FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8979
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
410 East College Blvd, Roswell, New Mexico 88201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (505) 625-8700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The registrant has one class of common stock outstanding. As of July 26,
1995, 13,309,456 shares of registrant's $1 par value common stock were
outstanding.
1
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED JUNE 30, 1995
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 1995 and September 30, 1994 3
Consolidated Statements of Operations for the
three months ended June 30, 1995 and 1994 4
Consolidated Statements of Operations for the
nine months ended June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 20
SIGNATURES 20
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
June 30, September 30,
1995 1994
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $155 $1,141
Accounts receivable (Note 2) 439 5,477
Prepaid expenses and other 72 33
------------- -------------
Total current assets 666 6,651
Properties, net 11,385 10,855
Net assets of discontinued
operations (Note 3) 6,869 6,851
Other assets 668 551
------------- -------------
$19,588 $24,908
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $315 $196
Current portion of long-term debt 235 220
Accrued expenses and other (Note 4) 2,349 3,822
------------- -------------
Total current liabilities 2,899 4,238
Long-term debt, including $78,284 and
$77,755, respectively, payable to a
related party (Note 2) 82,205 81,888
Other liabilities, including $1,179 and
$2,354, respectively, payable to a related
party (Note 5) 3,873 5,463
------------- -------------
88,977 91,589
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000
shares authorized; shares issued and
outstanding: 13,229,256 and 13,032,276,
respectively 13,229 13,032
Additional paid-in capital 46,127 43,972
Accumulated deficit (128,745) (123,685)
------------- -------------
(69,389) (66,681)
------------- -------------
$19,588 $24,908
============= =============
The accompanying notes are an integral part of these financial statements.
3
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
June 30,
-----------------------------
1995 1994
------------- -------------
REVENUES
Sales and operating revenue $2 $12
Overhead reimbursement and other income 2 16
------------- -------------
4 28
------------- -------------
COSTS AND EXPENSES
Operating costs (recoveries) (4) 77
Depreciation and amortization 42 38
General and administrative 375 545
Interest expense, all to a related party 1,179 1,174
Loss on sale of assets -- 5
------------- -------------
1,592 1,839
------------- -------------
Loss from continuing operations
before income taxes (1,588) (1,811)
Income tax expense -- --
------------- -------------
Loss from continuing operations (1,588) (1,811)
Loss from discontinued operations (Note 3) -- (1,400)
------------- -------------
Net Loss ($1,588) ($3,211)
============= =============
Loss per share:
Continuing operations ($0.12) ($0.14)
Discontinued operations -- (0.11)
------------- -------------
Loss per share ($0.12) ($0.25)
============= =============
Weighted average common shares outstanding 13,229,256 13,006,892
The accompanying notes are an integral part of these financial statements.
4
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the nine months ended
June 30,
-----------------------------
1995 1994
------------- -------------
REVENUES
Sales and operating revenue $6 $367
Overhead reimbursement and other income 8 343
------------- -------------
14 710
------------- -------------
COSTS AND EXPENSES
Operating costs 2 518
Depreciation and amortization 125 182
General and administrative 1,176 1,725
Interest expense, all to a related party 3,471 3,424
Loss on sale of assets -- 1,240
------------- -------------
4,774 7,089
------------- -------------
Loss from continuing operations
before income taxes (4,760) (6,379)
Income tax expense -- --
------------- -------------
Loss from continuing operations (4,760) (6,379)
Loss from discontinued operations (Note 3) (300) (1,400)
------------- -------------
Net Loss ($5,060) ($7,779)
============= =============
Loss per share:
Continuing operations ($0.37) ($0.49)
Discontinued operations (0.02) (0.11)
------------- -------------
Loss per share ($0.39) ($0.60)
============= =============
Weighted average common shares outstanding 13,102,936 13,006,892
The accompanying notes are an integral part of these financial statements.
