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.
On December 15, 1989, the Company permanently suspended operations at its wholly-owned subsidiary, Newhall Refining Co., Inc. ("Newhall refinery"). On March 14, 1990, the Company sold its wholly-owned subsidiary, Blacktop Materials Co., effective March 1, 1990. 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 on October 1, 1992 and completed a sale of substantially all of the refining and marketing operations on October 1, 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.
The Company's principal assets now consist of its exploration concession in Colombia and its discontinued real estate in California.
(b) Financial Information About Industry Segments
See Note 12 to the Consolidated Financial Statements in Item 8. The Company presently operates in one segment.
(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 provides for an exploration period of up to six years, which commenced in July 1988. If, at the end of the exploration period, no hydrocarbon accumulation of potential commercial significance has been discovered, the Opon Contract will terminate. The Opon Contract requires the associate parties (Amoco Colombia, Hondo Magdalena and ODC) to perform certain minimum work obligations each year of the exploration period. The minimum work obligations for each of the first five years of the exploration period have been completed. Ecopetrol has granted extensions of the exploration period from time to time, and, at present, commencement of the sixth-year exploration obligation has been extended until July 13, 1995. The associate parties plan to fulfill the sixth- year obligation by drilling a well to the La Paz formation (the Opon No. 4 well). The Opon Contract does not prescribe work obligations after the completion of the exploration period. At the end of the exploration period, the associate parties may seek to declare the field(s) capable of producing hydrocarbons to be commercial (capable of repaying investment and expenses and returning a profit). The associate parties would then present an application to Ecopetrol to declare the field commercial. Ecopetrol has 90 days to respond to the associate parties' application. If Ecopetrol agrees, then the field(s) are declared to be commercial and production may commence. If Ecopetrol does not agree, it may indicate to the associate parties the additional work it deems necessary to demonstrate that the field(s) are commercial. The additional work may take up to one year, and the exploration period would be extended for the period necessary to complete the additional work. If Ecopetrol does not agree that the field(s) are commercial after the completion of the additional work, the associate parties may proceed to develop and exploit the property, with Ecopetrol participating after the associate parties recover 200% of their costs.
An application for commerciality may be submitted by the associate parties as early as the time the Opon No. 4 well is completed and favorable results to support such an application are obtained from the well. However, an application may be delayed for extended production testing and/or further seismic assessment if Ecopetrol agrees to same and grants further extensions.
Upon the designation of an area or field as commercial, Ecopetrol has the right to acquire a 50% interest in such area or field and will reimburse the associate parties 50% of the direct exploration costs for each commercial discovery. Thereafter, Ecopetrol will pay 50% of all subsequent costs and will receive 50% of all production. Hondo Magdalena's interest in the Opon Contract will be reduced by one-half to 15%, if Ecopetrol becomes a party. A declaration of commerciality will allow Hondo Magdalena to share in the sale of production during the exploitation period. Prior to a declaration of commerciality, except for extended production tests, the associate parties may not sell hydrocarbons from the property. The interest of each of the parties who participate in production from the Opon Contract area is subject to a 20% royalty, which is paid to the Colombian government.
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 percent. Two years thereafter, the Opon Contract area will be further reduced to 25 percent of the original area. Two years thereafter, the Opon Contract area will be reduced to the area of the commercial field or fields that are in production or development, plus a reserve zone of five kilometers in width around the productive limit of each field. The commercial fields plus the zone surrounding each field will become the area of exploitation. The associate parties designate the acreage to be released. The reductions in the Opon Contract area will reduce the areas available to the associate parties for further exploration. The Company believes that the first acreage reduction will not cause the loss of material exploration opportunities. Additional seismic assessment of the Opon Contract area will be necessary to evaluate the effects of subsequent acreage reductions.
Hondo Magdalena acquired its interest in the Opon Contract from ODC. Prior to fiscal 1993, Hondo Magdalena 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.
Under a Farmout Agreement dated August 9, 1993, Amoco Colombia earned a 50% participating interest from Hondo Magdalena in the Opon Contract. Hondo Magdalena retains a 30% interest. Amoco Colombia paid $3.0 million in cash and paid Hondo Magdalena's costs related to the fifth- year obligation under the Opon Contract, a well to the La Paz formation (the Opon No. 3 well). Amoco Colombia has an option to conduct further seismic evaluation of the Opon Contract area at its expense. Under the Farmout Agreement, Amoco Colombia paid Hondo Magdalena an additional $5.0 million in October 1994 and will pay all but $2.0 million of Hondo Magdalena's costs related to the sixth-year obligations under the Opon Contract (the Opon No. 4 well). Amoco Colombia will again have the option to withdraw and relinquish its interests after the drilling of the sixth-year obligation well. ODC is also a party to the Farmout Agreement and has assigned a 10% interest in the Opon Contract to Amoco Colombia. As a result, Amoco Colombia, Hondo Magdalena and ODC have interests of 60%, 30% and 10%, respectively, in the Opon Contract and Amoco Colombia is operator.
The Opon No. 3 well began on October 12, 1993. The Opon No. 3 well was drilled to a total depth of 12,710 feet and penetrated a full section of the La Paz formation. Testing of the Opon No. 3 was completed in September 1994 and indicated the presence of potentially significant hydrocarbon reserves. The well tested at a rate of 45 million cubic feet of natural gas and 2,000 barrels of condensate per day through a 42/64-inch opening at the surface with 6,000 pounds-per-square-inch flowing tubing pressure. The natural gas and condensate came from 1,118 feet of perforations over the interval from 10,018 feet to 12,348 feet
within the La Paz formation. Amoco Colombia noted that downhole restrictions prevented the well from testing at higher rates. Additional wells and seismic data will be necessary in order to assess the size of the hydrocarbon resources associated with the discovery. Drilling of the sixth-year obligation well, the Opon No. 4 well, is expected to commence in February 1995. This well is located approximately three-quarters of a mile from the Opon No. 3 well.
Prior to Hondo Magdalena's participation, eight wells had been drilled to various depths in the Opon Contract area. All of these wells are the property of Ecopetrol, and are not considered to be included in the Opon Contract area. None of these wells are currently producing and none of the former contract holders have any rights in the Opon Contract.
