SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 1995.
- - or -
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _____________ to _________________.
Commission File No. 0-17267
MALLON RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1095959
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
999 18th Street, Suite 1700
Denver, Colorado 80202
(Address of principal executive offices)
(303) 293-2333
(Registrant's telephone number, including area code)
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
such shorter period of time Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
As of August 9, 1995:
7,793,503 shares of Registrant's Common Stock were outstanding;
1,100,918 shares of Registrant's Series A Preferred Stock
(convertible into 1,113,173 shares of Common Stock) were
outstanding; and
400,000 shares of Registrant's Series B Preferred Stock
(convertible into 941,177 shares of Common Stock) were
outstanding.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31,
1994 June 30, 1995
Current assets:
<S> <C> <C>
Cash and cash equivalents.................... $ 88,000 $ 677,000
Accounts receivable, with no allowance for doubtful accounts:
Joint interest participants.............. 490,000 800,000
Related parties.......................... 15,000 24,000
Oil and gas sales........................ 551,000 570,000
Other.................................... 79,000 1,265,000
Inventories.................................. 30,000 52,000
Other........................................ 89,000 203,000
Total current assets................. 1,342,000 3,591,000
Property and equipment:
Oil and gas properties, under full cost method.. 41,127,000 42,988,000
Mining properties and equipment.............. 4,888,000 5,363,000
Other equipment.............................. 375,000 390,000
46,390,000 48,741,000
Less accumulated depreciation, depletion
and amortization......................... (19,834,000) (21,038,000)
26,556,000 27,703,000
Other assets:
Notes receivable, related parties............ 43,000 45,000
Other, net................................... 285,000 291,000
Total Assets..................................... $ 28,226,000 $ 31,630,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable....................... $ 2,253,000 $ 2,778,000
Undistributed revenue........................ 584,000 427,000
Deferred revenues and drilling advances...... 207,000 291,000
Accrued taxes and expenses................... 62,000 75,000
Total current liabilities............ 3,106,000 3,571,000
Long-term debt................................... -- 2,500,000
Drilling advances................................ 315,000 315,000
Deferred revenues................................ 7,452,000 6,367,000
Minority interest................................ -- 2,500,000
Contingency (Note 6)............................. -- --
Stockholders' equity:
Series A Convertible Preferred Stock, $0.01 par
value, 1,467,890 shares authorized, 1,100,918
shares issued and outstanding, liquidation
preference $6,000,000.................... 5,730,000 5,730,000
Series B Convertible Preferred Stock, $0.01 par
value, 500,000 shares authorized, $400,000
shares issued and outstanding, liquidation
preference $4,000,000.................... 3,774,000 3,774,000
Common Stock, $0.01 par value, 25,000,000
shares authorized; 7,597,725 and 7,793,503
shares issued and outstanding, respectively.. 77,000 78,000
Additional paid-in capital.................... 38,727,000 38,598,000
Accumulated deficit........................... (30,955,000) (31,803,000)
Total stockholders' equity............ 17,353,000 16,377,000
Total Liabilities and Stockholders' Equity........ $ 28,226,000 $ 31,630,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
___________
<TABLE>
<CAPTION>
For the Six Months For the Three Months
Ended June 30, Ended June 30,
1994 1995 1994 1995
Revenues:
<S> <C> <C> <C> <C>
Oil and gas sales.................... $1,001,000 $ 1,518,000 $ 374,000 $1,019,000
Deferred revenue amortization........ 1,132,000 1,085,000 648,000 524,000
Operating service revenue............ 201,000 186,000 96,000 92,000
Interest and other................... 39,000 39,000 17,000 25,000
2,373,000 2,828,000 1,135,000 1,660,000
Costs and expenses:
Oil and gas production............... 1,080,000 1,103,000 528,000 593,000
Mine operating and administrative expenses. 80,000 247,000 33,000 151,000
Depletion, depreciation and amortization. 588,000 1,233,000 239,000 659,000
General and administrative............ 762,000 982,000 392,000 438,000
Interest and other.................... 105,000 111,000 24,000 92,000
2,615,000 3,676,000 1,216,000 1,933,000
Net loss before dividends................. (242,000) (848,000) (81,000) (273,000)
Dividends on preferred stock.......... (67,000) (158,000) (67,000) (79,000)
Net loss available to common stockholders.. $ (309,000) $(1,006,000) $(148,000) $(352,000)
Net loss per share of common stock........ $ (0.04) $ (0.13) $ (.02) $ (.05)
Weighted average shares outstanding....... 7,656,000 7,775,000 7,658,000 7,794,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1994 1995
Cash flows from operating activities:
<S> <C> <C>
Net loss..................................... $ (242,000) $ (848,000)
Adjustments to reconcile net loss to net cash
from operations:
Amortization of deferred revenue......... (1,132,000) (1,085,000)
Depletion, depreciation, and amortization.. 588,000 1,204,000
Stock issued for compensation............. (5,000) 28,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable................. (39,000) (279,000)
Inventory and other assets.......... (86,000) (152,000)
Increase (decrease) in:
Accounts payable.................... 180,000 525,000
Undistributed revenue............... 46,000 (157,000)
Accrued taxes and expenses.......... 90,000 13,000
Deferred revenues and drilling advances.. -- 84,000
Net cash used in operating activities... (600,000) (667,000)
Cash flows from investing activities:
Increase in notes receivable-related party..... (1,000) (2,000)
Additions to property and equipment............ (820,000) (2,239,000)
