the Vice Chancellor of the University of
Cambridge. He is a U.K. citizen and his business
address is Four Grosvenor Place, SW1X 7DL, London.
Purchaser
__________
John F. Price* Mr. Price is the President of the
Purchaser. See his description above.
Nicholas J. Morrell* See his description above.
R.E. Whitten* Mr. Whitten is the Secretary of the
Purchaser. See his description above.
ANNEX E
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to:
Commission file number: 1-8979
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Avenue, Suite 900, Houston, TX 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange on
Title of each class which registered
------------------- ----------------
Common stock, par American Stock
value $1 per share Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(continued)
1
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on December 12, 1997 based on the
closing price on the American Stock Exchange of such stock on such date
was $32,381,596.
Registrant's Common Stock outstanding at December 12, 1997 was
13,788,424 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement
for the annual shareholders meeting are incorporated by reference into
Part III.
2
HONDO OIL & GAS COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
Caption Page
PART I
Item 1. Business ............................................. 4
Item 2. Properties ...........................................14
Item 3. Legal Proceedings ....................................15
Item 4. Submission of Matters to a Vote of Security
Holders .............................................16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .........................17
Item 6. Selected Financial Data ..............................18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................20
Item 8. Financial Statements .................................31
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ..............61
PART III
Item 10. Directors and Executive Officers of
the Registrant ......................................61
Item 11. Executive Compensation ...............................61
Item 12. Security Ownership of Certain Beneficial
Owners and Management ...............................61
Item 13. Certain Relationships and Related Transactions .......61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .................................61
SIGNATURES ........................................................62
3
PART I
As used in this report, unless the context otherwise requires, the terms
"Registrant", "the Company" and "Hondo Oil" refer to Hondo Oil & Gas
Company and its consolidated subsidiaries.
Item 1. BUSINESS
(a) General Development of Business
The Company is an independent oil and gas company, presently focusing on
international oil and gas exploration and development. The Company was
incorporated as Pauley Petroleum Inc. ("Pauley") in 1958. In January
1988, The Hondo Company ("Hondo") acquired a controlling interest in
Pauley in exchange (the "Exchange") for all of the outstanding stock of
Hondo's subsidiary, Hondo Oil & Gas Company. In March 1988, the Company
acquired Fletcher Oil and Refining Company ("Fletcher" or the "Fletcher
refinery"). In January 1990, Pauley merged ("the Merger") with the
wholly-owned subsidiary acquired in the Exchange, Hondo Oil & Gas
Company. In conjunction with the Merger, Pauley Petroleum Inc., the
surviving corporation, changed its name to Hondo Oil & Gas Company.
In December 1989, the Company permanently suspended operations at its
wholly-owned subsidiary, Newhall Refining Co., Inc. ("Newhall
refinery"). During 1991, Hondo Oil adopted plans of disposal for both
its refining and marketing operations and its real estate operations
(primarily the land underlying the Newhall refinery). The Company
suspended operations at its Fletcher refinery in October 1992 and
completed a sale of substantially all of the refining and marketing
operations in October 1993.
In June 1992, the Company completed a sale of substantially all of its
domestic oil and gas assets and repaid a substantial portion of its
long-term debt with the proceeds.
In January 1996, Lonrho Plc acquired control of the Company. Prior to
that date the control of the Company was effectively shared with Robert
O. Anderson and his family. In a Schedule 13D amendment filed October
15, 1997, by Lonrho Plc and its affiliates, the filing parties said that
Lonrho Plc had retained Morgan Stanley & Co. Incorporated to assess and
implement strategic alternatives with respect to Lonrho's direct and
indirect investment in the Company. Lonrho Plc said such strategic
alternatives could include, without limitation, a possible
recapitalization of the Company or a sale or business combination
involving the Company or Lonrho's direct and indirect equity interest in
the Company (including the sale or assumption of the debt obligations of
the Company to affiliates of Lonrho).
The Company's principal asset is its exploration concession in Colombia.
(b) Financial Information About Industry Segments
See Note 11 to the Consolidated Financial Statements in Item 8. The
Company presently operates in one segment.
4
(c) Narrative Description of Business
INTERNATIONAL OPERATIONS
The Company's wholly-owned subsidiary, Hondo Magdalena Oil & Gas Limited
("Hondo Magdalena"), participates in the Opon Association Contract (the
"Opon Contract") with Empresa Colombiana de Petroleos ("Ecopetrol"),
Opon Development Company ("ODC") and Amoco Colombia Petroleum Company
("Amoco Colombia"). Ecopetrol is a quasi-governmental corporate
organization wholly-owned by the government of Colombia. The Opon
Contract was entered into between Ecopetrol and ODC in 1987, and
approved by the Ministry of Mines and Energy in 1988, to explore and
develop an area of approximately 190 square miles located in the Middle
Magdalena Basin about 125 miles north of Bogota, Colombia. The Opon
Contract is divided into an exploration period and an exploitation
period and expires in July 2015.
The Opon Contract provides for an exploration period of six years, which
commenced in July 1988 and was extended through September 30, 1995. The
minimum work obligations required by the Opon Contract for the
exploration period were completed by the associate parties (Amoco
Colombia, Hondo Magdalena and ODC). The Opon Contract provides that at
the end of the exploration period, the associate parties may seek to
declare a field capable of producing commercial hydrocarbons (repaying
investment and expenses and returning a profit) by presenting an
application to Ecopetrol. Ecopetrol has 90 days to respond to the
associate parties' application. If Ecopetrol agrees, then the field is
declared to be commercial and production may commence. Upon the
designation of an area or field as commercial, Ecopetrol acquires a 50%
interest in such area or field and reimburses the associate parties for
50% of the direct exploration costs for each commercial discovery from
its share of production. Thereafter, Ecopetrol pays 50% of costs and
will receive 50% of production. Revenue from the Opon Contract area is
subject to a 20% royalty, which is paid to the Colombian government.
The associate parties completed the minimum work obligations for each of
the six years of the exploration period with completion of the Opon No.
4 well in September 1995. An application for commerciality was
submitted by Amoco Colombia in February 1996. On May 8, 1996, Ecopetrol
approved a commercial field of approximately 2,500 acres around the Opon
No. 3 and No. 4 wells (described below). The interests in the
commercial field are approximately: Ecopetrol, 50%, Amoco Colombia, 30%,
Hondo Magdalena, 15.4%, and ODC, 4.6%. Amoco Colombia, Hondo Magdalena
and ODC have interests in the remainder of the Opon Contract area of
approximately 60%, 30.9% and 9.1%, respectively. The commercial field
is substantially smaller than that requested by Amoco Colombia. The
commercial field may be enlarged by future drilling and/or additional
technical information.* The associate parties submitted an application
to declare the area around the Opon No. 6 well commercial in August
1997. Ecopetrol responded in September 1997 that it considered the
information presented to be insufficient to evaluate the application for
the extension of the commercial area. The associate parties are
evaluating Ecopetrol's response in light of the terms of the Opon
Contract and plan to approach Ecopetrol for clarification of its
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
5
response. At this date, the area around the Opon No. 6 well is not a
part of the commercial area. Ecopetrol will not pay for its share of
expenditures to enlarge the commercial field until the new areas are
proven and declared commercial. Ecopetrol will participate in further
development costs of the existing commercial field.
The Opon Contract provides that at the end of the exploration period, if
a field capable of producing hydrocarbons in commercial quantities has
been discovered, the Opon Contract area will be reduced by 50%. Two
years thereafter, the Opon Contract area will be further reduced to 25%
of the original area. Two years thereafter, the Opon Contract area will
be reduced to the area of the commercial field that is in production or
development, plus a reserve zone of five kilometers in width around the
productive limit of such field. The commercial field plus the zone
surrounding such field will become the area of exploitation. The
associate parties designate the acreage to be released. Additional
wells will be required to enlarge the commercial area and to increase
the size of the area of exploitation.
The first acreage relinquishment of 50% occurred during 1996, effective
September 30, 1995, reducing the area of the Opon Contract area to
25,021.5 hectares (61,828 acres). The Company believes that the first
relinquishment did not cause the loss of significant exploration
opportunities. The second acreage relinquishment was due on September
30, 1997. By agreement with Ecopetrol, the second relinquishment has
been postponed until September 30, 1998. As consideration, the
associate parties agreed to perform, for the full Opon Contract area,
surface geological studies and petrochemical analysis, and to undertake
a study to determine the economic and technical viability of putting the
shallow oil producing wells in the Opon Contract area into production.
Hondo Magdalena acquired its interest in the Opon Contract from ODC.
Prior to fiscal 1993, Hondo Magdalena and ODC drilled four wells to the
shallow Mugrosa formation. Following extended production and pressure
testing, one of these wells was declared a dry hole. In fiscal 1993,
Hondo Magdalena drilled the Lilia No. 10 well to the La Paz formation at
its sole cost. The well was drilled to a total depth of 10,003 feet.
The well encountered mechanical problems after the logs were run, and it
was temporarily plugged and suspended. The well may be re-entered at a
future date. By completing these operations, Hondo Magdalena acquired
an 80% interest in the Opon Contract from ODC.
Under a Farmout Agreement dated August 9, 1993, Amoco Colombia earned a
60% participating interest in the Opon Contract, 50% from Hondo
Magdalena and 10% from ODC. Hondo Magdalena retained a 30% interest.
Amoco Colombia paid $3.0 million in cash and paid Hondo Magdalena's
costs related to the Opon No. 3 well, a well drilled to the La Paz
formation. Under the Farmout Agreement, Amoco Colombia paid Hondo
Magdalena an additional $5.0 million in October 1994 and paid all but
$2.0 million of Hondo Magdalena's costs related to the Opon No. 4 well,
also drilled to the La Paz formation.
The Opon No. 3 well, completed in September 1994, was drilled to a depth
of 12,710 feet at a total cost of approximately $30.0 million. The well
tested at a daily rate of 45 million cubic feet of natural gas and 2,000
barrels of condensate. The hydrocarbons were tested from 1,118 feet of
perforations in the La Paz formation through a 42/64-inch opening at the
surface with 6,000 pounds-per-square-inch flowing tubing pressure.
Downhole restrictions prevented the well from testing at higher rates.
6
The Opon No. 4 well, completed in September 1995, was drilled to a depth
of 11,500 feet at a total cost of approximately $28.5 million. The well
tested at a daily rate of 58 million cubic feet of natural gas and 1,900
barrels of condensate. The hydrocarbons were tested from 1,022 feet of
perforations in the La Paz formation through a 40/64-inch opening at the
surface with 8,121 pounds-per-square-inch flowing tubing pressure.
These two wells have confirmed the existence of a significant natural
gas field.
The Opon No. 6 well commenced drilling in October 1996. This well is
slightly more than 1 kilometer north of the Opon No. 3 well and is
outside the current commercial area. The well is presently estimated to
cost $30.2 million, of which Hondo Magdalena's share is 30.9%.* After
the drilling was completed, several mechanical problems in the
completion and testing of the Opon No. 6 well occurred. After there was
a failure of a portion of the guns during the initial completion attempt
in April 1997, a second set of perforating guns were fired. Cleanup and
testing on the second set of perforations commenced in May 1997 and,
while all the guns fired, the well has not flowed as anticipated. The
associate parties have suspended operations on the well in order to
fully evaluate all data from the well and prepare a plan for further
actions. Amoco Colombia has recently proposed a workover of the Opon
No. 6 well using propellant stimulation technology. A decision on the
proposal will be made in January 1998 following an economic analysis.*
The associate parties are attempting to negotiate a settlement of claims
against suppliers of services and equipment related to the problems
encountered during completion operations on the Opon No. 6 well, but no
settlement has been reached. If a settlement is not reached, the next
step will be arbitration.* No prediction of the outcome of these
matters can be made at this time.
The Opon No. 14 well, approximately 4 kilometers south of the Opon No. 4
well commenced drilling in October 1997. The total cost of the well is
estimated to be $21.5 million, of which Hondo Magdalena will bear
30.9%.* The well is planned for a total depth of 11,000 feet and is
intended to confirm the existence of the La Paz gas and condensate
reservoir in the south of the Opon Contract area.* The drilling of the
well has progressed in accordance with its plan to this date.
Operations in the Opon Contract area are subject to the operating risks
normally associated with exploration for, and production of, oil and
gas, including blowouts, cratering, and fires, each of which could
result in damage to, or destruction of, the oil and gas wells,
formations or production facilities or properties. In addition, there
are greater than normal mechanical drilling risks at the Opon Contract
area associated with high pressures in the La Paz and other formations.
These pressures may: cause collapse of the well bore, impede the drill
string while drilling, or cause difficulty in completing a well with
casing and cement.
Production is subject to political risks inherent in all foreign
operations, including: (i) loss of revenue, property, and equipment as a
result of unforeseen events such as expropriation, nationalization, war
and insurrection, (ii) risks of increases in taxes and governmental
royalties, (iii) renegotiation of contracts with governmental entities,
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
7
as well as, (iv) changes in laws and policies governing operations of
foreign-based companies in Colombia. Guerrilla activity in Colombia has
disrupted the operation of oil and gas projects, including those at the
Opon Contract area. Security in the area has been improved and the
associate parties have taken steps to enhance relations with the local
population through a community relations program. The government
continues its efforts through negotiation and legislation to reduce the
problems and effects of insurgent groups, including regulations
containing sanctions such as impairment or loss of contract rights on
companies and contractors if found to be giving aid to such groups. The
associate parties will continue to cooperate with the government, and do
not expect that future guerrilla activity will have a material impact on
the exploration and development of the Opon Project. However, there can
be no assurance that such activity will not occur or have such an impact
and no opinion can be given on what steps the government may take in
response to any such activity.
Colombia is among several nations whose progress in stemming the
production and transit of illegal drugs is subject to annual
certification by the United States government. In February 1997, the
President of the United States announced that Colombia again would
neither be certified nor granted a national interest waiver. The
consequences of the failure to receive certification generally include
the following: all bilateral aid, except anti-narcotics and humanitarian
aid, has been or will be suspended; the Export-Import Bank of the United
States and the Overseas Private Investment Corporation will not approve
financing for new projects in Colombia; U. S. representatives at
multilateral lending institutions will be required to vote against all
loan requests from Colombia, although such votes will not constitute
vetoes; and the President of the United States and Congress retain the
right to apply future trade sanctions. Each of these consequences of
the failure to receive such certification could result in adverse
economic consequences in Colombia and could further heighten the
political and economic risks associated with the Company's operations in
Colombia.
The government of Colombia has established a natural gas policy and is
pursuing a program to maximize the utilization of natural gas throughout
the country, including the industrial cities of Medellin, Cali and
Bogota, where developed markets and infrastructure are expanding. The
Colombian government's policy on natural gas is intended to increase the
consumption of natural gas in order to provide a more balanced use of
its energy resources. The policy includes the use of natural gas in
place of higher cost electricity and in place of wood to reduce
deforestation. The government intends to encourage the development of
markets for natural gas and is pursuing the development of pipeline
transportation systems for new markets. The proximity of the Opon
Contract area to these potential gas markets will be an advantage for
marketing the natural gas.
In July 1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol agreed
to construct a pipeline and wellhead facilities (which were not
contemplated in the Opon Contract). The parties constructed a 16 inch
pipeline approximately 88 kilometers in length from the Opon Contract
area north to Ecopetrol's gas processing plant at El Centro, and from
there to Ecopetrol's refinery at Barrancabermeja. The investment in
8
pipeline costs will be recovered through a pipeline tariff.* Ecopetrol
has constructed improvements at its El Centro gas processing plant to
handle incremental production from the Opon Contract area. Ecopetrol
will recover its investment through a gas processing fee.
The Comision de Regulacion de Energia y Gas (Commission for the
Regulation of Energy and Gas, "CREG"), an agency of the Ministry of
Mines and Energy of the Colombian government, regulates natural gas
pipelines and the sale of natural gas in Colombia. CREG's regulations
provide the ceiling price for natural gas and the methodology for
establishing pipeline tariffs. Based upon these regulations, Amoco
Colombia, as operator applied for a tariff for the pipeline; CREG has
not yet responded to this application.
Contracts, covering the sale of natural gas, the sale of condensate and
natural gas liquids, the processing of the gas stream, and
transportation of natural gas and liquids are complete and have been
signed by all parties. The contracts provide for: (i) the sale of 100
million cubic feet of natural gas per day for the life of the Opon
Contract at the regulated price determined semi-annually by a formula
based upon the average price received by Ecopetrol for exported fuel oil
during the prior two six-month periods (currently US$1.08 per million
British Thermal Units); (ii) the sale of condensate and natural gas
liquids at market-related and market-indexed prices; and (iii) the
processing of the gas stream at Ecopetrol's El Centro gas processing
plant for a fee of $0.159 per thousand cubic feet of gas. In a recent
amendment to the gas processing agreement the associate parties agreed
to bear the cost of processing royalty gas that is attributable to their
interests and Ecopetrol reduced the fee for processing from $0.20 to
$0.159 per thousand cubic feet of gas. Ecopetrol, as purchaser, pays
the pipeline tariff for the natural gas sold by the associate parties.
On March 3, 1997, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol, as
sellers, signed a contract with Termo Santander de Colombia E.S.P., as
purchaser ("Termo Santander"), to supply, subject to the conditions
noted below, natural gas to an electric generation plant at the Opon
Contract area. Termo Santander's power plant is located at the Opon
Contract area. Under the contract, the sellers will supply natural gas
requested by the purchaser up to 60 million cubic feet per day. The
sellers will receive $4.2 million per year for making the gas available
for purchaser's call. Purchaser will pay 60% of the government-
regulated price (described above) for the natural gas it takes. The
sellers will also receive additional bonus payments if the power plant
achieves a price for its electrical power in excess of certain target
rates. Condensate associated with the natural gas that is delivered to
the purchaser will be separately sold to Ecopetrol. The contract
provides for substantial penalties, decreasing over the life of the
contract, to the sellers for the failure to deliver gas. The
commencement of the contract is conditioned upon the completion of the
electric generation plant and a determination by the sellers that there
are sufficient reserves to supply natural gas to the purchaser for the
entire term of the agreement. In order to begin deliveries before the
condition concerning the sufficiency of reserves is satisfied, an
interim agreement for the sale of gas to Termo Santander was signed on
November 20, 1997. The interim agreement will be effective until
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
9
January 1, 1999, or until sufficient reserves are determined through
additional work on the Opon No. 6 well or the successful completion of
the Opon No. 14 well.* The gas sales price under the interim agreement
will be equivalent to the price, including the pipeline tariff, that
would have been received if the same gas were sold under the contract
with Ecopetrol described in the preceding paragraph.
The pipeline and wellsite facilities were completed in June 1997.
Ecopetrol completed the improvements to the El Centro gas plant in
November 1997. Production from the Opon field began on December 1,
1997, with gas supplied to Termo Santander for testing the first of two
turbines at the power plant. The first shipment of gas through the
pipeline began on December 5, 1997, but was interrupted for one week
shortly thereafter by a landslide. The first shipment of gas was 10
million cubic feet and the quantity is expected to increase to the
contract quantity of 100 million cubic feet per day by calendar year end
1997.*
Development of the Opon Project will require significant future capital
expenditures for which the Company will need additional funds. See
Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources in Item 7.
DISCONTINUED OPERATIONS
Refining and Marketing Operations
On October 1, 1993, the Company completed the sale of the common stock
of its Fletcher refinery and the assets of the Hilo, Hawaii asphalt
terminal. The Company's 41,000 bbl asphalt barge was sold in May 1993.
