FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1993
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 0-52
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 Boulevard, 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 February 7,
1994, 13,006,892 shares of registrant's $1 par value common stock were
outstanding.
Exhibit Index is located on page 18.
1
<PAGE>
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 1993
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets as of December
31, 1993 and September 30,1993 3
Consolidated Statements of Operations for
the three months ended December 31, 1993
and 1992 4
Consolidated Statements of Cash Flows for
the three months ended December 31, 1993
and 1992 5
Notes to Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
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PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
December 31, September 30.
1993 1993
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $919 $601
Accounts receivable 1,118 4,266
Inventory 302 770
Prepaid expenses and other 417 165
------------- -------------
Total current assets 2,756 5,802
Properties, net 15,452 15,910
Net assets of discontinued
operations (Note 2) 7,892 7,750
Other assets 658 680
------------- -------------
$26,758 $30,142
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $560 $1,871
Current portion of long-term debt 220 210
Accrued expenses and other 513 1,992
------------- -------------
Total current liabilities 1,293 4,073
Long-term debt, including $74,505
payable to a related party 78,615 78,828
Deferred taxes (Note 5) 561 561
Other liabilities, including $1,131 in fiscal
1994 payable to a related party (Note 3) 4,192 2,495
------------- -------------
84,661 85,957
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000
shares authorized; shares issued and
outstanding: 13,006,892 13,007 13,007
Additional paid-in capital 43,807 43,807
Accumulated deficit (114,717) (112,629)
------------- -------------
(57,903) (55,815)
------------- -------------
$26,758 $30,142
============= =============
The accompanying notes are an integral part of these financial statements.
3
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HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
December 31,
-----------------------------
1993 1992
------------- -------------
REVENUES
Sales and operating revenue $329 $ --
Gain (loss) on sale of assets (295) 151
Other income 84 417
------------- -------------
118 568
------------- -------------
COSTS AND EXPENSES
Operating costs 302 55
Depreciation, depletion, and amortization 78 99
General and administrative 693 1,389
Costs of exploration and exploratory
dry holes 2 46
Interest on indebtedness including $1,131
and $800, respectively, to a related party 1,131 808
------------- -------------
2,206 2,397
------------- -------------
Loss from continuing operations
before income taxes (2,088) (1,829)
Income tax expense (Note 5) -- --
------------- -------------
Loss from continuing operations (2,088) (1,829)
Loss from discontinued operations (Note 2) -- (1,200)
------------- -------------
Net Loss ($2,088) ($3,029)
============= =============
Loss per share:
Continuing operations ($0.16) ($0.14)
Discontinued operations -- ($0.09)
------------- -------------
Loss per share ($0.16) ($0.23)
============= =============
Weighted average common and common
equivalent shares outstanding 13,006,892 13,006,942
The accompanying notes are an integral part of these financial statements.
