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 September 30, 1994.
- or -
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _____________ to _________________.
Commission File No. 0-17267
MALLON RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1095959
(State or other jurisdiction (IRS 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, 1994
7,670,503 shares of Registrant's Common Stock were outstanding;
1,100,918 shares of Registrant's Series A Preferred Stock
(convertible into 1,113,173 shares of Common Stock) were
outstanding; and
400,000 shares of Registrant's Series B Mandatorily Redeemable
Convertible Preferred Stock (convertible into 941,177 shares
of Common Stock) were outstanding.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1993 September 30, 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 964,000 $ 132,000
Accounts receivable, with no
allowance for doubtful accounts:
Joint interest participants 229,000 544,000
Related parties 13,000 14,000
Oil/gas sales 636,000 805,000
Inventories 24,000 32,000
Other 111,000 196,000
Total current assets 1,977,000 1,723,000
Property and equipment:
Oil and gas properties,
under full cost method 38,885,000 40,507,000
Mineral properties 3,470,000 3,477,000
Mining property and equipment 1,361,000 1,382,000
Other equipment 295,000 373,000
44,011,000 45,739,000
Less accumulated depreciation,
depletion and impairment (17,425,000) (18,551,000)
26,586,000 27,188,000
Other assets:
Notes receivable, related parties 41,000 42,000
Other, net 169,000 257,000
Total Assets $ 28,773,000 $ 29,210,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ 10,000 $ 10,000
Trade accounts payable 1,354,000 2,060,000
Deferred revenues and drilling
advances 103,000 102,000
Accrued taxes and expenses 48,000 94,000
Total current liabilities 1,515,000 2,266,000
Notes payable 20,000 20,000
Drilling advances 316,000 315,000
Net profits interest 2,075,000 --
Deferred revenues 9,818,000 8,057,000
Series B Mandatorily Redeemable
Convertible Preferred Stock,
$0.01 par value, 500,000 shares
authorized, 400,000 shares issued
and outstanding, liquidation prefer-
ence and mandatory redemption of
$4,000,000 -- 3,790,000
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;
7,597,725 and 7,670,503 shares
issued and outstanding,
respectively 76,000 77,000
Additional paid-in capital 38,547,000 38,706,000
44,353,000 44,513,000
Accumulated deficit (29,324,000) (29,751,000)
Total stockholders' equity 15,029,000 14,762,000
Total Liabilities and Stockholders'
Equity $ 28,773,000 $ 29,210,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months For theThree Months
Ended September 30, Ended September 30,
1993 1994 1993 1994
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 970,000 $1,980,000 $ 280,000 $ 979,000
Deferred revenue amortization -- 1,485,000 -- 353,000
Mining management fee 81,000 -- -- --
Operating service revenue 111,000 287,000 37,000 86,000
Interest and other 33,000 64,000 4,000 25,000
1,195,000 3,816,000 321,000 1,443,000
Costs and expenses:
Oil and gas production 515,000 1,621,000 171,000 541,000
Mine operating expense 102,000 116,000 29,000 36,000
Depletion, depreciation and
amortization 266,000 1,126,000 90,000 549,000
General and administrative 770,000 1,255,000 217,000 493,000
Interest and other 5,000 125,000 1,000 9,000
1,658,000 4,243,000 508,000 1,628,000
Net loss before dividends (463,000) (427,000) (187,000) (185,000)
Preferred stock dividends and accretion -- (147,000) -- (80,000)
Net loss available to common stockholders$ (463,000) $ (574,000) $(187,000) $ (265,000)
Net loss per share of common stock $ (0.09) $ (0.08) $ (.03) $ (0.03)
Weighted average shares outstanding 1,153,000 7,661,000 5,532,000 7,671,000
</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 Nine Months
Ended September 30,
1993 1994
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (463,000) $ (427,000)
Adjustments to reconcile net loss to
net cash provided by operations:
Amortization of deferred revenue -- (1,485,000)
Depletion, depreciation, and
amortization 266,000 1,126,000
Stock issued for compensation 90,000 7,000
Other 1,000 (1,000)
(106,000) (780,000)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (372,000) (485,000)
Inventory and other assets (38,000) (181,000)
Increase (decrease) in:
Accounts payable 109,000 706,000
Accrued taxes and expenses 26,000 46,000
Deferred revenues and
drilling advances (9,000) (2,000)
Proceeds from volumetric
production payment 10,002,000 --
Payment on volumetric
production payment -- (276,000)
Net cash provided by (used
in) operating activities 9,612,000 (972,000)
Cash flows from investing activities:
Increase in notes receivable -
related party (8,000) --
Additions to property and equipment (12,453,000) (1,428,000)
Net cash used in investing
activities (12,461,000) (1,428,000)
Cash flows from financing activities:
Proceeds from debt issuance 1,998,000 --
Payments on long term debt (61,000) (2,075,000)
Net proceeds from sale of common
stock 1,204,000 --
Net proceeds from sale of
preferred stock -- 3,790,000
Deferred offering costs (223,000) --
Payment of dividends -- (147,000)
Net cash provided by
financing activities 2,918,000 1,568,000
Net increase (decrease) in cash and
cash equivalents 69,000 (832,000)
Cash and cash equivalents, beginning
of period 223,000 964,000
Cash and cash equivalents, end of
period $ 292,000 $ 132,000
Supplemental cash flow information:
Cash paid for interest $ 2,000 $ 96,000
Cash paid for income taxes $ -- $ --
Non-cash transactions:
Issuance of common stock in
exchange for:
Acquisition of property and
equipment $ 150,000 $ 300,000
Acquisition of Fruitland Gas
Company, net of note
receivable $ 67,000 $ --
Note payable exchanged for
oil and gas properties $ 7,343,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. General
General. 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, 1993.
