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 September 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 (I.R.S. Employer Identification No.)
of 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 November 8, 1995:
7,799,658 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 951,781 shares of Common Stock) were
outstanding.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
___________
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 88,000 $ 1,255,000
Accounts receivable, with no allowance for doubtful accounts:
Joint interest participants................... 490,000 452,000
Related parties............................... 15,000 33,000
Oil and gas sales............................. 551,000 544,000
Other......................................... 79,000 19,000
Inventories....................................... 30,000 49,000
Other............................................. 89,000 158,000
Total current assets...................... 1,342,000 2,510,000
Property and equipment:
Oil and gas properties, under full cost method.... 41,127,000 43,522,000
Mining properties and equipment................... 4,888,000 5,648,000
Other equipment................................... 375,000 527,000
46,390,000 49,697,000
Less accumulated depreciation, depletion and
amortization.................................. (19,834,000)(21,542,000)
26,556,000 28,155,000
Notes receivable, related parties.................... 43,000 61,000
Other, net........................................... 285,000 163,000
Total Assets......................................... $28,226,000 $30,889,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation...... $ -- $ 22,000
Trade accounts payable........................... 2,253,000 1,965,000
Undistributed revenue............................ 584,000 442,000
Drilling advances................................ 207,000 117,000
Accrued taxes and expenses....................... 62,000 77,000
Total current liabilities................ 3,106,000 2,623,000
Long-term debt....................................... -- 9,301,000
Capital lease obligation, net of current portion..... -- 41,000
Drilling advances.................................... 315,000 315,000
Deferred revenues.................................... 7,452,000 --
Total liabilities........................ 10,873,000 12,280,000
Contingency (Note 7)................................. -- --
Minority interest.................................... -- 2,278,000
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 7,799,658
shares issued and outstanding, respectively... 77,000 78,000
Additional paid in capital....................... 38,727,000 38,798,000
Accumulated deficit.............................. (30,955,000) (32,049,000)
Total stockholders' equity................ 17,353,000 16,331,000
Total Liabilities and Stockholders' Equity........... $ 28,226,000 $ 30,889,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
___________
<TABLE>
<CAPTION>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
1994 1995 1994 1995
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales......................... $1,980,000 $ 2,348,000 $ 979,000 $ 830,000
Deferred revenue amortization............. 1,485,000 1,420,000 353,000 335,000
Operating service revenue................. 135,000 131,000 40,000 44,000
Interest and other........................ 64,000 82,000 25,000 43,000
Gain on termination of volumetric
production payment..................... -- 446,000 -- 446,000
3,664,000 4,427,000 1,397,000 1,698,000
Costs and expenses:
Oil and gas production................... 1,469,000 1,406,000 495,000 402,000
Mine operating and administrative expenses. 116,000 361,000 36,000 114,000
Depletion, depreciation and amortization.. 1,126,000 1,758,000 549,000 525,000
General and administrative................ 1,255,000 1,453,000 493,000 471,000
Interest and other........................ 125,000 199,000 9,000 88,000
4,091,000 5,177,000 1,582,000 1,600,000
Operating income (loss)...................... (427,000) (750,000) (185,000) 98,000
Extraordinary item - loss on early retirement
of debt.................................. -- (344,000) -- (344,000)
Net loss before dividends.................... (427,000) (1,094,000) (185,000) (246,000)
Dividends on preferred stock................. (147,000) (239,000) (80,000) (81,000)
Net loss available to common stockholders.... $ (574,000) $(1,333,000) $(265,000) $(327,000)
Net loss per share before extraordinary item. $ (0.06) $ (0.10) $ (0.02) $ 0.01
Extraordinary item - loss on retirement of