4
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<TABLE>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
<CAPTION>
For the three months ended
December 31,
-----------------------------
1993 1992
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations ($2,088) ($1,829)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation, depletion and amortization 78 99
(Gain) loss on sale of assets 295 (151)
Costs of exploratory dry holes -- (4)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 1,656 516
Inventory 468 --
Prepaid expenses and other (252) (497)
Other assets (6) 42
Increase (decrease) in:
Accounts payable (1,311) (993)
Accrued expenses and other (609) (2,858)
Other liabilities 1,697 1,433
------------- -------------
Net cash used by continuing operations (72) (4,242)
------------- -------------
Pretax loss from discontinued operations -- (1,200)
Adjustments to reconcile pretax loss from discontinued
operations to net cash used by discontinued operations:
Depreciation and amortization -- 829
Provision for losses, net of utilization (118) (4,318)
Decrease in operating assets -- 4,369
Decrease in operating liabilities -- (5,189)
------------- -------------
Net cash used by discontinued operations (118) (5,509)
------------- -------------
Net cash used by operating activities (190) (9,751)
------------- -------------
</TABLE>
(Continued)
5
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<TABLE>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(In Thousands)
<CAPTION>
For the three months ended
December 31,
-----------------------------
1993 1992
------------- -------------
<S> <C> <C>
Cash flows from investing activities:
Proceeds from sale of assets 1,383 1,698
Capital expenditures (672) (3,671)
------------- -------------
Net cash provided (used) by investing activities 711 (1,973)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings -- --
Principal payments on long-term debt (203) (241)
------------- -------------
Net cash used by financing activities (203) (241)
------------- -------------
Net increase (decrease) in cash and cash equivalents
from all operations 318 (11,965)
Less net decrease in cash and cash equivalents from
discontinued operations -- (820)
------------- -------------
Net increase (decrease) in cash and cash equivalents
from continuing operations 318 (11,145)
Cash and cash equivalents at the beginning of the period 601 20,475
------------- -------------
Cash and cash equivalents at the end of the period $919 $9,330
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil & Gas Company
(hereinafter referred to as "Hondo Oil" or "the Company") include the
accounts of all subsidiaries, all of which are wholly-owned. All
significant intercompany transactions have been eliminated. The
Hondo Company (hereinafter referred to as "Hondo") presently owns 78%
of Hondo Oil's common stock.
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
except for implementation of Statement of Financial Account Standards
("SFAS") No. 109, "Accounting for Income Taxes", as further described
in Note 5. There have not been any significant developments or
changes in contingent liabilities and commitments.
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 Form 10-K for the fiscal
year ended September 30, 1993.
(b) Earnings Per Share
------------------
Net income (loss) per share amounts have been computed using the
weighted average number of common shares and dilutive common
equivalent shares outstanding. Fully diluted per share amounts are
not presented as the effect of the exercise of stock options is not
significant.
(c) Inventory
---------
Inventory, which consists entirely of lease and well equipment in
Colombia, is valued at the lower of cost or net realizable value.
7
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HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
(All Dollar Amounts in Thousands)
2) 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. In October 1992, the Fletcher refinery was placed
in a cold shut-down and subsequently the facility was used to
terminal crude oil and petroleum products for third parties. On
September 15, 1993, the Company executed an agreement for the sale of
its Fletcher refinery and its asphalt terminal in Hilo, Hawaii.
These assets represent the material portion of the Company's refining
and marketing segment. The transaction closed on October 1, 1993 at
which time $992 of the net accrued proceeds of $1,992 were received.
Additional net proceeds of $229 have been received in the current
quarter and further proceeds will be received when certain components
of the refinery equipment are sold by the buyer.
Revenue of the refining and marketing segment for the quarter ended
December 31, 1992 was $267. Operating losses of discontinued
operations for the quarters ended December 31, 1993 and 1992 were
$118 and $5,437, respectively, and were charged against loss
provisions established in earlier periods. An additional loss
provision of $1,200 pertaining to the real estate segment was
recorded for the quarter ended December 31, 1992. The Company has
recorded no loss provisions for discontinued operations this fiscal
year.
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued
segments. The operating losses from discontinued operations for the
quarters ended December 31, 1993 and 1992 include interest expense of
$72 and $709, respectively. Total interest expense allocated to
discontinued operations, both expensed and capitalized, includes $635
attributable to Lonrho Plc for the quarter ended December 31, 1992.
A summary of the segments' net assets is as follows:
December 31, September 30.
1993 1993
------------- -------------
Refining and Marketing:
Properties, net $100 $100
Loss provisions, net (31) (100)
------------- -------------
Refining and marketing net assets 69 --
Real estate 7,823 7,750
------------- -------------
$7,892 $7,750
============= =============
8
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HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
(All Dollar Amounts in Thousands)
3) Other Liabilities
-----------------
In accordance with the terms of the Company's debts to Lonrho Plc,
accrued interest will either be added to the outstanding principal or
paid by issuance of the Company's common stock on the interest due
date. As a result, the accrued interest is classified as a long-term
liability. Subsequent to December 31, 1993, the Company entered into
an agreement with the City of Long Beach which provides, among other
things, that payment of amounts due to the City of Long Beach arising
from the Company's interest in the Long Beach Unit, Wilmington Oil
Field, California, (THUMS) including $542 classified as a current
liability at September 30, 1993, will be deferred. Accordingly, all
liabilities to the City of Long Beach are now classified as
long-term. Other liabilities consist of the following:
December 31, September 30.
