<PAGE>
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: March 31, 1994
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 Blvd, Roswell, New Mexico 88201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (505) 625-8700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The registrant has one class of common stock outstanding. As of May 9,
1994, 13,006,892 shares of registrant's $1 par value common stock were
outstanding.
Page 1 of 16 There are no exhibits to this report.
<PAGE>
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED MARCH 31, 1994
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets as of March
31, 1994 and September 30,1993 3
Consolidated Statements of Operations for
the three months ended March 31, 1994 and 1993 4
Consolidated Statements of Operations for
the six months ended March 31, 1994 and 1993 5
Consolidated Statements of Cash Flows for
the six months ended March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 8
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 16
2
<PAGE>
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
March 31, September 30,
1994 1993
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,264 $601
Accounts receivable 1,152 4,266
Inventory 137 770
Prepaid expenses and other 297 165
------------- -------------
Total current assets 2,850 5,802
Properties, net 14,523 15,910
Net assets of discontinued
operations (Note 2) 7,983 7,750
Other assets 630 680
------------- -------------
$25,986 $30,142
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $355 $1,871
Current portion of long-term debt 220 210
Accrued expenses and other 299 1,992
------------- -------------
Total current liabilities 874 4,073
Long-term debt, including $75,505 and $74,505,
respectively, payable to a related party 79,622 78,828
Deferred taxes (Note 5) 561 561
Other liabilities, including $2,250 in fiscal
1994 payable to a related party (Note 3) 5,312 2,495
------------- -------------
86,369 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 (117,197) (112,629)
------------- -------------
(60,383) (55,815)
------------- -------------
$25,986 $30,142
============= =============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
March 31,
-----------------------------
1994 1993
------------- -------------
REVENUES
Sales and operating revenue $26 $21
Gain on sale of assets -- 26
Overhead reimbursement and other income 243 115
------------- -------------
269 162
------------- -------------
COSTS AND EXPENSES
Operating costs 137 8
Depreciation, depletion, and amortization 66 89
General and administrative 487 1,143
Interest on indebtedness including $1,119
and $826, respectively, to a related party 1,119 829
Loss on sale of assets 940 --
------------- -------------
2,749 2,069
------------- -------------
Loss from continuing operations
before income taxes (2,480) (1,907)
Income tax expense (Note 5) -- --
------------- -------------
Loss from continuing operations (2,480) (1,907)
Loss from discontinued operations (Note 2) -- --
------------- -------------
Net Loss ($2,480) ($1,907)
============= =============
Loss per share:
Continuing operations ($0.19) ($0.15)
Discontinued operations -- --
------------- -------------
Loss per share ($0.19) ($0.15)
============= =============
Weighted average common and common
equivalent shares outstanding 13,006,892 13,006,999
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the six months ended
March 31,
-----------------------------
1994 1993
------------- -------------
REVENUES
Sales and operating revenue $355 $21
Gain on sale of assets -- 177
Overhead reimbursement and other income 327 532
------------- -------------
682 730
------------- -------------
COSTS AND EXPENSES
Operating costs 439 63
Depreciation, depletion, and amortization 144 188
General and administrative 1,180 2,532
Costs of exploration and exploratory
dry holes 2 46
Interest on indebtedness including $2,250
and $1,627, respectively, to a related part 2,250 1,637
Loss on sale of assets 1,235 --
------------- -------------
5,250 4,466
------------- -------------
Loss from continuing operations
before income taxes (4,568) (3,736)
Income tax expense (Note 5) -- --
------------- -------------
Loss from continuing operations (4,568) (3,736)
Loss from discontinued operations (Note 2) -- (1,200)
------------- -------------
Net Loss ($4,568) ($4,936)
============= =============
Loss per share:
Continuing operations ($0.35) ($0.29)
Discontinued operations -- (0.09)
------------- -------------
Loss per share ($0.35) ($0.38)
============= =============
Weighted average common and common
equivalent shares outstanding 13,006,892 13,006,972
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the six months ended
March 31,
-----------------------------
1994 1993
------------- -------------
</CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations ($4,568) ($3,736)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation, depletion and amortization 144 188
(Gain) loss on sale of assets 1,235 (177)
Costs of exploratory dry holes -- 86
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 1,634 899
Inventory 633 --
Prepaid expenses and other (132) (234)
Other assets (6) 38
Increase (decrease) in:
Accounts payable (1,516) (1,831)
Accrued expenses and other (785) (3,790)
Other liabilities 2,817 3,630
------------- -------------
Net cash used by continuing operations (544) (4,927)
------------- -------------
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 -- 1,390
Provision for losses, net of utilization (250) (7,509)
Decrease in operating assets -- 4,968
Decrease in operating liabilities -- (5,478)
------------- -------------
Net cash used by discontinued operations (250) (7,829)
------------- -------------
Net cash used by operating activities (794) (12,756)
------------- -------------
</TABLE>
(Continued)
6
<PAGE>
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(In Thousands)
For the six months ended
March 31,
-----------------------------
1994 1993
------------- -------------
</CAPTION>
<S> <C> <C>
Cash flows from investing activities:
Proceeds from sale of assets 1,458 1,720
Capital expenditures (805) (8,569)
------------- -------------
Net cash provided (used) by investing activities 653 (6,849)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 1,000 --
Principal payments on long-term debt (196) (234)
------------- -------------
Net cash provided (used) by financing activities 804 (234)
------------- -------------
Net increase (decrease) in cash and cash equivalents
from all operations 663 (19,839)
Less net decrease in cash and cash equivalents from
discontinued operations -- (957)
------------- -------------
Net increase (decrease) in cash and cash equivalents
from continuing operations 663 (18,882)
Cash and cash equivalents at the beginning of the period 601 20,475
------------- -------------
Cash and cash equivalents at the end of the period $1,264 $1,593
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil & Gas Company
(hereinafter referred to as "Hondo Oil" or "the Company") include the
accounts of all subsidiaries, all of which are wholly-owned. All
significant intercompany transactions have been eliminated. The Hondo
Company (hereinafter referred to as "Hondo") owns 78% of Hondo Oil's
common stock.