An asphalt terminal in Honolulu, Hawaii and two gasoline stations
acquired through bankruptcy proceedings against a former customer of
Fletcher were disposed of in 1994. There are no remaining assets of the
refining and marketing operations. See Note 12 to the Consolidated
Financial Statements in Item 8.
Real Estate Operations
On December 15, 1989, the Company suspended operations at its Newhall
refinery. Subsequently, the Company adopted a plan of disposition which
included dismantling the refinery, effecting environmental remediation
of the land and further developing the land to a condition where it may
be sold. Execution of the plan was suspended in September 1993 and the
Company is now marketing the site in its current condition and with
existing land-use entitlements. The Newhall refinery site consists of
approximately 105 acres located adjacent to a major freeway intersection
in northern Los Angeles County. See Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 and
Note 12 to the Consolidated Financial Statements in Item 8.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
10
The Company owns in fee simple approximately 11 acres of undeveloped
land located in eastern Los Angeles County. An option to a developer on
the Company's Via Verde tract at a price of $3.1 million expires in
December 1997. The option agreement will allow the Company the right to
be released from the current agreement should there be a potential sale
of the parcel to a ready and willing buyer.
Each of the above real properties is subject to a mortgage in favor of
Lonrho Plc. See Note 5 to the Consolidated Financial Statements in Item
8.
COMPETITIVE FACTORS
Other parties have developed or announced discoveries of natural gas in
Colombia. These reserves and potential reserves exist on the north
coast of Colombia and in the Llanos Basin, east of the Company's
interest at the Opon Contract area. In the developing gas market of
Colombia, these gas supplies will compete for existing and new markets,
and for access to transportation facilities for natural gas. Such
competition may adversely affect the Company's ability to market its
natural gas and/or the price of natural gas. At this time, no
prediction can be made as to the effect such competition will ultimately
have upon the Company.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
Environmental matters
The Company's operations are subject to certain federal, state and local
laws, including those of Colombia, and regulations governing the
management of hazardous materials, the discharge of pollutants into the
environment and the handling and disposal of solid and hazardous waste.
(1) General
Minor spillage or discharge of petroleum and related substances are
a common occurrence at oil refineries and at oil and gas production
and drilling facilities. Such spills and discharges could create
liability under various federal, state and local environmental laws
and regulations. As is the case with other companies engaged in
oil and gas exploration, production and refining, the Company faces
exposure from potential claims and lawsuits involving environmental
matters. These matters may involve alleged soil and water
contamination and air pollution. The Company's policy is to accrue
environmental and clean-up costs when it is probable that a
liability has been incurred and the amount of the liability is
reasonably estimable. However, future environmental related
expenditures cannot be reasonably quantified in many circumstances
due to the conjectural nature of remediation and clean-up cost
estimates and methods, the imprecise and conflicting data regarding
the characteristics of various types of waste, the number of other
potentially responsible parties involved and changing environmental
laws and interpretations. Management believes the reduced scope of
the Company's operations following the sale of the Company's
domestic oil and gas properties and the Fletcher refinery has
significantly reduced the Company's potential exposure to
environmental liability.
11
(2) Fletcher Refinery
Generators of hazardous substances found in disposal sites at which
environmental problems are alleged to exist, as well as the owners
of those sites and certain other classes of persons, are subject to
claims brought by state and federal regulatory agencies. Fletcher
has been notified by the EPA that it is a potentially responsible
party in a proceeding under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"). The notice
relates to the Operating Industries, Inc. ("OII") dump site in
Monterey Park, California. During fiscal 1993, the Company sold
the Fletcher refinery in a stock sale through which the purchaser
assumed environmental liabilities of Fletcher, known and unknown.
Any liability related to OII (to which Fletcher has asserted the
defense of bankruptcy discharge and with respect to which Fletcher
entered into a settlement with certain potentially responsible
parties at the time of the bankruptcy) remains a liability of
Fletcher and is no longer a liability of the Company. However, the
statutes impose liability on "owners" and "operators," and these
statutes have been used to assert claims against controlling
shareholders of corporations involved in claims under CERCLA and
related statutes. The Company is sole shareholder of Pauley
Pacific Inc. which was sole shareholder of Fletcher. The assertion
of such a claim against the Company in the case of OII is
considered by management to be remote, since the Company was not an
owner of Fletcher until after the events occurred that are the
basis of the notice to Fletcher on the OII dump site.
(3) Newhall Refinery Site
The Company has evaluated the Newhall Refinery site to determine
the impact of refining activities on the environment. The Company
has conducted an environmental assessment of the refinery site and
a remediation plan for the site has been submitted to the Regional
Water Quality Control Board and has received staff approval. The
Company estimates that $2.0 million would be incurred in executing
the approved remediation plan; however, the Company expects to sell
the property without incurring these costs by reducing the purchase
price. The Company's estimate of the net realizable value of this
property has been reduced by estimated remediation costs in
determining the carrying value of the property and therefore the
remediation costs will not affect future results of operations.
See Note 12 to the Consolidated Financial Statements in Item 8.
The Newhall Refinery was recently notified by a California state
agency that it is considered a potentially responsible party, under
a state law that is equivalent to CERCLA, in the matter of the
cleanup of a dump site previously operated by Environmental
Protection Corporation, the Eastside Disposal Facility, near
Bakersfield, California. The Company has no record of having
disposed of any waste at the site, and is continuing its
investigation of the circumstances that have led to the
notification. Based upon the records obtained from other parties,
the quantities of waste attributed to Newhall are minute relative
to the total amount of waste delivered to the landfill. However,
management cannot assess at this time the potential exposure or
liability, if any, to the Company.
12
Government Regulations and Legislative Proposals
The Company is subject to governmental regulations which include various
controls on the exploration for, production, sale, and transportation of
crude oil and natural gas in Colombia. See International Operations
above. A number of foreign, federal and other legislative proposals, if
enacted, may have adverse effects on companies in the petroleum
industry, including the Company. These proposals involve, among other
matters, the imposition of additional taxes, price controls, land use
controls and other restrictive measures. The Company cannot determine to
what extent future operations and earnings may be affected by new
regulations or changes in current regulations.
EMPLOYEES
The Company employed 7 full-time personnel as of September 30, 1997.
(d) Financial Information About Foreign Operations
See Note 11 to the Consolidated Financial Statements in Item 8. The
Company operates in one foreign location: Colombia, South America. See
International Operations, above.
13
Item 2. PROPERTIES
OIL AND GAS PROPERTIES
The Company's principal asset is its interest in the Opon Association
Contract (the "Opon Contract"), an exploration concession for an area in
the Middle Magdalena Valley of Colombia, South America. Two wells
drilled during 1994 and 1995 have confirmed the existence of a
significant natural gas field. The following information should be read
in conjunction with the description of the Opon Contract contained in
International Operations in Item 1, particularly the descriptions of
commerciality, acreage relinquishment, and the term of the Opon
Contract.
(1) For estimated net quantities of proved oil and gas reserves,
results of operations from oil and gas producing activities and the
standardized measure of discounted future net cash flows relating
to proved oil and gas reserve quantities for the years ended
September 30, 1997, 1996 and 1995, as applicable, see Supplementary
Information about Oil and Gas Producing Activities and Reserves
(Unaudited) following the Consolidated Financial Statements in Item
8.
(2) The only estimates of total proved net oil and gas reserves filed
with any federal agency during fiscal 1997 are those contained in
this Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.
(3) No production income and cost per unit data for the years ended
September 30, 1997, 1996 and 1995 exists and none will be reported
until production in Colombia commences in fiscal 1998.
(4) The Company had two (0.3 net) wells capable of production (located
in Colombia) at September 30, 1997. An area of 2,500 acres (386
net acres), which encompasses the two completed wells, was declared
commercial in May 1996. The Company's interest in the commercial
area is 15.444375%. Additional wells are permitted to be drilled
on this acreage and additional areas reported as undeveloped in (5)
below may be declared commercial in the future.
(5) Undeveloped acreage at September 30, 1997, all located in Colombia,
consists of 59,327 gross acres, or 18,325 net acres, contained
within the areas of the Opon Contract which have not been declared
commercial. The Company's interest in this area is 30.88875%.
Portions of this acreage are subject to relinquishment to Ecopetrol
in the future.
(6) Net wells completed (all located in Colombia) for the years ended
September 30:
1997 1996 1995
---- ---- ----
Productive exploratory - - 0.3
Dry exploratory - - -
Productive development - - -
Dry development - - -
14
The Company's interest in net productive exploratory wells is
computed at the Company's interest at the time they are drilled.
The Company's interest in these wells is subject to a 50% reduction
upon a declaration of commerciality.
(7) Present activity: The Opon No. 6 well was commenced on October 24,
1996 in the non-commercial area of the Opon Contract and
encountered several mechanical problems during completion and
testing in April and May 1997. Work on the well has been suspended
until a plan for further actions has been developed. Amoco
Colombia has recently proposed a workover of the Opon No. 6 well
using propellant stimulation technology. A decision on the
proposal will be made in January 1998 following an economic
analysis.* Drilling of the Opon 14 commenced on October 23, 1997
in the non-commercial area of the Opon Contract and is expected to
be completed in the spring of 1998.*
(8) Delivery Commitments:
The Company has executed two contracts for sales of specific
quantities of natural gas from the Company's wells in Colombia.
See International Operations in Item 1. The Company believes the
reserves discovered in the Opon No. 3 and 4 wells are adequate to
meet these sales commitments in the near future.* Additional wells
are needed and will be drilled to insure the ability to meet
delivery commitments over the life of the contract.*
OTHER PROPERTIES
Refer to Item 1 for descriptions of properties owned by the Company
other than those described in Item 2, above.
Item 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal and administrative
proceedings incident to the ordinary course of its business. In the
opinion of management, any liability to the Company relative to the
various proceedings will not have a material adverse effect on the
Company's operations or financial condition.
The Company has evaluated the Newhall Refinery site to determine the
impact of refining activities on the environment. The Company has
conducted an environmental assessment of the refinery site and a
remediation plan for the site has been submitted to the Regional Water
Quality Control Board and has received staff approval. The Company
estimates that $2.0 million would be incurred in executing the approved
remediation plan; however, the Company expects to sell the property
without incurring these costs by reducing the purchase price. The
Company's estimate of the net realizable value of this property has been
reduced by estimated remediation costs in determining the carrying value
of the property and therefore the remediation costs will not affect
future results of operations. See Note 12 to the Consolidated Financial
Statements in Item 8.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
15
In the agreement for the sale of Fletcher Refinery in 1993, the Company
indemnified the buyer as to liabilities in excess of $0.3 million for
certain federal and state excise taxes arising from periods prior to the
sale. Fletcher notified the Company in July 1994 that an audit for
California Motor Vehicle Fuels Tax was underway and a preliminary review
by then Fletcher employees indicated that a significant liability might
exist. The Company retained a consultant to evaluate the contingent
liability. In September 1994, the Company accrued $1.4 million as a
result of the consultant's evaluation. An additional $0.7 million was
accrued in September 1995, primarily because of increases in the
estimated amounts of penalties and interest which could be due. The
State of California issued a preliminary report in June 1996 which
concluded taxes and penalties of $10.8 million were due as a result of
the audit. The State of California issued a Notice of Determination in
July 1997 reducing the taxes and penalties due to $5.7 million.
Assessed amounts are subject to a process of appeal and further
adjustment, which remedies are still being pursued. The buyer notified
the Company that it claims indemnity in this matter and in January 1997
filed suit in Superior Court, Los Angeles, California for a declaratory
judgment enforcing the indemnity and for other relief. The Company
accrued an additional $1.2 million in September 1997. The Company has
accrued its best estimate of the ultimate liability and believes this is
sufficient to provide for the amount that will ultimately be paid based
on the information available. No assurances can be given that the
ultimate liability, if any, will be the amount accrued, and any such
liability may be greater or less than the amount accrued.
The Newhall Refinery was recently notified by a California state agency
that it is considered a potentially responsible party, under a state law
that is equivalent to the Federal Comprehensive Response, Compensation
and Liability Act, in the matter of the cleanup of a dump site
previously operated by Environmental Protection Corporation, the
Eastside Disposal Facility, near Bakersfield, California. The Company
has no record of having disposed of any waste at the site, and is
continuing its investigation of the circumstances that have led to the
notification. Based upon the records obtained from other parties, the
quantities of waste attributed to Newhall are minute relative to the
total amount of waste delivered to the landfill. However, management
cannot assess at this time the potential exposure or liability, if any,
to the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Closing stock price ranges for the quarterly periods during the fiscal
years ended September 30, 1997 and 1996, as reported by the American
Stock Exchange Monthly Market Statistics reports, were as follows:
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
Fiscal 1997:
Low $ 10.75 $ 10.50 $ 6.44 $ 5.88
High $ 15.00 $ 14.00 $ 10.75 $ 7.25
Fiscal 1996:
Low $ 13.50 $ 9.25 $ 11.13 $ 11.00
High $ 20.88 $ 13.88 $ 14.50 $ 16.88
The common stock is listed on the American Stock Exchange under the
symbol HOG. The Company does not fully meet all of the guidelines of
the American Stock Exchange for continued listing of its shares. The
delisting policies and procedures of the Exchange provide guidelines
under which the Exchange will normally give consideration to suspending
dealings in a security, or removing a security from listing. Among
those guidelines that may be applicable to the Company are: (i) having
stockholders' equity of less than $2,000,000 if such company has
sustained losses from continuing operations and/or net losses in two of
its three most recent fiscal years; or (ii) having sustained losses
which are so substantial in relation to its overall operations or its
existing financial resources, or its financial condition has become so
impaired that it appears questionable, in the opinion of the Exchange,
as to whether such company will be able to continue operations and/or
meet its obligations as they mature; or (iii) having sold or otherwise
disposed of its principal operating assets or having ceased to be an
operating company or having discontinued a substantial portion of its
operations or business for any reason whatsoever. Where the company has
substantially discontinued the business that it conducted at the time it
was listed or admitted to trading, and has become engaged in ventures or
promotions which have not developed to a commercial stage or the success
of which is problematical, it shall not be considered an operating
company for the purposes of continued trading and listing on the
Exchange.
The number of shareholders of record on December 12, 1997 was 689.
DIVIDEND POLICY
The Company has not paid a dividend on its common stock in the two most
recent fiscal years, nor has it ever done so. The Company's loan
agreement with Thamesedge, Ltd. restricts the payment of dividends to
35% of the Company's Consolidated Net Adjusted Income (as defined in the
loan agreement) plus $2.0 million. Since the Company has incurred net
losses during this fiscal year and prior years, the payment of dividends
is restricted.
17
ITEM 6. SELECTED FINANCIAL DATA
<HEADING>
For the Fiscal Year Ended September 30,
----------------------------------------------------------
1997 a 1996 a 1995 a 1994 a 1993
---------- --------- --------- --------- ---------
(In Thousands Except Per Share Data)
OPERATING DATA
Revenue $29 $112 $46 $728 $980
Gain (loss) on sale of assets -- (6) -- (1,240) (8)
Operating costs and expenses 4,367 6,293 1,943 2,880 5,910
Depreciation, depletion
and amortization 230 156 266 220 365
Interest expense 6,222 5,009 4,680 4,605 3,411
Provision for income taxes (2) 5 113 (199) (46)
---------- --------- --------- --------- ---------
Income (loss) from
continuing operations (10,788) (11,357) (6,956) (8,018) (8,668)
Loss from discontinued
operations (1,600) b (1,300) c (4,950) b (3,038) b (15,176) d
---------- --------- --------- --------- ---------
Net Loss $(12,388) $(12,657) $(11,906) $(11,056) $(23,844)
========== ========= ========= ========= =========
Earnings (loss) per share
Continuing operations $(0.78) $(0.83) $(0.53) $(0.62) $(0.67)
Discontinued operations (0.12) (0.10) (0.37) (0.23) (1.16)
---------- --------- --------- --------- ---------
$(0.90) $(0.93) $(0.90) $(0.85) $(1.83)
========== ========= ========= ========= =========
Weighted average common
shares outstanding 13,781 13,673 13,171 13,009 13,007
========== ========= ========= ========= =========
18
<HEADING>
For the Fiscal Year Ended September 30,
----------------------------------------------------------
1997 a 1996 a 1995 a 1994 a 1993
---------- --------- --------- --------- ---------
(In Thousands)
OTHER FINANCIAL DATA
Working capital (deficit) $(5,834) $(5,109) $(1,077) $2,413 $1,729
========== ========= ========= ========= =========
Properties, net $40,612 $21,248 $12,777 $10,855 $15,910
========== ========= ========= ========= =========
Net assets of discontinued
operations $2,137 b $2,202 c $2,978 b $6,851 b $7,750 d
========== ========= ========= ========= =========
Total assets $44,930 $24,540 $18,398 $24,908 $30,142
========== ========= ========= ========= =========
Long-term debt $102,903 $83,334 $82,213 $81,888 $78,828
========== ========= ========= ========= =========
Shareholders' equity(deficit) $(93,173) $(80,891) $(73,364) $(66,681) $(55,815)
========== ========= ========= ========= =========
- -----------------------------
a Under the terms of a Farmout Agreement, the Company's partner in the
Company's Colombian operations paid for most costs incurred (both capitalized
and expensed) in Colombia in 1995 and 1994. The Company became responsible
for its share of costs in Colombia in 1996.
b The Company recorded valuation provisions against the carrying value of its
discontinued real estate operations and accrued for a contingent liability
arising from its discontinued refining and marketing operations in 1997, 1995
and 1994.
c The Company recorded valuation provisions against the carrying value of its
discontinued real estate operations in 1996.
d The Company completed the sale of substantially all of its discontinued
refining and marketing segment and recorded valuation provisions against the
carrying value of its discontinued real estate segment in 1993.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
Introduction
------------
Hondo Oil & Gas Company is an independent oil and gas company focusing
on international oil and gas exploration and development. The Company's
principal asset is its interest in the Opon Association Contract (the
"Opon Contract"), an exploration concession for an area in the Middle
Magdalena Valley of Colombia, South America. Significant reserves of
natural gas and condensate were shown to exist in the Opon Contract area
by two discovery wells drilled during 1994 and 1995. In accordance with
the terms of the Opon Contract, Empresa Colombiana de Petroleos
("Ecopetrol") declared a portion of the area as commercial in May 1996.
A pipeline and related wellsite facilities to deliver natural gas and
condensate to a market are complete, and production began in December
1997. Deliveries of natural gas to a power plant located at the Opon
Contract area also began in December 1997. The Opon No. 6 well
encountered mechanical problems during completion operations and is
temporarily suspended to evaluate information and develop plans for
further operations on the well, including workover of the well.*
Drilling of the Opon No. 14 well began in October 1997. If no problems
are encountered, the Opon No. 14 well should be completed and tested in
the Spring of 1998.* As further described below, the Company will
require additional financing to continue development of the Opon
project.
Cautionary Statements
---------------------
The Company believes that this report contains certain forward-looking
statements, as defined in the Private Securities Litigation Reform Act
of 1995, including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," "may" and words of
similar import, or statements of management's opinion. Such forward
looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following:
Substantial Reliance On Single Investment. The Company's success
currently is dependent on its investment in the Opon project in
Colombia, South America. See Note 1 to the Consolidated Financial
Statements in Item 8.