1993 1993
------------- -------------
Interest payable $1,131 $ --
City of Long Beach 1,637 1,332
Other 1,424 1,163
------------- -------------
$4,192 $2,495
============= =============
4) Cash Flow Information
---------------------
Cash interest expense paid for the three months ended December 31,
1993 and 1992 was $0 and $3,874, respectively.
5) Income Taxes
------------
As required by the provisions of SFAS No. 109, the Company changed
its method of accounting for income taxes from the provisions of
SFAS No. 96, "Accounting For Income Taxes", to the provisions of SFAS
No. 109, "Accounting For Income Taxes", effective October 1, 1993.
The change in accounting method had no material effect on the
Company's financial position, results of operations, or components of
income tax expense for the current or previous fiscal years.
Accordingly, no cumulative effect of a change in accounting principle
has been reported and footnote disclosures regarding the components
of income tax expense have been omitted.
9
<PAGE>
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
(All Dollar Amounts in Thousands)
5) 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 differences between financial reporting and
tax bases of assets and liabilities and are measured using the
enacted effective tax rates and laws that will be in effect when the
differences are expected to reverse. Prior to the adoption of
Statement 109, income tax expense was determined using the liability
method prescribed by Statement 96, which has been superseded by
Statement 109. Among other changes, Statement 109 changes the
recognition and measurement criteria for deferred tax assets included
in Statement 96.
The Company provides for income taxes based on estimated annual
effective rates. The Company has investment tax credit carryforwards
of approximately $4,096. The Company has recorded current income tax
expense to the extent that federal, state or alternative minimum tax
is projected to be owed. Deferred income taxes are recorded to the
extent that tax net operating losses are not available to offset
future reversals of temporary differences.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
1993
-------------
Deferred tax assets, long-term:
Net operating loss carryforwards $35,223
Valuation allowance (26,992)
-------------
8,231
-------------
Deferred tax liabilities, long-term:
Financial reporting basis of real estate in excess
of income tax basis 8,671
Income tax depreciation in excess of financial
reporting depreciation 121
-------------
8,792
-------------
Net deferred tax liabiity $561
=============
10
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HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
(All Dollar Amounts in Thousands)
5) Income Taxes (Continued)
------------
The difference between income tax expense from continuing operations
and the amount computed by applying the statutory Federal income tax
rate to loss from continuing operations before income taxes are as
follows:
For the three months ended
December 31,
-----------------------------
1993 1992
------------- -------------
Benefit on book loss computed at the
effective statutory rate ($708) ($622)
Losses from foreign operations 69 65
Net operating loss for which no benefit
is recognized 639 557
------------- -------------
$ -- $ --
============= =============
11
<PAGE>
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
------------------
Continuing Operations
The Company's principal asset is its interest in the Opon Association
Contract (the "Opon Contract") in Colombia. Hondo Magdalena Oil & Gas
Limited ("Hondo Magdalena"), a wholly-owned subsidiary, entered into a
Farmout Agreement dated August 9, 1993 under which Amoco Colombia Petroleum
Company ("Amoco Colombia") will earn a participating interest in Hondo
Magdalena's Opon Contract in the Middle Magdalena Valley of Colombia.
