FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
1-8979
(Commission File Number)
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10375 Richmond Ave, Ste. 900, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 954-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The registrant has one class of common stock outstanding. As of August 10,
1998, 13,798,424 shares of registrant's $1 par value common stock were
outstanding.
1
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED JUNE 30, 1998
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
June 30, 1998 and September 30, 1997 3
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997 4
Consolidated Statements of Operations for the nine
months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Supplementary Information About Oil and Gas Producing
Activities and Reserves 16
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 25
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
June 30, September 30,
1998 1997
------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $1,140 $1,019
Accounts receivable 2,502 296
Prepaid expenses and other 63 1
------------- -------------
Total current assets 3,705 1,316
Properties, net (Notes 1 and 3) 20 40,612
Net assets of discontinued operations (Note 8) 2,344 2,137
Other assets 42 865
------------- -------------
$6,111 $44,930
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable (Note 1) $7,285 $3,464
Accrued expenses and other, including $2,094
in 1998 due to a related party (Notes 1 and 6,087 3,421
Current portion of long-term debt, including
$112,518 in 1998 due to a related
party (Notes 1 and 5) 114,578 265
Funding agreement (Notes 1 and 6) 27,058 --
------------- -------------
Total current liabilities 155,008 7,150
Long-term debt, including $99,943 in 1997
due to a related party (Notes 1 and 5) -- 102,903
Funding agreement (Notes 1 and 6) -- 22,788
Other liabilities, including $3,407 in 1997
due to a related party (Note 7) -- 5,262
------------- -------------
155,008 138,103
Contingencies (Notes 1 and 8)
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000 shares
authorized; shares issued and outstanding:
13,798,424 and 13,788,424, respectively 13,798 13,788
Additional paid-in capital 53,737 53,675
Accumulated deficit (216,432) (160,636)
------------- -------------
(148,897) (93,173)
------------- -------------
$6,111 $44,930
============= =============
The accompanying notes are an integral part of these financial statements.
3
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
June 30,
----------------------------
1998 1997
------------- -------------
REVENUES
Sales and operating revenue $1,182 $3
Other income 15 --
------------- -------------
1,197 3
------------- -------------
COSTS AND EXPENSES
Operating costs 593 48
Depreciation, depletion, and amortization 417 57
Overhead, Colombian operations 397 492
General and administrative 545 523
Costs of exploration and dry holes 94 --
Interest on indebtedness including $2,094
and $1,602, respectively, to a
related party 3,406 1,602
------------- -------------
5,452 2,722
------------- -------------
Loss from continuing operations
before income tax expense (4,255) (2,719)
Income tax expense -- --
------------- -------------
Loss from continuing operations
before extraordinary items (4,255) (2,719)
EXTRAORDINARY ITEMS
Forgiveness of debt (Notes 1, 4, and 5) 3,554 --
Write-off of Colombian assets (Note 1) (39,982) --
------------- -------------
Net Loss $(40,683) $(2,719)
============= =============
Loss per share:
Continuing operations $(0.31) $(0.19)
Forgiveness of debt $0.26 --
Write-off of Colombian assets $(2.90) --
------------- -------------
Net loss per share $(2.95) $(0.19)
============= =============
Weighted average common shares outstanding 13,798,424 13,781,194
The accompanying notes are an integral part of these financial statements.
4
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the nine months ended
June 30,
----------------------------
1998 1997
------------- -------------
REVENUES
Sales and operating revenue $3,046 $4
Other income 23 19
------------- -------------
3,069 23
------------- -------------
COSTS AND EXPENSES
Operating costs 1,243 383
Depreciation, depletion, and amortization 1,072 172
Overhead, Colombian operations 1,373 1,619
General and administrative 1,778 1,519
Costs of exploration and dry holes 8,576 13
Interest on indebtedness including $5,962
and $4,480, respectively, to a
related party 8,395 4,480
------------- -------------
22,437 8,186
------------- -------------
Loss from continuing operations
before income tax expense (19,368) (8,163)
Income tax expense (benefit) -- (2)
------------- -------------
Loss from continuing operations
before extraordinary items (19,368) (8,161)
EXTRAORDINARY ITEMS
Forgiveness of debt (Notes 1, 4, and 5) 3,554 --
Write-off of Colombian assets (Note 1) (39,982) --
------------- -------------
Net Loss $(55,796) $(8,161)
============= =============
Loss per share:
Continuing operations $(1.41) $(0.59)
Forgiveness of debt $0.26 --
Write-off of Colombian assets $(2.90) --
------------- -------------
Net loss per share $(4.05) $(0.59)
============= =============
Weighted average common shares outstanding 13,795,091 13,780,083
The accompanying notes are an integral part of these financial statements.