5
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the nine months ended
June 30,
-----------------------------
1995 1994
------------- -------------
Cash flows from operating activities:
Loss from continuing operations ($4,760) ($6,379)
Adjustments to reconcile loss from continuing operations
to net cash used by continuing operations:
Depreciation and amortization 125 182
Loss on sale of assets -- 1,240
Accrued interest added to long-term debt 2,377 2,272
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 200 1,731
Inventory -- 633
Prepaid expenses and other (39) 19
Other assets (209) 72
Increase (decrease) in:
Accounts payable 119 (1,465)
Accrued expenses and other 45 (755)
Other liabilities 702 1,691
------------- -------------
Net cash used by continuing operations (1,440) (759)
Net cash used by discontinued operations (343) (404)
------------- -------------
Net cash used by operating activities (1,783) (1,163)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets 4,804 1,467
Capital expenditures (2,021) (857)
------------- -------------
Net cash provided by investing activities 2,783 610
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 3,175 1,000
Principal payments on long-term debt (5,220) (210)
Issuance of common stock 59 --
------------- -------------
Net cash provided (used) by financing activities (1,986) 790
------------- -------------
Net increase (decrease) in cash and cash equivalents (986) 237
Cash and cash equivalents at the beginning of the period 1,141 601
------------- -------------
Cash and cash equivalents at the end of the period $155 $838
============= =============
The accompanying notes are an integral part of these financial statements.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(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 owns 77% of Hondo Oil's common stock. Lonrho Plc, an
English company, owns 50% of The Hondo Company.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. There has
not been any change in the Company's significant accounting policies
for the periods presented. There has not been any significant devel-
opments or changes in contingent liabilities and commitments since
September 30, 1994, including the contingency described in Note 7.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. The results for these interim periods are not
necessarily indicative of results for the entire year. These
statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for
the fiscal year ended September 30, 1994.
(b) Earnings Per Share
------------------
Net income (loss) 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.
(c) 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 has had no material effect on the
Company's financial position, results of operations, or components of
income tax expense for the current or previous periods. Accordingly,
no cumulative effect of a change in accounting principle has been
recognized and the footnote disclosures required by SFAS No. 109 have
been omitted.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(c) Income Taxes (continued)
------------------------
Under Statement 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities
are determined based on reversals of differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted effective tax rates and laws that will be in effect
when the differences are expected to reverse.
The Company provides for income taxes in interim periods based on
estimated annual effective rates. The Company records current income
tax expense to the extent that federal, state or alternative minimum
tax is projected to be owed. The Company has investment tax credit
carryforwards of $3,665 which are accounted for by the flow-through
method.
2) Accounts Receivable and Long-Term Debt
--------------------------------------
Under the terms of a Farmout Agreement with Amoco Colombia, Amoco
Colombia paid the Company $5,000 (less withholding taxes of $200) in
October 1994. This amount was included in accounts receivable by the
Company at September 30, 1994. Also in October 1994, the Company
paid $5,000 to Lonrho Plc to reduce the balance of a loan from Lonrho
Plc. 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. The
Company has drawn $3,175 as of June 30, 1995.
The balances of the Company's long-term debts to Lonrho Plc were also
increased by the addition of accrued interest of $2,354 on October 1,
1994. See Note 5.
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. On October 1, 1993, the Company completed a sale of
substantially all of its refining and marketing segment. Further
proceeds are to be received when certain components of the refinery
equipment are sold by the buyer. See Note 7.
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
3) Discontinued Operations (continued)
-----------------------------------
Operating losses of discontinued operations for the quarters ended
June 30, 1995 and 1994 were $110 and $155, respectively.
Corresponding amounts for the nine-month periods were $318 and $401,
respectively, and were charged against loss provisions established in
earlier periods. The Company recorded discontinued loss provisions
of $300 for the quarter ended March 31, 1995 and $1,400 for the
quarter ended June 30, 1994. No other loss provisions have been
recorded in the subject periods.
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued
operations and is charged against loss provisions established in
earlier periods. The operating losses from discontinued operations
for the quarters ended June 30, 1995 and 1994 include interest
expense of $68 and $71, respectively. Corresponding amounts for the
nine-month periods ended June 30, 1995 and 1994 were $205 and $213,
respectively.
The balance of net assets of discontinued operations is comprised
solely of two parcels of land in the real estate segment. Changes in
this balance for the nine months ended June 30, 1995 are as follows:
Balance as of September 30, 1994 $6,851
Valuation provisions recorded (300)
Valuation provisions used 318
-------------
Balance at June 30, 1995 (unaudited) $6,869
=============
4) Accrued Expenses
----------------
Accrued expenses consist of the following:
June 30, September 30,
1995 1994
------------- -------------
(Unaudited)
Drilling costs (a) -- $2,000
Tier I Development costs (Note 8c) $541 --
Refining and marketing costs (Note 7) 1,486 1,544
Other 322 278
------------- -------------
$2,349 $3,822
============= =============
(a) Under the terms of a Farmout Agreement with Amoco Colombia,
the Company was obligated to pay $2,000 (approximately 10%) of
the costs to drill the Opon No. 4 well in Colombia. Drilling
commenced in February 1995 and the Company paid its $2,000
obligation in April 1995.