Under the terms of the Farmout Agreement, Amoco Colombia will earn a 50%
interest in the Opon Contract. Hondo Magdalena retains a 30% interest. To
earn the interest, Amoco Colombia paid $3.0 million in cash and is paying
Hondo Magdalena's costs related to the fifth-year obligations under the
Opon Contract, the Opon No. 3 well, a well to the La Paz formation. Amoco
Colombia may withdraw and relinquish its interest after drilling the first
farmout well. Amoco Colombia also has an option to conduct further seismic
evaluation of the contract area at its expense. Subsequent to completion
of the fifth-year contract obligations, Amoco Colombia may either (i) pay
Hondo Magdalena an additional $5.0 million and 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, or (ii) relinquish 5% of their
interest to Hondo Magdalena and pay all of Hondo Magdalena's costs related
to the sixth-year obligations under the Opon Contract. Amoco Colombia will
again have the option to withdraw and relinquish its interests after the
drilling of the second farmout well.
The Company commenced the drilling of the Opon No. 3 well on October 12,
1993. The Opon No. 3 well was commenced with a smaller drilling rig in
order to meet time constraints under the Opon Contract. After drilling the
first portion of the hole to approximately 500 feet and setting surface
casing, the smaller drilling rig was moved off the well site. The well
site was completed in early January 1994 and a larger rig was moved in to
complete the drilling of the well. The drilling of the well recommenced on
January 31, 1994.
Hondo Magdalena now serves as operator of the Opon Contract. Amoco
Colombia has exercised its right under the Opon Contract to become operator
effective March 1, 1994. The drilling of the sixth-year obligation well
under the Opon Contract must be commenced by July 15, 1994. Management
expects that the well will be financed by Amoco Colombia under the terms of
the Farmout Agreement described above.
Because of losses in prior years and decreases in shareholders' equity, the
Company does not fully meet all of the guidelines of the American Stock
Exchange for continued listing of its shares. Management has taken steps
to improve the Company's ability to meet the Exchange's guidelines and
preserve the listing; however, no assurances can be given that the
Company's shares will remain listed on the Exchange in the future.
In 1965, the Company (then Pauley Petroleum Inc.) acquired a nonoperating
contractor's interest in the Long Beach Unit, Wilmington Oil Field,
California ("THUMS"). The principal economic benefit of the interest was
the right to receive approximately 4,000 barrels per day of THUMS crude oil
that the Company used in conjunction with the Fletcher refinery. Following
the sale of the refinery in October 1993, the Company's interest in the
Unit, which had been marginally profitable at best, became a potentially
severe cash drain due to the recent decline in crude oil prices.
12
<PAGE>
On February 2, 1994 the Company entered into an agreement with the City of
Long Beach whereby the Company and the City of Long Beach released each
other from their respective rights and obligations under the THUMS
contracts, effective January 1, 1994. The agreement also provides that
amounts due the City of Long Beach of approximately $1.6 million will be
paid on or before January 1, 1997, or prior to that date, if the Company
has free available cash flow from the Opon No. 3 well or any other assets.
The amount due is not subject to interest charges.
Discontinued Operations
The Company has listed its 11 acre Via Verde Bluffs property in the City of
San Dimas with a real estate broker on an exclusive basis. The Company has
also entered into preliminary discussions with a potential buyer for the
105 acre Valley Gateway property in the City of Santa Clarita. No
agreement has been reached on either property at this time and no
assurances can be given that these negotiations will lead to a contract for
sale. The recent earthquake in Southern California had no material effect
on the Company's undeveloped real estate holdings although major damage
occurred to freeways serving the Valley Gateway property.
RESULTS OF OPERATIONS
---------------------
Overall, continuing and discontinued operations resulted in a loss of $2.1
million, or 16 cents per share, for the quarter ended December 31, 1993 and
$3.0 million, or 23 cents per share, for the comparable period last year.
The net loss from continuing operations of $2.1 million, or 16 cents per
share, for the quarter ended December 31, 1993 is $0.3 million, or 2 cents
per share, higher than the loss from the comparable period of the prior
year. The net loss of $1.2 million, or 9 cents per share, from
discontinued operations for the quarter ended December 31, 1992 has no
comparable figure in the current quarter.