debt per share........................... $ -- $ (0.04) $ -- $ (0.04)
Net loss available to common stockholders'
per share................................ $ (0.08) $ (0.17) $ (0.04) $ (0.04)
Weighted average shares outstanding.......... 7,661,000 7,782,000 7,671,000 7,795,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1994 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (427,000) $(1,094,000)
Adjustments to reconcile net loss to net cash from operations:
Amortization of deferred revenues........... (1,485,000) (1,420,000)
Depletion, depreciation, and amortization... 1,126,000 1,758,000
Stock issued for compensation............... 7,000 37,000
Termination of volumetric production payment.. -- (5,586,000)
Gain on termination of volumetric production
payment................................... -- (446,000)
Loss on early retirement of debt............. -- 219,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.................. (485,000) 87,000
Inventory and other assets........... (182,000) (73,000)
Increase (decrease) in:
Accounts payable and undistributed
revenue........................... 706,000 (430,000)
Accrued taxes and expenses........... 46,000 15,000
Volumetric production payment........ (276,000) --
Drilling advances...................... (2,000) (90,000)
Net cash used in operating activities...... (972,000) (7,023,000)
Cash flows from investing activities:
Increase in notes receivable, related parties.. -- (18,000)
Additions to property and equipment.......... (1,428,000) (3,132,000)
Net cash used in investing activities.. (1,428,000) (3,150,000)
Cash flows from financing activities:
Net proceeds from long-term debt............... -- 11,801,000
Payments on long-term debt..................... (2,075,000) (2,500,000)
Net proceeds from sale of preferred stock...... 3,790,000 --
Net proceeds from sale of subsidiary's preferred
stock....................................... -- 2,278,000
Payments of preferred dividends................ (147,000) (239,000)
Net cash provided by financing activities 1,568,000 11,340,000
Net increase (decrease) in cash and cash equivalents (832,000) 1,167,000
Cash and cash equivalents, beginning of period 964,000 88,000
Cash and cash equivalents, end of period $ 132,000 $1,255,000
Supplemental cash flow information:
Cash paid for interest........................ $ 94,000 $ 191,000
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
Issuance of warrants for loan origination fee $ -- $ 50,000
Capital lease transaction................. $ -- $ 63,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
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,
Laguna Gold was also a wholly owned subsidiary. In 1995, the
Company privately placed a 20% equity stake in Laguna Gold with
third party investors. 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. Certain amounts from 1994 have been reclassified to
conform to the 1995 presentation. Such reclassifications had no
effect on net income. 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 was $3.37 and $5.45
per equivalent barrel of production for the nine months ended
September 30, 1994 and 1995, respectively. The increase was a
result of increased production relative to a decrease in yearend
1994 reserves.
Capitalized Costs Relating to Oil and Gas Activities:
September 30,
1994 1995
Oil and gas properties........... $ 40,507,000 $ 43,522,000
Accumulated depreciation, depletion
and amortization.............. (17,225,000) (20,658,000)
$ 23,282,000 $ 22,395,000
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:
Nine Months Ended
September 30,
1994 1995
Property acquisition costs..... $ 638,000 $ 119,000
Development costs.............. 1,083,000 2,340,000
Full cost pool credits......... (99,000) (64,000)
$1,622,000 $ 2,275,000
Results of Operations from Oil and Gas Producing Activities:
Nine Months Ended September 30,
1994 1995
Oil and gas sales................. $ 1,980,000 $ 2,348,000
Deferred revenue amortization..... 1,485,000 1,420,000
Lease operating expense........... (1,469,000) (1,406,000)
Depletion expense................. (1,048,000) (1,646,000)
Results of operations - from producing
activities (excluding corporate
overhead, interest, and income
taxes)....................... $ 948,000 $ 716,000
Estimated Quantities of Proved Oil and Gas Reserves:
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.
Oil Gas
(BBLS) (MCF)
Total proved reserves, December 31, 1994 1,706,000 19,232,000
Proved developed reserves,
December 31, 1994 973,000 14,671,000
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 forecast in advance.