Purchase of marketable securities.............. (1,000,000) --
Net cash used in investing activities.. (1,821,000) (2,241,000)
Cash flows from financing activities:
Payments on long term debt.................... (2,075,000) 2,500,000
Net proceeds from sale of preferred stock..... 3,795,000 --
Net proceeds from sale of subsidiary preferred
stock..................................... -- 1,155,000
Payment of preferred dividends................ (67,000) (158,000)
Net cash provided by activities....... 1,653,000 3,497,000
Net increase (decrease) in cash and cash equivalents (768,000) 589,000
Cash and cash equivalents, beginning of period.... 964,000 88,000
Cash and cash equivalents, end of period.......... $ 196,000 $ 677,000
Supplemental cash flow information:
Cash paid for interest........................ $ 94,000 $ 80,000
Cash paid for income taxes.................... $ -- $ --
Non-cash transactions:
Issuance of common stock in exchange for:
Acquisition of property and equipment.. $ 300,000 $ 112,000
Loan origination fee................... $ -- $ 112,000
Sale of minority interest in subsidiary.. $ -- $ 1,845,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. GENERAL
Mallon Resources Corporation (the "Company") was incorporated
in Colorado in 1988, in connection with the consolidation of Mallon
Oil Company ("Mallon Oil"), Laguna Gold Company ("Laguna Gold,"
which was formerly known as Mallon Minerals Corporation) and 19
limited partnerships that they sponsored. Mallon Oil continues as
a wholly owned subsidiary of the Company. At December 31, 1994 and
March 31, 1995, Laguna Gold was also a wholly owned subsidiary.
Effective June 30, 1995, the Company privately placed a 20% equity
stake in Laguna Gold. All of the Company's business activities are
conducted through these two subsidiaries. Although consolidated
for financial reporting purposes, the operations of the Company's
two subsidiaries are separate and distinct.
The accompanying interim consolidated financial statements
have been prepared in accordance with the instructions for Form 10-
Q. The Company believes all adjustments (consisting of normal
recurring adjustments) necessary for a fair statement have been
included. These interim statements should be read in conjunction
with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
Note 2. OIL AND GAS PROPERTIES
The Company's oil and gas activities are conducted in the
United States.
Depletion of oil and gas property costs were $2.75 and $5.51
per equivalent barrel of oil production for the six months ended
June 30, 1994 and 1995, respectively.
Capitalized Costs Relating to Oil and Gas Activities:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1994 1995
<S> <C> <C>
Oil and gas properties.......... $ 39,936,000 $ 42,988,000
Accumulated depreciation, depletion
and amortization............. (17,225,000) (20,174,000)
$ 22,711,000 $ 22,814,000
</TABLE>
The Company does not have significant costs of unproved
properties or costs excluded from the full cost pool amortization
base.
Costs Incurred in Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1994 1995
<S> <C> <C>
Property acquisition costs... $ 508,000 $ 115,000
Development costs............ 640,000 1,830,000
Full cost pool credits....... (97,000) (65,000)
$1,051,000 $ 1,880,000
</TABLE>
Results of Operations from Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1994 1995
<S> <C> <C>
Oil and gas sales............... $ 1,001,000 $ 1,518,000
Deferred revenue amortization... 1,132,000 1,085,000
Lease operating expense......... (1,080,000) (1,103,000)
Depletion expense............... (543,000) (1,163,000)
Results of operations - from producing
activities (excluding corporate overhead,
interest, and income taxes).... $ 510,000 $ 337,000
</TABLE>
Estimated Quantities of Proved Oil and Gas Reserves and Discounted
Future Net Cash Flows:
Set forth below is a summary of the quantities of the
Company's proved crude oil and natural gas reserves estimated by an
independent consulting petroleum engineering firm as of December 31,
1994. All of the Company's reserves are located in the
continental United States.
<TABLE>
<CAPTION>
Oil Gas
(BBLS) (MCF)
<S> <C> <C>
Total proved reserves, December 31, 1994 1,544,000 16,294,000
Reserves attributable to the volumetric
production payment, December 31, 1994 162,000 2,938,000
Proved developed reserves, December 31,
1994 811,000 11,733,000
</TABLE>
Reserves to be delivered pursuant to the Company's volumetric
production payment discussed in Note 5 are excluded from the total proved
and proved developed reserve quantities presented above. Accordingly,
the standardized measure of discounted future net cash flows of
$13,758,000 at December 31, 1994, which is cash flow based, does
not include deferred revenues to be amortized as production and
delivery occurs in the future. However, all costs related to such
production and delivery, which are obligations of the Company, are
included.
There are numerous uncertainties inherent in estimating
quantities of proved oil and gas reserves and in projecting future
rates of production, particularly as to natural gas, and timing of
development expenditures. Such estimates involve the use of
judgments which may not be realized due to curtailment, shut-in
conditions and other factors which cannot be accurately determined.
The above information represents estimates only and should not be
construed as the current market value of the Company's oil and gas
reserves or the costs that would be incurred to obtain equivalent
reserves.
Note 3. MINERAL PROPERTIES
The Company's principal precious metals property is the Rio
Chiquito project located in Guanacaste Province, Costa Rica. The
net book value of the mineral properties and equipment was
approximately $4,700,000 at June 30, 1995. The Company, through
its subsidiary Laguna Gold, has the rights to exploration and
exploitation concessions covering approximately 45,000 acres. A 2%
gross royalty on production is reserved for the government of Costa
Rica. An unrelated mining company owns a 5% net profits interest.