5
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the nine months ended
June 30,
----------------------------
1998 1997
------------- -------------
Cash flows from operating activities:
Pretax loss from continuing operations $(19,368) $(8,163)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Cost of dry holes 8,546 --
Depreciation, depletion and amortization 1,072 172
Capitalized interest (677) (563)
Accrued interest added to long-term debt 7,275 5,261
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (931) 26
Prepaid expenses and other (62) (490)
Other assets (787) (570)
Increase (decrease) in:
Accounts payable 1,166 695
Accrued expenses and other 4,343 881
Funding agreement 3,551 1,425
Other liabilities (5,192) (1,613)
------------- -------------
Net cash used by continuing operations (1,064) (2,939)
Net cash used by discontinued operations (212) (296)
Income taxes (paid) received -- 2
------------- -------------
Net cash used by operating activities (1,276) (3,233)
------------- -------------
Cash flows from investing activities:
Sale of assets 2 --
Capital expenditures (3,640) (8,441)
------------- -------------
Net cash used by investing activities (3,638) (8,441)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 5,300 12,600
Principal payments on long-term debt (265) (765)
------------- -------------
Net cash provided by financing activities 5,035 11,835
------------- -------------
Net increase in cash and cash equivalents 121 161
Cash and cash equivalents at the beginning of the period 1,019 374
------------- -------------
Cash and cash equivalents at the end of the period $1,140 $535
============= =============
Refer to Notes 3, 5 and 6 for descriptions of non-cash transactions.
The accompanying notes are an integral part of these financial statements.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
1) Going Concern
-------------
The Company reported in its March 31, 1998 Quarterly Report on Form 10-Q
that the rate of decline in production from its Opon No. 3 and Opon No. 4
wells in Colombia had been higher than expected during the first five months
of production. Further testing of the wells was completed during the
current quarter. An analysis of the test results by the Company's
independent reserve engineers has concluded that it will become uneconomic
(operating costs will exceed operating revenues) to produce the wells before
the end of fiscal 1998 and that the drilling of additional wells would be
uneconomic (net profit over the life of a new well would be less than the
cost to drill it). See the Unaudited Supplementary Information about Oil
and Gas Producing Activities and Reserves following these financial
statements.
As a result of the revised reserve report, the Company has concluded that
the capitalized costs of its Colombian exploration and production activities
are worthless. As of June 30, 1998, the Company owes Amoco Colombia
Petroleum Company ("Amoco Colombia," the operator of the Opon concession)
$5,470 for current charges (included in accounts payable) and $27,058 under
the Funding Agreement (see Note 6). The Company is negotiating with Amoco
Colombia to voluntarily surrender its working interest in the Opon
concession in exchange for a release of the Company's liabilities to Amoco
Colombia. Accordingly, the capitalized costs of Colombian exploration have
been written off during the current period and the resulting charge has been
reported as an extraordinary item.
The Company's liabilities are far greater than its assets following this
extraordinary write-off. As more fully described in Note 5, the Company's
debts to Lonrho Plc include an event of default which is triggered if the
Company does not increase its reserves by October 1, 1998. Management
believes it is impossible for the Company to avoid the event of default.
Management has concluded that the Company is no longer a going-concern.
During July 1998, the Company has been able to negotiate the settlement of
three of its liabilities for ten cents on the dollar. The other ninety cents
of each dollar was written off to an extraordinary gain for the quarter
ended June 30, 1998, including $1,131 previously included in accounts
payable for an obligation to Phillips Petroleum. See Notes 4 and 5 for the
other components of the extraordinary gain.
2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an independent oil
and gas exploration and development company. The consolidated financial
statements of Hondo Oil include the accounts of all subsidiaries, all of
which are wholly owned. All significant intercompany transactions have been
eliminated. The Hondo Company owns 62.7% of Hondo Oil & Gas Company. Lonrho
Plc ("Lonrho"), a publicly-traded English company and the Company's primary
lender, owns 100% of The Hondo Company and owns an additional 5.7% of the
Company through another wholly-owned subsidiary. In total, Lonrho controls
68.4% of the Company's outstanding shares.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(a) Basis of Consolidation and Presentation (continued)
---------------------------------------------------
The accompanying consolidated financial statements have been prepared on a
historical cost basis and in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. There has not been
any change in the Company's significant accounting policies for the periods
presented. There have not been any significant developments or changes in
contingent liabilities and commitments since September 30, 1997, except as
described in Note 8. Certain reclassifications have been made to the prior
year's amounts to make them comparable to the current presentation. These
changes had no impact on previously reported results of operations or
shareholders' equity (deficit).
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results for this interim period are not necessarily
indicative of results for the entire year. These statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1997.
(b) Earnings Per Share
------------------
The Company implemented SFAS No. 128, Earnings per Share, beginning with the
quarter ended December 31, 1997. The Company has incurred losses in each of
the periods presented in these financial statements, thereby making the
inclusion of stock options in the basic earnings per share computation
antidilutive. Accordingly, stock options have not been included in the
present, or previously reported, basic earnings per share computations and
restatement of previously reported amounts is not necessary. Diluted per
share amounts are the same as basic per share amounts and, accordingly,
are not presented.
(c) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(d) Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes". Under Statement 109, the liability method is
used in accounting for income taxes. Deferred tax assets and liabilities
are determined based on reversals of differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted
effective tax rates and laws that will be in effect when the differences are
expected to reverse.
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(d) Income Taxes (continued)
-----------------------
The Company provides for income taxes in interim periods based on estimated
annual effective rates. The Company records current income tax expense to
the extent that federal, state or alternative minimum tax is projected to be
owed. The Company has investment tax credit carryforwards of $428 which
are accounted for by the flow-through method.