Due to the sale of substantially all of the Company's domestic oil and gas
properties in June 1992 and continuing reductions in the Company's few
remaining business activities, the results of continuing operations for the
quarters ended December 31, 1993 and 1992 are not comparable and may not be
indicative of the Company's future operating results. Operating revenues,
gain (loss) on sale of assets, other income, operating costs, depreciation,
and costs of exploration are all comprised of non-recurring transactions in
both periods.
The decrease in general and administrative expense of $0.7 million between
the quarters arises primarily from reductions in the number of employees,
offices, and aircraft.
Total interest expense in the current quarter of $1.1 million is less than
total interest expense of $1.6 million for the quarter ended December 31,
1992. The net decrease of $0.5 million arises from lower interest rates in
the current quarter, offset by an increase in outstanding debt of $11.8
million between the quarters. The amounts reported in the consolidated
statements of operations appear to increase by $0.3 million because $0.8
million of interest expense was allocated to discontinued operations for
the quarter ended December 31, 1992.
13
<PAGE>
Operating losses of discontinued operations, which are charged against
previously established loss provisions, amounted to $0.1 million and $5.4
million for the quarters ended December 31, 1993 and 1992, respectively.
The amounts are not comparable due to the sale of substantially all of the
Company's discontinued refining and marketing segment in September 1993. A
loss provision of $1.2 million was recorded against the carrying value of
the discontinued real estate operations for the quarter ended December 31,
1992. No loss provisions were necessary in the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the quarter ended December 31, 1993, cash inflows of $1.4 million
arose from the sale of assets. The Company utilized cash of $0.1 million
each to finance continuing and discontinued operations and to make
scheduled debt repayments of $0.2 million. In addition, the Company
expended $0.6 million and $0.1 million on capital projects for continuing
operations and discontinued real estate operations, respectively. Overall,
cash balances for the period increased by $0.3 million.
At December 31, 1993, the Company had cash balances of $0.9 million. In
addition, the Company has an outstanding facility with Lonrho Plc totalling
$4.0 million, of which $3.0 million has been drawn to date.
In December 1993 the Company reached an agreement with Lonrho Plc for the
restructuring of the terms of all of the Company's debt to Lonrho Plc. The
agreement was effective as of September 30, 1993, and provides for all
accrued interest on the respective loans at that date to be added to
principal. The interest rate for each loan is reduced to 6%, and interest
is payable semi-annually. The Company may offer payment of future interest
in shares of its common stock, and Lonrho may either accept such payment in
kind or add the amount of the interest due to principal. This
restructuring will substantially decrease the Company's debt service. For
fiscal 1994, the change in interest rate will reduce interest obligations
on Lonrho debt by approximately $3.0 million. The ability to pay interest
in kind or capitalize interest will allow the Company to service its debt
while cash resources are scarce.
The Farmout Agreement with Amoco Colombia is expected to provide funds for
the Company's capital expenditure obligations under the Opon Contract.
While Amoco Colombia is committed to drilling the fifth-year obligation
well, it has the option to withdraw from the Opon Contract upon completion
of that well. If Amoco Colombia elects to withdraw after the completion of
the fifth-year well, the Company does not have sufficient funds available
to meet the sixth-year obligation, a well which must be commenced prior to
July 15, 1994.
Based upon the Company's budget, existing cash and available facilities, as
well as the projected receipt of proceeds from asset sales, are projected
to provide sufficient funds to finance the Company's business activities
during fiscal 1994. The timing of receipt of proceeds from the sale of
certain equipment of Fletcher under the purchase and sale agreement and the
receipt of $5.0 million from Amoco Colombia after the Opon No. 3 well is
completed, each during fiscal 1994, are important parts of management's
projected cash flows. Failure to receive these monies would materially and
adversely affect the Company's liquidity. The Company continues to pursue
opportunities for the early sale of other assets, including the Company's
real estate assets in California. The Company has curtailed all non-
essential capital and other expenditures in order to conserve cash.
