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 March
31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
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 May 12, 1995:
7,794,203 shares of Registrant's Common Stock were outstanding;
1,100,918 shares of Registrant's Series A Convertible Preferred
Stock (convertible into 1,113,173 shares of Common Stock) were
outstanding; and
400,000 shares of Registrant's Series B Convertible 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, March 31,
1994 1995
Current assets:
<S> <C> <C>
Cash and cash equivalents.......... $ 88,000 $ 324,000
Accounts receivable, with no allowance
for doubtful accounts:
Joint interest participants..... 490,000 654,000
Related parties................. 15,000 23,000
Oil and gas sales............... 551,000 622,000
Other........................... 79,000 --
Inventories......................... 30,000 37,000
Other............................... 89,000 128,000
Total current assets........ 1,342,000 1,788,000
Property and equipment:
Oil and gas properties, under full
cost method 41,127,000 42,331,000
Mining properties and equipment..... 4,888,000 4,907,000
Other equipment..................... 375,000 383,000
46,390,000 47,621,000
Less accumulated depreciation, depletion
and amortization............... (19,834,000) (20,397,000)
26,556,000 27,224,000
Other assets:
Notes receivable, related parties.... 43,000 43,000
Loan origination fees, net of accumulated
amortization of $19,000 and $30,000,
respectively..................... 101,000 255,000
Other............................ 184,000 171,000
Total Assets............................. $ 28,226,000 $ 29,481,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
___________
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
1994 1995
Current liabilities:
<S> <C> <C>
Trade accounts payable............ $ 2,837,000 $ 3,643,000
Deferred revenues and drilling
advances....................... 207,000 198,000
Accrued taxes and expenses......... 62,000 124,000
Total current liabilities... 3,106,000 3,965,000
Notes payable........................... -- 1,375,000
Drilling advances....................... 315,000 315,000
Deferred revenues....................... 7,452,000 6,891,000
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, $0.01 par value, 25,000,000
shares authorized; 7,672,503 and 7,794,203
shares issued and outstanding,
respectively ............... 77,000 78,000
Additional paid-in capital........... 38,727,000 38,883,000
Accumulated deficit............... (30,955,000) (31,530,000)
Total stockholders' equity. 17,353,000 16,935,000
Total Liabilities and Stockholders' Equity.$ 28,226,000 $ 29,481,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION
<TABLE>
<CAPTION>
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
___________
For the Three Months
Ended March 31,
1994 1995
Revenues:
<S> <C> <C>
Oil and gas sales............... $ 627,000 $ 499,000
Deferred revenue amortization... 484,000 561,000
Operating service revenue....... 89,000 94,000
Interest and other.............. 38,000 14,000
1,238,000 1,168,000
Costs and expenses:
Oil and gas production.......... 552,000 510,000
Mine operating expense.......... 47,000 96,000
Depletion, depreciation and amortization 349,000 574,000
General and administrative............ 370,000 544,000
Interest and other 81,000 19,000
1,399,000 1,743,000
Loss before preferred stock dividends (161,000) (575,000)
Preferred stock dividends -- (79,000)
Net loss available to common stockholders.$ (161,000) $ (654,000)
Net loss per share of common stock........$ (0.02) $ (0.08)
Weighted average shares outstanding....... 7,642,000 7,757,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
1994 1995
Cash flows from operating activities:
<S> <C> <C>
Net loss.......................... $ (161,000) $ (575,000)
Adjustments to reconcile net loss to net
cash provided by operations:
Depletion, depreciation and
amortization.. 349,000 574,000
Stock issued for compensation.. 2,000 12,000
Amortization of deferred revenue... (484,000) (561,000)
Other.............................. (1,000) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable............. (113,000) (164,000)
Inventory and other assets...... (21,000) (86,000)
Increase (decrease) in:
Accounts payable................ 1,268,000 806,000
Accrued taxes and expenses..... . -- 62,000
Deferred revenues and drilling
advances.............. (2,000) (9,000)
Net cash provided by operating
activities.......... 837,000 59,000
Cash flows from investing activity -
Additions to property and equipment.... (517,000) (1,119,000)
Cash flows from financing activities:
Proceeds from long-term debt.......... -- 1,375,000
Accrued interest on net operating
profits interest.................. 78,000 --
Payment of preferred dividends........ -- (79,000)
Net cash provided by financing
activities............... 78,000 1,296,000
Net increase in cash and cash equivalents... 398,000 236,000
Cash and cash equivalents, beginning of period .964,000 88,000
Cash and cash equivalents, end of period. $1,362,000 $ 324,000
Supplemental cash flow information:
Cash paid for interest........... $ -- $ 18,000
Cash paid for income taxes....... $ -- $ --
Non-cash transactions:
Issuance of common stock in exchange for:
Property and equipment...... $ 300,000 $ 112,000
Loan origination fee........ $ -- $ 112,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial
statements.