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 Company's 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.
8
<PAGE>
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
(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
$179 have been received subsequently and further proceeds will be
received when certain components of the refinery equipment are sold by
the buyer.
Operating losses of discontinued operations for the quarters ended March
31, 1994 and 1993 were $127 and $3,158, respectively. Corresponding
amounts for the six months ended March 31, 1994 and 1993 were $246 and
$8,595, respectively, and were charged against loss provisions
established in earlier periods. A loss provision of $1,200 pertaining
to the real estate segment was recorded for the quarter ended December
31, 1992. The Company has not recorded a loss provision 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 March 31, 1994 and 1993 include interest expense of $70
and $698, respectively. Corresponding amounts for the six months ended
March 31, 1994 and 1993 were $142 and $1,407, respectively. Total
interest expense allocated to discontinued operations, both expensed and
capitalized, includes $823 and $1,661 attributable to Lonrho Plc for the
quarter and six months ended March 31, 1993, respectively.
A summary of the segments' net assets is as follows:
March 31, September 30,
1994 1993
------------- -------------
Refining and Marketing:
Properties, net $ -- $100
Loss privisions, net -- (100)
------------- -------------
Refining and marketing net assets -- --
Real estate 7,983 7,750
------------- -------------
Net assets $7,983 $7,750
============= =============
9
<PAGE>
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
(All Dollar Amounts in Thousands)
3) Other Liabilities
-----------------
In accordance with the terms of the Company's debts to Lonrho Plc,
accrued interest is either added to the outstanding principal or paid by
issuance of the Company's common stock on the interest due date, at the
option of Lonrho Plc. Accrued interest of $2,250, classified as a
long-term liability as of March 31, 1994, was added to the outstanding
principal balances on April 1, 1994.
During the quarter ended March 31, 1994, the Company entered into an
agreement with the City of Long Beach which provides, among other
things, that payment of amounts due to the City of Long Beach arising
from the Company's interest in the Long Beach Unit, Wilmington Oil
Field, California (THUMS), including $542 classified as a current
liability at September 30, 1993, will be deferred. Accordingly, all
liabilities to the City of Long Beach are now classified as long-term.
Other liabilities consist of the following:
March 31, September 30,
1994 1993
------------- -------------
Interest payable to Lonrho Plc $2,250 $ --
City of Long Beach 1,637 1,332
Other 1,425 1,163
------------- -------------
$5,312 $2,495
============= =============
4) Cash Flow Information
---------------------
Cash interest expense paid for the six months ended March 31, 1994 and
1993 was $133 and $3,912, 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 recognized and the footnote
disclosures required by SFAS No. 109 have been omitted.
10
<PAGE>
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
(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 reversals of differences between financial reporting
and tax bases of assets and liabilities and are measured using the
enacted effective tax rates and laws that will be in effect when the
differences are expected to reverse. Prior to the adoption of Statement
109, income tax expense was determined using the liability method
prescribed by Statement 96, which has been superseded by Statement 109.
Among other changes, Statement 109 changes the recognition and
measurement criteria for deferred tax assets included in Statement 96.
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.
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 from Hondo Magdalena. 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 also has an option
to conduct further seismic evaluation of the contract area at its
expense. After drilling of the Opon No. 3, Amoco Colombia may (i)
withdraw and relinquish its interest or, (ii) 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,
another La Paz formation well, or (iii) relinquish 5% of its 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. The drilling of
the well recommenced on January 31, 1994 with a larger top-drive drilling
rig. The well has been drilled to approximately 9,500 feet, where an
intermediate casing string is being installed. After the casing is set,
drilling will continue to the target depth of 13,000 feet.
Amoco Colombia exercised its right under the Farmout Agreement 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. However, Amoco Colombia is presently seeking an extension of this
date from the Colombian national oil company.
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.