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. DERIVATIVES
In November 1995, the Company entered into a "collar" hedging
transaction with an independent crude oil buyer covering 12,000
barrels per month of its oil production. Under this arrangement,
for each month beginning November 1995 through October 1996, if the
price for light sweet crude oil as quoted on the New York
Mercantile Exchange (NYMEX) is less than $16.50 per barrel, the
Company will receive the difference between $16.50 and the average
settlement price for that month for the 12,000 barrels subject to
the collar agreement. If the average settlement price exceeds
$18.00 per barrel, the Company will pay the difference between
$18.00 and such average price on the 12,000 barrels.
Also in November 1995, the Company entered into a "floor"
hedging transaction with an independent crude oil buyer covering
30,000 MMBTUs per month of the Company's gas production. Under this
arrangement, for each month beginning November 1995 through October
1996, if the price for gas as quoted on the NYMEX is less than
$1.70, the Company will receive the difference between $1.70 and
the average settlement price for that month for the 30,000 MMBTUs
subject to the floor agreement.
Note 4. 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 $5,006,000 at September 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.
Note 5. 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 bore interest at
11%, which was due and payable monthly.
On August 24, 1995, the Company established a $15,000,000
revolving line of credit facility with a commercial bank (the
"Facility"). The significant terms of the Facility are as follows:
- - Initial borrowing base under the Facility is $10,000,000,
subject to redetermination every six months;
- - Interest rate on the Facility is the London Interbank Offered
Rate (LIBOR), plus 2.5% (8.375% at September 30, 1995);
- - The Facility requires interest-only payments for two years,
converting to a three-year term note thereafter;
- - As part of the fee for the Facility, the Company issued
warrants to purchase 100,000 shares of the Company's common stock
at a price of $2.50 per share (the warrants were valued at $0.50
each);
- - The Facility is collateralized by substantially all of the
Company's oil and gas properties; and
- - The Company is obligated to maintain certain financial and
other covenants.
The proceeds of the Facility were used to retire the Company's
existing $2,500,000 line of credit and to terminate its volumetric
production payment (see Note 6). The Company paid a $125,000
prepayment penalty in order to retire the line of credit, and such
amount is included in the $344,000 extraordinary loss on debt
extinguishment.
Note 6. 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 burdening 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 $1.65 and 215 MBbls barrels of oil at an
average price of $13.01 per barrel to be delivered over eight
years. The Company was responsible for production costs associated
with operating the properties subject to the production payment
agreement. The amount received was recorded as deferred revenue.
The volumetric production payment was terminated by the Company's
payment of $5,586,000 in August 1995. This settlement resulted in
a $446,000 gain to the Company.
Note 7. 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 8. 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.
In 1995, an additional $32,000 was paid to this same individual as
additional compensation.
In lieu of cash loan origination fees, the Company issued
60,000 shares of its common stock to the investors providing the
$2,500,000 line of credit. The issuance of these shares was
recorded at the market price of the stock on the date of grant, a
total of $112,000. The unamortized portion of these in-lieu-of
loan origination fees was written off in conjunction with the
Company's extinguishment of its $2,500,000 line of credit and is
included in the $344,000 extraordinary loss on debt extinguishment.
During the nine months ended September 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.
During the nine months ended September 30, 1995, a total of
6,155 shares were issued under the Company's Stock Compensation
Plan for outside directors.
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% interest held by the new investors. 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.
Note 9. INCOME TAXES
The Company incurred a loss for both book and tax purposes for
the nine months ended September 30, 1994 and 1995. There is no
income tax benefit (expense) for the nine months ended
September 30, 1994 or 1995.
At December 31, 1994, 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 or 100% valuation allowance.
Under the Internal Revenue 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.
Note 10. RELATED PARTY TRANSACTIONS
The accounts receivable from related parties partially
consists 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 $61,000 at December 31, 1994
and September 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 December 31, 1994 and September
30, 1995, the Company had payables to the related company of
$24,000 and $7,000, 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
(payables to) receivables from the stockholder of ($9,000) and
$38,000 as of December 31, 1994 and September 30, 1995,
respectively, which are included in joint interest receivables on
the accompanying consolidated balance sheets.