14
<PAGE>
The Company's management believes that, before successful completion of the
Opon No. 3 well, additional debt or equity funds, beyond that which may be
provided under the agreements described above, may be unavailable to the
Company. The Company's cash resources in the near future may be limited to
cash on hand, an additional $1.0 million remaining under a line of credit
from Lonrho Plc and the net proceeds of sales of certain assets. Cash from
operations are not expected to be a source of funds unless and until the
Opon Project begins commercial production.
The Company's management believes that its 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. Successful completion of the Opon No. 3 well
currently being drilled is essential to the Company's ability to obtain
additional financing for the future development of the Opon Project.
Obtaining additional sources of funds is vital to the Company's long-term
ability to successfully develop the Opon Project. Unless and until success
is achieved at Opon, substantial doubt will exist as to the Company's
ability to continue as a going concern. There can be no assurance that the
Opon Project will be successfully developed or that alternative sources of
funds will become available in the future.
15
<PAGE>
PART II
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K are incorporated
by reference. Refer to the Exhibit Index on page 18.
(b) One report on Form 8-K was filed during the quarter ended
December 31, 1993. The report was dated October 12, 1993 and
reported the sale of the Company's wholly-owned subsidiary,
Fletcher Oil and Refining Company as well as certain other assets
included in the Company's discontinued refining and marketing
segment.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
(Registrant)
Date February 11, 1994 /s/ I. P. Brownlow
----------------- ------------------
I. P. Brownlow
Vice President and
Chief Financial Officer
The above officer of the registrant has signed this report as its duly
authorized representative and as its principal financial officer.
17
<PAGE>
EXHIBIT INDEX
Exhibit Number Subject
- -------------- -------------
10.1 Letter Agreement dated
February 2, 1994
between the Company
and the City of Long
Beach, excluding exhibits
**10.2 Hondo Oil & Gas Company 1993
Stock Incentive Plan, excluding
exhibits. (incorporated by
reference to Exhibit A to
the Company's Proxy Statement
on Schedule 14A filed with the
Securities and Exchange Commission
on January 28, 1994.)
** Incorporated by reference
18
AGREEMENT
This Agreement is made by and between HONDO OIL AND GAS COMPANY, a Delaware
corporation ("Hondo"), and the CITY OF LONG BEACH, a municipal corporation ("the
City").
RECITALS
--------
This Agreement is entered into with respect to the following facts and
objectives:
1. Hondo has entered into certain contracts with the City, identified as
follows:
(a) "Contractors' Agreement, Long Beach Unit, Wilmington Oil Field,
California," having an effective date of April 1, 1965 and recorded in Book
M1796, Page 409, et seq., Official Records of Los Angeles County, as
subsequently amended.
(b) "Unit Agreement, Long Beach Unit, California," having an
effective date of April 1, 1965 and recorded in Book M1799, page 559, et seq.,
Official Records of Los Angeles County;
(c) "Unit Operating Agreement, Long Beach Unit, California," having
an effective date of April 1, 1965 and recorded in Book M1799, page 801, et
seq., Official Records of Los Angeles County;
(d) "Gas Purchase Agreement" with the City of Long Beach, dated
January 29, 1988; and
(e) "Gas Processing Contract, No. 41224 with Lomita Gasoline Company,
2901 Orange Avenue, P.O. Drawer 851, Long Beach, California 90801. These
contracts are referred to collectively as the "THUMS Contracts".
2. The THUMS Contracts and particularly the Contractors' Agreement
provide, among other things, for delivery by the City of Oil and Wet Gas
Products Allocated to Hondo and the payment by Hondo of Unit Expense and Net
Profits.
3. The City and Hondo wish to release each other from their respective
rights and obligations under the THUMS Contracts without terminating Hondo's
interest in these contracts until at least September 1, 1994.