The principal objective at Opon is to confirm and commercially develop hydrocarbons from the La Paz formation. However, geologic and geophysical modeling indicates that, in addition to the potentially significant hydrocarbons discovered in the Opon No. 3 well, other potential hydrocarbon-bearing traps may lie within the Opon Contract area. Other traps and formations, including Cretaceous age formations lying below the Tertiary age La Paz formation, are possible objectives of further exploration efforts.
Operations in the Opon Contract area are subject to the operating risks normally associated with exploration for, and production of, oil and gas, including blowouts, cratering, and fires, each of which could result in damage to, or destruction of, the oil and gas wells, formations or production facilities or properties. In addition, there are greater than normal mechanical drilling risks at the Opon Contract area associated with high pressures in the La Paz and other formations. These pressures may: cause collapse of the well bore, impede the drill string while drilling, or cause difficulty in completing a well with casing and cement. These potential problems were overcome in the drilling of the Opon No. 3 well by the use of a top-drive drilling rig, heavy-weight drilling fluids and other technical drilling enhancements.
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, as well as, (iv) changes in laws and policies governing operations of foreign-based companies in Colombia. In the past, guerilla activity in Colombia has disrupted the operation of oil and gas projects, including site preparation at the Opon Contract area during fiscal 1991. Security in the area has been significantly improved and the associate parties have taken steps to enhance relations with the local population through a community relations program initiated in 1991. Since that time, operations have not been impeded. The government also continues its efforts through negotiation and legislation to ameliorate 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. Hondo Magdalena will continue to cooperate with the government, and does not expect that future guerilla 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.
Marketing arrangements for the sale of oil and natural gas will have to be made. The government of Colombia has recently 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 do not currently exist. 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 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. Colombia's largest refinery is located at Barrancabermeja, 30 miles north of the Opon Contract area. The proximity of the Opon Contract area to these potential gas markets will be an advantage for marketing the natural gas. Amoco Colombia is now pursuing discussions for the sale of natural gas in order to establish an early market for production from the Opon No. 3 well and expected production from the Opon No. 4 well.
Development of the Opon Project will require significant future capital expenditures. See Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources in Item 7.
U.S OIL AND GAS OPERATIONS
In January 1987, Hondo Oil & Gas Company (prior to the Exchange and subsequent Merger), acquired a number of oil and gas properties from Atlantic Richfield Company. Prior to the Exchange, Pauley owned certain oil and gas properties located primarily on the West Coast. The Company explored for, developed and produced oil and gas in approximately 13 states until 1992.
In June 1992, the Company completed a sale of substantially all of its domestic oil and gas assets. The Company's departure from the domestic oil and gas business was in part driven by management's believe that more profitable exploration and production opportunities exist abroad.
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 3 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 3 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. The Company has executed a contract for sale of this acreage for a minimum purchase price of $2.8 million. The sale is subject to certain contingencies and is scheduled to close in 1995.
Each of the above real properties is subject to a mortgage in favor of Lonrho Plc. See Note 6 to the Consolidated Financial Statements in Item 8.
COMPETITIVE FACTORS
Because of the sale of substantially all of the Company's domestic oil and gas properties in 1992 and the sale of substantially all of its discontinued refining and marketing assets in 1993, the only competition the Company currently faces is from other parties offering undeveloped raw land for sale in Los Angeles County and for participation in oil and gas concessions around the world. Many of the Company's competitors are large integrated oil companies having diverse operations and stronger capitalization.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
Environmental matters
The Company's operations are subject to certain federal, state and local laws 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. 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.
(2) Newhall Refinery Site
Operations at the Newhall refinery site ceased on December 15, 1989. Above ground facilities at the refinery have been dismantled and the site has been evaluated 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 the estimated remediation costs in determining the carrying value of the property and therefore the remediation costs will not affect future results of operations. The Company has requested changes in the approved plan that will reduce estimated remediation costs. See Note 3 to the Consolidated Financial Statements in Item 8.
(3) 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.
Government Regulations and Legislative Proposals
The Company is subject to governmental regulations which include various controls on the exploration for, production, export, import and transportation of crude oil and natural gas in Colombia, where the Company is participating in exploration operations. See International Operations above. A number of foreign, federal and state legislative proposals, if enacted, may have a significant adverse effect on companies in the petroleum industry, including Hondo Oil. 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 6 full-time personnel as of September 30, 1994.
(d) Financial Information About Foreign Operations
Prior to the sale of substantially all of the Company's oil and gas properties in 1992, all of the Company's crude oil and natural gas was produced in the United States, and all crude oil, natural gas and refined products were delivered and sold in the United States. The Company has an interest in a foreign concession to explore for and develop oil and gas in Colombia. However, no production had occurred as of September 30, 1994. See Note 12 to the Consolidated Financial Statements in Item 8.
Item 2.
Item 2. PROPERTIES
OIL AND GAS PROPERTIES
The Company uses the successful efforts method of accounting for its oil and gas producing activities. All significant producing properties and proved oil and gas reserves located in the United States were sold during 1992. The Company is continuing its efforts to develop its Colombian exploration concession. As of September 30, 1994 the Company had no producing wells or proved reserves in Colombia. See International Operations in Item 1.
(1) For estimated net quantities of proved developed 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, 1994, 1993 and 1992, 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 the fiscal year are those contained in this Annual Report on Form 10-K. This information has been filed with the Securities and Exchange Commission only.
(3) Production income and cost per unit for the years ended September 30 (all domestic), were as follows:
Oil Gas (per bbl) (per mcf) --------- --------- Average Sales Price Per Unit: 1994 - - 1993 - - 1992 $ 17.55 $ 1.40
Average Lifting Cost Per Equivalent Barrel of Production (a) (b): 1994 - 1993 - 1992 $ 8.30
(a) The common unit of production is based upon approximate relative energy content with six mcf of natural gas equivalent to one barrel of crude oil.
(b) Lifting (production) costs do not include lease acquisition costs, exploration and development costs, or depreciation, depletion and amortization of capitalized assets relating to producing activities, and make no provision for federal income taxes. Depreciation, depletion and amortization of capitalized acquisition, exploration and development costs are a part of the ultimate cost of the oil and gas produced.
(4) The Company had no domestic productive wells or developed acreage at September 30, 1994.
(5) Undeveloped acreage at September 30, 1994, all located in Colombia, consists of 123,658 gross acres, or 37,097 net acres, contained within the Opon Association Contract area.