MALLON RESOURCES CORPORATION
NOTES TO INTERIM 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. On March 31,
1995, the Company signed an agreement to privately place a 20% equity
stake in Laguna Gold for $2,500,000. 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 $3.15 and $5.58 per
equivalent barrel of oil production for the three months ended March
31, 1994 and 1995, respectively.
<TABLE>
<CAPTION>
Capitalized Costs Relating to Oil and Gas Activities:
March 31,
1994 1995
<S> <C> <C>
Oil and gas properties...............$ 39,679,000 $ 42,331,000
Accumulated depreciation, depletion,
amortization.......... (17,006,000) (19,554,000)
$ 22,673,000 $ 22,777,000
</TABLE>
The Company does not have significant costs of unproved properties
or costs excluded from the full cost pool amortization base.
<TABLE>
<CAPTION>
Costs Incurred in Oil and Gas Producing Activities:
March 31,
1994 1995
<S> <C> <C>
Property acquisition costs....... $ 492,000 $ 130,000
Exploration costs................... 18,000 352,000
Development costs................... 296,000 781,000
Full cost pool credits.............. (12,000) (32,000)
$ 794,000 $1,231,000
</TABLE>
<TABLE>
<CAPTION>
Results of Operations from Oil and Gas Producing Activities:
March 31,
1994 1995
<S> <C> <C>
Oil and gas sales.............. $ 626,000 $ 499,000
Deferred revenue amortization.. 484,000 561,000
Lease operating expense........ (552,000) (510,000)
Depreciation and depletion. (143,000) (533,000)
Results of operations - from producing
activities (excluding corporate overhead,
interest, and income taxes).... $ 415,000 $ 17,000
</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 for the year ended December 31,
1994. All of the Company's reserves are located in the continental
United States. The reserve volumes exclude quantities subject to the
volumetric production payment discussed in Note 5.
<TABLE>
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 reserve
calculations presented above. Accordingly, the standardized measure of
discounted future net cash flows, 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.
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.
There are numerous uncertainties inherent in estimating quantities
of proved oil and gas reserves and in projecting the 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
$4,500,000 at March 31, 1995. The Company, through its subsidiary
Laguna Gold, has the rights to 12 exploration concessions and one
exploitation concession covering approximately 182 square kilometers or
about 45,000 acres. A 2% gross royalty on production from the Rio
Chiquito is reserved for the government of Costa Rica. Sunshine Mining
Corp. owns a 5% net profits interest. Laguna Gold believes that it has
valid rights to the Rio Chiquito concessions, and that all necessary
exploration work has been performed.
On March 31, 1995, Laguna Gold signed an agreement to privately
place 25,000 shares of its Series A Convertible Preferred Stock for
$2,500,000. 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. 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. 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.
The private placement is scheduled to close May 31, 1995. The proceeds
from this offering will be used to fund the operations of Laguna Gold
for a twelve month period. The program includes additional core
drilling to expand mineable reserves on the Rio Chiquito anomaly
located on Laguna Gold's Costa Rica concessions, and preparation of 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. Proceeds will also be
used to fund day-to-day operations of Laguna Gold.
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, which totaled $1,375,000 as of
March 31, 1995 and $2,000,000 as of May 1, 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.
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 covers 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 is 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)
<C> <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>
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 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 the fair
value of the stock on the date of grant of $112,000. 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. The issuance of these
shares were recorded at the fair market value 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 three months
ended March 31, 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.