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
5) Other Liabilities
-----------------
In accordance with the terms of the Company's debts to Lonrho Plc, if
the Company does not have cash to pay interest, accrued interest is
either added to the outstanding principal or paid by issuance of the
Company's common stock on the interest due date, at the option of
Lonrho Plc. Accrued interest of $2,354 for the six-month period
ended September 30, 1994 was added to the outstanding principal
balances on October 1, 1994. Accrued interest of $2,292 for the
six-month period ended March 31, 1995 was paid by the issuance of
189,080 shares of common stock in April 1995.
Other liabilities consist of the following:
June 30, September 30,
1995 1994
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc $1,179 $2,354
City of Long Beach 1,534 1,534
Other 1,160 1,575
------------- -------------
$3,873 $5,463
============= =============
6) Cash Flow Information
---------------------
Cash interest expense paid, all of which arises from discontinued
operations, was $210 and $224 for the nine months ended June 30, 1995
and 1994, respectively.
7) Contingencies
-------------
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, when concluded, could
result in a liability different from the amount accrued.
10
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
8) Subsequent Events
-----------------
(a) Purchase of an Additional Interest in the Opon Contract
-------------------------------------------------------
As more fully described in the Company's 1994 Annual Report on Form
10-K, the Company owns a 30% interest in the Opon Association
Contract, an exploration and exploitation contract covering lands in
the Middle Magdalena Valley of Colombia. Currently, the parties to
the Opon Contract include Hondo Magdalena Oil & Gas Limited ("Hondo
Magdalena")(a wholly-owned subsidiary of Hondo Oil & Gas Company),
Amoco Colombia Petroleum Company ("Amoco Colombia"), and Opon
Development Company ("ODC"). The Colombian national oil company,
Ecopetrol, has the right to acquire a 50% interest when commerciality
is declared and will reimburse the associate parties for 50% of the
direct exploration costs.
In July 1995, the Company executed an agreement for the purchase of
an additional 0.88875% interest in the Opon Association Contract from
a party for whom ODC holds record title for a price of $888,750,
payable with not greater than 65,000 shares of the Company's common
stock. The number of shares to be issued to the beneficial owner is
dependent on the market price of the common stock at closing. The
transaction is contingent upon registration and listing of the common
shares to be issued. If the contingency has not been satisfied by
October 4, 1995, the agreement will terminate. The transaction is
also contingent upon obtaining a waiver from Amoco Colombia of any
preferential rights it holds under the Farmout Agreement.
(b) Memorandum of Understanding
---------------------------
In July 1995, Hondo Magdalena, Amoco Colombia, ODC, and Ecopetrol
executed a Memorandum of Understanding ("MOU") for the construction
of a pipeline and the sale of natural gas from the Opon Contract
area. See "General Discussion, Opon Exploration" in Management's
Discussion and Analysis of Financial Condition and Results of
Operations in Item 2.
(c) Interim Funding Agreement
-------------------------
As a result of execution of the MOU described above, another
agreement among Amoco Colombia, Hondo Magdalena, and ODC became
effective in July 1995. The Funding Agreement for Tier I Development
Project (the "Funding Agreement") provides for interim financing of
costs associated with the construction of a pipeline from the Opon
Contract area and certain other costs related to the Opon Contract.
See "Liquidity and Capital Resources" in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 2.
When the Funding Agreement became effective, Hondo Magdalena became
obligated for its share of subject costs since October 1, 1994.
Through June 30, 1995, the Company has accrued $541 for Tier I
Development costs.
11
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
8) Subsequent Events (continued)
-----------------------------
(d) Exercise of Stock Options
-------------------------
Stock options for 80,200 shares of the Company's common stock held
by former officers and employees of the Company have been exercised
subsequent to June 30, 1995. These exercises have resulted in
proceeds to the Company of $1,461 through July 26, 1995.
12
Item 2. 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. No revenues are
currently being generated and none are expected until the spring of 1996
at the earliest.