(6) Net wells completed for the years ended September 30:
1994 (a) 1993 (a) 1992 (b) -------- -------- --------
Productive exploratory 1 - 0.7 Dry exploratory - 1 3.3 Productive development - - 1.9 Dry development - - 1.5
(a) Located in Colombia, South America.
(b) The wells completed were located in the states of New Mexico, North Dakota, Oklahoma and Texas.
(7) Present activity at September 30, 1994:
As of September 30, 1994, the Company had no wells in process in the United States and 4 (1.2 net) wells in process in Colombia. See Note 4 to the Consolidated Financial Statements in Item 8.
(8) Delivery Commitments:
None
OTHER PROPERTIES
Refer to Item 1 for descriptions of properties owned by the Company other than those described in Item 2, above.
Item 3.
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 the estimated remediation costs in determining the carrying value of the property and therefore the remediation costs will not affect future results of operations. The Company has requested changes in the approved plan that will reduce estimated remediation costs. See Note 3 to the Consolidated Financial Statements in Item 8.
Item 4.
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.
PART II
Item 5.
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, 1994 and 1993, as reported by the American Stock Exchange Monthly Market Statistics reports, were as follows:
December 31 March 31 June 30 September 30 ----------- --------- ------- ------------ Fiscal 1994: Low $ 5.75 $ 5.88 $ 6.00 $ 9.75 High $ 8.38 $ 7.63 $ 12.50 $ 19.88
Fiscal 1993: Low $ 6.25 $ 7.13 $ 7.63 $ 6.00 High $ 9.75 $ 10.88 $ 10.50 $ 10.13
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, 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 has ceased to be an operating company or has discontinued a substantial portion of its operations of 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 of 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 8, 1994 was 835.
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.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
a In June 1992, the Company sold substantially all of its domestic oil and gas operations and repaid significant portions of its debt with the proceeds from the sale.
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 1994.
c 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.
d The Company recorded valuation provisions against the carrying value of its discontinued segments in 1992.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
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 in Colombia, South America. The objectives for the Company in fiscal 1994 have been i) to confirm management's belief that significant hydrocarbon resources are contained in the Opon Contract area ii) to position the Company to move forward with exploration of the Opon Contract area iii) to minimize general and administrative expense and limit cash outflows for other domestic business activities and iv) to dispose of discontinued assets.
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. During 1991, 1992 and 1993, Hondo Magdalena and ODC drilled four shallow oil wells to the Mugrosa formation, one of which was a dry hole, and one deep gas well to the La Paz formation. These efforts met with limited success.
In August 1993, Hondo Magdalena and ODC entered into a Farmout Agreement under which Amoco Colombia Petroleum Company ("Amoco Colombia") earned a 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, a deep gas well drilled to the La Paz formation. Amoco Colombia, Hondo Magdalena and ODC have interests of 60%, 30% and 10%, respectively. Amoco Colombia assumed the role of operator from Hondo Magdalena on March 1, 1994.
To retain a 5% interest in the Opon Contract in accordance with the terms of the Farmout Agreement, Amoco Colombia paid Hondo Magdalena an additional $5.0 million in October 1994. Amoco Colombia will pay all but $2.0 million of Hondo Magdalena's costs related to the sixth-year obligations under the Opon Contract, a La Paz formation well which must commence by July 13, 1995. Site preparation for this well, the Opon No. 4 well, has begun and drilling is expected to commence in February 1995 Amoco Colombia will have an option to withdraw and relinquish its interests after the drilling of the Opon No. 4 well.
In September 1994, Amoco Colombia and Hondo Magdalena announced the test results of the Opon No. 3 well. The well tested at a rate of 45 million cubic feet of natural gas and 2,000 barrels of condensate daily through a 42/64-inch opening at the surface with 6,000 pounds-per-square-inch flowing tubing pressure. The well was drilled to a depth of 12,710 feet and produced from 1,118 feet of perforations over the interval from 10,018 feet to 12,348 feet within the La Paz formation. Downhole restrictions prevented the well from testing at higher rates.
Management is pleased with the test results of the Opon No. 3 well. This discovery of potentially significant reserves of natural gas and condensate has confirmed management's beliefs. With completion of this well, the first obstacle in securing the Company's future has been overcome. However, timely and successful completion of the Opon No. 4 well, assessment of the size of the hydrocarbon resources, obtaining facilities for processing and transporting the production, securing contracts for sale of the production, and further exploration and development activities, all remain to be accomplished. Refer to Liquidity and Capital Resources.
Domestic Activities -------------------
In 1994, the Company continued to reduce the scope of its domestic operations. This process began in 1993 following the sale of the Company's U.S. oil and gas assets in June 1992. The Company has further reduced its employee count from fifteen at September 30, 1993 to the present level of six. The Company's principal office facilities in Roswell, New Mexico were sold in May 1994. The Company continues to lease a portion of the space at this location from the buyer. The Company has suspended activities of McKenzie Porcupine Pipeline Company related to a proposed pipeline right-of-way in the State of Alaska.
In 1965, the Company (then Pauley Petroleum Inc.) acquired a nonoperating contractor's interest in the Long Beach Unit, Wilmington Oil Field, California ("THUMS"). The principal economic benefit of the interest was the right to receive approximately 4,000 barrels per day of THUMS crude oil for use at the Company's refineries. Following the sale of the Fletcher refinery in October 1993, the Company's interest in the Unit, which had been marginally profitable at best, became a potentially severe cash drain due to a decline in crude oil prices.
On February 2, 1994, the Company entered into an agreement whereby the Company and the City of Long Beach released each other from their respective rights and obligations under the THUMS contracts, effective January 1, 1994. The agreement also provides that amounts due the City of Long Beach of approximately $1.5 million will be paid on or before January 1, 1997, or prior to that date, if the Company has free available cash flow from the Opon No. 3 well or any other assets. The amount due is not subject to interest charges.
In November 1994, the Company obtained extensions of the maturities of its debts to Lonrho Plc, an owner of the Company's majority shareholder. The maturities of all loans from Lonrho Plc have been extended from 1995 to not earlier than October 1, 1996.
Discontinued Operations -----------------------
The Company began an effort to sell its refining and marketing assets in April 1991. On October 1, 1993 the Company completed a transaction for the sale of its Fletcher refinery and asphalt terminal in Hilo, Hawaii. The Company received net proceeds of $1.1 million in 1994. Further
proceeds, currently estimated at $0.4 million, are to be received when certain components of the refinery equipment are sold by the buyer. The Company completed disposal of the remaining minor portions of the refining and marketing assets during 1994.