Effective May 1, 1994, The Anderson Company, a wholly-owned subsidiary,
sold the Company's office building and certain furniture and equipment in
Roswell, New Mexico, for $0.7 million in cash and deferred payments. A
loss of $0.9 million resulted, largely due to real estate market
conditions in Roswell. The sale will further reduce the Company's
expenses. The Company will continue to occupy a portion of the building
under a lease with the buyer.
Discontinued Operations
The Company has listed its 11 acre Via Verde Bluffs property in the City
of San Dimas and its 105 acre Valley Gateway property in the City of
Santa Clarita with real estate brokers. The Company has entered into
preliminary discussions with potential buyers for both properties. 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.
RESULTS OF OPERATIONS
---------------------
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
business activities, the results of continuing operations are not
comparable and may not be indicative of the Company's future operating
results. Operating revenues, gain (loss) on sale of assets, overhead
reimbursement and other income, operating costs, and costs of
exploration are primarily comprised of non-recurring transactions in both
periods.
Quarters Ended March 31, 1994 and 1993
Continuing operations reported losses of $2.5 million, or 19 cents per
share, for the quarter ended March 31, 1994 and $1.9 million, or 15 cents
per share, for the comparable period last year.
Loss on sale of assets for the quarter ended March 31, 1994 includes a
loss of $0.9 million arising from the sale of the Company's office
building and certain furniture and equipment in Roswell, New Mexico.
The decrease in general and administrative expense of $0.6 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 March
31, 1993. The net decrease of $0.5 million arises from lower interest
rates in the current quarter, offset by an increase in outstanding debt
of $13.0 million between the quarters. The amounts reported in the
consolidated statements of operations increased by $0.3 million because
$0.8 million of interest expense was allocated to discontinued operations
for the quarter ended March 31, 1993.
13
<PAGE>
Operating losses of discontinued operations, which are charged against
previously established loss provisions, amounted to $0.1 million and $3.2
million for the quarters ended March 31, 1994 and 1993, 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. No additional loss provisions have been recorded in the current
quarter.
Six Months Ended March 31, 1994 and 1993
Continuing operations reported losses of $4.6 million, or 35 cents per
share, for the six months ended March 31, 1994 and $3.7 million, or 29
cents per share, for the comparable period last year.
Loss on sale of assets includes a loss of $0.9 million recorded for the
period ended March 31, 1994, as described above.
Operating expenses for the six months ended March 31, 1994 arise
primarily from obsolescence of pipe inventories in Colombia.
The decrease in general and administrative expense of $1.3 million
between the six month periods arises primarily from reductions in the
number of employees, offices, and aircraft.
Total interest expense for the six months ended March 31, 1994 of $2.2
million is less than total interest expense for the year-earlier period
of $3.3 million. The net decrease of $1.1 million between the periods
arises from lower interest rates, offset by an increase in outstanding
debt of $13.0 million. The amounts reported in the consolidated
statements of operations increased by $0.6 million because $1.7 million
of interest expense was allocated to discontinued operations for the six
months ended March 31, 1993.
Operating losses of discontinued operations, which are charged against
previously established loss provisions, amounted to $0.2 million and $8.6
million for the six months ended March 31, 1994 and 1993, 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 additional loss provisions have been recorded in
the current period.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the six months ended March 31, 1994, cash inflows of $1.5 million
and $1.0 million arose from the sale of assets and borrowings from Lonrho
Plc under existing loan agreements, respectively. The Company utilized
cash of $0.5 million and $0.3 million to finance continuing and
discontinued operations, respectively, and made scheduled debt repayments
of $0.2 million. In addition, the Company expended $0.6 million and $0.2
million on capital projects for continuing operations and discontinued
real estate operations, respectively. Overall, cash balances for the
period increased by $0.7 million to $1.3 million.
14
<PAGE>
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 provided for
all accrued interest on the respective loans at that date to be added to
principal. The interest rate for each loan was reduced to 6%, and
interest is now 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. Lonrho Plc selected the latter option for interest due April
1, 1994. This restructuring substantially decreases the Company's debt
service. 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
in the near term. 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.
The Company's existing cash balances are projected to be sufficient to
finance the Company's business activities during fiscal 1994. Cash flow
projections for fiscal 1995 assume receipt of (i) $5.0 million from Amoco
Colombia after the Opon No. 3 well is completed and, (ii) proceeds from
the sale of certain equipment of Fletcher under the purchase and sale
agreement. Failure to receive these monies would materially and adversely
affect the Company's liquidity in fiscal 1995. The Company has curtailed
all non-essential capital and other expenditures in order to conserve
cash.
The Company's management believes that, before successful completion of
the Opon No. 3 well, additional debt or equity funds, may be unavailable
to the Company. The Company's cash resources in the near future may be
limited to cash on hand 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
and, possibly, the sixth-year obligation well, are essential to the
Company's ability to obtain additional financing for the 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) There are not exhibits to this report.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1994.
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 May 12, 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.
16