During the nine months ended September 30, 1995, the Company
recorded legal fees of $112,000 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 in exchange
of property and equipment. 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 $180,000
was recorded in the nine months ended September 30, 1995.
In February 1995, the Company entered into a Loan Agreement
establishing a $2,500,000 line of credit facility with three
entities, two of which are affiliates of an individual who owns,
beneficially, in excess of 5% of the Company's outstanding common
stock. This line of credit was retired in August 1995.
Two entities affiliated with an individual who owns,
beneficially, in excess of 5% of the Company's outstanding common
stock purchased an aggregate 15% equity stake in Laguna Gold by
their purchase of shares of the Laguna Gold Company Series A
Convertible Preferred Stock.
See Note 7 for additional related party transactions.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Third Quarter 1995 Summary
The Company's third quarter 1995 results reflect improvement
in several key areas:
- - The Company had operating income of $98,000 for the quarter,
a $283,000 improvement compared to third quarter 1994
- - Oil production increased 22% over third quarter 1994
- - Working capital improved by $1,626,000 since yearend 1994
- - The Company established a $15 million line of credit with a
commercial bank
Despite the progress made, three factors combined to generate
a loss for the quarter: first, gas sales suffered from lower gas
production and low gas prices; second, increased mining expenses
were incurred; and third, interest expense increased on the
Company's lines of credit.
Liquidity, Capital Resources and Capital Expenditures
The Company's working capital deficit as of September 30, 1995
was $113,000 compared to the working capital deficit of $1,764,000
at December 31, 1994. The working capital improvement was largely
attributable to the sale of Laguna Gold Company Series A
Convertible Preferred Stock. This transaction provided the Company
with net proceeds of $2,278,000 in working capital to fund the
operations of Laguna Gold. As a result, cash balances increased by
$1,167,000. Also, the Company's line of credit facilities enabled
the Company to reduce accounts payable. Accounts payable,
undistributed revenue and drilling advances decreased by $520,000
as the Company used its line of credit facilities to reduce these
balances.
On August 24, 1995, the Company refinanced its existing debt by
establishing a $15 million revolving line of credit facility (the
"Facility") with Hong Kong Shanghai Bank Corp. 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 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 was terminated;
- - The Company's existing $2,500,000 line of credit was retired;
- - The initial borrowing base under the Facility was
$10,000,000, subject to redetermination every six months;
- - The interest rate on the Facility is the London Interbank
Offered Rate (LIBOR), plus 2.5%;
- - The Facility requires interest-only payments for two years,
converting to a three-year term note thereafter;
- - As part of the fee for the Facility, the Company issued
warrants valued at $0.50 per warrant to purchase 100,000 shares of
the Company's common stock at a price of $2.50 per share;
- - The Facility is collateralized by substantially all of the
Company's oil and gas properties; and
- - The Company is obligated to maintain certain financial and
other covenants.
The remaining proceeds available under the Facility are intended to
fund the Company's oil and gas drilling operations and to provide
working capital.
With these important financial arrangements in place, the key
to the long-term resolution of the Company's working capital
situation is its drilling programs. From January 1, 1995 through
September 30, 1995, the Company drilled 8 wells and capitalized,
net to its working interest, and expended approximately $2,395,000
for the drilling program. Such operations inevitably have an
initial negative impact as development expenditures are incurred.
In addition to its drilling program, the Company is also
farming out non-core properties or properties with a higher risk
profile than the Company is willing to accept. The Company has had
one well completed under such an arrangement, and production on
this well started in August.
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. The
Company has engaged an engineering firm (The Winters Group of
Tucson, Arizona) to prepare a bankable feasibility study for
commercial development of Rio Chiquito. 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 shares of Laguna Gold Series A Convertible
Preferred Stock representing 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.