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. In September 1994, the Company accrued a contingent liability of $1.4 million for the indemnification because of an audit for California Motor Vehicle Fuels Tax. The audit could result in a liability different from the amount accrued, when concluded. See Liquidity and Capital Resources, below. The Company also reduced the value of its receivable for its share of proceeds from the pending sale of certain components of the Fletcher refinery equipment by $0.6 million, bringing total refining and marketing discontinued losses for the year to $2.0 million. See Note 3 to the Consolidated Financial Statements in Item 8.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HONDO OIL & GAS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
PAGE ----
Report of Independent Auditors 25
Financial Statements: Consolidated Balance Sheets as of September 30, 1994 and 1993 26
Consolidated Statements of Operations for the years ended September 30, 1994, 1993 and 1992 27
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended September 30, 1994, 1993 and 1992 28
Consolidated Statements of Cash Flows for the years ended September 30, 1994, 1993 and 1992 29
Notes to Consolidated Financial Statements 31
Supplementary Information about Oil & Gas Producing Activities and Reserves (Unaudited) 51
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders Hondo Oil & Gas Company Roswell, New Mexico
We have audited the accompanying consolidated balance sheets of Hondo Oil & Gas Company as of September 30, 1994 and 1993, 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, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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.
As more fully described in Note 1, the Company has no significant operating assets which are presently generating cash to fund its operating and capital expenditure requirements. In addition, at September 30, 1994, the Company had a deficiency in net assets. The Company is currently exploring for oil and natural gas under the Opon Association Contract in Colombia. The future of the Company is largely dependent upon the successful exploitation of its rights under this contract.
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, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Denver, Colorado November 9, 1994
HONDO OIL & GAS COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Information)
September 30, 1994 1993 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $1,141 $601 Accounts receivable (Notes 2 and 3) 5,477 4,266 Inventory -- 770 Prepaid expenses and other 33 165 ------------- ------------- Total current assets 6,651 5,802
Properties, net (Notes 1 and 4) 10,855 15,910 Net assets of discontinued operations (Note 3) 6,851 7,750 Other assets 551 680 ------------- ------------- $24,908 $30,142 ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $196 $1,871 Current portion of long-term debt (Note 6) 220 210 Accrued expenses and other (Note 5) 3,822 1,992 ------------- ------------- Total current liabilities 4,238 4,073
Long-term debt, including $77,755 and $74,505, respectively, payable to a related party (Note 6) 81,888 78,828 Deferred taxes (Note 11) -- 561 Other liabilities, including $2,354 in 1994 payable to a related party (Note 7) 5,463 2,495 ------------- ------------- 91,589 85,957 Contingent liabilities (Note 9)
Shareholders' equity (deficit): Preferred stock (Note 10) -- -- Common stock, $1 par value, 30,000,000 shares authorized; shares issued and outstanding: 13,032,276 and 13,006,892, respectively 13,032 13,007 Additional paid-in capital 43,972 43,807 Accumulated deficit (123,685) (112,629) ------------- ------------- (66,681) (55,815) ------------- ------------- $24,908 $30,142 ============= =============
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
(Continued)
The accompanying notes are an integral part of these financial statements.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies ------------------------------------------
(a) Basis of Consolidation and Presentation ---------------------------------------
The consolidated financial statements of Hondo Oil & Gas Company (hereinafter referred to as "Hondo Oil" or "the Company") include the accounts of all subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated. The Hondo Company, hereinafter referred to as "Hondo", owns 78% of Hondo Oil's common stock.
Effective March 31 and September 4, 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. On October 1, 1993, the Company completed the sale of substantially all of its refining and marketing assets. Refer to Note 3.
As described in Note 2, during 1992 the Company sold substantially all of its domestic oil and gas properties to Devon Energy Corporation. As a result, the Company's cash resources are limited to cash on hand, advances under lines of credit from a related party (See Note 6) and the proceeds of sales of certain assets. Cash from operations is not expected to be a source of funds unless and until the Company's Colombian Opon Association Contract begins production.
The Company's future is dependent upon successful exploitation of its rights under the Opon Association Contract. During 1993, the Company entered into a Farmout Agreement with Amoco Colombia Petroleum Company ("Amoco Colombia") relating to the Opon Contract in which the Company sold a partial interest. As part of the consideration for this interest, Amoco Colombia has or will provide funds for certain capital expenditures required by the contract during fiscal 1994 and 1995. Management estimates its available cash is sufficient to meet its cash needs for the next fiscal year assuming no material adverse changes to budgeted plans occur.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies (continued) ------------------------------------------------------
(a) Basis of Consolidation and Presentation (continued) ---------------------------------------------------
The Company now owns a 30% interest in the Opon Contract which drilled the Opon No. 3 well in Colombia in 1994 and will soon begin drilling of the Opon No. 4 well. The Opon No. 3 well discovered potentially significant reserves of natural gas and condensate. However, delivering these reserves to market is dependent upon successful completion of another well and subsequently obtaining financing for further development of the Opon Contract area. At September 30, 1994, exploration under the Opon Contract represents substantially all of the Company's current business operations. While the Opon No. 3 well has discovered potentially significant quantities of hydrocarbons, substantial contingencies must still be resolved before recovery of the Company's investment in Colombia, by production of the reserves, can be assured.
(b) Cash Equivalents ----------------
Cash equivalents represent highly liquid investments with maturities of three months or less when purchased.
(c) Inventory ---------
Inventory, which consists entirely of lease and well equipment in Colombia, is valued at the lower of cost or net realizable value.
(d) 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 and exploratory geological and geophysical costs and delay rentals are expensed as incurred. The Company does not capitalize salaries, or other general and administrative costs, pertaining to oil and gas acquisition, exploration, and development activities. 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 intangible drilling and equipment costs incurred on unsuccessful wells, are capitalized.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies (continued) ------------------------------------------------------
(d) Oil and Gas Properties (continued) ----------------------------------
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 costs of exploration, exploratory dry holes, and lease impairment.
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 Company and independent petroleum engineers.
(e) 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.
(f) Earnings Per Share ------------------
Net income per share amounts are computed using the weighted average number of common shares and dilutive common equivalent shares outstanding. The effect of common stock equivalents is not included for periods with losses. Fully diluted per share amounts are the same as primary per share amounts, and accordingly, are not presented.