Note 8. INCOME TAXES
The Company incurred a loss for both book and tax purposes for the
three months ended March 31, 1994 and 1995. There is no income tax
benefit (expense) for the three months ended March 31, 1994 or 1995.
At December 31, 1994, for tax purposes the Company's remaining net
operating loss ("NOL") carryforward was approximately $6,900,000 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 "Code"),
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. The Company's ability
to utilize any NOL in future years may be restricted, however, in the
event the Company undergoes an "ownership change" as defined in the
Code. Management is not aware of any such change.
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 and Mallon Oil partnerships as working interest owners.
These amounts will generally be settled in the ordinary course of
business without interest.
Notes receivable of $41,000 and $43,000 at March 31, 1994 and
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 March 31, 1994 and 1995, the Company had
a payable to the related company of $3,000 and $13,000, respectively,
which is 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 $7,000 and $17,000 as of March 31, 1994 and 1995,
respectively, which are included in joint interest receivables on the
accompanying consolidated balance sheets.
During the year ended December 31, 1994, the Company paid legal
fees of $10,000 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,
subsequent to March 31, 1995, fees of $32,000 were paid to this
individual.
The Company has a consulting agreement with an investment banking
firm in which a director is a partner for investment banking services
of $240,000 in 1995, of which $60,000 was incurred in the three months
ended March 31, 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
First Quarter 1995 -- Summary of Results
The Company's loss for first quarter 1995 was attributable to three key
factors: First, oil and gas sales were down as a result of lower gas
production and lower gas prices. Second, substantial mining expenses
were incurred in anticipation of increased mining activities, which are
being undertaken to enhance the value of the Company's gold mining
property. And, third, general and administrative expenses were up,
primarily due to increases in legal fees, investment banking expenses,
and travel costs, all of which related directly to the Company's
increased level of activities and the arrangement of two financings.
The Company's working capital deficit increased significantly during
first quarter 1995, due to the costs incurred to fund the Company's
accelerated development drilling program. The intent of the drilling
program is, of course, to increase production and revenues, thereby
generating additional cash flows to improve the Company's working
capital position. However, it will require more than several quarters
for the financial success of that strategy to be demonstrated. The
nature of oil and gas drilling operations requires the expenditure of
substantial drilling and completion costs well in advance of the
receipt of revenues from the production developed by the operations.
The effect of this natural, unavoidable, time lag is reflected in the
Company's working capital deficit at the end of first quarter 1995.
To address the Company's working capital situation, during first
quarter 1995, the Company established a $2,500,000 line of credit to
fund the costs of its oil and gas drilling program. To improve the
Company's working capital position for its mining operations, the
Company sold preferred stock convertible to a 20% equity interest in
its mining subsidiary, Laguna Gold. To be fully funded and closed in
the second quarter, this transaction provides the Company with another
$2,500,000 in working capital. The proceeds from this offering will be
used to fund the operations of Laguna Gold for a twelve month period.
The program includes additional core drilling to expand mineable
reserves on the Rio Chiquito anomaly located on Laguna Gold's Costa
Rica concessions, and preparation of 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. Proceeds will also be used to fund day-to-day
operations of Laguna Gold.
The increased oil and gas and mining exploration activities planned
will, at least for the short run, increase expenditures. However, the
long-term impact of these expenditures will be to increase the
Company's oil and gas reserves and production, and the reserve base of
the Company's gold mine. These improvements will add to the value of
the Company's asset bases and, therefore, to the value of the Company.
Liquidity, Capital Resources and Capital Expenditures
The Company's development drilling activities had a negative impact on
cash flows. Drilling operations require the expenditure of drilling
funds months in advance of the receipt of revenues from the well
drilled. The effect of this was seen in 1994 and first quarter 1995,
when the Company recorded negative cash flows.
As of March 31, 1995, the Company had drilled and completed one well
during first quarter 1995, and was in the process or planning the
drilling of 7 additional wells. The Company has permitted, or is in
the process of permitting, an additional 16 development locations for
drilling in 1995. The Company expects to drill a total of at least 12
wells by mid-1995. The Company has budgeted $2,800,000 for the first
phase of the drilling program. It will then evaluate further drilling
based upon the results of the initial drilling phase. Approximately
$1,116,000 was incurred in first quarter 1995.