Opon Exploration
----------------
Hondo Magdalena Oil & Gas Limited ("Hondo Magdalena"), a wholly-owned
subsidiary, became involved in the Opon Contract through a farmout
agreement with Opon Development Company ("ODC") in 1991. In August
1993, Hondo Magdalena and ODC entered into a Farmout Agreement under
which Amoco Colombia Petroleum Company ("Amoco Colombia") has earned a
participating interest in the Opon Contract. Amoco Colombia, Hondo
Magdalena and ODC presently have interests of 60%, 30% and 10%,
respectively. Empresa Colombiana de Petroleos ("Ecopetrol"), the
Colombian national oil company, has the right to acquire a 50% interest
when commerciality is declared and will reimburse the associate parties
for 50% of the direct exploration costs. As of June 30, 1995, Hondo
Magdalena has accumulated approximately $18.0 million in connection with
exploration of the Opon Contract area. Of this amount management
estimates that from $1.0 million to $7.2 million would be recoverable as
direct exploration costs after a declaration of commerciality. These
amounts would be recovered out of Ecopetrol's share of production.
Amoco Colombia assumed the role of operator from Hondo Magdalena on
March 1, 1994.
On July 21, 1995, Hondo Magdalena, ODC and Alliance Petroleum
International Co. ("Alliance") entered into a Purchase and Sale
Agreement under which Hondo Magdalena will acquire an additional
0.88875% interest in the Opon Contract. The interest is held by ODC as
nominee for Alliance. The sales price is $888,750 payable to Alliance
in shares of newly issued common stock of the Company. The number of
shares will be determined by the market price of the shares on the
American Stock Exchange at closing. However, no more than 65,000 shares
of common stock will be issued as consideration in the transaction.
Closing of the transaction is contingent upon effectiveness of a
registration statement for the shares and approval by the American Stock
Exchange of an Additional Listing Application. If this contingency has
not been satisfied by October 4, 1995, the agreement will terminate.
The closing is also contingent upon obtaining a waiver from Amoco
Colombia of any preferential rights under the Farmout Agreement.
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
13
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. Although
a significant amount of geologic information was obtained from the
drilling of the Opon No. 3 well, no core samples were taken and it is
not yet possible to accurately determine the porosities of the
productive intervals in the La Paz formation. Also, there is not yet
enough information to assess the quantity of reserves related to the La
Paz formation, including any hydrocarbons that may be present outside of
the area of current drilling. Additional seismic work is planned to
assess potential prospects in other portions of the Opon Contract area,
including areas where past theoretical interpretations have suggested
the possibility of the presence of a "hanging wall" section of the La
Paz formation. Additional drilling would be required to confirm if
hydrocarbons are present in these areas.
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 that commenced drilling on February 21, 1995. The well
has been drilled to its total depth of 12,800 feet. Completion and
testing of the Opon No. 4 well are expected to occur in August 1995.
As more fully described in the Company's 1994 Annual Report on Form
10-K, the Opon Contract provides that the Contract area will be reduced
by 50% at the end of the exploration period, July 13, 1995. Two more
acreage relinquishments are scheduled in the future at the end of two
successive two-year periods. Ecopetrol has verbally informed Amoco
Colombia that it will defer the 50% acreage relinquishment in July 1995.
Instead, the Contract area will be reduced by 75% (as opposed to 25%) in
July 1997.
On July 26, 1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol
executed a Memorandum of Understanding ("MOU") for the construction of a
pipeline and the sale of natural gas from the Opon Contract area. The
MOU provides that the parties will construct a 16 inch pipeline
approximately 88 kilometers in length from the Opon Contract area to
Ecopetrol's gas processing plant at El Centro, and from there to
Ecopetrol's refinery at Barrancabermeja. The pipeline is estimated to
cost $56.5 million. Preliminary work for the pipeline began in late
1994, and an order for pipe has been placed. Hondo Magdalena, ODC and
Amoco Colombia will each pay their respective share of the costs
incurred prior to July 1, 1995, up to a maximum of 10% of the total
pipeline costs. Ecopetrol will pay in cash its share of costs for the
pipeline incurred after July 1, 1995, if and when the field is declared
commercial (anticipated at the completion of the Opon Well No. 4,
assuming that the results are successful). After commerciality, the
remainder of Ecopetrol's share of costs will be recovered out of
production. Hondo Magdalena, ODC and Amoco Colombia have entered into
an agreement that provides for an interim financing arrangement for
Hondo Magdalena's share of the pipeline costs. See Note 8 to the
Consolidated Financial Statements in Item 1 and Liquidity and Capital
Resources, below. The investment in pipeline costs will be recovered
through a pipeline tariff that will include a 13.2% rate of return
(after Colombian taxes) on the investment. In the MOU, Ecopetrol agreed
to construct improvements at its El Centro gas processing plant to
14
handle incremental production from the Opon Contract area. Ecopetrol
will recover its investment through a gas processing fee that will
include a 13.2% rate of return (after Colombian taxes). The parties
agreed in the MOU to negotiate a contract for gas processing.