(g) Income Taxes ------------
As required by the provisions of SFAS No. 109, the Company changed its method of accounting for income taxes from the provisions of SFAS No. 96, "Accounting For Income Taxes", to the provisions of SFAS No. 109, "Accounting For Income Taxes", effective October 1, 1993. The change in accounting method had no material effect on the Company's financial position, results of operations, or components of income tax expense for the current or previous fiscal years. Accordingly, no cumulative effect of a change in accounting principle has been recognized.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies (continued) ------------------------------------------------------
(g) Income Taxes (continued) ------------------------
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. Prior to the adoption of Statement 109, income tax expense was determined using the liability method prescribed by Statement 96, which has been superseded by Statement 109. Among other changes, Statement 109 changes the recognition and measurement criteria for deferred tax assets included in Statement 96.
Investment tax credits are accounted for by the flow-through method which recognizes related benefits in the year realized.
(h) 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.
(i) New Accounting Standards ------------------------
In December 1991 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments". SFAS No. 107 requires disclosure of information relating to fair market values of financial instruments and is effective for fiscal years ending after December 15, 1995, for companies with total assets of less than $150,000. Accordingly, the difference between fair market values and carrying values of the Company's financial instruments has not been determined.
(j) 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 other income.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
2) Accounts Receivable; Disposal of Oil and Gas Assets ---------------------------------------------------
Under the terms of the Farmout Agreement with Amoco Colombia (See Note 1), Amoco Colombia had an option to withdraw from the Opon Contract following completion of the Opon No. 3 well. On September 26, 1994, Amoco Colombia notified the Company it had elected to proceed, and accordingly, incurred an obligation to the Company of $5,000. The $5,000 receivable accrued by the Company at September 30, 1994 was collected on October 14, 1994. No gain was recognized on the transaction, rather the full amount was used to reduce the balance of the Company's drilling in progress. See Notes 4 and 5.
The accounts receivable balances reported in the consolidated balance sheets are net of allowances for doubtful receivables of $399 and $555 for September 30, 1994 and 1993, respectively.
On March 18, 1992, the Company executed an agreement to sell substantially all of its domestic oil and gas properties to Devon Energy Corporation for a contractual price of $139,175. The purchase price was subject to various adjustments, including adjustments for the cash operating profit of the properties and capital expenditures pertaining to the properties from December 31, 1991 through the date of closing, June 25, 1992. Proceeds from the sale were $126,668 and the gain arising from the transaction was $23,588. The proceeds were used to reduce short-term and long-term debt by $94,080 and to repay accrued interest and expenses of $7,726. The remainder was retained to fund the ongoing operations of the Company. The reported 1992 gain of $21,403 also includes net losses from the disposal of domestic oil and gas properties excluded from the transaction described above and the disposal of fixed assets.
Since the time of the transaction described above, the Company has not owned any significant domestic oil and gas properties and has continued to dispose of the few remaining insignificant domestic properties and excess fixed assets. Loss on sale of assets for 1994 includes $935 from the sale of the Company's office building and certain furniture and equipment in Roswell, N.M.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
3) Discontinued Operations -----------------------
Effective March 31 and September 4, 1991, respectively, the Company adopted plans of disposal for its refining and marketing and real estate segments. Revenues of the refining and marketing segment for 1994, 1993 and 1992 were $64, $1,213 and $68,175 respectively. A summary, by segment, of the results of discontinued operations is as follows:
In October 1992, the Fletcher refinery was placed in a cold shut-down and subsequently the facility was used to terminal crude oil and petroleum products for third parties. On September 15, 1993, the Company executed an agreement for the sale of its Fletcher refinery and its asphalt terminal in Hilo, Hawaii. These assets represent the material portion of the Company's refining and marketing segment. The transaction closed on October 1, 1993 at which time $992 of the net accrued proceeds of $1,992 were received.
Refining and marketing losses for 1993 include $6,370 resulting from the sale and operating loss provisions of $3,000. The Company recorded a $44,000 valuation provision and a provision for future operating losses of $3,000 in 1992 in respect of the refining and marketing segment. Additional loss provisions of $2,000 have been required in 1994 for the reasons described below.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
3) Discontinued Operations (continued) -----------------------------------
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 during the ensuing year. 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 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 present 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. The State of California's audit is still in process and could result in a liability different from the amount accrued when concluded.
On December 15, 1989, the Company permanently suspended operations at its Newhall refinery because of expectations of continued operating losses. As of September 30, 1990, the Company reclassified the cost of Newhall's dismantled properties to the real estate segment. All costs incurred subsequent to December 15, 1989 have been capitalized. In September 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 now believes that a sale of the property in its present condition with existing entitlements is the best course of action. Accordingly, the carrying value of the property was further reduced by $5,700 in 1993 and prior accruals of environmental remediation and development costs of $9,174 were netted against the carrying value of the property.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
3) Discontinued Operations (continued) -----------------------------------
In addition to the Valley Gateway property, the Company owns the 11 acre Via Verde Bluffs property, carried at $2,575 and $2,995 at September 30, 1994 and 1993, respectively. Both properties were listed with brokers during 1994. The Company has executed a sale agreement for the Via Verde Bluffs property which is subject to certain contingencies and is scheduled to close in the summer of 1995.
In 1994, the carrying value of the real estate was further reduced by $1,400 as a result of local market conditions, current sale negotiations, and the timing of possible sales. It is management's belief that the market value of the property is equal to or in excess of the Company's carrying value, as adjusted.