The Company used net cash for operating activities of
$7,023,000 in the nine months ended September 30, 1995 compared to
$972,000 in the first three quarters of 1994. Noncash adjustments
included depletion, depreciation and amortization of $1,758,000 and
$1,126,000 in 1995 and 1994, respectively. Amortization of
deferred revenues of $1,420,000 in 1995 and $1,485,000 in 1994 also
adjusted cash flows from operating activities. Other noncash
adjustments are the $219,000 loss on early retirement of debt and a
gain on the termination of the Company's volumetric production
payment of $446,000. Other non-cash expenses were $37,000 and
$7,000, in 1995 and 1994, respectively. A net loss of $1,094,000
was incurred in 1995, $667,000 more than the loss of $427,000
experienced during 1994. Significantly reducing cash flows from
operations was the $5,586,000 payment to terminate the volumetric
production payment. A decrease in current liabilities of $505,000
in 1995 and an increase of $474,000 in 1994 impacted cash flows
from operating activities. Accounts payable and accrued expenses
increased in 1994 directly as a result of the significant costs
incurred in drilling and development activities. The decrease in
1995 was due to the application of amounts available under the
Company's line of credit facility to pay down accounts payable.
Cash flows used in investing activities for additions to
property and equipment were $3,132,000 and $1,428,000 in 1995 and
1994, respectively. The Company's 1995 development drilling
activities incurred significantly more costs than did the
production enhancement activities in 1994.
Financing activities netted cash flows of $11,340,000 in 1995
compared to $1,568,000 in 1994. Borrowings of $2,500,000 under the
initial line of credit and $9,301,000 under the new Facility were
significant financing activities during 1995. Cash proceeds, after
related expenses, on the sale of the Laguna Gold Company Series A
Convertible Preferred Stock contributed $2,278,000. Payment of
$2,500,000 on its initial line of credit used cash flows. In 1994,
$2,075,000 of the $3,790,000 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 $239,000 in the nine months ended September 30, 1995 and
$147,000 in the nine months ended September 30, 1994.
The above factors contributed to an increase in cash of
$1,167,000 in 1995 compared to a decrease of $832,000 in 1994.
Results of Operations
Nine Months Ended September 30, 1995 Compared to September 30, 1994
The following table summarizes the results of operations from
oil and gas activity for the nine months ended September 30:
1994* 1995*
Gas revenues...................... $1,874,000 $1,549,000
Gas production (mcf).............. 1,205,000 1,000,000
Average price per mcf............. $1.56 $1.55
Oil revenues...................... $1,591,000 $2,219,000
Oil production (bbl).............. 110,000 135,000
Average price per bbl............. $14.46 $16.43
Total oil and gas revenues........ $3,465,000 $3,768,000
Production and operating costs per BOE $4.72 $4.66
Depletion and amortization per BOE $3.37 $5.45
_______________________
* Includes 566,000 mcf and 39,000 bbls in 1994 and 692,000 mcf
and 26,000 bbls in 1995 delivered pursuant to the terms of the
volumetric production payment agreement. Included in total revenues
for 1994 and 1995 is $1,485,000 and $1,420,000, 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 nine months of 1995 to $2,348,000 from
$1,980,000 in 1994, representing a $368,000 (19%) 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 38,000 barrels (54%).
Average oil prices, not including the deferred revenue
amortization, increased $1.97 per barrel (14%) over the same period
in 1994. Gas production net to Mallon after deliveries required by
the volumetric production payment decreased by 331,000 mcf (52%).
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 gas sales from 1994 to
1995. Gas prices continue at a low level, averaging $1.55 in the
nine months ended September 30, 1995, a $0.01 decrease (1%) from
the prior year average of $1.56. Due to these low gas prices, the
Company has concentrated on oil production.
The Company recognized a gain on the termination of its
volumetric production payment. The difference between the
unamortized balance of deferred revenue as of August 24, 1995
($6,032,000) and the cash paid to terminate its obligation
($5,586,000) resulted in a $446,000 gain.