Change in Manner of Reserve Reporting. Commencing with the
previous quarterly report, the Company has excluded from the
Company's reported reserve quantities those reserves that are to be
delivered to third parties in satisfaction of the Company's
obligations under volumetric production payments (see Note 5).
Also, in the Company's consolidated statement of cash flows, the
sale of the volumetric production payment and the amortization of
the deferred revenue was moved from financing activities to
operating activities. The Company's standardized measure of
discounted future net cash flows will no longer include deferred
revenues to be amortized as production and delivery of volumetric
production payment quantities occurs in the future. Nevertheless,
all costs relating to the production and delivery of such reserves
for which the Company is obligated, including income taxes, are
included in such calculations. While the Company accepts that the
foregoing treatment of volumetric production payment reserves is
appropriate from an accounting presentation perspective, the
Company believes that it would be misleading to exclude such
reserves from presentations of the Company's reserves prepared for
other purposes. Accordingly, the Company will continue its policy
of clearly disclosing reserves that are to be delivered to third
parties in satisfaction of the Company's obligations under
volumetric production payments.
Change in Manner of Mandatorily Redeemable Convertible
Preferred Stock Reporting - Commencing with the previous quarterly
report, the Company has changed the accounting for its Mandatorily
Redeemable Convertible Preferred Stock. The balance of the
preferred stock has been reclassified from equity to a single line
item. Further, the Company is recording accretion for the
difference between the net proceeds received and the mandatory
redemption amount of $4,000,000.
Note 2. Oil and Gas Properties
The Company's oil and gas activities are conducted primarily in
the United States.
Depletion of oil and gas property costs were $2.53 and $3.37
per equivalent barrel of oil production for the nine months ended
September 30, 1993 and 1994, respectively.
On September 30, 1993, the Company closed the purchase of what
was to the Company a significant amount of oil and gas properties.
The operations of those properties have been included with the
Company's accompanying consolidated statement of operations,
beginning October 1, 1993.
Capitalized Costs Relating to Oil and Gas Activities:
<TABLE>
<CAPTION>
September 30,
1993 1994
<S> <C> <C>
Oil and gas properties $ 38,885,000 $ 40,507,000
Accumulated depreciation, depletion,
amortization and impairment (16,031,000) (17,225,000)
$ 22,854,000 $ 23,282,000
</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>
September 30,
1993 1994
<S> <C> <C>
Property acquisition costs $ 16,732,000 $ 638,000
Exploration costs 138,000 103,000
Development costs 2,732,000 980,000
Full cost pool credits -- (99,000)
$ 19,602,000 $ 1,622,000
</TABLE>
Results of Operations from Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1993 1994
<S> <C> <C>
Oil and gas sales $ 970,000 $ 1,980,000
Deferred revenue amortization -- 1,485,000
Lease operating expense (515,000) (1,621,000)
Depreciation and depletion (247,000) (1,048,000)
Results of operations - from producing
activities (excluding corporate
overhead, interest and income taxes) $ 208,000 $ 796,000
</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, 1993. All of the Company's reserves are located
in the continental United States.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
<S> <C> <C>
Company proved reserves, December 31, 1993 860,000 22,334,000
Proved developed reserve attributable to
the volumetric production payment 209,000 3,574,000
Company proved developed reserves,
December 31, 1993 602,000 17,999,000
</TABLE>
The Standardized Measure of Future Net Cash Flows was
$16,397,000 as of December 31, 1993 and does not include the
estimated effects of $9,818,000 for the volumetric production
payment discussed in Note 5.