The MOU also provides that the parties will negotiate a gas sales
contract under which Ecopetrol will purchase from the Opon Contract
parties, on a take-or-pay basis, 80 million cubic feet of natural gas
per day for the first three years after production begins, and 40
million cubic feet per day for the subsequent twelve years. The price
for the natural gas will be determined semi-annually by a formula based
upon the average price received by Ecopetrol for exported fuel oil
during the prior two six-month periods. The formula, as of July 1,
1995, yields a price of US$1.17 per million British Thermal Units. If
the Opon No. 4 well is not successful, the parties have certain options
with regard to the construction of the pipeline.
With completion of the Opon No. 3 well, which discovered potentially
significant reserves of natural gas and condensate, the first obstacle
in securing the Company's future was overcome. Execution of the MOU and
the interim Funding Agreement described in Liquidity and Capital
Resources below are additional milestones in the Company's return to
financial health. However, a number of activities remain to be
successfully completed, including: timely and successful results of the
Opon No. 4 well; assessing the size of the hydrocarbon resources
discovered; and carrying out further exploration and development
activities. Most of these activities will require additional capital
which the Company does not have at present. See Liquidity and Capital
Resources, below.
Domestic Activities
-------------------
The Company sold substantially all of its U.S. oil and gas assets in
June 1992. During the subsequent three years, the Company has
continually reduced the scope of its domestic operations. The Company
now has three professional and two support employees and has no
significant domestic oil and gas properties or owned office facilities.
Management believes the Company's overhead costs have been reduced to
the minimum level that will allow the efficient administration of its
continuing business.
See Liquidity and Capital Resources for a description of changes in the
terms and amounts of the Company's long-term debt occurring in fiscal
1995.
Discontinued Operations
-----------------------
The Company has completed the disposal of its discontinued refining and
marketing assets. Further proceeds, currently estimated at $0.4
million, are to be received when certain components of the refinery
equipment are sold by the buyer. In the agreement for the sale of the
15
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 the preliminary results of an audit for California Motor
Vehicle Fuels Tax. The audit, when concluded could result in a
liability different from the amount accrued. See Liquidity and Capital
Resources, below.
Included in the Company's discontinued real estate operations are two
parcels of real estate in California: the 11 acre Via Verde Bluffs
property in the City of San Dimas and the 105 acre Valley Gateway
property in the City of Santa Clarita. Management began an effort to
sell these properties in 1991. In 1993, the Company suspended a
development plan for the Valley Gateway property, a former refinery
site, due to the Company's limited cash resources and poor market
conditions in California. As described in Item 1 of the Company's 1994
Annual Report on Form 10-K, the Company estimates that $2.0 million
would be incurred in completing existing environmental remediation plans
for the Valley Gateway property. Management intends to sell the
property without incurring these costs by reducing the purchase price.
The Company listed the Valley Gateway property with a broker during
1994. The Company has had several inquiries, but no offers have been
received.
Other
-----
As more fully described in Item 5 of the Company's 1994 Annual Report on
Form 10-K, the Company does not fully meet all of the guidelines of the
American Stock Exchange for continued listing of its shares because of
continuing losses and decreases in shareholders' equity. Management has
kept the American Stock Exchange fully informed regarding the Company's
present status and future plans. Although the Company does not or may
not meet all of the guidelines, to date, the American Stock Exchange has
chosen to allow the Company's shares to remain listed. However, no
assurances can be given that the Company's shares will remain listed on
the Exchange in the future.