3) Properties
----------
Properties, at cost, consist of the following:
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
Oil and gas properties - Colombia:
Proved $-- $11,923
Accumulated depletion, depreciation
and amortization -- --
------------- -------------
-- 11,923
------------- -------------
Other properties - Colombia:
Wellsite facilities -- 4,689
Pipelines -- 12,061
Accumulated depreciation -- --
Drilling in progress -- 11,821
------------- -------------
-- 28,571
------------- -------------
Other properties - domestic
Other fixed assets 307 323
Accumulated depreciation (287) (205)
------------- -------------
$20 $40,612
============= =============
As more fully described in Note 1, the Company's capitalized costs
pertaining to its Colombian exploration activities were written off in the
current period.
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
3) Properties (continued)
----------------------
Total costs incurred (recovered), both capitalized and expensed, in Colombia
for oil and gas producing activities were:
For the nine For the
months ended year ended
June 30, 1998 Sep. 30, 1997
------------- -------------
(Unaudited)
Property acquisition costs $-- $--
============= =============
Exploration costs $7,937 $10,051
============= =============
Development costs $(104) $2,709
============= =============
The written-off balances of wellsite facilities and pipelines included
non-cash increases of $96 and $5,372 for the nine months ended June 30, 1998
and 1997, respectively, which were charged to the Funding Agreement (Note
6). Additions to written-off drilling in progress of $5,386 and ($1,055)
for the nine months ended June 30, 1998 and 1997, respectively, were unpaid
(prepaid) and are reflected in the balance of accounts payable. The balances
of written-off wells in progress, wellsite facilities and pipelines include
a non-cash decrease of $1,403 for the nine months ended June 30, 1998
pertaining to amounts due from Ecopetrol for commerciality, of which $957
was collected in July 1998.
4) Accrued expenses
----------------
Accrued expenses consist of the following:
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
Refining and marketing costs (Note 8) $3,192 $3,198
Interest payable to Lonrho Plc (Note 5) 2,094 --
City of Long Beach (a) 167 --
Unearned tariff revenue 514 --
Other 120 223
------------- -------------
$6,087 $3,421
============= =============
(a) After extraordinary gain of $1,500 arising from negotiated forgiveness.
10
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
5) Long-Term Debt
--------------
Long-term debt consists of the following:
June 30, September 30,
1998 1997
------------- -------------
Notes payable to Lonrho Plc (a),(b): (Unaudited)
Note A (c) $3,759 $3,479
Note B (c) 4,752 4,535
Note C (b),(d) 40,925 38,577
Note D (d) 35,172 33,126
Note E (e) 5,620 5,294
Note F (f) 22,290 14,932
Pollution Control Revenue Bonds (g) 1,960 2,225
Industrial Development Revenue Bonds (g) 100 1,000
------------- -------------
114,578 103,168
Less current maturities (114,578) (265)
------------- -------------
$-- $102,903
============= =============
(a) The following terms apply to Notes A through F:
(1) Interest is payable semiannually on October 1 and April 1 at a
rate of 6% (except Note F which is 13%).
(2) If management determines sufficient cash is not available to pay
interest, management may offer to issue the Company's unregistered
stock valued at the closing price on the interest due date as payment
in kind. Lonrho may choose to either add the accrued interest to the
balance of the debt outstanding or accept the payment in kind. The
Company has an obligation to register any shares issued in connection
with the above if so requested by Lonrho.
(3) Accrued interest of $3,868, $3,407, $2,823 and $2,411 has been
added to the outstanding debt as of April 1, 1998, October 1, 1997,
April 1, 1997, and October 1, 1996, respectively. Accrued interest
has not been paid by the issuance of common stock since fiscal 1996.
(4) As consideration for past deferrals of interest and principal
payments due under the terms of the first four notes, the Company
granted Lonrho Plc a 5% share of the Company's net profits, as
defined, under the Opon Contract. Following repayment of these notes,
Lonrho's entitlement will be reduced by half.
(5) If the Company does not furnish to Lonrho by October 1, 1998 a
report that shows an increase in proved gas reserves of 13,000,000
mcf, then Lonrho has the right to declare Notes A through F in default
and demand payment. Management believes the Company cannot achieve
the reserve increase. Accordingly, all amounts due to Lonrho have
been classified as current liabilities.
11
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(b) As consideration for extensions and certain other financial
undertakings received from Lonrho in 1996, the Company granted to
Lonrho a security interest in all of the shares of Hondo Magdalena on
May 13, 1997. In 1997, as consideration for extension of the term of
Note F and the granting of $7,000 additional credit thereunder, the
Company gave Lonrho an option to convert $7,000 of Note C into the
Company's common stock at a rate of $7.70 per share. The debt is
convertible at Lonrho's option at any time prior to maturity. The
option to convert the debt into common stock given in 1997 was
approved at the Company's 1998 annual meeting.
(c) Notes A and B are secured by mortgages on the Company's real estate
included in discontinued operations. Principal amortization in ten
equal semiannual installments will commence January 15, 1999 if
maturity is not accelerated by default. Note A is secured by the
Company's Via Verde Bluffs real estate. Note B is secured by the
Company's Valley Gateway real estate.
(d) Notes C and D are secured by the Company's Valley Gateway real estate.
Notes C and D are due January 15, 1999 if maturity is not accelerated
by default.
(e) In October 1994, the Company received $4,800, net of withholding
taxes, from Amoco Colombia under the terms of a Farmout Agreement.