If, as intended, the Company pursues additional acquisitions of proven
oil and gas properties, it will require additional acquisition capital.
The source of any such capital is not yet known, nor are any such
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. No assurance can be given that additional acquisitions will
be arranged or that the acquisition capital necessary to complete them
will be available.
The Company is exploring several alternatives to realize the value of
its mining properties. Until a feasibility study relating to putting
the Rio Chiquito deposit on production as a commercial gold and silver
mine is completed, it is uncertain what the Company's share of any
costs related to that undertaking will be. No assurance can be given
that the Company will be able to borrow its share of any capital
required, although the Company may attempt to do so. However, in March
1995, the Company, in a private placement, signed an agreement to sell
25,000 shares of Laguna Gold's Series A Convertible Preferred Stock for
$2,500,000, which represents a 20% equity stake in Laguna Gold. 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. Each share of Series A Convertible Preferred Stock
can be converted into shares of Laguna Gold common stock at the option
of the stockholder, or automatically in the event of a public offering
of the common stock of Laguna Gold. The private placement is scheduled
to close on May 31, 1995. The proceeds from this offering will be used
to fund the operations of Laguna Gold for a twelve month period. The
program includes additional core drilling to expand mineable reserves
on the Rio Chiquito anomaly located on Laguna Gold's Costa Rica
concessions, and preparation of 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. Proceeds will also be used to fund day-to-day
operations of Laguna Gold.
At March 31, 1995, the Company's working capital deficit worsened to
$2,177,000 compared to the working capital deficit of $1,764,000 at
December 31, 1994. The decrease in working capital was caused primarily by
increased accounts payable and accrued expenses of $868,000. Accounts
payable and accrued expenses increased as a result of the significant
costs incurred in drilling and development activities. The Company
employed two drilling rigs beginning in February 1995. Oil and gas
sales receivable increased due to increased oil production related to
the development drilling, and to higher oil prices. Joint interest
participants' accounts receivable also increased, by $164,000, due to
higher joint interest billing receivables related to invoicing joint
interest partners for enhancement work and the drilling program.
Inventory and other current assets decreased by $33,000.
Further reducing the Company's ability to generate cash flows and
positive working capital were the low gas prices received by the
Company in the first quarter. Generally, prices are beyond the control
of the Company and it is limited in its ability to protect its economic
interests from the effect of low prices.
To relieve the working capital deficit, on February 15, 1995, the
Company established a $2,500,000 line of credit with three private
investors. Borrowings under this line of credit bears 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. Amounts available under the line of credit will also be used to
pay for the Company's drilling activities. As of May 1, 1994, the
Company had borrowed $2,000,000 under the line of credit. Management
believes that the ultimate result of the drilling activities, which are
primarily aimed at oil production, will be to increase cash flow,
thereby reducing the working capital deficit 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. There can be no assurance
that the proceeds from the line of credit and drilling activities will
eliminate the working capital deficit. If they do not, however, the
Company will take other measures to improve its working capital
position. While it has no current intention to do so, management could
reduce expenses through staff layoffs and other means of expense
reduction, sell non-core properties, or obtain additional financing.
Results of Operations
The following table summarizes the results of operations from oil and
gas operations for the quarters ended March 31:
<TABLE>
1994* 1995*
<S> <C> <C>
Gas revenues .......................... $610,000 $467,000
Gas production (mcf) .................. 401,000 360,000
Average price per mcf ................. $1.52 $ 1.30
Oil revenues .......................... $501,000 $ 593,000
Oil production (bbl) .................. 36,000 37,000
Average price per bbl ................. $ 13.90 $15.94
Production and operating costs per BOE. $ 5.59 $5.16
Depreciation, depletion and amortization
per BOE ........................... $3.15 $5.48
</TABLE>
* Does include 206,000 mcf and 13,000 bbls in 1994 and 218,000 mcf and
10,000 bbls in 1995 delivered to Enron pursuant to the terms of the
volumetric production payment agreement.