Laguna Gold believes that it has valid rights to the Rio Chiquito
concessions.
Note 4. LONG-TERM DEBT
On February 15, 1995, the Company established a $2,500,000
line of credit pursuant to a loan agreement with three private
investors. Borrowings under this line of credit of $2,500,000 at June 30,
1995 bear interest at 11%, which is due and payable monthly. The line
of credit is collateralized by certain of the Company's oil and gas
properties and is due February 15, 1998.
On August 7, 1995, the Company received a commitment letter
from a financial institution to refinance the Company's debt and
provide the Company with a revolving line of credit facility (the
"Facility"). The significant terms of the refinancing are as
follows:
- - The Company's volumetric production payment (Note 5) will be
retired;
- - The Company's existing $2,500,000 line of credit (above) will be
retired;
- - Initial borrowing base under the Facility will be
$10,000,000, subject to redetermination every six months;
- - Interest rate on the Facility will be the London Interbank
Borrowing Offered Rate (LIBOR), plus 2.5%;
- - The Facility will require interest only payments for two
years, converting to a three year term note thereafter;
- - The Company will issue warrants to purchase 100,000 shares of
the Company's common stock at a price of $2.50 per share;
- - The Facility will be collateralized by substantially all of
the Company's oil and gas properties; and
- - The Company will be obligated to maintain certain financial
and other covenants.
The Facility is scheduled to close in August. The proceeds of the
Facility will be used for the following purposes:
- - To satisfy the remaining obligations under the Company's volumetric
production payment. While the remaining balance of the deferred
revenue will be approximately $6,032,000 as of August 31, 1995, the
cash necessary to satisfy the production payment will be less than
the amount recorded on the balance sheet because of hedging "profits"
that have accrued. Satisfying the obligation is expected to result
in a gain to the Company. This gain will be recognized in
the period during which the production payment is retired.
- - To retire the Company's existing $2,500,000 line of credit.
- - To fund the Company's oil and gas drilling operations.
- - To provide working capital.
Note 5. DEFERRED REVENUE
In connection with the Company's September 30, 1993
acquisition of producing oil and gas properties, the Company sold a
volumetric production payment payable out of the Company's interest
in the acquired properties for net proceeds of $10,002,000.
The production payment covered approximately 4,354,000 MMBTU
of natural gas at an average price of $1.98 and 215 MBbls barrels
of oil at an average price of $13.01 per barrel to be delivered
over eight years. The Company is responsible for production costs
associated with operating the properties subject to the production
payment agreement. The amount received was recorded as deferred
revenue. Annual amortization of deferred revenue, based on the
scheduled remaining deliveries under the production payment
agreement is as follows:
<TABLE>
<CAPTION>
Scheduled Deliveries
Annual Natural Gas Oil
Amortization (MCF) (Bbl)
<S> <C> <C> <C>
1995 $ 2,029,000 849,000 37,000
1996 1,485,000 614,000 28,000
1997 1,168,000 457,000 26,000
1998 943,000 351,000 23,000
1999 751,000 275,000 19,000
2000 611,000 223,000 16,000
2001 465,000 169,000 12,000
$ 7,452,000 2,938,000 161,000
</TABLE>
See Note 4 concerning the Company's intention to retire the
volumetric production payment.
Note 6. CONTINGENCY
In 1993, the Minerals Management Service commenced an audit of
royalties payable on certain oil and gas properties in which the
Company owns an interest. The operator of the properties is
contesting certain alleged deficiencies. The audit is not complete, and
it is not possible for the Company to estimate any potential
liability. However, management of the Company does not believe
that the ultimate outcome of this matter will have a material
negative impact on the financial position, liquidity or results of
operations of the Company. This matter has been dormant for more
than a year.
Note 7. CAPITAL
In January 1995, the Company issued 56,000 shares of its
common stock to an individual who is a partner in the same law firm
as one of the Company's directors. The Company recorded the stock
at $112,000, the market price of the stock on the date of grant.
Subsequent to March 31, 1995, $32,000 was paid to this same
individual as additional compensation for the same transaction.
In lieu of cash loan origination fees, the Company issued
60,000 shares of its common stock to the investors providing the
line of credit (see Note 4). The issuance of these shares were
recorded at the market price of the stock on the date of grant
of $112,000. The loan origination fees will be amortized over the
three year life of the line of credit.
During the six months ended June 30, 1995, an employee
exercised options for 5,000 shares of the Company's common stock at
$.01 per share. The options were granted in a previous year under
the Company's equity participation plan.
Effective June 30, 1995, Laguna Gold privately placed 25,000
shares of its Series A Convertible Preferred Stock for $2,500,000.
After underwriting discounts, offering expenses and other costs,
net proceeds of approximately $2,278,000 were realized. The
shares of Series A Convertible Preferred Stock are convertible into
20% of Laguna Gold's common stock. The net effect of this sale is
that the Company will retain an 80% equity stake in Laguna Gold with a 20%
minority interest. Each share of Series A Convertible Preferred Stock
can be converted into 100 shares of Laguna Gold $.01 par value common
stock at the option of the stockholder, or automatically in the event of a
public offering of the common stock. Each share of Series A
Convertible Preferred Stock includes 10 detachable warrants; each
warrant represents the right to purchase one share of the Company's
common stock at $2.50 per share. The warrants expire on February
15, 2000. As of June 30, 1995, $1,245,000 of the proceeds is
recorded in other receivables in the accompanying consolidated
balance sheet. Such proceeds were received in July 1995.