Also in October 1994, the Company paid $5,000 to Lonrho Plc to reduce
the balance of Note D and the related interest expense. At the same
time, Lonrho Plc made available $5,000 in the form of a new facility
loan to be drawn as needed by the Company. The Company drew $3,175 of
this facility loan during 1995 and the remaining $1,825 during 1996.
Note E is due January 15, 1999 if maturity is not accelerated by
default.
(f) In June 1996, Lonrho Plc agreed to provide the Company a facility loan
of $13,500 at a rate of 13%, payable semiannually. In July 1997, the
loan was amended to extend the maturity date to January 1, 1999 (if
not accelerated by default) and revise the amount available to
$20,500. In December 1997, the loan was again amended to revise the
amount available to $27,500. The loan is secured by free cash flow,
as defined, from Hondo Magdalena's operations. The Company drew
$14,600 during fiscal 1997 and $5,300 during the six months ended
March 31, 1998. Lonrho Plc has notified the Company that it will make
no further advances to the Company.
12
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
5) Long-Term Debt (continued)
--------------------------
(g) Both issues of these tax-exempt bonds were issued under the authority
of the California Pollution Control Financing Authority. The
Pollution Control Revenue bonds bear interest at an average rate of
6.15%, payable semiannually, and mature serially through November 1,
2003. The Industrial Development Revenue Bonds bear interest at a
rate of 7.5%, payable semiannually, and mature September 1, 2011.
Both bond issues are collateralized by certain refinery facilities and
equipment located at Valley Gateway and the Fletcher refinery. The
collateral at the Fletcher refinery is leased to the buyer for a
nominal annual fee. The trustee of the bonds was notified of changes
to the collateral in 1993 and the trustee has not taken any action to
declare a breach of covenant or a default.
In July 1998, the Company paid the Trustee $103 in full satisfaction
of the Industrial Development Revenue Bonds. Debt of $923 including
accrued interest was forgiven. The Trustee is investigating acquiring
title to the collateral, which has no value on the Company's books.
In May 1998, the Company did not make a scheduled interest payment on
the Pollution Control Revenue bonds. The interest payment was made
from an existing cash reserve fund. This issue is guaranteed by the
Small Business Administration ("SBA"). The Trustee has not notified
the Company it is in default. However, the Company is negotiating
with the Trustee and the SBA with a view to settling the liability for
ten cents on the dollar.
According to the terms of the various credit agreements, the Company is
restricted in its ability to: (a) incur additional debt; and (b) pay
dividends on and/or redeem capital stock.
Cash interest expense, all of which arises from discontinued operations, was
$165 and $181 for the nine months ended June 30, 1998 and 1997,
respectively.
6) Funding Agreement
-----------------
In May 1995, the Company's wholly-owned subsidiary, Hondo Magdalena Oil &
Gas Limited ("Hondo Magdalena"), Amoco Colombia Petroleum Company ("Amoco
Colombia"), and Opon Development Company entered into a Funding Agreement
for Tier I Development Project costs (the "Funding Agreement") to finance
costs associated with the construction of a pipeline from the Opon Contract
area, certain wellsite facilities, a geological and geophysical work
program, and for related overheads. The Funding Agreement provides that
Hondo Magdalena may repay the amounts financed up to 365 days after the date
of first production and sales, along with an equity premium computed using a
22% annualized interest rate. If the financed amounts are not repaid within
365 days after the date of first production and sales, a penalty of 100% of
the amount then due would be recovered out of Hondo Magdalena's revenues.
The Company does not have, and believes it cannot acquire, funds to repay
this obligation in order to avoid the 100% penalty. If incurred, management
estimates the penalty would be a minimum of $18,173 (the current principal
balance) and would be charged to income.
13
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
6) Funding Agreement (continued)
-----------------------------
The associate parties have agreed that the date of first production for
purposes of this agreement is January 30, 1998. Subsequent to the end of
the 365-day option period, Hondo Magdalena's revenues (if any) from
production of the first 80 million cubic feet of natural gas and related
condensate and natural gas liquids are pledged to secure its obligations
under the Funding Agreement.
The balance of the Funding Agreement consists of the following:
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
Outstanding principal $18,173 $17,566
Equity premiums 8,885 5,222
------------- -------------
$27,058 $22,788
============= =============
Equity premiums related to the financed pipeline and wellsite facilities
costs were capitalized until the commencement of production (December 1997),
including $624 and $1,926 for the nine months ended June 30, 1998 and 1997,
respectively. The remainder of the equity premiums accrued, relating to the
financed geological and geophysical work, overheads, and pipeline and
wellsite costs subsequent to the commencement of production, have been
expensed.
7) Other Liabilities
-----------------
Other liabilities consist of the following:
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc (Note 5) $-- $3,407
City of Long Beach (Note 4) -- 1,594
Other -- 261
------------- -------------
$-- $5,262
============= =============
14
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(All Dollar Amounts in Thousands)
8) Discontinued Operations
-----------------------
In 1991, the Company adopted plans of disposal for its refining and
marketing and real estate segments. In September 1993, the Company executed
an agreement for the sale of its Fletcher refinery and its asphalt terminal
in Hilo, Hawaii. These assets represented the material portion of the
Company's refining and marketing segment.