Role Of Ecopetrol. Ecopetrol is a quasi-governmental corporate
organization wholly-owned by the Colombian government, a party to the
Opon Contract and the purchaser of natural gas and liquid hydrocarbons
under contracts for the sale of production from the Opon field. See
International Operations, above. At present, the price of natural gas
is set by law enacted by the legislature of Colombia in 1983. The
____________________
* This statement may be considered forward-looking. See Cautionary
Statements.
20
regulated price of natural gas could be changed in the future by
governmental action. The participation of Ecopetrol, a government-owned
company, in the Opon project as a producer and as a purchaser, and the
power of the government of Colombia to set the price of natural gas
creates the potential for a conflict of interest in Ecopetrol and/or the
government. If such a conflict of interest materializes, the economic
value of the Company's interest in the Opon project could be diminished.
Marketing Of Natural Gas. The Company must secure additional markets
and sales contracts for natural gas in Colombia in order to increase
production and cash flow from the Opon project. This will depend on the
continued development of gas markets and an infrastructure for the
delivery of natural gas in Colombia. Also, other producers of natural
gas in Colombia will compete for the natural gas market and for access
to limited pipeline transportation facilities. See International
Operations and Competitive Factors in Item 1.
Foreign Operations. The Company's operations in Colombia are subject to
political risks inherent in all foreign operations. See International
Operations in Item 1.
Risks Of Oil And Gas Exploration. Inherent to the oil and gas industry
is the risk that future wells will not find hydrocarbons where
information from prior wells and engineering and geological data
indicate hydrocarbons should be found. Further, existing wells can
deplete faster than anticipated, potentially causing revisions to
reserve estimates and increasing costs due to replacement wells. Also,
because of the limited number of wells in the Opon Contract area, the
impact of the loss of a single well would potentially affect the
Company's production capability. Operations in the Opon Contract area
are subject to the operating risks normally associated with exploration
for, and production of oil and gas. See International Operations in
Item 1.
Laws And Regulations. The Company may be adversely affected by new laws
or regulations in the United States or Colombia regarding its operations
and/or environmental compliance, or by existing laws and regulations.
For additional information, see Other Factors Affecting the Company's
Business in Item 1.
Limited Capital. At September 30, 1997 the Company had a deficiency in
net assets of $93.2 million. The Company's principal asset, its
investment in the Opon project, will require additional capital for
exploitation. The Company has been unable to secure financing from
sources other than its principal shareholder. See Liquidity and Capital
Resources below and Note 1 to the Consolidated Financial Statements in
Item 8.
Losses From Operations. The Company experienced losses of $11,906,000,
$12,657,000 and $12,388,000 for the years ended September 30, 1995, 1996
and 1997, respectively. The Company anticipates continued losses
through fiscal 1998. See Results of Operations below.
Continuation Of American Stock Exchange Listing. Because of continuing
losses and decreases in shareholders' equity, the Company does not fully
meet all of the guidelines of the American Stock Exchange for continued
listing of its shares. See Market for Registrant's Common Equity and
Related Stockholder Matters in Item 5. Management has kept the Exchange
fully informed regarding the Company's present status and future plans.
21
Although the Company does not or may not meet all of the guidelines, to
date, the American Stock Exchange has chosen to allow the Company's
shares to remain listed. However, no assurances can be given that the
Company's shares will remain listed on the Exchange in the future.
Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
Opon Exploration
----------------
Hondo Magdalena Oil & Gas Limited ("Hondo Magdalena"), a wholly-owned
subsidiary, became involved in the Opon Contract through a farmout
agreement with Opon Development Company ("ODC") in 1991. In August
1993, Hondo Magdalena and ODC entered into a Farmout Agreement under
which Amoco Colombia Petroleum Company ("Amoco Colombia") earned a 60%
participating interest in the Opon Contract. To earn the interest,
Amoco Colombia paid $3.0 million in cash in 1993 and paid all of the
costs related to drilling the Opon No. 3 well in 1994. In addition,
Amoco Colombia paid Hondo Magdalena $5.0 million in October 1994 and
paid all but $2.0 million of Hondo Magdalena's costs for drilling the
Opon No. 4 well in 1995.
The Opon No. 3 well, completed in September 1994, was drilled to a depth
of 12,710 feet at a total cost of approximately $30.0 million. The well
tested at a daily rate of 45 million cubic feet of natural gas and 2,000
barrels of condensate. Downhole restrictions prevented the well from
testing at higher rates. The Opon No. 4 well, completed in September
1995, was drilled to a depth of 11,500 feet at a total cost of
approximately $28.5 million. The well tested at a daily rate of 58
million cubic feet of natural gas and 1,900 barrels of condensate.
These two wells have confirmed the existence of a significant natural
gas field and will supply gas for the contracts described below.
Presently, Amoco Colombia, Hondo Magdalena and ODC have interests in the
Opon Contract (outside the commercial area described below) of
approximately 60%, 30.9% and 9.1%, respectively. As provided in the
Opon Contract, upon the designation of an area or field as commercial,
Ecopetrol acquires a 50% interest in such area or field and will
reimburse the associate parties for 50% of the direct exploration costs
for each commercial discovery from its share of production. In May
1996, Ecopetrol approved a commercial field of approximately 2,500 acres
around the Opon No. 3 and No. 4 wells. The interests in the commercial
field are approximately 50%, 30%, 15.4%, and 4.6% for Ecopetrol, Amoco
Colombia, Hondo Magdalena, and ODC, respectively. The commercial field
is substantially smaller than that requested, but may be enlarged by
future drilling and/or additional technical information.* The
associate parties submitted an application to declare the area around
the Opon No. 6 well commercial in August 1997. Ecopetrol responded in
September 1997 that it considered the information presented to be
insufficient to evaluate the application for the extension of the
commercial area. The associate parties are evaluating Ecopetrol's
response in light of the terms of the Opon Contract and plan to approach
Ecopetrol for clarification of its response. At this date, the area
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
22
around the Opon No. 6 well is not a part of the commercial area.
Ecopetrol will not pay for its share of expenditures to enlarge the
commercial field until the new areas are proven and declared commercial.
Ecopetrol will participate in further development costs of the existing
commercial field.
The Opon Contract provides that the Opon Contract area will be reduced
after the end of the exploration period, or September 30, 1995. The
first acreage relinquishment of 50% was completed during 1996. The Opon
Contract area now covers 25,021.5 hectares (61,827 acres). The second
acreage relinquishment was due on September 30, 1997. By agreement with
Ecopetrol, the second relinquishment has been postponed until September
30, 1998. As consideration, the associate parties agreed to perform,
for the full Opon Contract area, surface geological studies and
petrochemical analysis, and to undertake a study to determine the
economic and technical viability of putting the shallow oil producing
wells in the Opon Contract area into production. On September 30, 1999,
the Opon Contract area will be reduced to the area of the commercial
field that is in production or development, plus a reserve zone of five
kilometers in width around the productive limit of such field. The
commercial field plus the zone surrounding such field will become the
area of exploitation. The associate parties designate the acreage to be
released. Additional wells will be required to enlarge the commercial
area and to increase the size of the area of exploitation.*
The Opon No. 6 well commenced drilling in October 1996. This well is
slightly more than 1 kilometer north of the Opon No. 3 well and is
outside the current commercial area. The well is presently estimated to
cost $30.2 million, of which Hondo Magdalena's share is 30.9%.* After
the drilling was completed, several mechanical problems in the
completion and testing of the Opon No. 6 well occurred. After there was
a failure of a portion of the guns during the initial completion attempt
in April 1997, a second set of perforating guns were fired. Cleanup and
testing on the second set of perforations commenced in May 1997 and,
while all the guns fired, the well has not flowed as anticipated. The
associate parties have suspended operations on the well in order to
fully evaluate all data from the well and prepare a plan for further
actions. Amoco Colombia has recently proposed a workover of the Opon
No. 6 well using propellant stimulation technology. A decision on the
proposal will be made in January 1998 following an economic analysis.*
The associate parties are attempting to negotiate a settlement of claims
against suppliers of services and equipment related to the problems
encountered during completion operations on the Opon No. 6 well, but no
settlement has been reached. If a settlement is not reached, the next
step will be arbitration.* No prediction of the outcome of these
matters can be made at this time.
The Opon No. 14 well, approximately 4 kilometers south of the Opon No. 4
well, commenced drilling in October 1997. The total cost of the well is
estimated to be $21.5 million, of which Hondo Magdalena will bear
30.9%.* The well is planned for a total depth of 11,000 feet and is
intended to confirm the existence of the La Paz gas and condensate
reservoir in the south of the Opon Contract area.* The drilling of the
well has progressed in accordance with its plan to this date.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
23
In July 1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol agreed
to construct a pipeline and wellhead facilities (which were not
contemplated in the Opon Contract). The parties constructed a 16 inch
pipeline approximately 88 kilometers in length from the Opon Contract
area north to Ecopetrol's gas processing plant at El Centro, and from
there to Ecopetrol's refinery at Barrancabermeja. The investment in
pipeline costs will be recovered through a pipeline tariff.* Ecopetrol
has constructed improvements at its El Centro gas processing plant to
handle incremental production from the Opon Contract area. Ecopetrol
will recover its investment through a gas processing fee.
The Comision de Regulacion de Energia y Gas (Commission for the
Regulation of Energy and Gas, "CREG"), an agency of the Ministry of
Mines and Energy of the Colombian government, regulates natural gas
pipelines and the sale of natural gas in Colombia. CREG's regulations
provide the ceiling price for natural gas and the methodology for
establishing pipeline tariffs. Based upon these regulations, Amoco
Colombia, as operator applied for a tariff for the pipeline; CREG has
not yet responded to this application.
Contracts, covering the sale of natural gas, the sale of condensate and
natural gas liquids, the processing of the gas stream, and
transportation of natural gas and liquids are complete and have been
signed by all parties. The contracts provide for: (i) the sale of 100
million cubic feet of natural gas per day for the life of the Opon
Contract at the regulated price determined semi-annually by a formula
based upon the average price received by Ecopetrol for exported fuel oil
during the prior two six-month periods (currently US$1.08 per million
British Thermal Units); (ii) the sale of condensate and natural gas
liquids at market-related and market-indexed prices; and (iii) the
processing of the gas stream at Ecopetrol's El Centro gas processing
plant for a fee of $0.159 per thousand cubic feet of gas. In a recent
amendment to the gas processing agreement the associate parties agreed
to bear the cost of processing royalty gas that is attributable to their
interests and Ecopetrol reduced the fee for processing from $0.20 to
$0.159 per thousand cubic feet of gas. Ecopetrol, as purchaser, pays
the pipeline tariff for the natural gas sold by the associate parties.
In March 1997, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol, as
sellers, signed a contract with Termo Santander de Colombia E.S.P., as
purchaser ("Termo Santander"), to supply, subject to the conditions
noted below, natural gas to an electric generation plant at the Opon
Contract area. Termo Santander's power plant is located at the Opon
Contract area. Under the contract, the sellers will supply natural gas
requested by the purchaser up to 60 million cubic feet per day. The
sellers will receive $4.2 million per year for making the gas available
for purchaser's call. Purchaser will pay 60% of the government-
regulated price (described above) for the natural gas it takes. The
sellers will also receive additional bonus payments if the power plant
achieves a price for its electrical power in excess of certain target
rates. Condensate associated with the natural gas that is delivered to
the purchaser will be separately sold to Ecopetrol. The contract
provides for substantial penalties, decreasing over the life of the
contract, to the sellers for the failure to deliver gas. The
commencement of the contract is conditioned upon the completion of the
electric generation plant and a determination by the sellers that there
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
24
are sufficient reserves to supply natural gas to the purchaser for the
entire term of the agreement. In order to begin deliveries before the
condition concerning the sufficiency of reserves is satisfied, an
interim agreement for the sale of gas to Termo Santander was signed on
November 20, 1997. The interim agreement will be effective until
January 1, 1999, or until sufficient reserves are determined through
additional work on the Opon No. 6 well or the successful completion of
the Opon No. 14 well.* The gas sales price under the interim agreement
will be equivalent to the price, including pipeline tariff, that would
have been received if the same gas were sold under the contract with
Ecopetrol described in the preceding paragraph.
The pipeline and wellsite facilities were completed in June 1997.
Ecopetrol completed the improvements to the El Centro gas plant in
November 1997. Production from the Opon field began on December 1,
1997, with gas supplied to Termo Santander for testing the first of two
turbines at the power plant. The first shipment of gas through the
pipeline began on December 5, 1997, but was interrupted for one week
shortly thereafter by a landslide. The first shipment of gas was 10
million cubic feet and the quantity is expected to increase to the
contract quantity of 100 million cubic feet per day by the end of
calendar 1997.*
The associate parties have submitted invoices to Ecopetrol under the gas
sales agreement for payments under the take-or-pay clause. Ecopetrol
has indicated that it will not pay these invoices. The associate
parties are reviewing their legal options to pursue the collection of
these invoices.*
Amoco Colombia has submitted budgets to Hondo Magdalena and ODC for
calendar years 1996, 1997 and 1998. Hondo Magdalena approved capital
expenditures for wells and the pipeline projects, and certain other
expenditures, but did not approve the proposed overhead. As of this
date, no final budget has been approved for calendar years 1996, 1997 or
1998. The parties are currently at an impasse in resolving the dispute
about overhead. Hondo Magdalena has paid invoices from Amoco Colombia,
including disputed overhead and has charged the full overhead amount to
expense. It is management's opinion that the Company is not obligated
to pay for overhead unless charged pursuant to an approved budget;
however the Company has paid Amoco Colombia's invoices, under protest
and subject to audit, in the hope of resolving the dispute. If the
dispute cannot be resolved, the joint operating agreement among Amoco
Colombia, Hondo Magdalena and ODC provides for arbitration of disputes.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
25
Discontinued Operations
-----------------------
Two of the Company's former business segments, refining and marketing
operations and real estate operations were discontinued in 1991.
On December 15, 1989, the Company suspended operations at its Newhall
refinery. Subsequently, the Company adopted a plan of disposition which
included dismantling the refinery, effecting environmental remediation
of the land and further developing the land to a condition where it may
be sold. Execution of the plan was suspended in September 1993 and the
Company is now marketing the site in its current condition and with
existing land-use entitlements. The Newhall refinery site consists of
approximately 105 acres located adjacent to a major freeway intersection
in northern Los Angeles County. See Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 and
Note 12 to the Consolidated Financial Statements in Item 8.
The Company owns in fee simple approximately 11 acres of undeveloped
land located in eastern Los Angeles County. An option to a developer on
the Company's Via Verde tract at a price of $3.1 million expires in
December 1997. The option agreement allows the Company the right to be
released from the current agreement should there be a potential sale of
the parcel to a ready and willing buyer.
On October 1, 1993 the Company completed a transaction for the sale of
its Fletcher refinery and related assets. In the agreement for the sale
of the Fletcher refinery, the Company indemnified the buyer as to
liabilities in excess of $0.3 million for certain federal and state
excise taxes arising from periods prior to the sale. As more fully
described in Note 12 to the Consolidated Financial Statements in Item 8,
the State of California issued a preliminary report in June 1996 finding
that the Fletcher refinery owed $10.8 million for certain state excise
taxes (and related penalties and interest) arising from periods when the
Company owned the Fletcher refinery. The State of California issued a
Notice of Determination in July 1997 reducing this amount to $5.7
million. Assessed amounts are subject to a process of appeals and may
be further adjusted.* The Company and the Fletcher refinery intend to
further contest the assessment through the appeals and hearing process.
The Company believes the liability it has accrued is sufficient to
provide for the amount ultimately found to be due.*
RESULTS OF OPERATIONS
Results of operations for the year ended September 30, 1997 amounted to
a loss of $12.4 million, or 90 cents per share, of which $10.8 million
arose from continuing operations and $1.6 million resulted from
discontinued operations. The Company reported a net loss of $12.7
million, or 93 cents per share, for the year ended September 30, 1996.
The 1996 loss included discontinued loss provisions of $1.3 million and
a loss of $11.4 million from continuing operations. In 1995, the
Company reported a net loss of $11.9 million, or 90 cents per share,
which included losses from discontinued operations of $5.0 million and a
loss of $6.9 million from continuing operations.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
26
As described previously, the Company had moved from a domestic oil and
gas operation to a foreign oil and gas operation. The historical
results of continuing operations contain many non-recurring
transactions. As a result, they are not comparable and are a poor
indicator of the Company's future operating results. Management expects
losses from continuing operations to continue through fiscal 1998.*
1997 vs 1996
------------
Operating costs for fiscal 1997 include an accrual of $0.4 million for
revisions to estimated plugging and abandonment costs of an offshore
unit in California. No comparable costs were incurred in fiscal 1996.
Overhead, Colombian operations decreased $0.4 million between the years
ended September 30, 1997 and 1996 primarily because:(i) year end
adjustments recorded by Amoco Colombia increasing the figure in December
1995 did not recur in December 1996 and (ii) Ecopetrol participated in
overhead expenses pertaining to the commercial operations for all of
fiscal 1997, but only the last five months of fiscal 1996.
The Company's Colombian operations undertook a seismic exploration
program during fiscal 1996. The decrease of $1.7 million in exploration
costs between the years arises because there were no comparable expenses
incurred in fiscal 1997.
The level of the Company's indebtedness to Lonrho Plc and to Amoco
Colombia under the Funding Agreement has increased by $31.1 million
between September 30, 1996 and September 30, 1997. Interest expense
increased by only $1.2 million between the years ended September 30,
1997 and 1996 because the majority of the charges from the Funding
Agreement are capitalized.
Management has the following expectations for 1998 results of
operations: revenue and related operating costs and depreciation,
depletion and amortization will increase significantly in conjunction
with the commencement of production in December 1997; overhead,
Colombian operations, general and administrative expense, and
exploration expenses should not vary significantly from 1997.* These
factors are expected to combine to produce approximately break-even
results before interest expense.* The level of interest expense to be
reported in 1998 is difficult to predict at the current time, but it
will increase substantially from 1997 if no outside financing to repay
the Funding Agreement is acquired.*
1996 vs 1995
------------
The Company's share of expenses from the Opon operation was borne solely
by Amoco Colombia during 1995 and 1994 while the Opon Nos. 3 and 4 wells
were being drilled. The increases in operating expenses, overhead,
Colombian operations and exploration costs of $0.1 million, $2.5 million
and $1.6 million, respectively, for the year ended September 30, 1996 as
compared to the year ended September 30, 1995, all arise from the
Company assuming its share of these costs in 1996. The increase in
interest expense of $0.3 million between the years arises primarily from
Colombian costs financed with the Funding Agreement.
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
27
Discontinued Operations
-----------------------
The Company implemented disposal accounting for its refining and
marketing and real estate segments during 1991. In 1997, the Company
recorded loss provisions of $1.2 million and $0.4 million for its
refining and marketing and real estate segments, respectively, as
described previously. Loss provisions of $0.4 million for the refining
and marketing segment and $0.9 million for the real estate segment were
recorded in 1996. Loss provisions for 1995 amounted to $0.7 million and
$4.3 million for refining and marketing and real estate, respectively.
Operating losses from discontinued operations of $0.3 million, $0.1
million, and $0.4 million for 1997, 1996, and 1995, respectively, were
charged against loss provisions established in earlier periods.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal, 1997, cash inflows of $14.6 million arose from borrowings
from Lonrho Plc. The Company utilized cash of $3.9 million and $0.4
million to finance continuing and discontinued operations, respectively,
$8.9 million for capital expenditures, and made scheduled debt
repayments of $0.8 million. At September 30, 1997, the Company had cash
balances of $1.0 million.