Note 8. INCOME TAXES
The Company incurred a loss for both book and tax purposes for
the six months ended June 30, 1994 and 1995. There is no income
tax benefit (expense) for the six months ended June 30, 1994 or
1995.
At December 31, 1994, for tax purposes the Company's remaining
net operating loss ("NOL") carryforward was approximately
$7,000,000 which will begin to expire in 2005. This tax loss
carryforward is in addition to net operating losses arising from
the operations of Laguna Gold prior to 1989 which can be utilized
only to the extent of future taxable income of Laguna Gold, but
limited to consolidated taxable income.
Under the Internal Revenue Code of 1986, as amended, the Company
generally would be entitled to reduce its future federal income tax
liabilities by carrying the unused NOL forward for a period of 15 years
to offset its future income taxes.
Note 9. RELATED PARTY TRANSACTIONS
The accounts receivable from related parties consists
primarily of joint interest billings to directors, officers,
stockholders, employees and affiliated entities for drilling and
operating costs incurred on oil and gas properties in which these
related parties participate with Mallon Oil as working interest
owners. These amounts will generally be settled in the ordinary
course of business without interest.
Notes receivable of $43,000 and $45,000 at December 31, 1994
and June 30, 1995, respectively, consist of loans to employees,
which bear interest at prime plus 2%.
Certain oil and gas properties located in Alabama, in which
the Company has working interests, are operated by a company owned
by an individual who also owns, beneficially, in excess of 5% of
the Company's common stock. As of June 30, 1994 and 1995, the
Company had payables to the related company of $1,000 and $25,000,
respectively, which are included in accounts payable on the
accompanying consolidated balance sheets.
A company that owns an interest in Laguna Gold's mining
property is owned by an individual who owns, beneficially, in
excess of 5% of the Company's common stock. The Company has
receivables from the stockholder of $5,000 and $-0- as of June 30,
1994 and 1995, respectively, which are included in joint interest
receivables on the accompanying consolidated balance sheets.
During the six months ended June 30, 1995, the Company
recorded legal fees of $37,000 to a law firm of which a director of
the Company is a senior partner. That firm also represented the
Company in connection with litigation that was resolved in May
1995. In January 1995, 56,000 shares of the Company's common stock
valued at $112,000 were issued to a member of the firm for
consulting services performed by him. Also, fees of $32,000 were
paid to this individual.
The Company has a consulting agreement with an investment
banking firm, in which a director of the Company is a partner. The
agreement requires payments of $240,000 in 1995, of which $120,000
was recorded in the six months ended June 30, 1995.
In February 1995, the Company entered into a Loan Agreement
establishing a $2,500,000 line of credit facility pursuant to which
it can borrow funds from three entities, two of which are
affiliates of an individual who owns, beneficially, in excess of 5%
of the Company's outstanding common stock.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Second Quarter 1995 -- Summary of Results
The Company's second quarter 1995 results showed significant
improvement over the first quarter, in two key areas:
- - Oil and gas sales increased by almost $483,000 due to
increased oil sales resulting from the Company's recent drilling
successes.
- - General and administrative expenses decreased by $106,000.
Driven by these improvements, the Company's loss for the second
quarter, after consideration of the preferred stock dividend, was
$352,000, a $302,000 (46%) improvement over the $654,000 loss of
first quarter 1995. This improvement occurred despite four negative
factors which combined to generate the loss: first, oil and gas sales
were hurt as a result of lower gas production and continued low gas prices;
second, substantially increased mining expenses ($151,000) were incurred
for projects designed to enhance the value of the Company's gold mining
property; third, depletion, depreciation and amortization expenses
increased due to the increase in oil production; and fourth,
interest expense on the line of credit was much higher than in the
first quarter.
The Company's working capital improved significantly by the end of
second quarter 1995, to a positive $20,000. This reflects a $2,197,000
improvement over the $2,177,000 working capital deficit at March 31, 1995.
See the discussion under "Liquidity, Capital Resources and Capital
Expenditures" below.
Liquidity, Capital Resources and Capital Expenditures
The Company's working capital as of June 30, 1995 was $20,000
compared to the working capital deficit of $1,764,000 at December
31, 1994, and the working capital deficit of $2,177,000 at March
31, 1995. The increase in working capital was caused primarily by
increased accounts receivable of $1,524,000. Of this amount,
$1,245,000 was due from the sale of the Laguna Gold Series A
Convertible Preferred Stock described below, which was paid on July
10, 1995. Joint interest participants' accounts receivable also
increased, by $310,000, due to invoicing joint interest partners
for their share of drilling program expenses. Accounts payable
increased by $525,000 as a result of the costs incurred in drilling
and development activities.
During first quarter 1995, as an initial step to address the
Company's working capital deficit, the Company established a
$2,500,000 line of credit to fund its oil and gas drilling
operations. Borrowings under this line of credit bear interest at
11%, which is payable monthly. The line of credit is
collateralized by certain of the Company's oil and gas properties
and is due February 15, 1998. As of June 30, 1995, the Company had
borrowed the maximum $2,500,000 under the line of credit to pay for
the Company's drilling activities.