Operating losses of discontinued operations for the quarters ended June 30,
1998 and 1997 were $64 and $74, respectively. Corresponding amounts for
the nine months ended June 30, 1998 and 1997 were $207 and $265,
respectively, and were charged against loss provisions established in
earlier periods. The Company recorded no loss provisions for discontinued
operations for the nine months ended June 30, 1998 and 1997.
The balance of net assets of discontinued operations is comprised solely of
two parcels of land in the real estate segment. Changes in this balance for
the nine months ended June 30, 1998 are as follows:
Balance as of September 30, 1997 $2,137
Valuation provisions established --
Valuation provisions used 207
-------------
Balance at March 31, 1998 (Unaudited) $2,344
=============
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued segments.
Allocations of interest to the real estate operations were $49 and $62 for
the quarters ended June 30, 1998 and 1997, respectively. Comparable amounts
for the nine-month periods were $148 and $187, respectively.
In the agreement for the sale of the Fletcher refinery, the Company
indemnified the buyer as to liabilities in excess of $300 for certain
federal and state excise taxes arising from periods prior to the sale. The
Company has accrued a contingent liability, presently amounting to $3,192,
with regards to an indemnity claim from the buyer's parent relating to a
challenged assessment by the State of California against Fletcher for
alleged excise tax deficiencies. The Company believes the assessment is
unjustified and the amounts alleged to be owing can be substantially
reduced, if not eliminated, through the review process provided by law. The
buyer's parent, Signal Treating Service, Inc., was not a party to the sale
agreement, but has brought a lawsuit against the Company in the amount of
the State's current assessment of approximately $5,740. The Company believes
it has valid defenses against the lawsuit which is not expected to go to
trial before August 1999.
15
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
JUNE 30, 1998
(All Dollar Amounts in Thousands)
The following supplemental information regarding the oil and gas activities of
Hondo Oil is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission ("SEC") and Statement of Financial
Accounting Standards ("SFAS") No. 69, "Disclosures About Oil and Gas Producing
Activities." Estimated Reserve Quantities and the Standardized Measure of
Discounted Future Net Cash Flows Relating to Proved Reserves are presented on
the basis of reserve reports prepared by Netherland, Sewell & Associates.
Information regarding capitalized costs relating to oil and gas producing
activities and costs incurred for property acquisition, exploration, and
development activities are included in Note 3 to the consolidated financial
statements. SEC rules restrict the disclosure of reserves to proved reserves.
Proved reserves are estimated quantities of crude oil, condensate, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved reserves do not
include hydrocarbons the recovery of which is subject to reasonable doubt
because of uncertainty as to economic factors.
The Company reported in its March 31, 1998 Quarterly Report on Form 10-Q that
the rate of decline in production from its Opon No. 3 and Opon No. 4 wells in
Colombia had been higher than expected during the first five months of produc-
tion which commenced in December 1997. Further testing of the wells was
completed during the current quarter. An analysis of the test results by the
Company's independent reserve engineers has been completed and the results of
the revised reserve report as of June 30, 1998 are presented below.
Assumptions used in determining proved reserves and future net cash flows are:
- - Condensate and natural gas liquid reserves produced in association with the
natural gas are a function of the natural gas reserves.
- - The Company's share of reserves and future net cash flows is 15.444375%,
subject to a royalty of 20% payable to the Colombian government.
- - Prices of $12.45 and $18.64 per barrel of condensate and natural gas liquids
and $0.82 and $1.09 per million British Thermal Units of natural gas are used
in the cash flow projections for June 30, 1998 and September 30, 1997,
respectively. These prices were determined in accordance with the terms of
executed sales contracts. Both prices are held constant through the life of
the properties. Production costs and capital costs were projected at current
price levels.
- - Pipeline capital and operating costs are not included in the cash flow
projections because these costs will be recovered through pipeline tariffs.
16
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
JUNE 30, 1998
(All Dollar Amounts in Thousands)
Estimated Reserve Quantities
- ----------------------------
Proved reserves are estimated quantities of crude oil, condensate, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods.
Estimates of oil and gas proved reserves and production, all located in
Colombia, are as follows:
Oil (a) Gas
(MBBLS) (MMCF)
------------- -------------
Proved reserves, September 30, 1996 2,337 61,561
Revisions in previous estimates (394) (9,085)
------------- -------------
Proved reserves, September 30, 1997 1,943 52,476
Production (63) (1,435)
Revisions in previous estimates (1,862) (50,672)
------------- -------------
Proved reserves, June 30, 1998 18 369
============= =============
(a) All condensate and natural gas liquids.
As of June 30, 1998, all of the above reserves are classified as proved
developed. As of September 30, 1997, 671 mbbls and 18,176 mmcf of the above
reserves were classified as proved developed. For 1996, none of the reserves
were classified as proved developed.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
- ---------------------------------------------------------------------------
Reserves
- --------
The following table sets forth the computation of the standardized measure of
discounted future cash flows relating to proved reserves. The standardized
measure is the estimated future cash inflows from proved reserves less
estimated future production and development costs, estimated future income
taxes and a discount factor. Future cash inflows represent expected revenues
from the production of proved reserves based on prices in existence at the
period end. Escalation based on inflation, regulatory changes and supply
and demand are not considered. Estimated future production and development
costs related to future production of reserves are based on historical
information, as available, and estimates drawn from similar gas fields in other
locations. Such costs include, but are not limited to, production, drilling
development wells and installation of production facilities. Inflation and
other anticipatory costs are not considered until the actual cost change takes
effect. Estimated future income tax expenses are computed using tax rates
legislated in Colombia. Consideration is given to the effects of permanent
differences, utilization of net operating loss carryforwards, tax credits and
allowances. A discount rate of 10% is applied to the annual future net cash
flows after income taxes.