In December 1993, the Company restructured the terms of its debts to
Lonrho Plc. The revised terms included reduction of interest rates to a
fixed rate of 6% and provisions allowing the Company to offer payment of
future interest in shares of its common stock, and allowing Lonrho Plc
to either accept such payment in kind or add the amount of the interest
due to principal. The ability to pay interest in kind or capitalize
interest allows the Company to service its debt while cash resources are
scarce.
The Company obtained a facility loan of $13.5 million in a Revolving
Credit Agreement dated as of June 28, 1996, between the Company and
Thamesedge, Ltd., a subsidiary of Lonrho Plc. This loan was amended and
restated, as described below. Under a December 1996 letter agreement,
as consideration for extension of maturities and certain other financial
undertakings, the Company granted to Lonrho a security interest in all
of the shares of Hondo Magdalena. The Company signed a Security
Interest Agreement dated as of May 13, 1997 to document the pledge of
the Hondo Magdalena shares. The Company also agreed to give Lonrho an
option to convert $13.5 million of existing loans with an interest rate
of 6% into the Company's common stock. The debt will be convertible at
Lonrho's option at any time prior to January 1, 1998 at a rate of
$12.375 per share. The portion of the debt that may be converted into
common stock is not secured by the pledge of the Hondo Magdalena shares.
The option to convert the debt into common stock was approved by the
Company's shareholders at the 1997 Annual Meeting.
In July 1997, the Company and Thamesedge, Ltd. agreed to amend and
restate the June 1996 Revolving Credit Agreement. Under the Amended and
Restated Revolving Credit Agreement dated as of July 2, 1997, Thamesedge
agreed to make additional advances of $7.0 million to the Company,
making the total amount of the loan $20.5 million. The interest rate
remains 13%, due semi-annually; as provided in other debts to Thamesedge
and described above, the Company may make interest payments in shares of
its common stock. The loan now matures January 1, 1999. As additional
28
consideration for the loan, the Company agreed to give Lonrho an option
to convert $7.0 million of existing debt with an interest rate of 6%
into the Company's shares at $7.70 per share (110% of the closing price
on July 1, 1997). The option to convert must be approved by the
Company's shareholders at the next annual meeting. If the option to
convert is not approved by the shareholders, the interest rate on $7
million of existing debt will increase to 13.5%. Lonrho has further
agreed to vote its shares on the matter of the option to convert in
proportion to the votes cast by disinterested shareholders. As of
September 30, 1997, $14.6 million of this facility has been drawn.
In August 1997, Thamesedge Ltd. assigned all of its interest in the
Company's indebtedness to London Australian & General Property Company
Limited ("LAGP"), a subsidiary of Lonrho Plc. In December 1997 the
Company restructured the terms of certain debt to LAGP, and obtained an
additional funding commitment of $7.0 million for fiscal 1998. The
Company extended all of the above described indebtedness due on January
1, 1998 to January 15, 1999 and amended the notes by adding a cross-
default provision and a new event of default. The new event of default
requires the Company to furnish to LAGP by October 1, 1998 a reserve
report that shows a minimum of 13 billion cubic feet of gas increase
over the 1997 proved reserve figure. In the event of a default under
this new provision, LAGP has the right to declare all the loans in
default and demand payment. The new $7.0 million commitment from Lonrho
Plc for fiscal 1998 will be added to the July 1997 Amended and Restated
Revolving Credit Agreement under the same terms and condition as the
existing agreement explained above. The Company presently owes Lonrho
Plc $99.9 million, of which $93.8 million is due January 15, 1999.
On May 5, 1995, Hondo Magdalena, ODC and Amoco Colombia entered into a
Funding Agreement for Tier I Development Project costs (the "Funding
Agreement") for the interim financing of costs associated with the
construction of a pipeline from the Opon Contract area (see Note 6 to
the Consolidated Financial Statements in Item 8) and certain other costs
related to the Opon Contract. The Funding Agreement became effective on
July 26, 1995. Hondo Magdalena has financed its share of the costs
(including overhead) for the pipeline and an approved geological and
geophysical work program. The Funding Agreement provides that Hondo
Magdalena may repay the amounts financed up to 365 days after the date
of first production, along with an equity premium computed on a 22%
annualized interest rate. The equity premium is computed monthly on
Hondo Magdalena's share of expenditures (including any amounts to be
later recouped from Ecopetrol after commerciality). Alternatively, from
the date of first production until 90 days thereafter, Hondo Magdalena
may elect to repay 125% of its share (excluding any amounts to be later
recouped from Ecopetrol after commerciality) of the total costs
accumulated up to the date of repayment. If the financed amounts are
not repaid within 365 days after the date of first production, an
additional penalty of 100% of the amount then due would be recovered out
of Hondo Magdalena's revenues. Hondo Magdalena's revenues from
production of the first 80 million cubic feet of natural gas and
corresponding condensate and natural gas liquids are pledged to secure
its obligations under the Funding Agreement. Production may be deemed
to have commenced in December 1997 and the Company does not have the
commitments or funds to repay the Funding Agreement within either the 90
or 365 day option periods.* If the Company does not secure financing to
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
29
repay the Funding Agreement prior to 365 days after the date of first
production, it will incur the 100% penalty and will pay the increased
amount out of production, as described above.*
Based upon the Company's budget and current information, management
believes existing cash, available facilities, Lonrho commitments, net
proceeds from the sale of Opon gas and the Funding Agreement will be
sufficient to finance the Company's known obligations (the pipeline and
related facilities, estimated completion expenses of the Opon No. 6
well, estimated drilling and completion expenses of the Opon No. 14
well, overhead obligations unrelated to capital projects and other
business activities) during fiscal 1998.* However, management believes
the Company will need additional cash to participate in the drilling of
additional wells in Colombia and/or to participate in other capital
projects.* If the Company becomes obligated for the drilling of an
additional well, or other capital projects, the Company has the option
to not participate in some or all of the capital projects.* In
management's view, use of this election would be a last resort to
preserve the Company's existing interest in the Opon Contract area
because substantial penalties would be incurred by not participating.
Cash flow from operations which commenced in December 1997 is not
expected to be a source of free funds since pursuant to the Funding
Agreement, Amoco receives the proceeds from the first 80 million cubic
feet of gas and associated liquids.* Any additional free cash flow is
committed to existing loan obligations. Management is reviewing several
options for raising funds including sale of the Company's 15.4% interest
in the pipeline.* Management continues to pursue discussions with a
number of financial institutions regarding debt or equity financing of
the Company's future obligations for the Opon project but has received
no commitments.* Additional deliverability from current drilling
projects and adequate production capability through the pipeline
infrastructure will be important factors in obtaining third party
financing.* In the interim, the Company must continue to rely on the
financial support of Lonrho.* While the Company will continue to seek
permanent financing in the near-term, there can be no assurance that the
Opon Project will be successfully developed or that additional debt or
equity funds will become available.* Furthermore, the success of the
Opon No. 14 well is critical to obtaining third party financing (either
debt or equity) and for the decision by the associate parties to the
Opon Contract to continue the development of the Opon project.*
____________________
* This statement may be considered forward-looking. See Cautionary
Statements under General Discussion, above.
30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HONDO OIL & GAS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors 32
Financial Statements:
Consolidated Balance Sheets as of
September 30, 1997 and 1996 33
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995 34
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended September 30, 1997, 1996 and 1995 35
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 36
Notes to Consolidated Financial Statements 37
Supplementary Information about Oil and Gas Producing Activities
and Reserves (Unaudited) 56
31
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Hondo Oil & Gas Company
We have audited the accompanying consolidated balance sheets of Hondo Oil & Gas
Company as of September 30, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended September 30, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hondo
Oil & Gas Company at September 30, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Denver, Colorado
November 21, 1997,
except for Note 5 as to which the date is
December 18, 1997
</AUDIT-REPORT>
32
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
September 30,
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $1,019 $374
Accounts receivable, net of allowances
of $44 and $332, respectively 296 317
Prepaid expenses and other 1 79
----------- -----------
Total current assets 1,316 770
Properties, net (Note 3) 40,612 21,248
Net assets of discontinued operations (Note 12) 2,137 2,202
Other assets 865 320
----------- -----------
$44,930 $24,540
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $3,464 $2,849
Current portion of long-term debt (Note 5) 265 738
Accrued expenses and other (Note 4) 3,421 2,292
----------- -----------
Total current liabilities 7,150 5,879
Long-term debt, including $99,943 and
$80,109, respectively, payable to a
related party (Note 5) 102,903 83,334
Funding agreement (Note 6) 22,788 11,513
Other liabilities, including $3,407 and
$2,411, respectively, payable to a
related party (Note 7) 5,262 4,705
----------- -----------
138,103 105,431
Contingent liabilities (Notes 10 and 12)
Shareholders' equity (deficit) (Notes 5 and 8):
Preferred stock -- --
Common stock, $1 par value, 30,000,000 shares
authorized; shares issued and outstanding:
13,788,424 and 13,776,194, respectively 13,788 13,776
Additional paid-in capital 53,675 53,581
Accumulated deficit (160,636) (148,248)
----------- -----------
(93,173) (80,891)
----------- -----------
$44,930 $24,540
=========== ===========
The accompanying notes are an integral part of these financial statements.
33
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Share and Per Share Data)
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
REVENUES
Sales and operating revenue $4 $2 $23
Other income 25 110 23
----------- ----------- -----------
29 112 46
----------- ----------- -----------
COSTS AND EXPENSES
Operating costs 575 169 47
Depreciation, depletion, and amortization 230 156 266
Overhead, Colombian operations 2,183 2,576 119
General and administrative 1,582 1,779 1,608
Exploration costs 27 1,769 169
Interest on indebtedness including $6,222,
$4,786 and $4,659, respectively, to a
related party (Note 5) 6,222 5,009 4,680
Loss on sale of assets -- 6 --
----------- ----------- -----------
10,819 11,464 6,889
----------- ----------- -----------
Loss from continuing operations
before income taxes (10,790) (11,352) (6,843)
Income tax expense (benefit) (Note 9) (2) 5 113
----------- ----------- -----------
Loss from continuing operations (10,788) (11,357) (6,956)
Loss from discontinued operations (Note 12) (1,600) (1,300) (4,950)
----------- ----------- -----------
Net Loss $(12,388) $(12,657) $(11,906)
=========== =========== ===========
Loss per share:
Continuing operations $(0.78) $(0.83) $(0.53)
Discontinued operations (0.12) (0.10) (0.37)
----------- ----------- -----------
Net loss per share $(0.90) $(0.93) $(0.90)
=========== =========== ===========
Weighted average common shares outstanding 13,780,963 13,672,722 13,171,049
The accompanying notes are an integral part of these financial statements.
34
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In Thousands Except Common Shares)
Common Stock Retained
------------------------ Additional Earnings
Paid-In (Accumulated
Shares Amount Capital Deficit)
----------- ----------- ----------- -----------
Balance at October 1, 1994 13,032,276 $13,032 $43,972 $(123,685)
Purchase of interest in Opon Association
Contract with common stock (Note 3) 44,438 44 845 --
Payment of interest with common stock (Note 5) 189,080 189 2,104 --
Exercise of stock options (Note 8) 157,584 158 1,883 --
Net loss -- -- -- (11,906)
----------- ----------- ----------- -----------
Balance at September 30, 1995 13,423,378 13,423 48,804 (135,591)
Payment of interest with common stock (Note 5) 319,316 319 4,423 --
Exercise of stock options (Note 8) 33,500 34 354 --
Net loss -- -- -- (12,657)
----------- ----------- ----------- -----------
Balance at September 30, 1996 13,776,194 13,776 53,581 (148,248)
Payment of liabilities with common stock 12,230 12 94 --
Net loss -- -- -- (12,388)
----------- ----------- ----------- -----------
Balance at September 30, 1997 13,788,424 $13,788 $53,675 $(160,636)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
35
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Pretax loss from continuing operations $(10,790) $(11,352) $(6,843)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation, depletion and amortization 230 156 266
Loss on sale of assets -- 6 --
Accrued interest added to long-term debt 5,261 34 2,385
Accrued interest paid with common stock -- 4,742 2,292
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 21 10 199
Prepaid expenses and other 78 (72) 26
Other assets (731) (12) (201)
Increase (decrease) in:
Accounts payable 230 1,189 159
Accrued expenses and other (40) -- 123
Funding agreement 1,961 3,361 275
Other liabilities (118) (178) (357)
----------- ----------- -----------
Net cash used by continuing operations (3,898) (2,116) (1,676)
Net cash used by discontinued operations (366) (210) (473)
----------- ----------- -----------
Net cash used by operating activities (4,264) (2,326) (2,149)
----------- ----------- -----------
Cash flows from investing activities:
Sale of assets -- 1 4,804
Capital expenditures (8,926) (913) (2,021)
----------- ----------- -----------
Net cash provided (used) by investing activities (8,926) (912) 2,783
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings 14,600 1,825 3,175
Principal payments on long-term debt (765) (235) (5,220)
Issuance of stock -- 251 2,041
----------- ----------- -----------
Net cash provided (used) by financing activities 13,835 1,841 (4)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 645 (1,397) 630
Cash and cash equivalents at the beginning of the year 374 1,771 1,141
----------- ----------- -----------
Cash and cash equivalents at the end of the year $1,019 $374 $1,771
=========== =========== ===========
Refer to Notes 3 and 6 for descriptions of non-cash transactions.
The accompanying notes are an integral part of these financial statements.
36
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
1) Nature of Business
------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an independent
oil and gas exploration and development company. The Hondo Company owns
62.7% of Hondo Oil & Gas Company. Lonrho Plc ("Lonrho"), a publicly-
traded English company and the Company's primary lender, owns 100% of The
Hondo Company and owns an additional 5.7% of the Company through another
wholly-owned subsidiary. In total, Lonrho controls 68.4% of the Company's
outstanding shares.
During 1991 the Company adopted plans of disposal for its refining and
marketing and real estate operations. Substantially all of the refining an
marketing assets were sold in 1993. Following the sale of substantially all
of its domestic oil and gas properties in 1992, the Company's sole
continuing business activity is exploitation of an oil and gas concession in
Colombia, South America.
The Company's wholly-owned subsidiary, Hondo Magdalena Oil & Gas Limited
("Hondo Magdalena"), became involved in the Opon Association Contract (the
"Opon Contract") in Colombia in 1991. Amoco Colombia Petroleum Company
("Amoco Colombia") earned an interest in the Opon Contract through a Farmout
Agreement executed in 1993. Amoco Colombia, Hondo Magdalena, and Opon
Development Company presently have working interests of approximately 60%,
31%, and 9%, respectively. The Colombian national oil company, Ecopetrol,
has the right to acquire 50% of the Opon Contract when commerciality is
declared and will reimburse the associate parties (out of future production)
for 50% of the direct exploration costs. In 1995, Ecopetrol agreed to
include certain costs related primarily to construction of a pipeline and
wellsite facilities in the commercial area, and to pay cash for its share of
those costs. Commerciality was declared for a portion of the Contract area
in May 1996 and Ecopetrol reimbursed the associate parties for its share of
the above described costs in September 1996 (See Note 6). Subsequent to the
declaration of commerciality, the Company's share of costs for activities
within the commercial area is approximately 15%.
Amoco Colombia was obligated by the 1993 Farmout Agreement to fund all but
$2,000 of Hondo Magdalena's share of drilling and related costs during the
drilling of two exploration wells and to make certain payments to Hondo
Magdalena. Amoco Colombia spent approximately $56,500 to drill the first
two exploratory natural gas wells in 1994 and 1995. The combined results of
production tests of these wells indicate they will produce at a daily rate
of 103 million cubic feet of natural gas and 3,900 barrels of condensate.
The Company was able to attribute proved reserves to this discovery as of
September 30, 1996 following completion of negotiations for sales of the
discovered hydrocarbons. As more fully described in Note 6, Amoco Colombia
agreed to finance the Company's share of costs to build a natural gas
pipeline, construct wellhead facilities, and acquire seismic data, including
related overhead. Acquisition of the seismic data was completed during
fiscal 1996, and construction of the pipeline and related wellhead
facilities was completed during fiscal 1997. The Company began earning
revenue in December 1997.
37
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
1) Nature of Business (continued)
------------------------------
A third well was drilled during fiscal 1997. In April and May 1997, several
mechanical problems were encountered during the completion and testing of
the third well. Further work on the well has been suspended until a plan
has been finalized (estimated to occur in January 1998). Drilling of a
fourth well commenced in October 1997. Both of the third and fourth wells
are located in the non-commercial portion of the concession, therefore,
Ecopetrol does not pay a share of the drilling costs.
As more fully described in Note 6, a substantial portion of the Company's
revenue is pledged to repayment of the Funding Agreement. Cash from
operations after Funding Agreement repayments will not be sufficient to fund
Colombian operating costs and capital expenditures, and U.S. overheads,
during fiscal 1998. Based upon the Company's budget, management believes
existing facilities and further commitments from Lonrho and the Funding
Agreement will be sufficient to finance the Company's known cash
requirements during fiscal 1998. The Company will require significant
additional funding for the continued development of the Opon Contract area
and repayment of the Funding Agreement subsequent to fiscal 1998. The
Company has the option to not participate in some or all of the Opon capital
projects which may be proposed in the future and the option to allow the
Funding Agreement to be repaid entirely from production. However,
substantial penalties would be incurred by choosing either of these
alternatives.
The Company continues to be dependent on its majority shareholder, Lonrho
Plc, to fund its future cash needs. Management believes that outside
financing will not be forthcoming until Opon 14 is successfully completed in
the spring of 1998. Obtaining permanent financing for development of the
Company's Opon project is vital to the Company's ability to successfully
exploit this concession in the future. There can be no assurance that the
Opon Project will be successfully developed or that additional debt or
equity funds will become available.
2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil include the accounts of
all subsidiaries, all of which are wholly owned. All significant
intercompany transactions have been eliminated.
In 1991, the Company adopted plans of disposal for its refining and
marketing and its real estate segments, respectively. Accordingly, the
results of operations and the net assets of the discontinued segments have
been reclassified to discontinued operations for all periods presented.
Assets of discontinued operations are recorded at the lower of cost or net
realizable value. Refer to Note 12.
38
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(b) Cash Equivalents
----------------
Cash equivalents represent highly liquid investments with original
maturities of three months or less.
(c) Oil and Gas Properties
----------------------
Oil and gas properties are accounted for using the successful efforts
method. Under this method, property acquisition costs are capitalized when
incurred. Exploratory geological and geophysical costs and general and
administrative costs, including salaries, are expensed as incurred. The
Company capitalizes interest expense for individual capital projects
requiring more than three months for completion and costing more than
$1,000. The costs of drilling exploratory wells are capitalized pending
determination of whether the wells have found proved reserves. If proved
reserves are not discovered, such dry hole costs are expensed. All
developmental drilling costs, including those for unsuccessful wells, are
capitalized.
Acquisition costs of unproved properties which are considered to be
individually significant are periodically assessed for impairment on a
property-by-property basis. Individually insignificant properties are
assessed for impairment as a group. Any decline in value is included in the
statement of operations in exploration costs.
Intangible drilling and development costs and tangible equipment are
depleted by the units-of-production method using proved developed reserves
on a field basis. Leasehold costs are also depleted on a field basis using
total proved reserves. Estimates of proved reserves are based upon reports
of independent petroleum engineers.