Lease operating expense per equivalent barrel averaged $4.66
in the first nine months of 1995 compared to $4.72 during the first
nine months of 1994. The decrease of $0.06 (1%), occurred despite
the fact that operating costs on the recently drilled wells are
initially high, primarily due to high salt water disposal
costs. In August 1995, the Company converted one of its wells to a
disposal well, which will reduce this expense and improve
profitability. Also, for several days in August, certain new wells
were shut-in for testing which reduced production and increased
expenses. Further, as production decreases (as is the case with
"flush" production described earlier) and operating expenses remain
constant, the effective rate per barrel of oil equivalent will
increase. The Company is constantly working to improve operations
and decrease operating expense, and management intends to decrease
the per barrel expense. The Company incurred all costs related to
the production and delivery of the volumetric production payment
quantities.
Depletion and amortization increased to $5.45 per barrel of oil
equivalent for the first nine months of 1995, up $2.08 (62%) from $3.37 in
1994. The increase is the result of production increases and a decline in
the underlying reserve base, which declined from December 31, 1993
to December 31, 1994 as a result of low yearend 1994 gas prices and
a significant downward revision to one of the Company's major properties.
The calculation of depletion expense is based on the Company's year-end
1994 reserve report and all of its current production.
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 $361,000 in the nine months ended September
30, 1995 compared to $116,000 in the nine months ended September
30, 1994, a $245,000 increase (211%). As a result of the increased
activity described above, expenses were significantly higher in the
third 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 increase in mining expenses
will continue throughout 1995 and into 1996, and will impede the Company's
ability to generate a profit.
Interest and other expense of $199,000 was up $74,000 (59%) in
the first nine months of 1995 from $125,000 in the first nine
months of 1994. Interest on the Company's lines of credit accounts
for the 1995 interest expense while 1994 interest expense was
incurred on the net profits interest through April 1994. As a
result of its recently completed financing transaction, interest
expense will increase significantly.
Total general and administrative costs were $1,453,000 for
first nine months of 1995, an increase of $198,000 (16%) over
general and administrative expenses of $1,255,000 for the first
nine 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 in 1994. 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.
As a result of the early retirement of its line of credit, the
Company expensed the unamortized balance of the loan origination
fee associated with the line, and paid a $125,000 prepayment
penalty. These two items created a $344,000 extraordinary loss on
early retirement of debt.
The Company paid the 8% dividend on its $4,000,000 face value
Series B Stock. This amount totaled $239,000 in 1995 and $147,000
for the period from April 16, 1994 to September 30, 1994. The
dividend is payable quarterly and will total approximately $80,000
per quarter in the future.
Three Months Ended September 30, 1995 Compared to September 30,
1994
The following table summarizes the results of operations from
oil and gas operations for the three months ended September 30:
1994* 1995*
Gas revenues....................... $ 764,000 $ 429,000
Gas production (mcf)............... 514,000 259,000
Average price per mcf.............. $1.49 $1.66
Oil revenues....................... $ 568,000 $ 736,000
Oil production (bbl)............... 36,000 46,000
Average price per bbl.............. $15.78 $16.00
Total oil and gas revenues......... $1,332,000 $1,165,000
Production and operating costs per BOE $4.06 $4.52
Depletion per BOE................. $4.14 $5.50
_____________________
* Includes 78,000 mcf and 12,000 bbls in 1994 and 172,000 mcf
and 6,000 bbls in 1995 delivered pursuant to the terms of the
volumetric production payment agreement. Included in total
revenues for 1994 and 1995 is $353,000 and $335,000, 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 were $830,000 compared to $979,000 in 1994,
representing a $149,000 (18%) decrease. Oil production net to the
Company after deliveries required by the Company's volumetric
production payment increased by 16,000 barrels (67%). 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 were almost the same as
in 1994. Gas production net to Mallon after deliveries required by
the volumetric production payment decreased by 349,000 mcf (80%).
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 third
quarter 1994 to third quarter 1995. Additionally in 1995, three
wells requiring remedial work had abnormal production declines.