Three Months Ended March 31, 1995 Compared to March 31, 1994
The Company generated net cash from operating activities of $59,000 in
first quarter 1995 compared to $837,000 in first quarter 1994.
Included in these cash flows are depreciation, depletion and
amortization of $574,000 and $349,000, respectively. Amortization of
deferred revenue of $561,000 in 1994 and $484,000 in 1995 negatively
impacted cash flow from operating activities. A loss of $575,000 was
incurred in 1995, $414,000 more than the loss of $161,000 experienced
during 1994. Other non-cash items were $12,000 and $1,000, in 1995 and
1994, respectively. An increase in accounts payable and accrued
liabilities of $868,000 in 1995 and $1,268,000 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. Oil and gas sales receivable
increased due to increased oil production related to the development
drilling, and to higher oil prices. Increases in accounts receivable
and other assets of $250,000 in 1995 and $134,000 in 1994 decreased
available cash flows.
Cash flows from investing activities from additions to property and
equipment were $517,000 and $1,119,000 in 1994 and 1995, respectively.
Financing activities netted cash flows of $1,296,000 in 1995, compared
to $78,000 in 1994. Borrowings of $1,375,000 under the line of credit
were the significant financing activity during first quarter 1995.
Dividends on the Series B Convertible Preferred Stock totaled $79,000
in first quarter 1995. The $78,000 of cash flows provided by financing
activities in 1994 was the accrued interest recorded on the Company's
net profits interest.
The above factors led to an increase in available cash of $236,000 in
1995 compared to an increase of $398,000 in 1994.
Exclusive of quantities produced and delivered pursuant to the
Company's volumetric production payment, 1995 oil and gas sales
decreased to $499,000 from $627,000 in 1994, representing a $128,000
(or 26%) decrease. Oil production net to the Company increased by
4,000 barrels or approximately 13%. Not included in the oil production
totals presented above is 10,000 and 13,000 barrels in 1995 and 1994,
respectively, which were delivered in accordance with the terms of the
volumetric production payment. Management believes that its drilling
program will provide a substantial increase in oil production in 1995.
Average oil prices increased from $13.90 per barrel in 1994 to $15.94
per barrel 1995, a 15% increase.
Gas production net to the Company decreased by 53,000 mcf (or 27%) in
first quarter 1995 as compared to first quarter 1994. 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 first quarter 1995 to
first 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. Natural gas production delivered to meet
the demand of the volumetric production payment was 218,000 mcf in
1995, and 206,000 mcf in 1994, thereby limiting the net amount to the
Company. Average gas prices decreased in 1995 by $.22 per mcf (or
15%). The decrease in gas prices adversely affects the Company's
potential to generate cash flows.
Included in total revenues for 1995 and 1994 is $561,000 and $484,000,
respectively, from the amortization of the Company's deferred revenues.
Deferred revenues were recorded from the sale of the volumetric
production payment covering approximately 4.3 MMBTU of gas and 215,000
barrels of oil (see Note 5). The deferred revenue is amortized over
eight years as deliveries are made to the purchaser. The scheduled
deliveries were approximately 218,000 and 206,000 mcf and 13,000 and
10,000 barrels in 1995 and 1994, respectively. The Company incurs all
costs related to the production and delivery of these quantities.
Lease operating expense per equivalent barrel averaged $5.16 in 1995,
compared to $5.59 in 1994. The decrease of $.43 (or 8%) is due
primarily to operational efficiencies employed by the Company's 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.
There were no sales of gold and silver in 1995 or 1994, and no sales
are expected in the immediate future. Direct costs related to the
mining operation were $96,000 in 1995 and $47,000 in 1994. Laguna Gold
has raised approximately $2,500,000 in a private placement, which is
expected to close in second quarter 1995. The proceeds from this
offering will be used to fund the operations of Laguna Gold for a
twelve month period. The program includes additional core drilling to
expand mineable reserves on the Rio Chiquito anomaly located on Laguna
Gold's Costa Rica concessions, and preparation of 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. Proceeds will also be used to
fund day-to-day operations of Laguna Gold. As a result of this
increased activity, expenses were significantly higher in the first
quarter 1995. Expenses incurred in this year, not incurred in 1994,
include salaries and expenses for a trenching and mapping program and
other increased activity, 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, and 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. Additionally, the
Company recorded a $14,000 foreign exchange loss in first quarter 1995.