(d) Other Fixed Assets
------------------
Other fixed assets are recorded at historical cost and are depreciated by
the straight-line method using useful lives of 7 to 10 years.
(e) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. Under the new requirements, the dilutive effect of
stock options is to be excluded from the primary earnings per share
computation. The Company has incurred losses in each of the periods covered
in these financial statements, thereby making the inclusion of stock options
in the primary earnings per share computation antidilutive. Accordingly,
stock options have already been excluded from the primary earnings per share
computation and previously reported primary earnings per share amounts do
not need to be restated. Fully diluted per share amounts are the same as
primary per share amounts and, accordingly, are not presented.
39
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(f) Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes." Under Statement 109, the liability method is
used in accounting for income taxes. Deferred tax assets and liabilities
are determined based on reversals of differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted
effective tax rates and laws that will be in effect when the differences are
expected to reverse.
Investment tax credits are accounted for by the flow-through method which
recognizes related benefits in the year realized.
(g) Loan Fees
---------
Capitalized loan fees pertaining to long-term loans are included in other
assets. The loan fees are stated at cost and are amortized by the
straight-line method, which approximates the level yield method, over the
life of the related loan.
(h) Foreign Currency Translation
----------------------------
The Company's Colombian business is conducted in a highly inflationary
economic environment. Accordingly, the financial statements of the
Company's foreign subsidiary are remeasured as if the functional currency
were the U.S. dollar using historical exchange rates. Exchange gains and
losses, which have been immaterial to date, are included in operating costs.
(i) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(j) Fair Value of Financial Instruments
-----------------------------------
SFAS Statement No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosures of fair value information about financial
instruments for which it is practicable to estimate that value. The
Company's financial instruments include: cash and cash equivalents,
receivables, accounts payable, long-term debt, the Funding Agreement, and
certain other long-term liabilities. Disclosures of fair values determined
in accordance with SFAS No. 107 are included in Notes 5, 6, and 7. The
Company believes that the recorded values approximate fair values for
financial instruments for which no separate disclosure of fair value is
made.
40
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(k) Stock Option Valuation
----------------------
The Company implemented the disclosure requirements of SFAS No. 123,
Accounting and Disclosure of Stock-Based Compensation as of September 30,
1997. The Statement gives companies the option to either follow fair value
accounting or to continue to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. The Company has elected to continue to follow APB No. 25
for recognition of expense from stock options and stock-based awards.
Therefore, implementation of the Statement had no impact on results of
operations for any of the years reported.
(l) Reclassifications
-----------------
Certain reclassifications have been made to the prior years' amounts to make
them comparable to the fiscal 1997 presentation. These additional changes
had no impact on previously reported results of operations or shareholders'
equity (deficit).
3) Properties
----------
Properties, at cost, consist of the following:
September 30,
1997 1996
----------- -----------
Oil and gas properties (Colombia):
Proved $11,923 $11,803
Accumulated depletion, depreciation
and amortization -- --
----------- -----------
11,923 11,803
----------- -----------
Other properties - Colombia:
Wellsite facilities 4,689 2,039
Pipelines 12,061 5,398
Wells in progress 11,821 1,858
Other properties - domestic
Other fixed assets 323 311
Accumulated depreciation (205) (161)
----------- -----------
$40,612 $21,248
=========== ===========
41
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
3) Properties (continued)
----------------------
The balance of wells in progress includes non-cash increases of $674 and
$1,225 which were accrued in accounts payable as of September 30, 1997 and
1996, respectively. The Company capitalized interest of $782 and $180 in
the balance of wells in progress for the years ended September 30, 1997
and 1996, respectively. The balances of wellsite facilities and pipelines
include non-cash increases of $6,538 and $7,968 for 1997 and 1996,
respectively, which were charged to the Funding Agreement (Note 6). The
balances of wells in progress, wellsite facilities and pipelines include
a non-cash decrease of $2,916 for 1996 pertaining to amounts due from
Ecopetrol under the commerciality declaration (See Note 1), of which $2,629
had been collected and applied to the Funding Agreement as of September 30,
1997. The balance of $287 was retained by Ecopetrol subject to completion
of an audit and is included in accounts receivable as of September 30, 1997.
Total costs incurred (both capitalized and expensed) in Colombia for oil and
gas producing activities were:
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
Property acquisition costs (a) $-- $38 $889
=========== =========== ===========
Exploration costs $10,051 $3,731 $169
=========== =========== ===========
Development costs $2,709 $2,558 $190
=========== =========== ===========
(a) In September 1995, the Company acquired an additional 0.88875%
interest in the Opon Contract by the issuance of 44,438 shares of its
common stock.
4) Accrued expenses
----------------
Accrued expenses consist of the following:
September 30,
1997 1996
----------- -----------
Refining and marketing costs (Note 12) $3,198 $2,028
Other 223 264
----------- -----------
$3,421 $2,292
=========== ===========
42
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
5) Long-Term Debt
--------------
Long-term debt consists of the following: September 30,
1997 1996
----------- -----------
Notes payable to Lonrho Plc (a),(b):
Note A (c) $3,479 $3,277
Note B (c) 4,535 4,271
Note C (a),(d) 38,577 36,361
Note D (d) 33,126 31,200
Note E (e) 5,294 5,000
Note F (f) 14,932 --
Pollution Control Revenue Bonds (g) 2,225 2,475
Industrial Development Revenue Bonds (g) 1,000 1,000
Other -- 488
----------- -----------
103,168 84,072
Less current maturities (265) (738)
----------- -----------
$102,903 $83,334
=========== ===========
Maturities are as follows for the years ending September 30:
1998 $265
1999 93,812
2000 1,898
2001 1,918
2002 1,938
Thereafter 3,337
-----------
$103,168
===========
(a) In December 1997, the Company and Lonrho agreed to defer commencement
of principal amortization for Notes A through E. The descriptions in
(b) through (e) below reflect the revisions. As consideration for
extensions and certain other financial undertakings received from
Lonrho in 1996, the Company granted to Lonrho a security interest in
all of the shares of Hondo Magdalena and agreed to give Lonrho an
option to convert $13,500 of Note C into the Company's common stock at
a rate of $12.375 per share. The portion of the debt that may be
converted into common stock will not be secured by the pledge of the
Hondo Magdalena shares. In 1997, as consideration for extension of
the term of Note F and the granting of $7,000 additional credit
thereunder, the Company gave Lonrho an option to convert another
$7,000 of Note C into the Company's common stock at a rate of $7.70
per share. The debt will be convertible at Lonrho's option at any
time prior to maturity. The option to convert the debt into common
stock given in 1997 will be subject to shareholder approval at the
Company's 1998 annual meeting. If the conversion option is not
approved by the shareholders, the interest rate on the $7,000 will
revert to 13.5%, the rate of interest on such debt prior to the 1993
restructuring.
43
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(b) The following terms apply to Notes A through E:
(1) Interest is payable semiannually at a rate of 6%.
(2) If management determines sufficient cash is not available to pay
interest, management may offer to issue the Company's unregistered
stock valued at the American Stock Exchange closing price on the
interest due date as payment in kind. Lonrho may choose to either add
the accrued interest to the balance of the debt outstanding or accept
the payment in kind. The Company has an obligation to register any
shares issued in connection with the above if so requested by Lonrho.
(3) Accrued interest of $3,407, $2,823, $2,411 and $2,354 has been
added to the outstanding debt as of October 1, 1997, April 1, 1997,
October 1, 1996, and October 1, 1994, respectively. Accrued interest
of $2,375, $2,367 and $2,293 has been paid by the issuance of 197,944,
121,372 and 189,080 shares, respectively, of the Company's common
stock for amounts due on April 1, 1996, October 1, 1995 and April 1,
1995, respectively.
(4) As consideration for past deferrals of interest and principal
payments due under the terms of the first four notes, the Company has
granted Lonrho Plc a 5% share of the Company's net profits, as
defined, under the Opon Contract. Following repayment of these notes,
Lonrho's entitlement will be reduced by half.
(5) If the Company does not furnish to Lonrho by October 1, 1998 a
report that shows an increase in proved gas reserves of 13,000,000
mcf, then Lonrho has the right to declare Notes A through E in default
and demand payment.
(c) Notes A and B are secured by mortgages on the Company's real estate
included in discontinued operations. Absent repayment in full as a
result of the sale of the securing real estate, principal amortization
in ten equal semiannual installments will commence January 15, 1999.
Note A is secured by the Company's Via Verde Bluffs real estate. Note
B is secured by the Company's Valley Gateway real estate.
(d) Notes C and D are secured by the Company's Valley Gateway real estate.
Notes C and D are due January 15, 1999 and are subordinated to the
Company's other indebtedness existing at September 30, 1997.
(e) In October 1994, the Company received $4,800, net of withholding
taxes, from Amoco Colombia under the terms of the Farmout Agreement
(See Note 1). Also in October 1994, the Company paid $5,000 to Lonrho
Plc to reduce the balance of Note D and the related interest expense.
At the same time, Lonrho Plc made available $5,000 in the form of a
new facility loan to be drawn as needed by the Company. The Company
drew $3,175 of this facility loan during 1995 and the remaining $1,825
during 1996. Note E is due January 15, 1999.
(f) In June 1996, Lonrho Plc agreed to provide the Company an additional
facility loan of $13,500 at a rate of 13%, payable semiannually. In
July 1997, the loan was amended to extend the maturity date to January
1, 1999 and revise the amount available to $20,500. The provisions
for payment of interest with the Company's common shares described in
(b)(2) above apply to this loan. The loan is secured by free cash
flow, as defined, from Hondo Magdalena's operations. The Company drew
$14,600 during fiscal 1997 and additional amounts of $1,700 and $1,400
in October and December 1997, respectively.
44
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(g) Both issues of these tax-exempt bonds were issued under the authority
of the California Pollution Control Financing Authority. The
Pollution Control Revenue bonds bear interest at an average rate of
6.15%, payable semiannually, and mature serially through November 1,
2003. The Industrial Development Revenue Bonds bear interest at a
rate of 7.5%, payable semiannually, and mature September 1, 2011.
Both bond issues are collateralized by certain refinery facilities and
equipment located at Valley Gateway and the Fletcher refinery. The
collateral at the Fletcher refinery is leased to the buyer for a
nominal annual fee. The trustee of the bonds was notified of changes
to the collateral in 1993 and the trustee has not taken any action to
declare a breach of covenant or a default. The Company routinely
communicates with the Trustee and has received no indication that the
Trustee is contemplating any such action.
According to the terms of the various credit agreements, the Company is
restricted in its ability to: (a) incur additional debt; and (b) pay
dividends on and/or redeem capital stock.
Hondo Oil paid interest of $219, $234 and $248 for the years ended September
30, 1997, 1996 and 1995, respectively. In accordance with the provisions of
SFAS No. 107, the Company has estimated the fair value of its long-term debt
to be $97,414 as of September 30, 1997 using a discount rate of 13%.
6) Funding Agreement
-----------------
Effective July 26, 1995, Hondo Magdalena, Amoco Colombia, and Opon
Development Company entered into a Funding Agreement for Tier I Development
Project costs (the "Funding Agreement") for the interim financing of costs
associated with the construction of a pipeline from the Opon Contract area,
certain wellsite facilities, a geological and geophysical work program, and
for related overheads. The Funding Agreement provides that Hondo Magdalena
may repay the amounts financed by Amoco Colombia from prior to the date of
first production until 365 days thereafter, along with an equity premium
computed using a 22% annualized interest rate. The equity premium will be
computed monthly on Hondo Magdalena's share of expenditures (including any
amounts to be recouped from Ecopetrol after commerciality). Alternatively,
from the date of first production until 90 days thereafter, Hondo Magdalena
may elect to repay 125% of its share (excluding any amounts to be recouped
from Ecopetrol after commerciality) of the total costs accumulated up to the
date of repayment. If the financed amounts are not repaid within 365 days
after the date of first production, an additional penalty of 100% of the
amount then due would be recovered out of Hondo Magdalena's revenues. Hondo
Magdalena's revenues from production of the first 80 million cubic feet of
natural gas and related condensate and natural gas liquids are pledged to
secure its obligations under the Funding Agreement.
45
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
6) Funding Agreement (continued)
-----------------------------
The Company has accrued equity premiums computed in accordance with the 22%
annualized interest rate option. Equity premiums of $2,774, $1,262 and $57
related to the financed pipeline costs and wellsite facilities have been
capitalized for the years ended September 30, 1997, 1996 and 1995,
respectively. The remainder of the equity premiums accrued to date,
relating to the financed geological and geophysical work and overheads, have
been expensed.
The balance of the Funding Agreement consists of the following:
September 30,
1997 1996
----------- -----------
Outstanding principal $17,566 $9,771
Equity premiums 5,222 1,742
----------- -----------
$22,788 $11,513
=========== ===========
The balance of the Funding Agreement was reduced by $2,629 in September 1996
by application of the Company's share of payments from Ecopetrol arising
from the declaration of commerciality (Note 1).
In accordance with the provisions of SFAS No. 107, the Company has estimated
the fair value of the Funding Agreement to be $24,690 as of September 30,
1997 using a discount rate of 13%.
7) Other Liabilities
-----------------
Other liabilities consist of the following:
September 30,
1997 1996
----------- -----------
Interest payable to Lonrho Plc (Note 5) $3,407 $2,411
City of Long Beach (a) 1,594 1,533
Other 261 761
----------- -----------
$5,262 $4,705
=========== ===========
(a) Due January 1, 1999 together with interest accrued at 6%. In
accordance with the provisions of SFAS No. 107, the Company has
estimated the fair value of this liability to be $1,462 as of
September 30, 1997 using a discount rate of 13%.
46
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
8) Shareholders' Equity
--------------------
In addition to its common shares, the Company has authorized 10,000,000
shares of one dollar par value preferred stock. No preferred shares have
been issued as of September 30, 1997.
The Company has a stock option plan under which options to purchase common
shares of the Company are granted to certain officers, directors and key
employees. The options are priced equal to or greater than the market price
in effect at the date of grant. Accordingly, no compensation expense is
recognized in connection with this plan. Generally, options granted under
the plan have a term of five years, are half vested after six months of
service and are fully vested after eighteen months of service. As of
September 30, 1997 and 1996 additional options of 94,000 and 15,000,
respectively, were available for future grants under the stock option plan.
The information for 1995 in the table below includes the exercise of 74,700
options priced at $19.00 per share originating from the Company's terminated
1982 Stock Option Plan. The Company granted an option for 25,000 shares at
$7.50 per share to a former officer in March 1995. The option was not
granted under a stock option plan and was priced less than the market price
at date of grant. Compensation of $138 was included in general and
administrative expense at the date of grant. The option was exercised
during 1996. All other reported options originate from the Company's 1993
Stock Incentive Plan.
As required by SFAS 123 "Accounting for Stock-Based Compensation," the
Company has determined the fair value of options granted in 1997 and 1996
and the pro forma effect on net loss and net loss per share as if
compensation expense equal to that fair value had been recorded. The fair
value at date of grant was determined using the Black-Scholes option pricing
model and the assumptions listed in the table below. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, management believes the model used does not necessarily provide a
reliable single measure of the fair value of its stock options. The
estimated fair value of an option is included in pro forma expense as it
vests. Therefore, as required by the transition provisions of SFAS 123,
options granted in 1995 and vesting in 1996 were not valued and were not
included in the pro forma computations.
47
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
8) Shareholders' Equity (continued)
--------------------------------
The following table summarizes information relative to stock options
outstanding:
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
Options outstanding - beginning of year 218,232 187,732 220,316
Granted 58,000 64,000 125,000
Exercised -- (33,500) (157,584)
----------- ----------- -----------
Options outstanding - end of year 276,232 218,232 187,732
=========== =========== ===========
Options exercisable - end of year 186,232 154,232 137,732
Weighted-average exercise prices:
Options outstanding - beginning of year $12.57 $11.14 $11.40
Granted
Contractual price $9.00 $14.13 $12.96
Fair value price $3.99 $6.24 NA
Exercised NA $7.50 $12.95
Options outstanding - end of year $11.82 $12.57 $11.14
Options exercisable - end of year $12.30 $11.93 $9.98
End of year - outstanding options:
Low exercise price $7.50 $7.50 $7.50
High exercise price $14.63 $14.63 $14.63
Average remaining contractual life (years) 2.81 3.32 3.29
Fair value of options granted:
Net loss - as reported $(12,388) $(12,657) NA
Net loss - pro forma $(12,630) $(12,773) NA
Loss per share - as reported $(0.90) $(0.93) NA
Loss per share - pro forma $(0.92) $(0.93) NA
Assumptions for fair value determination:
Expected life (years) 3.56 3.56 NA
Volatility 0.52 0.52 NA
Interest rate 6.41% 6.30% NA
Dividend yield 0.00% 0.00% NA
48
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
9) Income Taxes
------------
Income tax expense (benefit) reported in the statements of operations is
comprised entirely of current income taxes paid (received) in Colombia.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
September 30,
1997 1996
----------- -----------
Deferred tax assets, long-term:
Domestic net operating loss carryforwards $44,953 $43,734
Foreign income tax basis of
capitalized assets in excess of
financial reporting basis 1,178 1,432
Income tax basis of real estate in
excess of financial reporting basis 1,991 1,965
Financial reporting basis of accrued
liabilities in excess of tax basis 1,311 1,045
Valuation allowances (48,850) (47,467)
----------- -----------
583 709
----------- -----------
Deferred tax liabilities, long-term:
Foreign income tax depreciation in
excess of financial reporting
depreciation 583 709
----------- -----------
583 709
----------- -----------
Net deferred tax liability $-- $--
=========== ===========
The differences between income tax expense (benefit) from continuing opera-
tions and the amount computed by applying the statutory Federal income tax
rate to loss from continuing operations before income taxes are as follows:
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
Benefit computed at the effective
statutory rate $(4,273) $(4,499) $(2,365)
Nondeductible interest 2,468 1,425 --
Losses from foreign operations 999 1,919 215
Foreign income tax expense (2) 5 113
Net operating loss for which no benefit
is recognized 806 1,155 2,150
----------- ----------- -----------
$(2) $5 $113
=========== =========== ===========
49
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
9) Income Taxes (continued)
------------------------
At September 30, 1997, the Company had the following domestic net operating
loss and investment tax credit carryforwards:
<HEADING>
Alternative
Tax Net Minimum Net Investment
Operating Tax Operating Tax
Year of Expiration Loss Loss Credit
------------------ ----------- ----------- -----------
Consolidated Carryforwards:
2003 $3,166 --
2004 12,469 $10,917
2005 2,803 --
2006 26,755 22,155
2007 15,807 30,041
2008 25,551 23,919
2009 13,115 14,517
2010 7,616 7,620
2011 3,388 3,393
2012 2,818 2,818
----------- -----------
$113,488 $115,380
=========== ===========
Separate Carryforwards (a)
1998 -- -- $144
1999 -- -- 210
2000 $12,397 $12,397 74
2002 6,101 6,101 --
2003 6,714 10,715 --
----------- ----------- -----------
$25,212 $29,213 $428
=========== =========== ===========
(a) These separate carryforwards can only be used against future income
and tax liabilities of the company within the consolidated group which
generated the carryforwards.
In conjunction with the sale of the Fletcher refinery in 1993 as described
in Note 12, unrestricted net operating loss carryforwards of $59,658 and
separate net operating loss carryforwards of $23,983 pertaining to the
Fletcher refinery were reattributed to Hondo Oil.