17
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
JUNE 30, 1998
(All Dollar Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
- ---------------------------------------------------------------------------
Reserves (continued)
- --------------------
The methodology and assumptions used in calculating the standardized measure
are those required by SFAS NO. 69. It is not intended to be representative of
the fair market value of proved reserves. The valuations of revenues and costs
do not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
For the nine For the
months ended year ended
June 30, 1998 Sep. 30, 1997
------------- -------------
Future cash inflows $624 $96,223
Future production costs (586) (40,239)
Future development costs -- (27,028)
Future income tax expenses -- --
------------- -------------
Net future cash flows 38 28,956
10% annual discount for estimated timing
of cash flows (1) (12,942)
------------- -------------
Standardized measure of discounted
future net cash flows $37 $16,014
============= =============
The principal sources of changes in the standardized measure of discounted
future cash flows between June 30, 1998 and September 30, 1997 are as follows:
For the nine For the
months ended year ended
June 30, 1998 Sep. 30, 1997
------------- -------------
Net change due to revisions in quantity estimat $(29,867) $(5,530)
Changes in estimated future development costs 14,946 (1,324)
Net change due to changes in prices and production
costs (370) (12,532)
Previously estimated development costs incurred
during the period -- 11,056
Net change in income taxes -- 6,991
Accretion of discount 1,201 1,965
Production, net of costs (27) --
Other (1,860) (4,265)
------------- -------------
$(15,977) $(3,639)
============= =============
18
HONDO OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES AND RESERVES (UNAUDITED)
JUNE 30, 1998
(All Dollar Amounts in Thousands)
Results of Operations for Oil and Gas Producing Activities
- ----------------------------------------------------------
The following table sets forth the results of operations from oil and gas
producing and exploration activities. Income tax expense was computed using
the statutory tax rate for the period adjusted for utilization of net operating
loss carryforwards, permanent differences, tax credits and allowances.
For the nine For the
months ended year ended
June 30, 1998 Sep. 30, 1997
------------- -------------
Revenues $2,617 $4
Production costs (2,590) (2,758)
Exploration expenses (8,576) (27)
Depreciation, depletion and amortization (931) --
------------- -------------
(9,480) (2,781)
Income tax benefit -- (1,102)
------------- -------------
Results of operations from exploration
and production activities (excluding
corporate overhead and interest) $(9,480) $(1,679)
============= =============
19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL DISCUSSION
Introduction
------------
Please refer to our previously filed Annual Report on Form 10-K for the
year ended September 30, 1997 and Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 for an introduction and background on the
Company and its prior activities. This general discussion will address
certain of the previously identified open and unresolved Opon issues.
Opon Exploration
----------------
As previously reported, the Company and Amoco Colombia had a dispute
regarding audit exceptions for the Opon Project for years 1994, 1995 and
1996 which had been submitted to arbitration. The parties met in July
1998 and have significantly reduced the number and scope of audit
exceptions on which they disagree. Final resolution of the entire
dispute should reached in the near future. The Company has also
approved the 1996 and 1997 joint operating committee budgets in their
entirety and no longer has any disputes regarding overhead operating
expenses. This has not resulted in any adjustments to the Company's
financial statements since the Company had previously expensed all
disputed overhead operating expenses as incurred. The Company has agreed
with Amoco Colombia on a settlement of all claims related to equipment
failure with suppliers to the Opon 6 well, except for the claim with the
supplier of the TCP guns that initially failed to fire. If this
remaining dispute is not resolved within 30 days the Company will
consider filing an arbitration claim in London, UK pursuant to the
contract. The settlements have already resulted, and will result, in
partial payments of outstanding invoices to several suppliers and will
further increase the amount the Company owes Amoco Colombia but will
reduce the Company's accrued liabilities. There is still no resolution
of the dispute with Comision de Regulacion de Energia y Gas ("CREG")
over the pipeline tariffs and the Company continues to accrue the
pipeline tariff overpayment as a liability. There is still no
resolution with Ecopetrol regarding the take or pay contract and the
Company has not accrued the related $5.2 million invoice in its
financial statements.
In April 1998 the Company announced that the rate of decline in
production from its Opon No. 3 and Opon No. 4 gas wells in Colombia had
been higher than expected during the first five months of production.
Recent testing of the wells is complete. An analysis of the test
results by the Company's independent reserve engineers has concluded
that it will become uneconomic (operating costs will exceed operating
revenues) to produce the wells before the end of fiscal 1998 and that
the drilling of additional wells would be uneconomic (net profit over
the life of a new well would be less than the cost to drill it). In its
annual report for the year ended September 30, 1997, the Company
reported proved reserves of 52.5 billion cubic feet of natural gas and
1.9 million barrels of associated liquids, for which the present value
of net cash flows was $16.0 million. As a result of the significant
declines in production observed since December 1997 and the recently
20
completed testing, proved reserves as of June 30, 1998 are now estimated
to be 0.4 billion cubic feet of natural gas and 0.02 million barrels of
associated liquids, for which the present value of net cash flows is
less than $0.1 million.