Changes in the balance of real estate are as follows:
September 30, 1994 1993 ------------- -------------
Beginning balance $7,750 $20,500 Development and dismantlement costs 168 1,606 Accrued future development costs: Short-term -- (2,870) Long-term -- (6,304) Valuation provisions established (1,400) (5,700) Valuation provisions used 333 518 ------------- ------------- Ending balance $6,851 $7,750 ============= =============
Remaining acres 116 116 ============= =============
Interest expense included in the losses from discontinued operations pertains only to debt directly attributable to the discontinued segments. Interest of $2,522 and $4,184 for 1993 and 1992, respectively, was allocated to refining and marketing operations. Allocations of interest to the real estate operations were $285, $295 and $304 for 1994, 1993 and 1992 respectively. Interest expense allocated to discontinued operations also includes $2,514 and $2,370 attributable to Lonrho Plc for the years ended September 30, 1993 and 1992, respectively.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
4) Properties ----------
Properties, at cost, consist of the following:
September 30, 1994 1993 ------------- -------------
Proved oil and gas properties (domestic) $3 $1,742 Accumulated depreciation, depletion and amortization (3) (1,493) ------------- ------------- 0 249 Drilling in progress (a),(b) 10,696 13,629 ------------- ------------- Oil and gas properties, net 10,696 13,878 ------------- -------------
Other fixed assets 267 2,693 Accumulated depreciation (108) (661) ------------- ------------- Other properties, net 159 2,032 ------------- -------------
$10,855 $15,910 ============= =============
(a) As of September 30, 1994, drilling in progress represents the cost of four of the five wells the Company drilled in Colombia prior to fiscal 1994. The fifth well was expensed as a dry hole in fiscal 1993. Assignment of proved reserves to these costs is dependent upon further exploration work which is now in progress. If the additional capital expenditures fail to establish proved reserves, these capitalized costs could be written off during fiscal 1995.
(b) See Notes 2 and 5 regarding accruals at September 30, 1994 which affect this balance.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
4) Properties (continued) ----------------------
Total costs incurred (both capitalized and expensed) in oil and gas producing activities were:
(a) See Note 5 regarding accruals at September 30, 1994 which affect the 1994 amount.
5) Accrued expenses ----------------
Accrued expenses consist of the following:
September 30, 1994 1993 ------------- -------------
Drilling costs (a) $2,000 $600 Refining and marketing costs (Note 3) 1,544 500 Ad valorem taxes -- 229 Other 278 663 ------------- ------------- $3,822 $1,992 ============= =============
(a) Under the terms of the Farmout Agreement with Amoco Colombia (See Note 1), Amoco Colombia had an option to withdraw from the Opon Contract following completion of the Opon No. 3 well. On September 26, 1994, Amoco Colombia notified the Company it had elected to proceed. Amoco Colombia's election obligates Amoco Colombia to proceed with the drilling of Opon No. 4 well and, in turn, obligates the Company to pay $2,000 of the drilling costs for Opon No. 4 well. As of September 30, 1994, the Company has accrued its obligations for the Opon No. 4 well and increased the balance of drilling in progress.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
6) Long-Term Debt --------------
Long-term debt consists of the following:
September 30, 1994 1993 ------------- -------------
Notes payable to Lonrho Plc (a),(b): Note A (c) $3,181 $3,087 Note B (c) 4,144 3,050 Note C (d) 35,302 34,274 Note D (d),(e) 35,128 34,094 Pollution Control Revenue Bonds (f) 2,930 3,140 Industrial Development Revenue Bonds (f) 1,000 1,000 Other 423 393 ------------- ------------- 82,108 79,038 Less current maturities (220) (210) ------------- -------------
$81,888 $78,828 ============= =============
Maturities are as follows for the years ending September 30:
1995 $220 1996 235 1997 49,033 1998 13,497 1999 13,513 Thereafter 5,610 ------------- $82,108 =============
Hondo Oil paid interest of $260, $4,031 and $16,259 for the years ended September 30, 1994, 1993 and 1992, respectively. Interest of $829 and $814, all of which pertained to discontinued operations, was capitalized for the years ended September 30, 1993 and 1992, respectively. Capitalized interest for the year ended September 30, 1993 arose from amounts owed to Lonrho Plc.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
6) Long-Term Debt (continued) --------------------------
(a) In December 1993, the Company restructured its debts to Lonrho Plc, a shareholder of Hondo, effective September 30, 1993. The following terms apply to each of the four notes: (1) Interest is payable semiannually at a rate of 6%. (2) If management determines sufficent 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. (3) Accrued interest of $2,354, $2,250 and $6,005 has been added to the outstanding debt as of October 1, 1994, April 1, 1994 and September 30, 1993, respectively. (4) As consideration for past deferrals of interest and principal payments due under the terms of the 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 the four notes, Lonrho's entitlement will be reduced by half. (5) Net proceeds from asset sales are to be applied to the reduction of Notes C and D.
(b) In November 1994, the Company and Lonrho agreed to defer commencement of principal amortization for each of the four loans. The maturity terms noted below reflect the revisions.
(c) Notes A and B are secured by 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 October 1, 1996. 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. An additional $1,000 was drawn under the terms of Note B during 1994.
(d) Notes C and D are secured by the Company's Valley Gateway real estate. Note C is to be amortized in three equal annual installments beginning November 1, 1996. Note D is due October 1, 1996. Notes C and D are subordinated to the Company's other indebtedness existing at September 30, 1994.
(e) In October 1994, the Company received $4,800, net of withholding taxes, from Amoco Colombia under the terms of the Farmout Agreement (See Notes 1 and 2). 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 facility loan that may be drawn as needed by the Company.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
6) Long-Term Debt (continued) --------------------------
(f) 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 6.11%, 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 has been notified of these changes in the collateral. No substitute collateral has been provided. The Company has received no correspondence from the Trustee related to these events.
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.
7) Other Liabilities -----------------
During 1994, the Company entered into an agreement with the City of Long Beach which provides, among other things, that payment of amounts due to the City of Long Beach arising from the Company's interest in the Long Beach Unit, Wilmington Oil Field, California (THUMS), including $542 classified as a current liability at September 30, 1993, will be deferred. Accordingly, all liabilities to the City of Long Beach are now classified as long-term. Other liabilities consist of the following:
September 30, 1994 1993 ------------- -------------
Interest payable to Lonrho Plc (Note 6) $2,354 $ -- City of Long Beach 1,534 1,332 Other 1,575 1,163 ------------- ------------- $5,463 $2,495 ============= =============
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
8) Retirement Plans ----------------
The Company has made available to all full-time administrative employees, who have completed at least one year of service, a defined contribution profit-sharing plan (401(k) Plan). Qualifying employees may contribute up to 10.00% of their annual earnings, but not in excess of the maximum amount allowed by the Internal Revenue Service, and the Company will match the employee contribution up to a maximum 5.00% of an employee's annual earnings. The Company's matching contributions for the years ended September 30, 1994, 1993 and 1992 were $27, $121 and $232, respectively.