During second quarter 1995, as a second step designed to
improve its working capital position for mining operations, the
Company sold preferred stock in its mining subsidiary, Laguna Gold,
convertible into a 20% equity interest. Closed effective June 30,
1995 and paid on July 10, 1995, this transaction provided the Company
with net proceeds of $1,278,000 in working capital to fund the operations
of Laguna Gold.
As an important third step to improve its working capital
situation, the Company, on August 7, 1995, received a commitment
letter from Hong Kong Shanghai Bank Group to refinance the Company's
debt and provide the Company with a revolving line of credit facility
(the "Facility"). By (i) lowering borrowing costs, (ii) eliminating
the Company's production payment obligations and thereby freeing up
cash flows, and (iii) providing 2 years of "interest only" debt
service obligations, the Facility is expected to greatly enhance the
Company's working capital and general financial condition. The
significant terms of the refinancing are as follows:
- - The Company's volumetric production payment to an affiliate
of Enron (see Note 5) will be retired;
- - The Company's existing $2,500,000 line of credit will be retired;
- - Initial borrowing base of under the Facility will be
$10,000,000, subject to redetermination every six months;
- - Interest rate on the Facility will be the London Interbank
Borrowing Offered Rate (LIBOR), plus 2.5%;
- - The Facility will require interest only payments for two
years, converting to a three year term note thereafter;
- - The Company will issue warrants to purchase 100,000 shares of
the Company's common stock at a price of $2.50 per share;
- - The Facility will be collateralized by substantially all of
the Company's oil and gas properties; and
- - The Company will be obligated to maintain certain financial
and other covenants.
The Facility is scheduled to close in August. The proceeds of the
Facility will be used for the following purposes:
- - To satisfy the remaining obligations under the Company's volumetric
production payment. While the remaining balance of the deferred
revenue will be approximately $6,032,000 as of August 31, 1995, the
cash necessary to satisfy the production payment will be less than
the amount recorded on the balance sheet because of hedging
"profits" that have accrued. Satisfying the obligation is expected
to result in a gain to the Company. This gain will be recognized in
the period during which the production payment is retired.
- - To retire the Company's existing $2,500,000 line of credit.
- - To fund the Company's oil and gas drilling operations.
- - To provide working capital.
The final step to the long-term resolution of the Company's working
capital situation is its drilling programs. The goal of the Company's
drilling operations is to grow through the drill bit: increase
production and revenues, thereby generating additional cash flow.
From January 1, 1995 through June 30, 1995, the Company had drilled
and completed eight wells and has capitalized, net to its working
interest, approximately $1,945,000 for the first phase of the
drilling program. The Company plans to drill 5 additional wells by yearend.
Initially, this level of development drilling has a negative impact on cash
flows, however, despite this effect and depressed gas prices, revenues were
up $492,000 this quarter over the last quarter. Additional drilling, and
any acquisitions, would require additional capital. Beyond the Facility,
the source of any such additional capital is not yet known, nor are any
acquisitions arranged. If an acquisition is contracted, the Company would
expect to finance it with a combination of debt and equity capital, although
the details of such financing cannot be predicted at this time.
As with its oil and gas operations, the Company is exploring
alternatives to realize the value of its mining properties.
Company has engaged an engineering firm to prepare a bankable
feasibility study for commercial development of Rio Chiquito in
anticipation of making an initial public offering of Laguna Gold
stock when market conditions become favorable. No assurance can be
given that the Company will be able to raise its share of any
capital required related to this undertaking. However, the
Company, in a private placement, sold 25,000 shares of Laguna
Gold's Series A Convertible Preferred Stock for a 20% equity stake in
Laguna Gold. The proceeds are being spent for additional core drilling
to expand mineable reserves, for preparation of the bankable feasibility
study, and for day-to-day operations.
Results of Operations
Six Months Ended June 30, 1995 Compared to June 30, 1994
The Company used net cash in operating activities of $667,000
in the six months ended June 30, 1995 compared to $600,000 in the
first half of 1994. Included in these cash flows are depletion,
depreciation, and amortization of $1,204,000 and $588,000 in 1995
and 1994, respectively. Amortization of deferred revenue of
$1,085,000 in 1995 and $1,132,000 in 1994 negatively impacted cash
flow from operating activities. A loss of $848,000 was incurred in
1995, $606,000 more than the loss of $242,000 experienced during
1994. Other non-cash items were $28,000 and ($5,000), in 1995 and
1994, respectively. An increase in current liabilities of $465,000 in
1995 and $316,000 in 1994 increased cash flows from operating
activities. Accounts payable and accrued expenses increased
directly as a result of the significant costs incurred in drilling and
development activities. The Company employed two drilling rigs beginning
in February 1995. Increases in accounts receivable and other assets of
$431,000 in 1995 and $125,000 in 1994 decreased available cash flows.
Joint interest billings receivable increased due to the development drilling
activity. Oil and gas sales receivable increased due to increased
oil production related to the development drilling, and to higher
oil prices.
Cash flows used in investing activities for additions to
property and equipment were $2,239,000 and $820,000 in 1995 and
1994, respectively. The Company's development drilling activities
incurred significantly more costs than did the production
enhancement activities in 1994.
Financing activities netted cash flows of $3,497,000 in 1995
compared to $1,653,000 in 1994. Borrowings of $2,500,000 under the
line of credit were the significant financing activity during
second quarter 1995. Cash proceeds, after related expenses,
through June 30, 1995 on the sale of the Laguna Gold Series A
Convertible Preferred Stock were $1,155,000. In 1994, $2,075,000
of the $3,795,000 of net proceeds from the sale of the Company's
Series B Convertible Preferred Stock were used to retire a net
operating profits interest the Company had sold in connection with
its September 1993 acquisition of producing oil and gas properties.