The current production revenue from the Opon Nos. 3 and 4 wells
continues to decline and net cash flow to the Company's interest is
expected to turn negative before the end of the fiscal year. No
additional wells are planned to be drilled by Amoco Colombia in the Opon
concession contract area. The Company has commenced negotiations with
Amoco Colombia for a voluntary surrender of its working interest in the
Opon concession pursuant to the joint operating agreement in exchange
for a release of our liabilities which include $5.5 million in current
charges and $27.1 million under the Funding Agreement as of June 30,
1998. There are no assurances that these negotiations will be
successful. Amoco Colombia has the option to place Hondo Magdalena into
default on or after October 15, 1998 and Hondo Magdalena has a 30 day
period to cure the default or lose the interest in the Opon concession
contract. The Company does not have the financial resources to cure the
potential default, if declared by Amoco Colombia, and does not have any
known possibility of outside financing. In July 1998, Amoco Colombia
announced that it would write off a significant amount of its Opon
investment.
At June 30, 1998, the Company was indebted to its majority shareholder,
Lonrho Plc, and its affiliates in the aggregate amount of $112.5
million. Management believes it will be impossible for the Company to
comply with an existing loan covenant to increase reserves in the Opon
area by 13 billion cubic feet of gas by October 1, 1998. The Company
has not received a notice of default from Lonrho Plc. The Company does
not know if Lonrho plans to foreclose on its security interest in the
shares of Hondo Magdalena.
Stock Exchange Listing
----------------------
The Company has withdrawn its appeal of the delisting decision by the
American Stock Exchange and the shares of the Company's common stock are
no longer traded on that exchange. The shares are now traded over the
counter on the electronic bulletin board under the symbol HOGL.
Discontinued Operations
-----------------------
Two of the Company's former business segments, refining and marketing
operations and real estate operations were discontinued in 1991. No
change in the status of these discontinued operations from that reported
in the Company's 1997 Annual Report on Form 10-K occurred during the
current period except that Via Verde Development Company, a wholly-owned
subsidiary of the Company, entered into a contract for the sale of one
of the Company's two real estate tracts in May 1998. The contract for
the Via Verde property, consisting of 11.5 acres of undeveloped land, is
for $3.13 million and is expected to close in October 1998. Proceeds
from that sale are pledged and would be paid to Lonrho under its
existing loan agreements and a mortgage to Lonrho executed in 1993 in
connection with a new advance of funds by Lonrho at that time.
21
RESULTS OF OPERATIONS
Quarters Ended June 30, 1998 and 1997
-------------------------------------
Results of continuing operations for the quarter ended June 30, 1998
amounted to a net loss of $4.3 million, or 31 cents per share. The
Company reported a net loss from continuing operations of $2.7 million,
or 19 cents per share, for the quarter ended June 30, 1997. No losses
from discontinued operations were reported for either period. In
addition, for the quarter ended June 30, 1998, the Company had an
extraordinary gain from the forgiveness of debt of $3.6 million (as more
fully described in Liquidity and Capital Resources), or 26 cents per
share, and an extraordinary loss from the write-off of its Colombian
assets of $40.0 million, or $2.90 per share, arising from the extreme
downward adjustment of its oil and gas reserves as more fully described
above. The net loss for the quarter ended June 30, 1998 amounted to
$40.7 million, or $2.95 per share.
Production from the Opon field commenced in December 1997. The
Company's share of Opon production during the current quarter amounted
to 597,670 mmbtu sold for an average price of $1.15 per mmbtu and 27,355
barrels of condensate and natural gas liquids sold for an average price
of $12.20 per barrel. In addition, the Company recorded tariff revenues
on 667,193 mcf at an average price of 25 cents per mcf. Due to an
unexpected drop in pressure and related production from the Opon No. 3
and No. 4 wells during the third quarter, the revenue was considerably
lower than planned and anticipated. The total mmbtu sold declined from
913,131 for the quarter ended March 31, 1998 to 597,670 for the current
quarter. By contract, the Company's gas price is equal to the Colombian
Resolution 61 price which adjusts semi-annually based on world fuel oil
prices. The Resolution 61 price changed from $1.15 per mmbtu to 85
cents per mmbtu on July 1, 1998.
Net operating profit (defined as operating revenue less operating
expenses, depreciation, depletion, and amortization, and overhead,
Colombian operations) improved by $0.4 million between the periods as a
result of the commencement of production in December 1997.
The level of the Company's debts to Lonrho Plc and to Amoco Colombia
under the Funding Agreement have increased by approximately $21.4
million between June 30, 1997 and June 30, 1998. Interest expense
increased by $1.8 million between the quarters because of the increased
debt levels and because interest is no longer being capitalized for the
pipeline construction.