In addition, the Company has a defined benefit pension plan covering certain former officers of the Company. The plan was created to provide pension benefits greater than the amounts allowable (in accordance with IRS regulations) under the former defined benefit plan (terminated in 1989) available to all full-time non-union employees. The benefits of the continuing plan are based on years of service and compensation during the last five years of service as in the terminated plan, less the pension benefit determined under the terminated plan. The plan is unfunded. The weighted average discount rates used in determining the actuarial present value of the projected benefit obligation were 7.50% and 6.75% for September 30, 1994 and 1993, respectively. The following table sets forth the plan's funded status and amounts recognized in the Company's balance sheet:
September 30, 1994 1993 ------------- -------------
Actuarial present value of projected (fully accumulated) benefit obligation, fully vested $625 $683 Plan assets at fair value -- -- ------------- ------------- Projected benefit obligation in excess of plan assets 625 683 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (215) (268) Unrecognized prior service cost (58) (64) Unrecognized net transition obligation (145) (159) Adjustment required to recognize minimum liability 418 491 ------------- ------------- Accrued pension cost included in other long-term liabilities $625 $683 ============= =============
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
8) Retirement Plans (continued) ----------------------------
Net pension cost included the following components:
9) 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. 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. 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.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
10) 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, 1994.
The Company has two stock option plans 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 in connection with the plan is recognized. The 1982 Stock Option Plan has been terminated except for 74,700 outstanding options priced at $19.00 per share which expire in May 1997. Options granted, exercised and outstanding at September 30, 1994 under the 1993 Stock Incentive Plan were all priced at $7.50 per share.
The following table summarizes certain information relative to the stock option plans:
Share Options -------------
Outstanding at October 1, 1993 75,200 Granted 171,000 Exercised (25,384) Expired or terminated (500) ------------- Outstanding at September 30, 1994 220,316 =============
Additional options of 179,000 are available for future grants at September 30, 1994. No additional options were available at September 30, 1993. Of the 220,316 options outstanding at September 30, 1994, 136,816 were exercisable at that date.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
11) Income Taxes ------------
Until 1992, Hondo Oil was included in the consolidated tax return of Hondo because Hondo owned greater than 80% of Hondo Oil's shares. Hondo's ownership of Hondo Oil became less than 80% in 1992. Hondo Oil had a tax allocation agreement with Hondo whereby Hondo Oil reimbursed Hondo for the use of Hondo's tax attributes to the extent these attributes were applied against taxable income generated by Hondo Oil in the consolidated tax return. Under the terms of this agreement, Hondo Oil paid $500 to Hondo in 1992. This payment was made to reimburse Hondo for alternative minimum tax net operating losses utilized by Hondo Oil in the consolidated tax return filed for the year ended September 30, 1990.
The components of income tax benefit from continuing operations are as follows:
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
11) Income Taxes (continued) ------------------------
Significant components of the Company's deferred tax assets and liabilities are as follows: September 30, 1994 1993 ------------- ------------- Deferred tax assets, long-term: Net operating loss carryforwards $38,734 $35,223 Valuation allowances (38,734) (26,992) ------------- ------------- -- 8,231 ------------- ------------- Deferred tax liabilities, long-term: Financial reporting basis of real estate in excess of income tax basis -- 8,671 Income tax depreciation in excess of financial reporting depreciation -- 121 ------------- ------------- -- 8,792 ------------- ------------- Net deferred tax liability $-- $561 ============= =============
The differences between income tax benefit from continuing operations and the amount computed by applying the statutory Federal income tax rate to income (loss) from continuing operations before income taxes are as follows:
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
11) Income Taxes (continued) ------------------------
At September 30, 1994, the Company had the following net operating loss and investment tax credit carryforwards for financial statement and income tax reporting purposes:
(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 3, 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.
HONDO OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994
(All Dollar Amounts in Thousands)
12) Segment information -------------------
Following reclassification of the Company's refining and marketing and real estate segments to discontinued operations in 1991, the Company's operations have been concentrated in one industry segment: the exploration for and production of reserves of oil and natural gas. In 1992, the Company sold substantially all of its domestic oil and gas reserves. The Company's continuing activities are presently limited to exploration for oil and gas reserves located in Colombia. Currently, no proven reserves have been established and the Company has no foreign sales as yet, and no export sales. As a result of the asset sale noted above, the Company has no significant customers (comprising more than 10% of continuing operation's revenue) with which it will do business in the foreseeable future. Information segregating the Company's continuing domestic and foreign operations is as follows:
HONDO OIL & GAS COMPANY SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES AND RESERVES (UNAUDITED) September 30, 1994
(All Dollar Amounts in Thousands)
In September 1994, the Company announced the discovery of potentially significant reserves of natural gas and condensate in an exploratory well recently drilled on the Opon Association Contract area in Colombia. Results of testing of this well indicate the well is capable of producing 45 million cubic feet of natural gas and 2,000 barrels of condensate daily. The Company has a 30% interest in the well. Ecopetrol, the Colombian national oil company, has the right to a 50% working interest participation after the contract area is declared commercial. No definitive assessment of the size of the hydrocarbon resources associated with the discovery can presently be made and no proven reserves have been assigned.
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."
Due to the sale of substantially all of the Company's oil and gas properties during 1992 (See Note 2 to the Consolidated Financial Statements), certain of the disclosure provisions referenced above are not presently applicable. Disclosures regarding proved oil and gas reserve quantities are presented only for 1992. The standardized measure of discounted future net cash flows (and the changes therein) has been omitted. Disclosures regarding capitalized costs relating to oil and gas producing activities and costs incurred for property acquisition, exploration, and development activities are included in Note 4 to the consolidated financial statements.
Estimates of oil and gas proved reserves and production, all located in the United States, were as follows:
Oil Gas (MBBLS) (MMCF) ------------- -------------
Proved reserves, October 1, 1991 14,452 83,745 Revisions in previous estimates -- -- Sale of producing properties (12,701) (75,399) Extensions, discoveries and purchases 266 1,353 Production (2,017) (9,699) ------------- ------------- Proved reserves, September 30, 1992 0 0 ============= =============
Proved reserves at October 1, 1991 include proved developed reserves of 13,503 MBBLS and 74,174 MMCF.
HONDO OIL & GAS COMPANY SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES AND RESERVES (UNAUDITED) September 30, 1994
(All Dollar Amounts in Thousands)
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.
Note: The balance of $222 for discontinued operations as of September 30, 1993 was included in the assets of a subsidiary which was sold as of that date.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in the Company's auditors during the two most recent fiscal years.
PART III
Item 10.
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.
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.
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.
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.