Dividends on the Series B Convertible Preferred Stock totaled
$158,000 in the six months ended June 30, 1995 and $67,000 in
the six months ended June 30, 1994.
The above factors led to an increase in cash of $589,000 in
1995 compared to a decrease of $768,000 in 1994.
The following table summarizes the results of operations from
oil and gas operations for the six months ended June 30:
<TABLE>
1994* 1995*
<S> <S> <S>
Gas revenues................... $1,112,000 $1,126,000
Gas production (mcf) .......... 754,000 731,000
Average price per mcf.......... $1.47 $1.54
Oil revenues................... $1,021,000 $1,477,000
Oil production (bbl) .......... 72,000 89,000
Average price per bbl.......... $14.26 $16.58
Production and operating
costs per BOE............... $5.47 $5.23
Depreciation, depletion and
amortization per BOE....... $2.75 $5.51
</TABLE>_____________________
* Does include 472,000 mcf and 25,000 bbls in 1994 and 520,000 mcf
and 20,000 bbls in 1995 delivered pursuant to the terms of the
volumetric production payment agreement. Included in total revenues for
1995 and 1994 is $1,085,000 and $1,132,000, respectively, from the amortization
of the Company's deferred revenues.
Exclusive of quantities produced and delivered pursuant to the
Company's volumetric production payment, oil and gas sales
increased during the first six months of 1995 to $1,518,000 from
$1,001,000 in 1994, representing a $517,000 (52%) increase. This
increase is due primarily to the production enhancement activities
completed in 1994 and the Company's development drilling program in
1995. Higher oil prices also contributed to the increased sales.
Oil production net to Mallon after deliveries required by the
volumetric production payment increased by 23,000 barrels (49%).
Average oil prices, not including the deferred revenue
amortization, increased $2.76 per barrel (18%) over the same period
in 1994. Gas production net to Mallon after deliveries required by
the volumetric production payment decreased by 71,000 mcf (25%).
Gas prices continued at a low level, averaging $1.44 in the six
months ended June 30, 1995, a $0.07 decrease (5%) from the prior year
average $1.51 for the six months ended June 30, 1994.
Lease operating expense per equivalent barrel averaged $5.23
in the first six months of 1995 compared to $5.47 during the first
six months of 1994. The decrease of $0.24 (4%), is due primarily
to operational and enhancement efficiencies employed by the field
personnel. The Company is constantly working to improve operations
and decrease operating expense, and management intends to continue
the decrease in per barrel expense. The Company incurs all costs related
to the production and delivery of the volumetric production payment quantities.
There were no sales of gold and silver in 1995 or 1994, and no
sales are expected in the immediate future. Costs related to the
mining operation were $247,000 in the six months ended June 30,
1995 compared to $80,000 in the six months ended June 30 1994 (209%).
As a result of the increased activity described above, expenses were
significantly higher in the second quarter 1995. Expenses incurred in this
year, not incurred in 1994, include salaries and expenses for a trenching
and mapping program, a core drilling program, preparation of a
bankable feasibility study and salary for an officer hired
effective January 1, 1995 to supervise the core drilling program
and oversee the preparation of the bankable feasibility study.
Increased travel and related expenses incurred in traveling to
Costa Rica to plan for the core drilling program, plan and
supervise the trenching and mapping program and travel related to
the equity offering also contributed to higher mining expenses.
The Company recorded a $14,000 foreign exchange loss in the first
six months of 1995. Additionally, Laguna recorded $60,000 for its
share of the Company's investment banking consulting fees. The
increase in mining expenses will continue throughout 1995, and
impede the Company's ability to generate a profit. However, the
expenditures will ultimately increase the reserve base of the mine.
Depletion, depreciation and amortization went to $5.51 barrel
of oil equivalent for the first six months of 1995, up from $2.75
in 1994. The increase of $2.76 (100%) is the result in production in
relation to the underlying reserve base, which declined from December 31,
1993 to December 31, 1994 as a result of low yearend prices and a
significant downward revision as a result of decreased actual production
on one of the Company's major properties. The calculation of depletion
expense is based on the Company's yearend 1994 reserve report and all of
its current production.
Interest and other expense of $111,000 was up slightly in the
first six months of 1995 from $105,000 in the first six months of
1994. Interest at 11% on the Company's line of credit accounts for
the 1995 interest expense while 1994 interest expense was incurred
at 15% on the net profits interest. The net profits interest was
retired in April 1994. If, as intended, the Company completes its
financing transaction, interest expense will increase
significantly.
Total general and administrative costs were $1,233,000 for
first six months of 1995, an increase of $645,000 (110%) over
general and administrative expenses of $588,000 for the first six
months of 1994. Salaries were higher in 1995 than in 1994 as two
officers were hired effective April 1, 1994. Their salaries and
related expenses were included in the first quarter of this year,
but not last year. Legal expense was very high, especially in the
first quarter of 1995, due to several reasons. The Company is
appealing a decision in a complex lawsuit in which it sought
substantial damages. Fees related to this matter recorded in 1995
approximated $38,000. The Company also incurred legal fees of $15,000
in reaching a settlement in another matter. Travel and related expenses
were high because of expenditures incurred pursuing the Laguna Gold private
placement and for travel related to the line of credit transaction,
and as a result of the new mining personnel traveling to Costa Rica
to familiarize themselves with the existing operation. Expenses recorded
in 1995 and not in 1994 included consulting fees of $60,000
pursuant to the Company's consulting agreement with an investment
banking firm.