50
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
10) Contingent liabilities
----------------------
The Company is involved in a number of legal and administrative proceedings
incident to the ordinary course of its business. In the opinion of
management, any liability to the Company relative to the various proceedings
will not have a material adverse effect on the Company's operations or
financial condition.
The Company is subject to various environmental laws and regulations of the
United States and Colombia. As is the case with other companies engaged in
similar industries, the Company faces exposure from actual or potential
claims and lawsuits involving environmental matters. These matters may
involve alleged soil and water contamination and air pollution. The
Company's policy is to accrue environmental and clean-up costs when it is
probable that a liability has been incurred and the amount of the liability
is reasonably estimable. However, future environmental related expenditures
cannot be reasonably quantified in many circumstances due to the conjectural
nature of remediation and clean-up cost estimates and methods, the imprecise
and conflicting data regarding the characteristics of various types of
waste, the number of other potentially responsible parties involved, and
changing environmental laws and interpretations. Management believes the
reduced scope of the Company's operations following the sale of the
Company's domestic oil and gas properties and the Fletcher refinery have
significantly reduced the Company's potential exposure to environmental
liability, including potential Superfund claims against Fletcher, which
liability, in the opinion of management, is not material.
51
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
11) Segment information
-------------------
The Company's operations are concentrated in one industry segment, the
exploration for and production of reserves of oil and natural gas. Since
1992, the Company's continuing activities have been limited to exploration
for oil and gas reserves located in Colombia. The Company has no foreign
sales and no export sales in the reported periods, but has begun producing
its reserves in fiscal 1998. The Company currently has two contracts for
the sale of its production in place. These two customers, Ecopetrol and
Termosantander (an affiliate of Amoco Corporation separate from the
Company's partner in Opon), will comprise 100% of the Company's revenue.
Information segregating the Company's continuing domestic and foreign
operations is as follows:
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
Sales and operating revenue:
United States $1 $2 $23
Foreign 3 -- --
----------- ----------- -----------
$4 $2 $23
=========== =========== ===========
Operating profit (loss):
United States $(406) $(45) $(140)
Foreign (2,419) (4,511) (326)
----------- ----------- -----------
Operating loss (2,825) (4,556) (466)
Loss on sale of assets -- (6) --
Interest expense (6,222) (5,009) (4,680)
Corporate expense and other (1,743) (1,781) (1,697)
----------- ----------- -----------
Loss from continuing operations
before income taxes $(10,790) $(11,352) $(6,843)
=========== =========== ===========
Identifiable assets:
United States $3,247 $2,973 $5,645
Foreign 41,683 21,567 12,753
----------- ----------- -----------
$44,930 $24,540 $18,398
=========== =========== ===========
52
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
12) Discontinued Operations
-----------------------
In 1991, the Company adopted plans of disposal for its refining and
marketing and real estate segments. A summary, by segment, of the results of
discontinued operations is as follows:
<HEADING>
For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
Refining and marketing $(1,200) $(400) $(650)
Real estate (400) (900) (4,300)
Income tax expense (benefit) -- -- --
----------- ----------- -----------
$(1,600) $(1,300) $(4,950)
=========== =========== ===========
Per share $(0.12) $(0.10) $(0.37)
=========== =========== ===========
In September 1993, the Company executed an agreement for the sale of its
Fletcher refinery and its asphalt terminal in Hilo, Hawaii. These assets
represented the material portion of the Company's refining and marketing
segment. Loss provisions pertaining to the refining and marketing segment of
$1,200, $400 and $650 have been required in 1997, 1996 and 1995 for reasons
described below.
The agreement for the sale of Fletcher included a provision allowing the
Company to share in the proceeds from the sale of certain components of the
refinery equipment which the buyer planned to sell. Based on estimates of a
broker of used refinery equipment, the Company recorded $1,000 as the
estimated realizable value at the time of the transaction. The buyer and
the Company have not succeeded in selling this equipment. In September
1994, the Company reduced the carrying value of the receivable by $600 on
the basis of an offer from the buyer for the Company's share of equipment
sale proceeds. In September 1996, the Company wrote off the remaining
receivable of $400 as uncollectible.
53
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
12) Discontinued Operations (continued)
-----------------------------------
In the agreement for the sale of the Fletcher refinery, the Company
indemnified the buyer as to liabilities in excess of $300 for certain
federal and state excise taxes arising from periods prior to the sale.
Fletcher notified the Company in July 1994 that an audit for California
Motor Vehicle Fuels Tax was underway and a preliminary review by then
Fletcher employees indicated that a significant liability might exist. The
Company retained a consultant to evaluate the contingent liability. In
September 1994, the Company accrued $1,400 as a result of the consultant's
evaluation. An additional $650 was accrued in September 1995, primarily
because of increases in the estimated amounts of penalties and interest
which could be due. The State of California issued a preliminary report in
June 1996 which concluded taxes and penalties of $10,820 were due as a
result of the audit. The State of California issued a Notice of
Determination in July 1997 reducing the taxes and penalties due to $5,740.
Assessed amounts are subject to a process of appeal and further adjustment,
which remedies are still being pursued. The buyer notified the Company that
it claims indemnity in this matter and in January 1997 filed suit in
Superior Court, Los Angeles, California for a declaratory judgment enforcing
the indemnity and for other relief. The Company accrued an additional
$1,200 in September 1997. The Company has accrued its best estimate of the
ultimate liability and believes this is sufficient to provide for the amount
that will ultimately be paid based on the information available.
In 1989, the Company permanently suspended operations at its Newhall
refinery because of expectations of continued operating losses. The Company
reclassified the cost of Newhall's dismantled properties to the real estate
segment. All costs incurred subsequent to 1989 have been charged against
previously established loss provisions. In 1993, the Company suspended
execution of a development plan for the property, now referred to as Valley
Gateway, which included dismantling the refinery, effecting environmental
remediation of the land and further developing the land to a condition where
it could be sold as land ready for construction. This decision was made as
a result of continued declines in the local real estate market and the
Company's limited cash resources. Management believed that a sale of the
property in its present condition with existing entitlements was the best
course of action. The Company has conducted an environmental assessment of
the refinery site and a remediation plan for the site has been submitted to
the Regional Water Quality Control Board and has received staff approval.
The Company estimates that $2.0 million would be incurred in executing the
approved remediation plan; however, the Company expects to sell the property
without incurring these costs by reducing the purchase price. The Company's
estimate of the net realizable value of this property has been reduced by
estimated remediation costs in determining the carrying value of the
property and therefore the remediation costs will not affect future results
of operations.
In addition to the Valley Gateway property, the Company owns the 11 acre Via
Verde Bluffs property, carried at $2,580 and $2,548 at September 30, 1997
and 1996, respectively. Both properties have been listed with brokers since
1994.
54
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(All Dollar Amounts in Thousands)
12) Discontinued Operations (continued)
-----------------------------------
In 1995 the carrying value of the real estate was reduced by $4,300 as a
result of depressed demand in the local market, sale negotiations, and the
timing of possible sales. In September 1996, the Company revised its
estimate of the realizable value of the Valley Gateway property to zero,
resulting in an additional loss provision of $900. This decision was made
following three years of unsuccessful efforts to sell the property in its
present state and little interest from potential buyers. In September 1997,
the Company provided for an additional carrying costs of $400. Management
believes it can dispose of the property and any associated liabilities for
little or no additional cost.
Changes in the balance of real estate are as follows:
September 30,
1997 1996
----------- -----------
Beginning balance $2,202 $2,978
Development and dismantlement costs -- --
Valuation provisions established (400) (900)
Valuation provisions used 335 124
----------- -----------
Ending balance $2,137 $2,202
=========== ===========
Remaining acres 116 116
=========== ===========
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued segments.
Allocations of interest to the real estate operations were $240, $262 and
$274 for 1997, 1996 and 1995, respectively.
55
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1997
(All Dollar Amounts in Thousands)
The following supplemental information regarding the oil and gas activities of
Hondo Oil is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission ("SEC") and Statement of Financial
Accounting Standards ("SFAS") No. 69, "Disclosures About Oil and Gas Producing
Activities." Estimated Reserve Quantities and the Standardized Measure of
Discounted Future Net Cash Flows Relating to Proved Reserves are presented on
the basis of reserve reports prepared by Netherland, Sewell & Associates.
Information regarding capitalized costs relating to oil and gas producing
activities and costs incurred for property acquisition, exploration, and
development activities are included in Note 3 to the consolidated financial
statements. SEC rules restrict the disclosure of reserves to proved reserves.
Proved reserves are estimated quantities of crude oil, condensate, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved reserves do not
include hydrocarbons the recovery of which is subject to reasonable doubt
because of uncertainty as to economic factors.
During fiscal 1996, three contracts covering the sale of natural gas, the sale
of condensate and natural gas liquids, and the processing of the gas stream
were executed with the Colombian national oil company, Ecopetrol. These
provide for (i) the sale of 100 million cubic feet of natural gas per day for
the life of the concession (July 2015) at the regulated price determined
semi-annually by a formula based upon the average price received by Ecopetrol
for exported fuel oil during the prior two six-month periods; (ii) the sale of
condensate and natural gas liquids at market-related and market-indexed prices;
and (iii) the processing of the gas stream at Ecopetrol's El Centro gas
processing plant for a fee of $0.20 per thousand cubic feet of gas. In March
1997, a contract was executed for the sale of up to 60 million cubic feet of
natural gas per day to an electric generation facility being constructed
adjacent to the concession. The contract has not and will not become effective
until the sellers determine that there are sufficient reserves to supply
natural gas to the purchaser for the life of the contract. An interim one-year
agreement has recently been executed to allow deliveries of available gas.
The Company successfully completed drilling of a second well in Colombia in
September 1995 and commenced construction of a pipeline and related wellhead
facilities for production and transportation of the discovered natural gas and
related liquids. Following execution of the first contract described above,
the Company reported proved reserves for the first time in it's 1996 Annual
Report.
A third well was drilled during fiscal 1997. In April and May 1997, several
mechanical problems were encountered during the completion and testing of the
third well. Further work on the well has been suspended until a plan has been
finalized. Construction of the pipeline and wellhead facilities is complete
and production commenced in December 1997. A fourth well is presently being
drilled and is expected to be completed in the spring of 1998.
56
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1997
(All Dollar Amounts in Thousands)
Assumptions used in determining proved reserves and future net cash flows are:
- - Condensate and natural gas liquid reserves produced in association with the
natural gas are a function of the natural gas reserves.
- - The Company's share of reserves and future net cash flows is 15.444375%,
subject to a royalty of 20% payable to the Colombian government.
- - Prices of $18.64 and $21.31 per barrel of condensate and natural gas liquids
and $1.09 and $1.20 per million British Thermal Units of natural gas are
used in the cash flow projections for September 30, 1997 and 1996,
respectively. These prices were determined in accordance with the terms of
the executed sales contract described above. Both prices are held constant
through the life of the properties. Production costs and capital costs were
projected at current price levels.
- - Pipeline capital and operating costs are not included in the cash flow
projections because these costs will be recovered through pipeline tariffs.
Estimated Reserve Quantities
- ----------------------------
Proved reserves are estimated quantities of crude oil, condensate, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods.
Estimates of oil and gas proved reserves and production, all located in
Colombia, are as follows:
Oil (a) Gas
(MBBLS) (MMCF)
----------- -----------
Proved reserves, October 1, 1995 -- --
Revisions in previous estimates -- --
Extensions, discoveries and purchases 2,337 61,561
----------- -----------
Proved reserves, September 30, 1996 2,337 61,561
Revisions in previous estimates (394) (9,085)
----------- -----------
Proved reserves, September 30, 1997 1,943 52,476
=========== ===========
(a) All condensate and natural gas liquids.
As of September 30, 1997, 671 mbbls and 18,176 mmcf of the above reserves were
classified as proved developed. None of the 1996 reserves were classified as
proved developed.
A new interpretation (by the reserve engineers) of the reservoir limits after
the drilling of the third well was the primary reason for a downward revision
of the proved reserves for fiscal 1997.
57
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1997
(All Dollar Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
- ---------------------------------------------------------------------------
Reserves
- --------
The following table sets forth the computation of the standardized measure of
discounted future cash flows relating to proved reserves. The standardized
measure is the estimated future cash inflows from proved reserves less
estimated future production and development costs, estimated future income
taxes and a discount factor. Future cash inflows represent expected revenues
from the production of proved reserves based on prices in existence at the
fiscal year end. Escalation based on inflation, regulatory changes and supply
and demand are not considered. Estimated future production and development
costs related to future production of reserves are based on historical
information, as available, and estimates drawn from similar gas fields in other
locations. Such costs include, but are not limited to, production, drilling
development wells and installation of production facilities. Inflation and
other anticipatory costs are not considered until the actual cost change takes
effect. Estimated future income tax expenses are computed using tax rates
legislated in Colombia. Consideration is given to the effects of permanent
differences, utilization of net operating loss carryforwards, tax credits and
allowances. A discount rate of 10% is applied to the annual future net cash
flows after income taxes.
The methodology and assumptions used in calculating the standardized measure
are those required by SFAS NO. 69. It is not intended to be representative of
the fair market value of proved reserves. The valuations of revenues and costs
do not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
For the years ended
------------------------
September 30,
1997 1996
----------- -----------
Future cash inflows $96,223 $126,564
Future production costs (40,239) (33,934)
Future development costs (27,028) (36,063)
Future income tax expenses -- (14,843)
----------- -----------
Net future cash flows 28,956 41,724
10% annual discount for estimated timing
of cash flows (12,942) (22,071)
----------- -----------
Standardized measure of discounted
future net cash flows $16,014 $19,653
=========== ===========
58
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
September 30, 1997
(All Dollar Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
- ---------------------------------------------------------------------------
Reserves (continued)
- --------------------
The principal sources of changes in the standardized measure of discounted
future cash flows between September 30, 1997 and 1996 are as follows:
Net change due to changes in prices and production
costs $(12,532)
Net change due to revisions in quantity estimates (5,530)
Previously estimated development costs incurred
during the period 11,056
Changes in estimated future development costs (1,324)
Net change in income taxes 6,991
Accretion of discount 1,965
Other (4,265)
-----------
$(3,639)
===========
Results of Operations for Oil and Gas Producing Activities
- ----------------------------------------------------------
The following table sets forth the results of operations from oil and gas
producing and exploration activities. Income tax expense was computed using
the statutory tax rate for the period adjusted for utilization of net operating
loss carryforwards, permanent differences, tax credits and allowances.
<HEADING> For the years ended
-------------------------------------
September 30,
1997 1996 1995
----------- ----------- -----------
Revenues $4 $2 $23
Production costs (2,758) (2,745) (166)
Exploration expenses (27) (1,769) (169)
Depreciation, depletion and amortization -- -- --
----------- ----------- -----------
(2,781) (4,512) (312)
Income tax benefit (1,102) (1,787) (124)
----------- ----------- -----------
Results of operations from exploration
and production activities (excluding
corporate overhead and interest) $(1,679) $(2,725) $(188)
=========== =========== ===========
59
HONDO OIL & GAS COMPANY
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
September 30, 1997
(All Dollar Amounts in Thousands)
<HEADING>
Additions
Balance at charged to Balance
beginning costs and at end
of period expenses Write-offs of period
----------- ----------- ----------- -----------
Allowance for doubtful receivables:
Continuing operations:
1997 $332 $-- $(288) $44
=========== =========== =========== ===========
1996 $399 $4 $(71) $332
=========== =========== =========== ===========
1995 $399 $-- $-- $399
=========== =========== =========== ===========
60
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the
Company's Proxy Statement to be filed within 120 days after fiscal
year end and is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: See the Index to Financial Statements
in Item 8 hereof.
(2) Financial Statement Schedules: Page
II. Valuation and Qualifying Accounts 60
Schedules other than those listed above are omitted because they are
not required or not applicable, or because the information required in
a schedule is otherwise included in the Notes to Consolidated
Financial Statements.
(3) Exhibits filed with this report: See Item (c) below.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter
ended September 30, 1997.
(c) Exhibits: See Exhibit Index on page 63 for exhibits required by
Item 601 of Regulation S-K.
(d) Financial statement schedules required by Regulation S-X which
are excluded from the annual report to shareholders by Rule
14a-3 (b)(1): See Item (a)(2) above.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report
on Form 10-K for the year ended September 30, 1997 to be signed on its
behalf by the undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
Date: December 23, 1997 By/s/ Stanton J. Urquhart
------------------------
Stanton J. Urquhart
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K for the year ended September 30, 1997 has
been signed below by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
<HEADING>
Signature Title Date
- ----------------------- -------------------------- -----------------
/s/ John J. Hoey President, Chief Executive December 23, 1997
- ----------------------- Officer, and Director
JOHN J. HOEY
/s/ Douglas G. McNair Director December 23, 1997
- -----------------------
DOUGLAS G. MCNAIR
/s/ Nicholas J. Morrell Director December 23, 1997
- -----------------------
Nicholas J. Morrell
/s/ John F. Price Director December 23, 1997
- -----------------------
JOHN F. PRICE
/s/ Robert K. Steer Director December 23, 1997
- -----------------------
ROBERT K. STEER
/s/ R.E. Whitten Director December 23, 1997
- -----------------------
R.E. WHITTEN
/s/ Stanton J. Urquhart Vice President, Principal December 23, 1997
- ----------------------- Financial and Principal
STANTON J. URQUHART Accounting Officer
ANNEX F
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
1-8979
(Commission File Number)
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Ave, Ste. 900, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The registrant has one class of common stock outstanding. As of August 10,
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 NINE MONTHS ENDED JUNE 30, 1998
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
June 30, 1998 and September 30, 1997 3
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997 4
Consolidated Statements of Operations for the nine
months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Supplementary Information About Oil and Gas Producing
Activities and Reserves 16
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 25
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
June 30, September 30,
1998 1997
------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $1,140 $1,019
Accounts receivable 2,502 296
Prepaid expenses and other 63 1
------------- -------------
Total current assets 3,705 1,316
Properties, net (Notes 1 and 3) 20 40,612
Net assets of discontinued operations (Note 8) 2,344 2,137
Other assets 42 865
------------- -------------
$6,111 $44,930
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable (Note 1) $7,285 $3,464
Accrued expenses and other, including $2,094
in 1998 due to a related party (Notes 1 and 6,087 3,421
Current portion of long-term debt, including
$112,518 in 1998 due to a related
party (Notes 1 and 5) 114,578 265
Funding agreement (Notes 1 and 6) 27,058 --
------------- -------------
Total current liabilities 155,008 7,150
Long-term debt, including $99,943 in 1997
due to a related party (Notes 1 and 5) -- 102,903
Funding agreement (Notes 1 and 6) -- 22,788
Other liabilities, including $3,407 in 1997
due to a related party (Note 7) -- 5,262
------------- -------------
155,008 138,103
Contingencies (Notes 1 and 8)
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000 shares
authorized; shares issued and outstanding:
13,798,424 and 13,788,424, respectively 13,798 13,788
Additional paid-in capital 53,737 53,675
Accumulated deficit (216,432) (160,636)
------------- -------------
(148,897) (93,173)
------------- -------------
$6,111 $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
June 30,
----------------------------
1998 1997
------------- -------------
REVENUES
Sales and operating revenue $1,182 $3
Other income 15 --
------------- -------------
1,197 3
------------- -------------
COSTS AND EXPENSES
Operating costs 593 48
Depreciation, depletion, and amortization 417 57
Overhead, Colombian operations 397 492
General and administrative 545 523
Costs of exploration and dry holes 94 --
Interest on indebtedness including $2,094
and $1,602, respectively, to a
related party 3,406 1,602
------------- -------------
5,452 2,722
------------- -------------
Loss from continuing operations
before income tax expense (4,255) (2,719)
Income tax expense -- --
------------- -------------
Loss from continuing operations
before extraordinary items (4,255) (2,719)
EXTRAORDINARY ITEMS
Forgiveness of debt (Notes 1, 4, and 5) 3,554 --
Write-off of Colombian assets (Note 1) (39,982) --
------------- -------------
Net Loss $(40,683) $(2,719)
============= =============
Loss per share:
Continuing operations $(0.31) $(0.19)
Forgiveness of debt $0.26 --
Write-off of Colombian assets $(2.90) --
------------- -------------
Net loss per share $(2.95) $(0.19)
============= =============
Weighted average common shares outstanding 13,798,424 13,781,194
The accompanying notes are an integral part of these financial statements.