4. Delivery of the Oil Allocated to Hondo for the months of December 1993
and January 1994 has been made by the City under the THUMS Contracts to KOCH
Industries, Inc. ("KOCH"), at the direction of Hondo for its account.
5. It is anticipated that deliveries of the Oil Allocated to Hondo for
the month of February 1994 will likewise be made by the City to KOCH for the
account of Hondo.
6. As of the date of execution of this Agreement, Hondo owes the City the
amount of $ 2,396,280.14 as more specifically set forth on Exhibit "A" hereto
and will owe further amounts for deliveries of Oil Allocated to it in January
and February 1994.
7. KOCH presently holds the sum of $ 1,093,301.55, for the account of
Hondo for deliveries of Oil Allocated to Hondo for the month of December 1993.
KOCH will hold further sums for delivery to it of Oil Allocated to Hondo for the
months of January and February 1994. The payment of all of these amounts will
be withheld by KOCH until after execution of this Agreement by the parties, at
which time, upon the direction of Hondo, KOCH will pay all of the amounts to
City for the account of Hondo.
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<PAGE>
THE AGREEMENT
-------------
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
1. Hondo is released from all of its obligations under the THUMS
Contracts from January 1, 1994 through August 31, 1994.
2. The City is released from all of its obligations under the THUMS
Contracts, including its obligation to deliver to Hondo Oil and Wet Gas Products
Allocated to Hondo from January 1, 1994 through August 31, 1994.
3. The City will deliver to KOCH the Oil Allocated to Hondo for the
months of January and February 1994 and receive from KOCH and retain the entire
compensation for that oil, provided by the oil sales agreement between Hondo and
KOCH. Thereafter, the City may deliver the Oil Allocated to Hondo to a third
party and receive compensation for that oil from the third party without having
to share any of that compensation with Hondo.
4. Hondo releases and agrees to direct KOCH to release and pay to the
City all monies which it presently holds for Hondo's account for Oil Allocated
to Hondo that has been delivered by the City and for monies which it may hold
for Hondo's account for Oil Allocated to Hondo that is to be delivered in the
months of January and February 1994. Hondo will execute further documents which
may be necessary to assure such payments by KOCH to the City.
5. Hondo agrees to pay to the City, and hereby reaffirms its obligation
to pay, the net amount listed on Exhibit "A" due from Hondo as of December 31,
1993, which is the sum of $1,093,493.39. In addition, Hondo agrees to pay,
subject to its audit, whatever amount may be due for the 1993 Article 9
adjustment. For three years beginning on January 1, 1994, Hondo shall be
obligated to pay all the amounts set forth in this paragraph only from the first
available free cash flow from the Opon No. 3 Well in Colombia or from the first
available free cash flow from any other asset that Hondo now owns or may later
acquire. If these amounts have not been paid in full by January 1, 1997, Hondo
shall be required to pay the remaining balance to the City from any source
available to it. During the three year period from January 1, 1994 through
December 31, 1996, any statute of limitation applicable to the bringing of suit
by the City against Hondo for recovery of these amounts shall be tolled.
6. The THUMS Contracts shall terminate on September 1, 1994 unless this
agreement is extended beyond that date by mutual agreement of the parties.
7. This Agreement is effective as of January 1, 1994.
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<PAGE>
The parties have executed this Agreement on the dates set forth opposite
their respective signatures.
HONDO OIL AND GAS COMPANY
February 1, 1994 By: /s/ John J. Hoey
- ---------------- ----------------
JOHN J. HOEY
President and Chief
Executive Officer
By: /s/ C.B. McDaniel
-----------------
C.B. McDANIEL
Secretary
THE CITY OF LONG BEACH,a
municipal corporation
February 2, 1994 By: /s/ Henry Toboada
- ---------------- -----------------
Assistant City Manager
The foregoing agreement is approved as to form this 2nd day
---
of February, 1994.
---------------
JOHN R. CALHOUN, City Attorney
By: /s/ Richard Alesso
------------------
Deputy
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