The Company paid the 8% dividend on its $4,000,000 face value
Series B Stock. This amount totaled $160,000 in 1995 and $67,000
for the period from April 16, 1994 to June 30, 1994. The dividend
is payable quarterly and will total approximately $80,000 per
quarter in the future.
Three Months Ended June 30, 1995 Compared to June 30, 1994
The Company used cash in operating activities of $726,000 in
second quarter 1995 compared to $1,149,000 in second quarter 1994.
Included in these cash flows are depreciation, depletion and
amortization of $659,000 and $243,000 in 1995 and 1994,
respectively. Amortization of deferred revenue of $524,000 in 1995
and $648,000 in 1994, negatively impacted cash flow from operating
activities. A loss of $273,000 was incurred in 1995, $192,000 more
than the loss of $81,000 experienced during 1994. Other non-cash
items were $16,000 and $(7,000), in 1995 and 1994, respectively.
An increase in current liabilities of $394,000 in 1995 and $950,000
in 1994 increasing cash flows from operating activities. Accounts
payable and accrued expenses increased directly as a result of the
significant costs incurred in drilling and development activities.
Increases in accounts receivable and other assets of $209,000 in
1995 decreased available cash flows. The increase in receivable
was due primarily to joint interest billings receivable due from
the Company's drilling partners.
Cash flows used in investing activities from additions to
property and equipment were $1,120,000 and $303,000 in 1995 and
1994, respectively.
Financing activities netted cash flows of $2,201,000 in 1995,
compared to $1,576,000 in 1994. Borrowings of $1,125,000 under the
line of credit and the net proceeds of $1,155,000 from the Laguna
Gold Series A Convertible Preferred Stock were the significant
financing activities during second quarter 1995. Dividends on the
Series B Convertible Preferred Stock totaled $79,000 in second
quarter 1995. The cash flows provided by financing activities in
1994 was the result of the sale of the Company's Series B
Convertible Preferred Stock for net proceeds of $ 3,795,000. Of
this amount, $2,152,000 was used to retire a net operating profits
interest the Company had sold in connection with its September 1993
acquisition of producing oil and gas properties. Dividends on the
Series B Convertible Preferred Stock totaled $158,000 in the six
months ended 1995 and $67,000 in 1994.
The following table summarizes the results of operations from
oil and gas operations for the three months ended June 30:
<TABLE>
1994* 1995*
<S> <S> <S>
Gas revenues................... $500,000 $659,000
Gas production (mcf) .......... 380,000 370,000
Average price per mcf.......... $1.51 $1.41
Oil revenues................... $522,000 $884,000
Oil production (bbl) .......... 36,000 52,000
Average price per bbl.......... $14.57 $17.03
Production and operating
costs per BOE............... $5.32 $5.22
Depreciation, depletion and
amortization per BOE....... $2.21 $5.45
</TABLE>_____________________
* Does include 293,000 mcf and 12,000 bbls in 1994 and 302,000 mcf
and 10,000 bbls in 1995 delivered pursuant to the terms of the
volumetric production payment agreement. Included in total revenues for
1995 and 1994 is $524,000 and $648,000, respectively, from the
amortization of the Company's deferred revenues.
Exclusive of quantities produced and delivered pursuant to the
Company's volumetric production payment, second quarter 1995 oil
and gas sales increased to $1,019,000 from $374,000 in 1994,
representing a $645,000 (172%) increase. Oil production net to the
Company after deliveries required by the Company's volumetric
production payment increased by 18,000 barrels (74%). The
significant increase in oil production is a direct result of the
Company's development drilling program. Average oil prices, not
including the deferred revenue amortization, increased $2.57 per
barrel (17%) over the same period in 1994. Gas production net to
Mallon after deliveries required by the volumetric production
payment decreased by 19,000 mcf (22%). In 1994, enhancement
operations provided "flush" or high initial production immediately
following the enhancement work. In addition to the declines from
these high levels last year, normal production declines contributed
to the decrease in production from second quarter 1995 to second
quarter 1994. Additionally in 1995, three wells requiring remedial
work had abnormal production declines. The Company has scheduled
this remedial work and intends to see the benefits of this work by
the third quarter. Gas prices were still at a low level, $1.41,
during the three months ended June 30, 1995, averaging $0.10 (7%)
less than the $1.51 average for the three months ended June 30, 1994.
Lease operating expense per equivalent barrel averaged $5.22
in second quarter 1995, compared to $5.32 in 1994. The decrease of
$0.10 (2%) is due primarily to operational efficiencies employed by
the field personnel. The Company is constantly working to improve
operations and decrease operating expense, and management intends
to continue the decrease in per barrel expense. The Company incurs all
costs related to the production and delivery of the volumetric production
payment quantities.