4
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the nine months ended
June 30,
----------------------------
1998 1997
------------- -------------
REVENUES
Sales and operating revenue $3,046 $4
Other income 23 19
------------- -------------
3,069 23
------------- -------------
COSTS AND EXPENSES
Operating costs 1,243 383
Depreciation, depletion, and amortization 1,072 172
Overhead, Colombian operations 1,373 1,619
General and administrative 1,778 1,519
Costs of exploration and dry holes 8,576 13
Interest on indebtedness including $5,962
and $4,480, respectively, to a
related party 8,395 4,480
------------- -------------
22,437 8,186
------------- -------------
Loss from continuing operations
before income tax expense (19,368) (8,163)
Income tax expense (benefit) -- (2)
------------- -------------
Loss from continuing operations
before extraordinary items (19,368) (8,161)
EXTRAORDINARY ITEMS
Forgiveness of debt (Notes 1, 4, and 5) 3,554 --
Write-off of Colombian assets (Note 1) (39,982) --
------------- -------------
Net Loss $(55,796) $(8,161)
============= =============
Loss per share:
Continuing operations $(1.41) $(0.59)
Forgiveness of debt $0.26 --
Write-off of Colombian assets $(2.90) --
------------- -------------
Net loss per share $(4.05) $(0.59)
============= =============
Weighted average common shares outstanding 13,795,091 13,780,083
The accompanying notes are an integral part of these financial statements.
5
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the nine months ended
June 30,
----------------------------
1998 1997
------------- -------------
Cash flows from operating activities:
Pretax loss from continuing operations $(19,368) $(8,163)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Cost of dry holes 8,546 --
Depreciation, depletion and amortization 1,072 172
Capitalized interest (677) (563)
Accrued interest added to long-term debt 7,275 5,261
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (931) 26
Prepaid expenses and other (62) (490)
Other assets (787) (570)
Increase (decrease) in:
Accounts payable 1,166 695
Accrued expenses and other 4,343 881
Funding agreement 3,551 1,425
Other liabilities (5,192) (1,613)
------------- -------------
Net cash used by continuing operations (1,064) (2,939)
Net cash used by discontinued operations (212) (296)
Income taxes (paid) received -- 2
------------- -------------
Net cash used by operating activities (1,276) (3,233)
------------- -------------
Cash flows from investing activities:
Sale of assets 2 --
Capital expenditures (3,640) (8,441)
------------- -------------
Net cash used by investing activities (3,638) (8,441)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 5,300 12,600
Principal payments on long-term debt (265) (765)
------------- -------------
Net cash provided by financing activities 5,035 11,835
------------- -------------
Net increase in cash and cash equivalents 121 161
Cash and cash equivalents at the beginning of the period 1,019 374
------------- -------------
Cash and cash equivalents at the end of the period $1,140 $535
============= =============
Refer to Notes 3, 5 and 6 for descriptions of non-cash transactions.
The accompanying notes are an integral part of these financial statements.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
1) Going Concern
-------------
The Company reported in its March 31, 1998 Quarterly Report on Form 10-Q
that the rate of decline in production from its Opon No. 3 and Opon No. 4
wells in Colombia had been higher than expected during the first five months
of production. Further testing of the wells was completed during the
current quarter. An analysis of the test results by the Company's
independent reserve engineers has concluded that it will become uneconomic
(operating costs will exceed operating revenues) to produce the wells before
the end of fiscal 1998 and that the drilling of additional wells would be
uneconomic (net profit over the life of a new well would be less than the
cost to drill it). See the Unaudited Supplementary Information about Oil
and Gas Producing Activities and Reserves following these financial
statements.
As a result of the revised reserve report, the Company has concluded that
the capitalized costs of its Colombian exploration and production activities
are worthless. As of June 30, 1998, the Company owes Amoco Colombia
Petroleum Company ("Amoco Colombia," the operator of the Opon concession)
$5,470 for current charges (included in accounts payable) and $27,058 under
the Funding Agreement (see Note 6). The Company is negotiating with Amoco
Colombia to voluntarily surrender its working interest in the Opon
concession in exchange for a release of the Company's liabilities to Amoco
Colombia. Accordingly, the capitalized costs of Colombian exploration have
been written off during the current period and the resulting charge has been
reported as an extraordinary item.
The Company's liabilities are far greater than its assets following this
extraordinary write-off. As more fully described in Note 5, the Company's
debts to Lonrho Plc include an event of default which is triggered if the
Company does not increase its reserves by October 1, 1998. Management
believes it is impossible for the Company to avoid the event of default.
Management has concluded that the Company is no longer a going-concern.
During July 1998, the Company has been able to negotiate the settlement of
three of its liabilities for ten cents on the dollar. The other ninety cents
of each dollar was written off to an extraordinary gain for the quarter
ended June 30, 1998, including $1,131 previously included in accounts
payable for an obligation to Phillips Petroleum. See Notes 4 and 5 for the
other components of the extraordinary gain.
2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an independent oil
and gas exploration and development company. The consolidated financial
statements of Hondo Oil include the accounts of all subsidiaries, all of
which are wholly owned. All significant intercompany transactions have been
eliminated. The Hondo Company owns 62.7% of Hondo Oil & Gas Company. Lonrho
Plc ("Lonrho"), a publicly-traded English company and the Company's primary
lender, owns 100% of The Hondo Company and owns an additional 5.7% of the
Company through another wholly-owned subsidiary. In total, Lonrho controls
68.4% of the Company's outstanding shares.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(a) Basis of Consolidation and Presentation (continued)
---------------------------------------------------
The accompanying consolidated financial statements have been prepared on a
historical cost basis and 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, except as
described in Note 8. 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.
(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.
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(d) Income Taxes (continued)
-----------------------
The Company provides for income taxes in interim periods based on estimated
annual effective rates. The Company records current income tax expense to
the extent that federal, state or alternative minimum tax is projected to be
owed. The Company has investment tax credit carryforwards of $428 which
are accounted for by the flow-through method.
3) Properties
----------
Properties, at cost, consist of the following:
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
Oil and gas properties - Colombia:
Proved $-- $11,923
Accumulated depletion, depreciation
and amortization -- --
------------- -------------
-- 11,923
------------- -------------
Other properties - Colombia:
Wellsite facilities -- 4,689
Pipelines -- 12,061
Accumulated depreciation -- --
Drilling in progress -- 11,821
------------- -------------
-- 28,571
------------- -------------
Other properties - domestic
Other fixed assets 307 323
Accumulated depreciation (287) (205)
------------- -------------
$20 $40,612
============= =============
As more fully described in Note 1, the Company's capitalized costs
pertaining to its Colombian exploration activities were written off in the
current period.
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
3) Properties (continued)
----------------------
Total costs incurred (recovered), both capitalized and expensed, in Colombia
for oil and gas producing activities were:
For the nine For the
months ended year ended
June 30, 1998 Sep. 30, 1997
------------- -------------
(Unaudited)
Property acquisition costs $-- $--
============= =============
Exploration costs $7,937 $10,051
============= =============
Development costs $(104) $2,709
============= =============
The written-off balances of wellsite facilities and pipelines included
non-cash increases of $96 and $5,372 for the nine months ended June 30, 1998
and 1997, respectively, which were charged to the Funding Agreement (Note
6). Additions to written-off drilling in progress of $5,386 and ($1,055)
for the nine months ended June 30, 1998 and 1997, respectively, were unpaid
(prepaid) and are reflected in the balance of accounts payable. The balances
of written-off wells in progress, wellsite facilities and pipelines include
a non-cash decrease of $1,403 for the nine months ended June 30, 1998
pertaining to amounts due from Ecopetrol for commerciality, of which $957
was collected in July 1998.
4) Accrued expenses
----------------
Accrued expenses consist of the following:
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
Refining and marketing costs (Note 8) $3,192 $3,198
Interest payable to Lonrho Plc (Note 5) 2,094 --
City of Long Beach (a) 167 --
Unearned tariff revenue 514 --
Other 120 223
------------- -------------
$6,087 $3,421
============= =============
(a) After extraordinary gain of $1,500 arising from negotiated forgiveness.
10
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
5) Long-Term Debt
--------------
Long-term debt consists of the following:
June 30, September 30,
1998 1997
------------- -------------
Notes payable to Lonrho Plc (a),(b): (Unaudited)
Note A (c) $3,759 $3,479
Note B (c) 4,752 4,535
Note C (b),(d) 40,925 38,577
Note D (d) 35,172 33,126
Note E (e) 5,620 5,294
Note F (f) 22,290 14,932
Pollution Control Revenue Bonds (g) 1,960 2,225
Industrial Development Revenue Bonds (g) 100 1,000
------------- -------------
114,578 103,168
Less current maturities (114,578) (265)
------------- -------------
$-- $102,903
============= =============
(a) The following terms apply to Notes A through F:
(1) Interest is payable semiannually on October 1 and April 1 at a
rate of 6% (except Note F which is 13%).
(2) If management determines sufficient cash is not available to pay
interest, management may offer to issue the Company's unregistered
stock valued at the closing price on the interest due date as payment
in kind. Lonrho may choose to either add the accrued interest to the
balance of the debt outstanding or accept the payment in kind. The
Company has an obligation to register any shares issued in connection
with the above if so requested by Lonrho.
(3) Accrued interest of $3,868, $3,407, $2,823 and $2,411 has been
added to the outstanding debt as of April 1, 1998, October 1, 1997,
April 1, 1997, and October 1, 1996, respectively. Accrued interest
has not been paid by the issuance of common stock since fiscal 1996.
(4) As consideration for past deferrals of interest and principal
payments due under the terms of the first four notes, the Company
granted Lonrho Plc a 5% share of the Company's net profits, as
defined, under the Opon Contract. Following repayment of these notes,
Lonrho's entitlement will be reduced by half.
(5) If the Company does not furnish to Lonrho by October 1, 1998 a
report that shows an increase in proved gas reserves of 13,000,000
mcf, then Lonrho has the right to declare Notes A through F in default
and demand payment. Management believes the Company cannot achieve
the reserve increase. Accordingly, all amounts due to Lonrho have
been classified as current liabilities.
11
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(b) As consideration for extensions and certain other financial
undertakings received from Lonrho in 1996, the Company granted to
Lonrho a security interest in all of the shares of Hondo Magdalena on
May 13, 1997. In 1997, as consideration for extension of the term of
Note F and the granting of $7,000 additional credit thereunder, the
Company gave Lonrho an option to convert $7,000 of Note C into the
Company's common stock at a rate of $7.70 per share. The debt is
convertible at Lonrho's option at any time prior to maturity. The
option to convert the debt into common stock given in 1997 was
approved at the Company's 1998 annual meeting.
(c) Notes A and B are secured by mortgages on the Company's real estate
included in discontinued operations. Principal amortization in ten
equal semiannual installments will commence January 15, 1999 if
maturity is not accelerated by default. Note A is secured by the
Company's Via Verde Bluffs real estate. Note B is secured by the
Company's Valley Gateway real estate.
(d) Notes C and D are secured by the Company's Valley Gateway real estate.
Notes C and D are due January 15, 1999 if maturity is not accelerated
by default.
(e) In October 1994, the Company received $4,800, net of withholding
taxes, from Amoco Colombia under the terms of a Farmout Agreement.
Also in October 1994, the Company paid $5,000 to Lonrho Plc to reduce
the balance of Note D and the related interest expense. At the same
time, Lonrho Plc made available $5,000 in the form of a new facility
loan to be drawn as needed by the Company. The Company drew $3,175 of
this facility loan during 1995 and the remaining $1,825 during 1996.
Note E is due January 15, 1999 if maturity is not accelerated by
default.
(f) In June 1996, Lonrho Plc agreed to provide the Company a facility loan
of $13,500 at a rate of 13%, payable semiannually. In July 1997, the
loan was amended to extend the maturity date to January 1, 1999 (if
not accelerated by default) and revise the amount available to
$20,500. In December 1997, the loan was again amended to revise the
amount available to $27,500. The loan is secured by free cash flow,
as defined, from Hondo Magdalena's operations. The Company drew
$14,600 during fiscal 1997 and $5,300 during the six months ended
March 31, 1998. Lonrho Plc has notified the Company that it will make
no further advances to the Company.
12
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(g) Both issues of these tax-exempt bonds were issued under the authority
of the California Pollution Control Financing Authority. The
Pollution Control Revenue bonds bear interest at an average rate of
6.15%, payable semiannually, and mature serially through November 1,
2003. The Industrial Development Revenue Bonds bear interest at a
rate of 7.5%, payable semiannually, and mature September 1, 2011.
Both bond issues are collateralized by certain refinery facilities and
equipment located at Valley Gateway and the Fletcher refinery. The
collateral at the Fletcher refinery is leased to the buyer for a
nominal annual fee. The trustee of the bonds was notified of changes
to the collateral in 1993 and the trustee has not taken any action to
declare a breach of covenant or a default.
In July 1998, the Company paid the Trustee $103 in full satisfaction
of the Industrial Development Revenue Bonds. Debt of $923 including
accrued interest was forgiven. The Trustee is investigating acquiring
title to the collateral, which has no value on the Company's books.
In May 1998, the Company did not make a scheduled interest payment on
the Pollution Control Revenue bonds. The interest payment was made
from an existing cash reserve fund. This issue is guaranteed by the
Small Business Administration ("SBA"). The Trustee has not notified
the Company it is in default. However, the Company is negotiating
with the Trustee and the SBA with a view to settling the liability for
ten cents on the dollar.
According to the terms of the various credit agreements, the Company is
restricted in its ability to: (a) incur additional debt; and (b) pay
dividends on and/or redeem capital stock.
Cash interest expense, all of which arises from discontinued operations, was
$165 and $181 for the nine months ended June 30, 1998 and 1997,
respectively.
6) Funding Agreement
-----------------
In May 1995, the Company's wholly-owned subsidiary, Hondo Magdalena Oil &
Gas Limited ("Hondo Magdalena"), Amoco Colombia Petroleum Company ("Amoco
Colombia"), and Opon Development Company entered into a Funding Agreement
for Tier I Development Project costs (the "Funding Agreement") to finance
costs associated with the construction of a pipeline from the Opon Contract
area, certain wellsite facilities, a geological and geophysical work
program, and for related overheads. The Funding Agreement provides that
Hondo Magdalena may repay the amounts financed up to 365 days after the date
of first production and sales, along with an equity premium computed using a
22% annualized interest rate. If the financed amounts are not repaid within
365 days after the date of first production and sales, a penalty of 100% of
the amount then due would be recovered out of Hondo Magdalena's revenues.
The Company does not have, and believes it cannot acquire, funds to repay
this obligation in order to avoid the 100% penalty. If incurred, management
estimates the penalty would be a minimum of $18,173 (the current principal
balance) and would be charged to income.
13
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
6) Funding Agreement (continued)
-----------------------------
The associate parties have agreed that the date of first production for
purposes of this agreement is January 30, 1998. Subsequent to the end of
the 365-day option period, Hondo Magdalena's revenues (if any) from
production of the first 80 million cubic feet of natural gas and related
condensate and natural gas liquids are pledged to secure its obligations
under the Funding Agreement.
The balance of the Funding Agreement consists of the following:
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
Outstanding principal $18,173 $17,566
Equity premiums 8,885 5,222
------------- -------------
$27,058 $22,788
============= =============
Equity premiums related to the financed pipeline and wellsite facilities
costs were capitalized until the commencement of production (December 1997),
including $624 and $1,926 for the nine months ended June 30, 1998 and 1997,
respectively. The remainder of the equity premiums accrued, relating to the
financed geological and geophysical work, overheads, and pipeline and
wellsite costs subsequent to the commencement of production, have been
expensed.
7) Other Liabilities
-----------------
Other liabilities consist of the following:
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc (Note 5) $-- $3,407
City of Long Beach (Note 4) -- 1,594
Other -- 261
------------- -------------
$-- $5,262
============= =============
14
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
8) Discontinued Operations
-----------------------
In 1991, the Company adopted plans of disposal for its refining and
marketing and real estate segments. In September 1993, the Company executed
an agreement for the sale of its Fletcher refinery and its asphalt terminal
in Hilo, Hawaii. These assets represented the material portion of the
Company's refining and marketing segment.
Operating losses of discontinued operations for the quarters ended June 30,
1998 and 1997 were $64 and $74, respectively. Corresponding amounts for
the nine months ended June 30, 1998 and 1997 were $207 and $265,
respectively, and were charged against loss provisions established in
earlier periods. The Company recorded no loss provisions for discontinued
operations for the nine months ended June 30, 1998 and 1997.
The balance of net assets of discontinued operations is comprised solely of
two parcels of land in the real estate segment. Changes in this balance for
the nine months ended June 30, 1998 are as follows:
Balance as of September 30, 1997 $2,137
Valuation provisions established --
Valuation provisions used 207
-------------
Balance at March 31, 1998 (Unaudited) $2,344
=============
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued segments.
Allocations of interest to the real estate operations were $49 and $62 for
the quarters ended June 30, 1998 and 1997, respectively. Comparable amounts
for the nine-month periods were $148 and $187, 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. The
Company has accrued a contingent liability, presently amounting to $3,192,
with regards to an indemnity claim from the buyer's parent relating to a
challenged assessment by the State of California against Fletcher for
alleged excise tax deficiencies. The Company believes the assessment is
unjustified and the amounts alleged to be owing can be substantially
reduced, if not eliminated, through the review process provided by law. The
buyer's parent, Signal Treating Service, Inc., was not a party to the sale
agreement, but has brought a lawsuit against the Company in the amount of
the State's current assessment of approximately $5,740. The Company believes
it has valid defenses against the lawsuit which is not expected to go to
trial before August 1999.
15
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
JUNE 30, 1998
(All Dollar Amounts in Thousands)
The following supplemental information regarding the oil and gas activities of
Hondo Oil is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission ("SEC") and Statement of Financial
Accounting Standards ("SFAS") No. 69, "Disclosures About Oil and Gas Producing
Activities." Estimated Reserve Quantities and the Standardized Measure of
Discounted Future Net Cash Flows Relating to Proved Reserves are presented on
the basis of reserve reports prepared by Netherland, Sewell & Associates.
Information regarding capitalized costs relating to oil and gas producing
activities and costs incurred for property acquisition, exploration, and
development activities are included in Note 3 to the consolidated financial
statements. SEC rules restrict the disclosure of reserves to proved reserves.
Proved reserves are estimated quantities of crude oil, condensate, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved reserves do not
include hydrocarbons the recovery of which is subject to reasonable doubt
because of uncertainty as to economic factors.