Six months ended June 30, 1998 and 1997
---------------------------------------
Results of continuing operations for the nine months ended June 30, 1998
amounted to a net loss of $19.4 million, or $1.41 per share. The
Company reported a net loss from continuing operations of $8.2 million,
or 59 cents per share, for the nine months ended June 30, 1997. No
losses from discontinued operations were reported for either period. In
addition, for the nine months ended June 30, 1998, the Company had an
extraordinary gain from the forgiveness of debt of $3.6 million (as more
fully described in Liquidity and Capital Resources), or 26 cents per
share, and an extraordinary loss from the write-off of its Colombian
assets of $40.0 million, or $2.90 per share, arising from the extreme
22
downward adjustment of its oil and gas reserves as more fully described
above. The net loss for the nine months ended June 30, 1998 amounted to
$55.8 million, or $4.05 per share.
Net operating profit (defined as operating revenue less operating
expenses, depreciation, depletion, and amortization, and overhead,
Colombian operations) improved by $1.5 million between the periods as a
result of the commencement of production in December 1997.
The Company has charged its entire cost of $8.6 million for the
unsuccessful Opon No. 14 well to costs of exploration and dry holes
during the current period. No comparable expense was incurred in the
prior period.
Interest expense increased by $3.9 million between the nine-month
periods because of the increased debt levels and because interest is no
longer being capitalized for the pipeline construction.
LIQUIDITY AND CAPITAL RESOURCES
The Company reached a settlement with Phillips Petroleum on July 14,
1998 for $0.1 million pursuant to its obligation/liability of $1.2
million. The Company reached a settlement with the City of Long Beach,
California on July 10, 1998 for $0.2 million pursuant to its
obligation/liability of $1.7 million. The Company reached a settlement
with the trustee of the Newhall Industrial Development Revenue bonds on
July 27, 1998 that becomes fully effective after 90 days for $0.1
million pursuant to its obligation/liability of $1.0 million. The
Company did not make a scheduled interest payment of $0.1 million on the
Newhall Pollution Control Revenue bonds (amounting to principal and
accrued interest of $2.0 million as of June 30, 1998). The bond Trustee
has not issued a notice of default. The Company is in settlement
discussions with the U.S. Small Business Administration as guarantor and
payer of the bonds for the same payoff rate of ten cents on the dollar.
The Company has not reached any settlement with Lonrho Plc on its June
30, 1998 obligation of $114.6 in principal and accrued interest or with
Amoco Colombia on its June 30, 1998 obligation of $27.1 in principal and
accrued interest and the Company does not have the available cash
resources to make any settlement, even at the ten cents on the dollar
deployed in prior settlements.
The Company has previously accrued a contingent liability in the amount
of $3.2 million with regard to demands upon it relating to a challenged
assessment by the State of California against Fletcher Oil & Refining
Company ("Fletcher", a former subsidiary of the Company) for alleged
fuel tax deficiencies. The Company believes the assessment of the State
of California was unjustified and the amounts alleged by the State to be
owing can be substantially reduced, if not eliminated completely through
the review process provided by law. A lawsuit was brought against the
Company by Signal Treating Service, Inc. ("Signal") which was not a
party to the contract in which the stock of Fletcher was sold. In the
lawsuit Signal is seeking payment by the Company of the State's current
assessment of $5.7 million. The Company's counsel in the litigation has
advised that it has valid defenses against the lawsuit which is not
expected to go to trial before August 1999. If the Company is not
successful in the lawsuit it will not have the funds, and will have no
known means of obtaining the funds, to pay any judgment in the order of
the amount demanded by the plaintiff or in the amount currently booked
23
as a contingent liability or in any significant amount. Whatever rights
the Company has with regard to a letter from Lonrho Plc which created
the possibility that Lonrho might provide funds relating to the
contingent liability if an actual liability was established by the end
of fiscal 1998, will expire at the end of fiscal 1998 well before the
issue of alleged liability will be decided. The Company has not been
successful to date in negotiating a settlement in this litigation.
The Company does not have any source of new cash from available or new
facilities. Based upon the Company's current cash position, management
believes it has enough resources to settle the remaining Newhall bond
issue and to settle with its other remaining small creditors for the
same settlement rate of ten cents on the dollar paid to other creditors.
The Company does not have the financial resources to make any payments
to Amoco Colombia or Lonrho Plc except for the previously mentioned
payment to Lonrho Plc upon the sale of the Via Verde property. The
Company currently has four employees and continues to downsize its
operation and ongoing expenses to conserve its minimum cash resources.
Management is considering available alternatives in light of its
current financial situation which may include, among others, continued
negotiations with its existing creditors, dissolution of the Company, or
a filing under the appropriate bankruptcy law.
CAUTIONARY STATEMENTS
The Company believes that this report contains certain forward-looking
statements, as defined in the Private Securities Litigation Reform Act
of 1995, including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," "may" and words of
similar import, or statements of management's opinion. Such forward
looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
24
Part II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-K are incorporated
by reference. Refer to Exhibit Index below.
(b) One report on Form 8-K was filed during the quarter ended June 30,
1998:
1) Form 8-K filed April 13, 1998 to report the Opon No. 14 well to
be a dry hole and to report initial concerns over declines in
production pressures and volumes from the Opon No. 3 and No. 4
wells.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date: August 11, 1998 /s/ Stanton J. Urquhart
----------------- -----------------------
Stanton J. Urquhart
Vice President and Controller
The above officer of the registrant has signed this report as its duly
authorized representative and as its chief accounting officer.
EXHIBIT INDEX
Exhibit
Number Subject
------- --------------------------------------------
27 Financial Data Schedule
25