The Company recognized a gain on the termination of its
volumetric production payment. The difference between the
unamortized balance of deferred revenues as of August 24, 1995
($6,032,000) and the cash paid to terminate its obligation
($5,586,000) resulted in a $446,000 gain.
Lease operating expense per equivalent barrel averaged $4.52
in the third quarter of 1995 compared to $4.06 during the third
quarter of 1994. The increase of $0.46 (11%), is due primarily to
operating costs on the recently drilled wells, which are initially
high primarily due to high salt water disposal costs. In August
1995, the Company converted one of its wells to a disposal well,
which will reduce this expense and improve profitability. Also,
for several days in August, certain new wells were shut in for
testing which reduced production and increased expenses. Further,
as production decreased (as is the case with "flush" production
described earlier) and operating expenses remain constant, the
effective rate per barrel of oil equivalent will increase. The
Company is constantly working to improve operations and decrease
operating expense, and management intends to decrease the per
barrel expense. The Company incurred all costs related to the
production and delivery of the volumetric production payment
quantities.
Depletion increased to $5.50 barrel of oil equivalent for
1995, up from $4.14 in 1994. The increase of $1.36 (33%) reflects
an increase in production and a decline in the underlying reserve
base, which declined from December 31, 1993 to December 31, 1994 as
a result of low yearend 1994 gas prices and a significant downward
revision as a result of decreased actual production on one of the
Company's major properties.
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 $114,000 in third quarter 1995 and $36,000 in
third quarter 1994, a $78,000 (217%) increase. Expenses incurred
in 1995, 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. The increase in mining
expenses will continue throughout 1995, and impede the Company's
ability to generate a profit.
Interest and other expense of $88,000 was up by $79,000 in
1995 compared to $9,000 in 1994 as the Company incurred interest at
11% on its $2,500,000 line of credit retired August 24, 1995 and at
8.375% on its new Facility in 1995.
Total general and administrative costs were $471,000 in 1995,
a decrease of $22,000 (5%) over the $493,000 for 1994. Recorded in
third quarter 1995 and not in third quarter 1994 are consulting
fees of $30,000 pursuant to the Company's consulting agreement with
an investment banking firm. Otherwise, the Company has made a
concentrated effort to reduce general and administrative expenses.
As a result of the early retirement of its line of credit, the
Company expensed the unamortized balance of the loan origination
fee associated with the line, and paid a $125,000 prepayment
penalty. These two items created a $344,000 loss on early
retirement of debt.
The Company paid the 8% dividend on its $4,000,000 face value
Series B Convertible Preferred Stock. This amount totaled $81,000
for third quarter 1995 and $80,000 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 Internal Revenue 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.
In November 1995, the Company entered into a "collar" hedging
transaction with an independent crude oil buyer covering 12,000
barrels per month of its oil production. Under this arrangement,
for each month beginning November 1995 through October 1996, if the
price for light sweet crude oil as quoted on the New York
Mercantile Exchange (NYMEX) is less than $16.50 per barrel, the
Company will receive the difference between $16.50 and the average
settlement price for that month for the 12,000 barrels subject to
the collar agreement. If the average settlement price exceeds
$18.00 per barrel, the Company will pay the difference between
$18.00 and such average price on the 12,000 barrels.
Also in November 1995, the Company entered into a "floor"
hedging transaction with an independent crude oil buyer covering
30,000 MMBTUs per month of the Company's gas production. Under this
arrangement, for each month beginning November 1995 through October
1996, if the prime for gas as quoted on the NYMEX is less than
$1.70 on 30,000 MMBTUs, the Company will receive the difference
between $1.70 and the average settlement price for that month for
the 30,000 MMBTU's subject to the floor agreement.
Inflation has not historically had a material impact on the
Company's consolidated 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
flows, 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 third quarter 1995, the Company filed a Periodic
Report of Form 8-K dated August 24, 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: November 14, 1995 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: November 14, 1995 By: /s/ Duane C. Knight, Jr.
Duane C. Knight, Jr.
Treasurer
<TABLE> <S> <C>
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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.
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