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
VIII. Valuation and Qualifying Accounts 53
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 two Forms 8-K during the quarter ended September 30, 1994, dated September 12, 1994 and September 30, 1994. The first announced test results of an exploratory well recently completed in Colombia in which the Company has an interest. The second reported that Amoco Colombia elected to proceed with drilling of the sixth-year obligation well and to pay Hondo Magdalena $5,000,000 under the Farmout Agreement dated August 9, 1993.
(c) Exhibits: See Exhibit Index on page 57 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.
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 to be signed on its behalf by the undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
Date: December 29, 1994 By:/s/Stanton J. Urquhart ----------------------- Stanton J. Urquhart Vice President and Chief Financial Officer
(continued)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
EXHIBIT INDEX
Exhibit Number Subject ------- ---------------------------------------------------------------
3.1 Revised Certificate of Incorporation.
3.2 Bylaws.
*4.1 Documents relating to the $1 million principal amount of California Pollution Control Authority, 7 1/2% Industrial Development Revenue Bonds (Newhall Refining Co., Inc. Project) including Installment Sale Agreement and Indenture of Trust.
*4.2 Documents relating to the $5 million principal amount of California Pollution Control Financing Authority Pollution Control Revenue Bonds (Newhall Refining Co., Inc. Project), including Pollution Control Facilities Lease Agreement, Indenture, U.S. Small Business Administration Pollution Control Facility Payment Guaranty and Reimbursement Agreement.
*10.1 Note Purchase Agreement and Letter Agreement dated November 28, 1988, between the Company and Thamesedge, Ltd.
**10.2 Letter Agreement dated December 18, 1992, between the Company and Thamesedge, Ltd., amending Note Purchase Agreement (Exhibit 10.1, above) (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, filed with the Securities and Exchange Commission on December 28, 1992).
**10.3 Loan Agreement dated December 20, 1991, by and between Hondo Oil & Gas Company and Lonrho Plc, including the Promissory Notes and Letter Agreement related thereto (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1991, filed with the Securities and Exchange Commission on January 13, 1992).
**10.4 Letter Agreement dated December 18, 1992, between the Company and Lonrho Plc, amending Loan Agreement (Exhibit 10.3, above) (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, filed with the Securities and Exchange Commission on December 28, 1992).
**10.5 Net Profits Share Agreement dated December 18, 1992, among the Company, Lonrho Plc, Thamesedge, Ltd. (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, filed with the Securities and Exchange Commission on December 28, 1992).
EXHIBIT INDEX (continued)
Exhibit Number Subject ------- ---------------------------------------------------------------
**10.6 Note Dated April 30, 1993, for $3,000,000, from Via Verde Development Company to Lonrho Plc; Guaranty of the Company (incorporated by reference to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, filed with the Securities and Exchange Commission on May 17, 1993).
**10.7 Note dated June 25, 1993 for $4,000,000 from the Company to Lonrho Plc; Letter Agreement relating to same (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993, filed with the Securities and Exchange Commission on December 28, 1993).
**10.8 Letter Agreement dated December 17, 1993, by and among the Company, Via Verde Development Company, Newhall Refining Co., Inc., Lonrho Plc and Thamesedge Ltd. and Note Amendments, amending prior loan agreements and notes (Exhibits 10.1 through 10.7, above),(incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993, filed with the Securities and Exchange Commission on December 28, 1993).
**10.9 Letter Agreement dated November 10, 1994, by and among the Company, Via Verde Development Company, Newhall Refining Co., Inc., Lonrho Plc and Thamesedge Ltd. and Note Amendments (excluding Exhibit E to the Letter Agreement filed as Exhibit 10.10, below) amending prior loan agreements and notes (Exhibits 10.1 through 10.8, above),(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated November 29, 1994, filed with the Securities and Exchange Commission on November 29, 1994).
**10.10 Promissory Note dated October 31, 1994, in the original principal amount of $5,000,000, from the Company to Lonrho Plc (additional loan facility),(incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K dated November 29, 1994, filed with the Securities and Exchange Commission on November 29, 1994).
*10.11 Employee Capital Appreciation Savings Plan, effective January 1, 1985.
**10.12 Form of Indemnity Agreement between Pauley and its directors and officers, approved January 27, 1987 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, filed with the Securities and Exchange Commission on December 28, 1992).
EXHIBIT INDEX (continued)
Exhibit Number Subject ------- ---------------------------------------------------------------
**10.13 Opon Association Contract (translation) dated July 15, 1987, between Ecopetrol and Opon Development Company, excluding exhibits and attachments (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1991, filed with Securities and Exchange Commission on January 13, 1992).
**10.14 Farmout Agreement among Hondo Magdalena Oil & Gas Limited, Opon Development Company and Amoco Colombia Petroleum Company dated August 9, 1993, excluding exhibits (incorporated by reference to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, filed with the Securities and Exchange Commission on August 16, 1993).
**10.15 New Operating Agreement dated as of August 9, 1993, among Amoco Colombia Petroleum Company, Hondo Magdalena Oil & Gas Limited and Opon Development Company (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993, filed with Securities and Exchange Commission on December 28, 1993).
**10.16 Stock and Asset Purchase Agreement between Signal Oil & Refining Company, Inc. and the Company and Pauley Pacific Inc. dated September 15, 1993, excluding exhibits (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8- K dated October 12, 1993, filed with the Securities and Exchange Commission on October 12, 1993).
**10.17 Letter Agreement dated February 2, 1994 between the Company and the City of Long Beach, excluding exhibits (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993, filed with the Securities and Exchange Commission on February 14, 1994).
**10.18 Hondo Oil & Gas Company 1993 Stock Incentive Plan, excluding exhibits (incorporated by reference to Exhibit A to the Company's Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on January 28, 1994.
10.19 Agreement for Purchase and Sale of Real Estate and Escrow Instructions between Via Verde Development Company and Kaufman and Broad -- Coastal Valleys, Inc., excluding exhibits.
EXHIBIT INDEX (continued)
Exhibit Number Subject ------- ---------------------------------------------------------------
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedules.
--------------------------------------
* These exhibits, which were previously incorporated by reference to the Company's reports which have now been on file with the Commission for more than 5 years, are not filed with this Annual Report pursuant to 17 C.F.R. 229.601(b)(4)(iii)(A). The Company agrees to furnish these documents to the Commission upon request.
** Incorporated by reference