There were no sales of gold and silver in 1995 or 1994, and no
sales are expected in the immediate future. Costs related to the
mining operation were $151,000 in second quarter 1995 and $33,000
in second quarter 1994. Expenses incurred in this year, not
incurred in 1994, include salaries and expenses for a trenching and
mapping program, a core drilling program, preparation of a bankable
feasibility study and salary for an officer hired effective January
1, 1995. Increased travel and related expenses incurred in
traveling to Costa Rica to plan for the core drilling program, plan
and supervise the trenching and mapping program also contributed to
higher mining expenses. Additionally, Laguna recorded $30,000 for
its share of the investment banking consulting fees. The increase
in mining expenses will continue throughout 1995, and impede the
Company's ability to generate a profit. However, the expenditures
will ultimately increase the reserve base of the mine. The
increased reserve base will add to the value of Laguna Gold, and
therefore, to the Company.
Depreciation, depletion and amortization increased to $5.45
barrel of oil equivalent for 1995, up from $2.21 in 1994. The
increase of $3.34 (147%) reflects an increase in production in
relation to the underlying reserve base, which declined from
December 31, 1993 to December 31, 1994 as a result of low yearend
gas prices and a significant downward revision as a result of
decreased actual production on one of the Company's major
properties.
Interest and other expense of $92,000 was up significantly in
1995 ($24,000 was incurred in 1994) as the Company incurred
interest at 11% on its line of credit in 1995. The net profits
interest, bearing interest at 15%, was paid in April 1994.
Total general and administrative costs were $438,000 in 1995,
an increase of $46,000 (12%) over the $392,000 for 1994. Legal
fees increased because the Company is appealing a decision in a
complex lawsuit in which it sought substantial damages. Fees
related to this matter recorded in second quarter 1995 approximated
$16,000. Also recorded in second quarter 1995 and not recorded
second quarter 1994 are consulting fees of $30,000 pursuant to the
Company's consulting agreement with an investment banking firm.
The Company paid the 8% dividend on its $4,000,000 face value
Series B Convertible Preferred Stock. This amount totaled $79,000
for second quarter 1995 and $67,000 in 1994. The annual dividend
is $320,000, payable quarterly.
Miscellaneous
At December 31, 1994, the Company had a NOL carryforward of
approximately $7,000,000, which will begin to expire in 2005. The
amount and availability of an NOL carryforward is subject to a
variety of interpretations and restrictions. Under a provision of
the Code, a corporation's ability to utilize an NOL carryforward to
offset income following an "ownership change" is limited. If an
ownership change occurs, the ability of the Company to use its NOL
carryforward will be limited so that a portion of the Company's NOL
carryforward will not be available to offset the Company's taxable
income in a particular year. Management is not aware of any such
ownership change.
The Company has in the past engaged, and may in the future engage,
in hedging transactions (transactions in which a portion of the
Company's future oil and/or gas production is sold into the futures
market) when management believes it is in the Company's interest to
do so. Such transactions "lock-in" prices, thus protecting against
future price downturns, but they also limit the Company's ability
to benefit from future price increases.
Inflation has not historically had a material impact on the
Company's financial statements, and management does not believe
that the Company will be materially more or less sensitive to the
effects of inflation than other companies in the oil and gas
business.
When evaluating the Company, its operations, or its
expectations, the reader should bear in mind that the Company and
its operations are subject to numerous risks and uncertainties.
Among these are risks related to the oil and gas and the mining
businesses (including operating risks and hazards and the plethora
of regulations imposed thereon), risks and uncertainties related to
the volatility of the prices of oil and gas and minerals,
uncertainties related to the estimation of reserves of oil and gas
and minerals and the value of such reserves, the effects of
competition and extensive environmental regulation, the
uncertainties related to foreign operations, and many other
factors, many of which are necessarily out of the Company's
control. The nature of oil and gas drilling operations is such
that the expenditure of substantial drilling and completion costs
are required well in advance of the receipt of revenues from the
production developed by the operations. Thus, it will require more
than several quarters for the financial success of that strategy to
be demonstrated. Until then, drilling operations are expected to
be a net drain on working capital, not a contributor. Management
believes that the ultimate result of the drilling activities, which
are primarily aimed at oil production, will be to increase cash
flow, thereby improving its working capital position and increasing
liquidity. However, drilling activities are subject to numerous
risks, including the risk that no commercially productive oil or
gas reservoirs will be encountered. Also, the sales from
successful drilling activities are affected by prevailing prices
for oil and gas. Hydrocarbon prices can be extremely volatile and
can substantially affect the Company's revenues, cash flows and
working capital.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During second quarter 1995, the Company filed a Periodic Report of
Form 8-K dated June 30, 1995. The Report related to an "Item 5.
Other Events" matter.
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.
REGISTRANT:
MALLON RESOURCES CORPORATION
Date: August 14, 1995 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: August 14, 1995 By: /s/ Duane C. Knight, Jr.
Duane C. Knight, Jr.
Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR THE YEAR-TO-DATE
PERIOD, EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 677
<SECURITIES> 0
<RECEIVABLES> 2,659
<ALLOWANCES> 0
<INVENTORY> 52
<CURRENT-ASSETS> 3,591
<PP&E> 48,741
<DEPRECIATION> 21,038
<TOTAL-ASSETS> 31,630
<CURRENT-LIABILITIES> 3,571
<BONDS> 9,182
<COMMON> 78
0
9,504
<OTHER-SE> 6,795
<TOTAL-LIABILITY-AND-EQUITY> 31,630
<SALES> 1,518
<TOTAL-REVENUES> 2,828
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,676
<INTEREST-EXPENSE> 111
<INCOME-PRETAX> (848)
<INCOME-TAX> 0
<INCOME-CONTINUING> (848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<NET-INCOME> (848)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