The Company reported in its March 31, 1998 Quarterly Report on Form 10-Q that
the rate of decline in production from its Opon No. 3 and Opon No. 4 wells in
Colombia had been higher than expected during the first five months of produc-
tion which commenced in December 1997. Further testing of the wells was
completed during the current quarter. An analysis of the test results by the
Company's independent reserve engineers has been completed and the results of
the revised reserve report as of June 30, 1998 are presented below.
Assumptions used in determining proved reserves and future net cash flows are:
- - Condensate and natural gas liquid reserves produced in association with the
natural gas are a function of the natural gas reserves.
- - The Company's share of reserves and future net cash flows is 15.444375%,
subject to a royalty of 20% payable to the Colombian government.
- - Prices of $12.45 and $18.64 per barrel of condensate and natural gas liquids
and $0.82 and $1.09 per million British Thermal Units of natural gas are used
in the cash flow projections for June 30, 1998 and September 30, 1997,
respectively. These prices were determined in accordance with the terms of
executed sales contracts. Both prices are held constant through the life of
the properties. Production costs and capital costs were projected at current
price levels.
- - Pipeline capital and operating costs are not included in the cash flow
projections because these costs will be recovered through pipeline tariffs.
16
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
JUNE 30, 1998
(All Dollar Amounts in Thousands)
Estimated Reserve Quantities
- ----------------------------
Proved reserves are estimated quantities of crude oil, condensate, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods.
Estimates of oil and gas proved reserves and production, all located in
Colombia, are as follows:
Oil (a) Gas
(MBBLS) (MMCF)
------------- -------------
Proved reserves, September 30, 1996 2,337 61,561
Revisions in previous estimates (394) (9,085)
------------- -------------
Proved reserves, September 30, 1997 1,943 52,476
Production (63) (1,435)
Revisions in previous estimates (1,862) (50,672)
------------- -------------
Proved reserves, June 30, 1998 18 369
============= =============
(a) All condensate and natural gas liquids.
As of June 30, 1998, all of the above reserves are classified as proved
developed. As of September 30, 1997, 671 mbbls and 18,176 mmcf of the above
reserves were classified as proved developed. For 1996, none of the reserves
were classified as proved developed.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
- ---------------------------------------------------------------------------
Reserves
- --------
The following table sets forth the computation of the standardized measure of
discounted future cash flows relating to proved reserves. The standardized
measure is the estimated future cash inflows from proved reserves less
estimated future production and development costs, estimated future income
taxes and a discount factor. Future cash inflows represent expected revenues
from the production of proved reserves based on prices in existence at the
period end. Escalation based on inflation, regulatory changes and supply
and demand are not considered. Estimated future production and development
costs related to future production of reserves are based on historical
information, as available, and estimates drawn from similar gas fields in other
locations. Such costs include, but are not limited to, production, drilling
development wells and installation of production facilities. Inflation and
other anticipatory costs are not considered until the actual cost change takes
effect. Estimated future income tax expenses are computed using tax rates
legislated in Colombia. Consideration is given to the effects of permanent
differences, utilization of net operating loss carryforwards, tax credits and
allowances. A discount rate of 10% is applied to the annual future net cash
flows after income taxes.
17
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
JUNE 30, 1998
(All Dollar Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
- ---------------------------------------------------------------------------
Reserves (continued)
- --------------------
The methodology and assumptions used in calculating the standardized measure
are those required by SFAS NO. 69. It is not intended to be representative of
the fair market value of proved reserves. The valuations of revenues and costs
do not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
For the nine For the
months ended year ended
June 30, 1998 Sep. 30, 1997
------------- -------------
Future cash inflows $624 $96,223
Future production costs (586) (40,239)
Future development costs -- (27,028)
Future income tax expenses -- --
------------- -------------
Net future cash flows 38 28,956
10% annual discount for estimated timing
of cash flows (1) (12,942)
------------- -------------
Standardized measure of discounted
future net cash flows $37 $16,014
============= =============
The principal sources of changes in the standardized measure of discounted
future cash flows between June 30, 1998 and September 30, 1997 are as follows:
For the nine For the
months ended year ended
June 30, 1998 Sep. 30, 1997
------------- -------------
Net change due to revisions in quantity estimat $(29,867) $(5,530)
Changes in estimated future development costs 14,946 (1,324)
Net change due to changes in prices and production
costs (370) (12,532)
Previously estimated development costs incurred
during the period -- 11,056
Net change in income taxes -- 6,991
Accretion of discount 1,201 1,965
Production, net of costs (27) --
Other (1,860) (4,265)
------------- -------------
$(15,977) $(3,639)
============= =============
18
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
JUNE 30, 1998
(All Dollar Amounts in Thousands)
Results of Operations for Oil and Gas Producing Activities
- ----------------------------------------------------------
The following table sets forth the results of operations from oil and gas
producing and exploration activities. Income tax expense was computed using
the statutory tax rate for the period adjusted for utilization of net operating
loss carryforwards, permanent differences, tax credits and allowances.
For the nine For the
months ended year ended
June 30, 1998 Sep. 30, 1997
------------- -------------
Revenues $2,617 $4
Production costs (2,590) (2,758)
Exploration expenses (8,576) (27)
Depreciation, depletion and amortization (931) --
------------- -------------
(9,480) (2,781)
Income tax benefit -- (1,102)
------------- -------------
Results of operations from exploration
and production activities (excluding
corporate overhead and interest) $(9,480) $(1,679)
============= =============
19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL DISCUSSION
Introduction
------------
Please refer to our previously filed Annual Report on Form 10-K for the
year ended September 30, 1997 and Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 for an introduction and background on the
Company and its prior activities. This general discussion will address
certain of the previously identified open and unresolved Opon issues.
Opon Exploration
----------------
As previously reported, the Company and Amoco Colombia had a dispute
regarding audit exceptions for the Opon Project for years 1994, 1995 and
1996 which had been submitted to arbitration. The parties met in July
1998 and have significantly reduced the number and scope of audit
exceptions on which they disagree. Final resolution of the entire
dispute should reached in the near future. The Company has also
approved the 1996 and 1997 joint operating committee budgets in their
entirety and no longer has any disputes regarding overhead operating
expenses. This has not resulted in any adjustments to the Company's
financial statements since the Company had previously expensed all
disputed overhead operating expenses as incurred. The Company has agreed
with Amoco Colombia on a settlement of all claims related to equipment
failure with suppliers to the Opon 6 well, except for the claim with the
supplier of the TCP guns that initially failed to fire. If this
remaining dispute is not resolved within 30 days the Company will
consider filing an arbitration claim in London, UK pursuant to the
contract. The settlements have already resulted, and will result, in
partial payments of outstanding invoices to several suppliers and will
further increase the amount the Company owes Amoco Colombia but will
reduce the Company's accrued liabilities. There is still no resolution
of the dispute with Comision de Regulacion de Energia y Gas ("CREG")
over the pipeline tariffs and the Company continues to accrue the
pipeline tariff overpayment as a liability. There is still no
resolution with Ecopetrol regarding the take or pay contract and the
Company has not accrued the related $5.2 million invoice in its
financial statements.
In April 1998 the Company announced that the rate of decline in
production from its Opon No. 3 and Opon No. 4 gas wells in Colombia had
been higher than expected during the first five months of production.
Recent testing of the wells is complete. An analysis of the test
results by the Company's independent reserve engineers has concluded
that it will become uneconomic (operating costs will exceed operating
revenues) to produce the wells before the end of fiscal 1998 and that
the drilling of additional wells would be uneconomic (net profit over
the life of a new well would be less than the cost to drill it). In its
annual report for the year ended September 30, 1997, the Company
reported proved reserves of 52.5 billion cubic feet of natural gas and
1.9 million barrels of associated liquids, for which the present value
of net cash flows was $16.0 million. As a result of the significant
declines in production observed since December 1997 and the recently
20
completed testing, proved reserves as of June 30, 1998 are now estimated
to be 0.4 billion cubic feet of natural gas and 0.02 million barrels of
associated liquids, for which the present value of net cash flows is
less than $0.1 million.
The current production revenue from the Opon Nos. 3 and 4 wells
continues to decline and net cash flow to the Company's interest is
expected to turn negative before the end of the fiscal year. No
additional wells are planned to be drilled by Amoco Colombia in the Opon
concession contract area. The Company has commenced negotiations with
Amoco Colombia for a voluntary surrender of its working interest in the
Opon concession pursuant to the joint operating agreement in exchange
for a release of our liabilities which include $5.5 million in current
charges and $27.1 million under the Funding Agreement as of June 30,
1998. There are no assurances that these negotiations will be
successful. Amoco Colombia has the option to place Hondo Magdalena into
default on or after October 15, 1998 and Hondo Magdalena has a 30 day
period to cure the default or lose the interest in the Opon concession
contract. The Company does not have the financial resources to cure the
potential default, if declared by Amoco Colombia, and does not have any
known possibility of outside financing. In July 1998, Amoco Colombia
announced that it would write off a significant amount of its Opon
investment.
At June 30, 1998, the Company was indebted to its majority shareholder,
Lonrho Plc, and its affiliates in the aggregate amount of $112.5
million. Management believes it will be impossible for the Company to
comply with an existing loan covenant to increase reserves in the Opon
area by 13 billion cubic feet of gas by October 1, 1998. The Company
has not received a notice of default from Lonrho Plc. The Company does
not know if Lonrho plans to foreclose on its security interest in the
shares of Hondo Magdalena.
Stock Exchange Listing
----------------------
The Company has withdrawn its appeal of the delisting decision by the
American Stock Exchange and the shares of the Company's common stock are
no longer traded on that exchange. The shares are now traded over the
counter on the electronic bulletin board under the symbol HOGL.
Discontinued Operations
-----------------------
Two of the Company's former business segments, refining and marketing
operations and real estate operations were discontinued in 1991. No
change in the status of these discontinued operations from that reported
in the Company's 1997 Annual Report on Form 10-K occurred during the
current period except that Via Verde Development Company, a wholly-owned
subsidiary of the Company, entered into a contract for the sale of one
of the Company's two real estate tracts in May 1998. The contract for
the Via Verde property, consisting of 11.5 acres of undeveloped land, is
for $3.13 million and is expected to close in October 1998. Proceeds
from that sale are pledged and would be paid to Lonrho under its
existing loan agreements and a mortgage to Lonrho executed in 1993 in
connection with a new advance of funds by Lonrho at that time.
21
RESULTS OF OPERATIONS
Quarters Ended June 30, 1998 and 1997
-------------------------------------
Results of continuing operations for the quarter ended June 30, 1998
amounted to a net loss of $4.3 million, or 31 cents per share. The
Company reported a net loss from continuing operations of $2.7 million,
or 19 cents per share, for the quarter ended June 30, 1997. No losses
from discontinued operations were reported for either period. In
addition, for the quarter ended June 30, 1998, the Company had an
extraordinary gain from the forgiveness of debt of $3.6 million (as more
fully described in Liquidity and Capital Resources), or 26 cents per
share, and an extraordinary loss from the write-off of its Colombian
assets of $40.0 million, or $2.90 per share, arising from the extreme
downward adjustment of its oil and gas reserves as more fully described
above. The net loss for the quarter ended June 30, 1998 amounted to
$40.7 million, or $2.95 per share.
Production from the Opon field commenced in December 1997. The
Company's share of Opon production during the current quarter amounted
to 597,670 mmbtu sold for an average price of $1.15 per mmbtu and 27,355
barrels of condensate and natural gas liquids sold for an average price
of $12.20 per barrel. In addition, the Company recorded tariff revenues
on 667,193 mcf at an average price of 25 cents per mcf. Due to an
unexpected drop in pressure and related production from the Opon No. 3
and No. 4 wells during the third quarter, the revenue was considerably
lower than planned and anticipated. The total mmbtu sold declined from
913,131 for the quarter ended March 31, 1998 to 597,670 for the current
quarter. By contract, the Company's gas price is equal to the Colombian
Resolution 61 price which adjusts semi-annually based on world fuel oil
prices. The Resolution 61 price changed from $1.15 per mmbtu to 85
cents per mmbtu on July 1, 1998.
Net operating profit (defined as operating revenue less operating
expenses, depreciation, depletion, and amortization, and overhead,
Colombian operations) improved by $0.4 million between the periods as a
result of the commencement of production in December 1997.
The level of the Company's debts to Lonrho Plc and to Amoco Colombia
under the Funding Agreement have increased by approximately $21.4
million between June 30, 1997 and June 30, 1998. Interest expense
increased by $1.8 million between the quarters because of the increased
debt levels and because interest is no longer being capitalized for the
pipeline construction.
Six months ended June 30, 1998 and 1997
---------------------------------------
Results of continuing operations for the nine months ended June 30, 1998
amounted to a net loss of $19.4 million, or $1.41 per share. The
Company reported a net loss from continuing operations of $8.2 million,
or 59 cents per share, for the nine months ended June 30, 1997. No
losses from discontinued operations were reported for either period. In
addition, for the nine months ended June 30, 1998, the Company had an
extraordinary gain from the forgiveness of debt of $3.6 million (as more
fully described in Liquidity and Capital Resources), or 26 cents per
share, and an extraordinary loss from the write-off of its Colombian
assets of $40.0 million, or $2.90 per share, arising from the extreme
22
downward adjustment of its oil and gas reserves as more fully described
above. The net loss for the nine months ended June 30, 1998 amounted to
$55.8 million, or $4.05 per share.
Net operating profit (defined as operating revenue less operating
expenses, depreciation, depletion, and amortization, and overhead,
Colombian operations) improved by $1.5 million between the periods as a
result of the commencement of production in December 1997.
The Company has charged its entire cost of $8.6 million for the
unsuccessful Opon No. 14 well to costs of exploration and dry holes
during the current period. No comparable expense was incurred in the
prior period.
Interest expense increased by $3.9 million between the nine-month
periods because of the increased debt levels and because interest is no
longer being capitalized for the pipeline construction.
LIQUIDITY AND CAPITAL RESOURCES
The Company reached a settlement with Phillips Petroleum on July 14,
1998 for $0.1 million pursuant to its obligation/liability of $1.2
million. The Company reached a settlement with the City of Long Beach,
California on July 10, 1998 for $0.2 million pursuant to its
obligation/liability of $1.7 million. The Company reached a settlement
with the trustee of the Newhall Industrial Development Revenue bonds on
July 27, 1998 that becomes fully effective after 90 days for $0.1
million pursuant to its obligation/liability of $1.0 million. The
Company did not make a scheduled interest payment of $0.1 million on the
Newhall Pollution Control Revenue bonds (amounting to principal and
accrued interest of $2.0 million as of June 30, 1998). The bond Trustee
has not issued a notice of default. The Company is in settlement
discussions with the U.S. Small Business Administration as guarantor and
payer of the bonds for the same payoff rate of ten cents on the dollar.
The Company has not reached any settlement with Lonrho Plc on its June
30, 1998 obligation of $114.6 in principal and accrued interest or with
Amoco Colombia on its June 30, 1998 obligation of $27.1 in principal and
accrued interest and the Company does not have the available cash
resources to make any settlement, even at the ten cents on the dollar
deployed in prior settlements.
The Company has previously accrued a contingent liability in the amount
of $3.2 million with regard to demands upon it relating to a challenged
assessment by the State of California against Fletcher Oil & Refining
Company ("Fletcher", a former subsidiary of the Company) for alleged
fuel tax deficiencies. The Company believes the assessment of the State
of California was unjustified and the amounts alleged by the State to be
owing can be substantially reduced, if not eliminated completely through
the review process provided by law. A lawsuit was brought against the
Company by Signal Treating Service, Inc. ("Signal") which was not a
party to the contract in which the stock of Fletcher was sold. In the
lawsuit Signal is seeking payment by the Company of the State's current
assessment of $5.7 million. The Company's counsel in the litigation has
advised that it has valid defenses against the lawsuit which is not
expected to go to trial before August 1999. If the Company is not
successful in the lawsuit it will not have the funds, and will have no
known means of obtaining the funds, to pay any judgment in the order of
the amount demanded by the plaintiff or in the amount currently booked
23
as a contingent liability or in any significant amount. Whatever rights
the Company has with regard to a letter from Lonrho Plc which created
the possibility that Lonrho might provide funds relating to the
contingent liability if an actual liability was established by the end
of fiscal 1998, will expire at the end of fiscal 1998 well before the
issue of alleged liability will be decided. The Company has not been
successful to date in negotiating a settlement in this litigation.
The Company does not have any source of new cash from available or new
facilities. Based upon the Company's current cash position, management
believes it has enough resources to settle the remaining Newhall bond
issue and to settle with its other remaining small creditors for the
same settlement rate of ten cents on the dollar paid to other creditors.
The Company does not have the financial resources to make any payments
to Amoco Colombia or Lonrho Plc except for the previously mentioned
payment to Lonrho Plc upon the sale of the Via Verde property. The
Company currently has four employees and continues to downsize its
operation and ongoing expenses to conserve its minimum cash resources.
Management is considering available alternatives in light of its
current financial situation which may include, among others, continued
negotiations with its existing creditors, dissolution of the Company, or
a filing under the appropriate bankruptcy law.
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.
24
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 June 30,
1998:
1) Form 8-K filed April 13, 1998 to report the Opon No. 14 well to
be a dry hole and to report initial concerns over declines in
production pressures and volumes from the Opon No. 3 and No. 4
wells.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date: August 11, 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.
FORM OF PROXY CARD
OF
HONDO OIL & GAS COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF HONDO OIL & GAS COMPANY.
The undersigned hereby appoints John H. Hoey and S.J.
Urquhart, or either one of them, proxies with full power of
substitution, and hereby authorizes them to represent and to
vote, as designated below, all the shares of Common Stock of
Hondo Oil & Gas Company (the "Company") held of record by the
undersigned on November 18, 1998, at the Special Meeting of
Stockholders of the Company to be held on December 23 1998, and
any adjournments or postponements thereof as follows:
(1) Proposal to adopt the Agreement and Plan of Merger, dated as
of October 12, 1998 among the Company, HOGC Acquisition
Corporation, ("Purchaser"), and Lonhro Plc., and to approve the
related merger of Purchaser with and into the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) In the discretion of the proxyholder, upon all matters
presented at the Special Meeting but which were not known to the
Board of Directors at a reasonable time before the solicitation
of this proxy and upon such other business as may be properly
come before the Special Meeting, including any adjournments or
postponements thereof.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE
MANNER DIRECTED ABOVE. IF NO DIRECTION IS MADE, IT WILL BE VOTED
FOR PROPOSAL (1) ABOVE.
The undersigned acknowledges receipt of the Notice of Special
Meeting of Stockholders and the Proxy Statement (with all Annexes
thereto) dated November __, 1998. The undersigned ratifies all
that the proxies or any of them or their substitutes may lawfully
do or cause to be done by virtue hereof and revokes all former
proxies.
DATED: _____________, 1998
___________________________
Signature
___________________________
Signature if held jointly
Please sign this proxy
exactly as your name(s)
appears above. If the stock
is registered in the names of
two or more persons, each
should sign. Executors,
administrators, trustees,
guardians, attorneys and
corporate officers should add
their titles.
IMPORTANT: PLEASE MARK,
DATE, SIGN AND RETURN THIS
PROXY IN THE ENVELOPMENT
PROVIDED. NO POSTAGE IS
REQUIRED IF MAILED IN THE
UNITED STATES.