SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q/A
(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 Identification No.)
incorporation or organization)
999 18th Street, Suite 1700
Denver, Colorado 80202
(Address of principal executive offices)
(303) 293-2333
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period of time Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of May 12, 1995:
7,794,203 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 Mandatorily Redeemable
Convertible Preferred Stock (convertible into 941,177 shares
of Common Stock) were outstanding
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
___________
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1994 1995
<S> <C> <C>
Current assets:
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
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
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)
Series B Mandatorily Redeemable Convertible
Preferred Stock, $0.01 par value, 500,000
shares authorized, 400,000 shares issued
and outstanding, liquidation preference
and mandatory redemption of $4,000,000... 3,804,000 3,814,000
Stockholders' equity:
Series A 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
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...................... (30,985,000) (31,570,000)
Total stockholders' equity....... 13,549,000 13,121,000
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
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
___________
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1994 1995
<S> <C> <C>
Revenues:
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 and accretion -- (89,000)
Net loss available to common stockholders.... $ (161,000) $ (664,000)
Net loss per share of common stock........... $ (0.02) $ (0.09)
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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1994 1995
<S> <C> <C>
Cash flows from operating activities:
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, as amended on Form 10-K/A.
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.
Capitalized Costs Relating to Oil and Gas Activities:
<TABLE>
<CAPTION>
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.
Costs Incurred in Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
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>
Results of Operations from Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
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>
<CAPTION>
Oil Gas
(BBLS) (MCF)
<S> <C> <C>
Total proved reserves, December 31, 1994 1,544,000 16,294,000
Reserves attributable to the volumetric
production payment, December 31, 1994 162,000 2,938,000
Proved developed reserves, December 31, 1994 811,000 11,733,000
</TABLE>
Reserves to be delivered pursuant to the Company's volumetric production
payment discussed in Note 5 are excluded from the 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)
<S> <C> <C> <C>
1995..................... $ 2,029,000 849,000 37,000
1996..................... 1,485,000 614,000 28,000
1997..................... 1,168,000 457,000 26,000
1998..................... 943,000 351,000 23,000
1999..................... 751,000 275,000 19,000
2000..................... 611,000 223,000 16,000
2001..................... 465,000 169,000 12,000
$ 7,452,000 2,938,000 161,000
</TABLE>
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>
<CAPTION>
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 Mandatory Redeemable Convertible Preferred Stock ("Series B Stock)
totaled $79,000 in first quarter 1995. Mandatory redemption of this stock
begins on April 1, 1997, when 20% of the total outstanding shares will be
redeemed. An additional 20% per year will be redeemed on each April 1
thereafter until all $4,000,000 of the Series B Stock has been redeemed. 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 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-31-1995
<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> 20,347
<TOTAL-ASSETS> 29,481
<CURRENT-LIABILITIES> 3,965
<BONDS> 8,581
<COMMON> 78
3,814
9,504
<OTHER-SE> 7,313
<TOTAL-LIABILITY-AND-EQUITY> 29,481
<SALES> 499
<TOTAL-REVENUES> 1,168
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (575)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