RESULTS OF OPERATIONS
The Company sold substantially all of its domestic oil and gas
operations in June 1992 and has continued to reduce the scope of its
domestic operations since that time. As a result, historical results of
continuing operations (primarily domestic in nature) are not indicative
of the Company's expected future operating results (primarily foreign in
nature).
Quarters ended June 30, 1995 and 1994
--------------------------------------
Results of continuing operations for the quarter ended June 30, 1995
amounted to a net loss of $1.6 million, or 12 cents per share. The
16
Company reported a net loss from continuing operations of $1.8 million,
or 14 cents per share, for the quarter ended June 30, 1994. Results for
the quarter ended June 30, 1994 also included a discontinued loss
provision of $1.4 million, or 11 cents per share.
The decrease in general and administrative expense of $0.2 million
between the quarters arises primarily from reductions in the number of
employees and insurance costs.
Operating losses of discontinued operations, which are charged against
loss provisions established in earlier periods, amounted to $0.1 million
and $0.2 million for the quarters ended June 30, 1995 and 1994,
respectively.
Nine months ended June 30, 1995 and 1994
----------------------------------------
Results of continuing operations for the nine months ended June 30, 1995
amounted to a net loss of $4.8 million, or 37 cents per share. The
Company reported a net loss from continuing operations of $6.4 million,
or 49 cents per share, for the nine months ended June 30, 1994. Results
for the nine month periods ended June 30, 1995 and 1994 also included
discontinued loss provisions of $0.3 million, or 2 cents per share, and
$1.4 million, or 11 cents per share, respectively.
Significant variances in the components of results of operations between
the nine-month periods ended June 30, 1995 and 1994 result primarily
from non-recurring transactions occurring in the nine months ended June
30, 1994, including the following:
- Sales and operating revenue includes recoupment of $0.3 million
in oil and gas revenues from a single payor arising from periods
prior to the asset sale in June 1992.
- Loss on sale of assets includes $0.2 million from the sale of the
last significant oil and gas asset not included in the June 1992
asset sale and $0.9 million from the sale of the Company's office
building and certain furniture and equipment in Roswell, New
Mexico.
- Overhead reimbursement and other income includes $0.3 million for
services as operator of the Opon Association Contract.
- Operating costs include $0.4 million arising from a pipe
inventory obsolescence charge.
The decrease in general and administrative expense of $0.5 million
between the periods arises primarily from reductions in the number of
employees and insurance costs. General and administrative expense for
the nine months ended June 30, 1995 also includes a one time charge of
$0.1 million for compensation expense arising from stock options granted
to a former officer.
Operating losses of discontinued operations, which are charged against
loss provisions established in earlier periods, amounted to $0.3 million
17
and $0.4 million for the nine month periods ended June 30, 1995 and
1994, respectively. An additional loss provision of $0.3 million was
recorded in March 1995 due to the extended holding periods of the
subject properties. An additional loss provision of $1.4 million was
recorded in June 1994 due to local market conditions and sales
negotiations in process at that time.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 1995, cash inflows of $4.8
million, $3.2 million, and $0.1 million arose from the sale of assets,
borrowings from Lonrho Plc under existing loan agreements, and issuance
of common stock as a result of the exercise of stock options,
respectively. The Company utilized cash of $1.4 million and $0.3
million to finance continuing and discontinued operations, respectively,
$2.0 million for capital expenditures, $5.0 million to reduce the
balance of loans from Lonrho Plc (see below), and made scheduled debt
repayments of $0.2 million. At June 30, 1995, the Company had cash
balances of $0.2 million. The Company has received $1.5 million
subsequent to June 30, 1995 from the exercise of stock options held by
former officers and employees of the Company.
In October 1994, the Company received $4.8 million, net of withholding
taxes, from Amoco Colombia in accordance with the Farmout Agreement.
Also in October 1994, the Company paid $5.0 million to Lonrho Plc to
reduce the balance of outstanding loans from Lonrho Plc, and future
interest expense. At the same time, Lonrho Plc made available $5.0
million in the form of a facility loan that may be drawn as needed by
the Company. This facility loan was used in April 1995 to fund Hondo
Magdalena's $2.0 million contribution to the costs of drilling the Opon
No. 4 well, and will be used to satisfy any liability which may
ultimately arise from the state excise tax audit described above, and to
finance other business activities. As of June 30, 1995, the Company had
drawn $3.2 million of the facility loan.