The increase in mining expenses will continue throughout 1995, and
impede the Company's ability to turn 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, and
therefore, to the Company. Depreciation, depletion and amortization
increased to $5.58 barrel of oil equivalent for 1995, up from $3.15 in
1994. The increase of $2.43 (or 77%) reflects an increase in
production in relation to the underlying reserve base, which declined
from December 31, 1994 to December 31, 1995 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 $19,000 was down significantly in 1995
($81,000 was incurred in 1994) as the Company incurred interest at 15%
on its net profits interest in 1994. The net profits interest was paid
in April 1994. The Company has a $2,500,000 line of credit established
on February 15, 1995, which bears interest at 11%. Accordingly,
management expects interest expense to increase in 1995.
Total general and administrative costs were $544,000 in 1995, an
increase of $174,000 (or 47%) over the $370,000 for 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 fees
increased 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 first quarter 1995 approximated
$22,000. Also, the Company incurred approximately $10,000 in expenses
related to the documentation, title work and legal review of the line
of credit. The Company also incurred legal fees of $15,000 in reaching
a settlement in another matter. Travel and related expenses were also
high because of expenditures and effort 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. Also
recorded in first quarter 1995 and not recorded first quarter 1994 is
consulting fees of $60,000 pursuant to the Company's consulting
agreement with an investment banking firm. The Company now anticipates
general and administrative expenses of approximately $1,900,000 for all
of 1995.
The factors discussed above combined to result in a net loss of
$575,000 for 1995, compared to a net loss of $161,000 for 1994. This
represents a $414,000 (or 257%) decrease in the Company's
profitability.
The Company paid the 8% dividend on its $4,000,000 face value Series B
Convertible Preferred Stock. This amount totaled $79,000 for first
quarter 1995. The annual dividend is $320,000, payable quarterly.
Miscellaneous
The Company's oil and gas operations are significantly affected by
certain provisions of the Code applicable to the oil and gas industry.
Current law permits the Company to deduct currently, rather than
capitalize, intangible drilling and development costs incurred or borne
by it. The Company, as an independent producer, is also entitled to a
deduction for percentage depletion with respect to the first 1,000
barrels per day of domestic crude oil (and/or equivalent units of
domestic natural gas) produced by it (if such percentage depletion
exceeds cost depletion). Generally, this deduction is 15% of gross
income from an oil and gas property, without reference to the
taxpayer's basis in the property. The percentage depletion deduction
may not exceed 100% of the taxable income from a given property.
Further, percentage depletion is limited in the aggregate to 65% of the
Company's taxable income. Any depletion disallowed under the 65%
limitation, however, may be carried over indefinitely.
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 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.
In February 1992, the Financial Accounting Standards Board released
Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting
for Income Taxes," which requires an asset and liability approach for
financial accounting and reporting for income taxes. The new standard
was adopted by the Company in fiscal 1993. The impact of SFAS No. 109
on the Company's consolidated financial statements was immaterial. At
December 31, 1994 the Company has a net deferred tax asset of $963,000,
for which a valuation allowance for an equal amount was established.
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.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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: May 16, 1995 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: May 16, 1995 By: /s/ Duane C. Knight, Jr.
Duane C. Knight, Jr.
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> MAR-31-1995
<CASH> 324
<SECURITIES> 0
<RECEIVABLES> 1,299
<ALLOWANCES> 0
<INVENTORY> 37
<CURRENT-ASSETS> 1,788
<PP&E> 47,621
<DEPRECIATION> 20,397
<TOTAL-ASSETS> 29,481
<CURRENT-LIABILITIES> 3,965
<BONDS> 0
<COMMON> 78
0
9,504
<OTHER-SE> 7,353
<TOTAL-LIABILITY-AND-EQUITY> 29,481
<SALES> 499
<TOTAL-REVENUES> 1,168
<CGS> 606
<TOTAL-COSTS> 606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (575)
<INCOME-TAX> 0
<INCOME-CONTINUING> (575)
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<NET-INCOME> (654)
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</TABLE>