In November 1994, the Company obtained extensions of the maturity of its
debts to Lonrho Plc. The maturity of all loans from Lonrho Plc has been
extended from 1995 to not earlier than October 1, 1996. Approximately
$49 million of the Company's long-term debt becomes due in fiscal year
1997 under the revised terms. At present, the Company does not have
funds to meet these obligations, or subsequent long-term debt
obligations. Management believes that the Company will be able to
repay, refinance, or restructure these amounts if and when it
establishes sufficient proven reserves and production at the Opon
project.
On May 5, 1995, Hondo Magdalena, ODC and Amoco Colombia entered into a
Funding Agreement for Tier I Development Project costs (the "Funding
Agreement") for the interim financing of costs associated with the
construction of a pipeline from the Opon Contract area (see Note 8 to
the Consolidated Financial Statements in Item 1 and General Discussion,
Opon Exploration, above) and certain other costs related to the Opon
Contract. The Funding Agreement became effective on July 26, 1995 with
the execution of the MOU. Hondo Magdalena may finance its share of the
costs (including overhead) for the pipeline and an approved geological
18
and geophysical work program for up to 365 days after the date that
production from the Opon Contract area begins. The Funding Agreement
provides that Hondo Magdalena may repay the amounts financed from prior
to the date of first production until 365 days thereafter, along with an
equity premium computed on a 22% annualized interest rate. The equity
premium will be computed monthly on Hondo Magdalena's share of
expenditures (including any amounts to be later recouped from Ecopetrol
after commerciality). Alternatively, from the date of first production
until 90 days thereafter, Hondo Magdalena may elect to repay 125% of its
share (excluding any amounts to be later recouped from Ecopetrol after
commerciality) of the total costs accumulated up to the date of
repayment. If the financed amounts are not repaid within 365 days after
the date of first production, an additional penalty of 100% of the
amount then due would be recovered out of Hondo Magdalena's revenues.
Hondo Magdalena's revenues from production of the first 80 million cubic
feet of natural gas and corresponding condensate and natural gas liquids
are pledged to secure its obligations under the Funding Agreement.
Based upon the Company's budget and current projections, existing cash,
available facilities and the newly completed interim Funding Agreement
are expected to be sufficient to finance the Company's capital
expenditure obligations for the Opon Contract, and other business
activities, during fiscal 1995. However, subsequent to the completion
and testing of the Opon No. 4 well (estimated to occur in August 1995),
significant additional permanent financing will be required for capital
expenditures for facilities for processing and transporting the
production, operator's overhead costs, further exploration and
development activities, and other business activities. Cash from
operations is not expected to be a source of funds until the Opon
Project begins commercial production.
Management has held preliminary discussions with a number of lenders
regarding financing of the Company's future obligations for the Opon
project. The Company's management believes that, subject to successful
completion of the Opon No. 4 well, the elements to support permanent
long-term debt or equity funds should be in place.
The Company believes that the Opon Project has significant potential to
be developed in conjunction with Colombia's planned natural gas
transmission network and that the Company's future revenues will be
derived from this source. A number of challenges remain, the most
important of which is obtaining permanent financing, before the
Company's long-term future can be secure. There can be no assurance
that the Opon Project will be successfully developed or that additional
debt or equity funds will become available in the future.
19
PART II
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-K are set forth in
the Exhibit Index below.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date: July 28, 1995 /s/ Stanton J. Urquhart
______________ _______________________
Stanton J. Urquhart
Vice President and
Controller
The above officer of the registrant has signed this report as its duly
authorized representative and as its chief accounting officer.
EXHIBIT INDEX
Exhibit
Number Subject
_______ __________________________________
10.1 Funding Agreement for Tier I Development Project among
Hondo Magdalena Oil & Gas Limited, Amoco Colombia
Petroleum Company and Opon Development Company dated
May 5, 1995, excluding exhibits (except Exhibit A).
10.2 Purchase and Sale Agreement among Hondo Magdalena Oil
& Gas Limited, Opon Development Company and Alliance
Petroleum International Co. dated July 21, 1995,
excluding exhibits.
10.3 Memorandum of Understanding (translation) among Hondo
Magdalena Oil & Gas Limited, Amoco Colombia Petroleum
Company, Opon Development Company, and Empresa
Colombiana de Petroleos dated July 26, 1995, excluding
exhibits (except Exhibit A).
27 Financial Data Schedule
20