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
Company, through its wholly owned subsidiary Laguna Gold Company
(LGC), holds exploration and exploitation concessions covering
approximately 45,000 acres. In order to achieve profitable
operations, management believes that an additional capital
investment is required for equipment and improvements. Such
equipment and improvements would include additional mining
equipment, installation of permanent electricity, and improvements
to the processing facilities.
Note 4. Net Profits Interest
The net profits interest (the "NPI") sold to Enron in
connection with the Company's September 1993 acquisition provided
that 80% of the net revenues generated from the acquired properties
(exclusive of production delivered in satisfaction of the
production payment) were payable to Enron until such payments
aggregated $1,998,000, plus interest thereon equal to 15% per
annum. The Company recorded the NPI as a borrowing and accrued
interest as incurred. Certain of the Company's obligations under
the NPI were collateralized by liens on all of the acquired
properties. The principal balance and accrued interest were paid
in April 1994 and the NPI was retired.
Note 5. Deferred Revenue
In connection with the September 1993 acquisition, the Company
sold a volumetric production payment from the Company's interest in
certain acquired properties for net proceeds of $10,002,000. The
production payment covers approximately 4.3 MMBTU of natural gas at
an average price of $1.65 per MMBTU and 215,000 barrels 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, calculated on a units-of-
production method and based on the scheduled deliveries under the
production payment agreement, is as follows:
<TABLE>
<CAPTION>
Scheduled Deliveries
Annual Natural Gas Oil
Amortization (MMBTU) (Bbl)
<S> <C> <C> <C>
1994 $2,366,000 1,057,000 48,000
1995 2,030,000 934,000 37,000
1996 1,485,000 676,000 28,000
1997 1,168,000 503,000 26,000
1998 943,000 386,000 23,000
1999 751,000 302,000 19,000
2000 611,000 246,000 16,000
2001 464,000 186,000 12,000
$9,818,000 4,290,000 209,000
</TABLE>
Note 6. Contingency
The Minerals Management Service has 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 assorted 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.
Note 7. Mandatorily Redeemable Convertible Preferred Stock
On April 15, 1994, the Company completed the private placement
(the "Placement") of 400,000 shares of its new Series B Mandatorily
Redeemable Convertible Preferred Stock, $0.01 par value per share
(the "Series B Stock"). The newly created Series B Stock bears an
8% dividend payable quarterly, and is convertible into shares of
the Company's common stock at a conversion price of $4.25 per
share. Gross proceeds from the Placement were $4,000,000.
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
first $2,152,000 of net proceeds (which were approximately
$3,790,000) were applied to retire the net profits interest held by
Enron (see Note 4) that burdened certain of the Company's producing
oil and gas properties. The remaining net proceeds will be used to
drill development wells and engage in other production enhancement
operations on the Company's properties. In connection with the
Series B Stock, dividends of $67,000 were paid on June 30, 1994,
and $80,000 on September 30, 1994.
Note 8. Income Taxes
At December 31, 1993, for tax purposes the Company's remaining
net operating loss carryforward was approximately $4,500,000. This
tax loss carryforward is in addition to net operating losses
arising from the operations of LGC prior to 1989, which can be
utilized only to the extent of LGC's future taxable income, but
limited to consolidated taxable income.
The primary differences between the accumulated deficit and tax
loss carryforwards is due to amortization of syndication costs,
which are not deductible for tax purposes, foreign subsidiaries
which are not included in the consolidated tax return, intangible
drilling costs, the impairment of oil and gas properties and
depreciation and depletion.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity, Capital Resources and Capital Expenditures:
Effective September 30, 1993, the Company acquired certain oil
and gas properties. As a part of the financing of the acquisition,
the Company undertook substantial obligations to deliver oil and
gas in satisfaction of its production payment (see Note 5 to the
consolidated financial statements) payable to Enron Reserve
Acquisition Corp. ("Enron"). This obligation will not require all
of the production or cash flows expected to be generated from the
acquired properties. The Company has started, and will continue,
to enhance and develop the operations of the acquired properties.
As explained in previous filings, enhancement and drilling
programs initially had a negative impact on cash flows during the
first nine months. To be enhanced, the producing zones must be
shut-in while procedures to improve future production were
performed. While shut-in, the properties do not provide cash flows
and also require the use of cash flows to finance the enhancement
procedures. Development drilling operations also required the
expenditure of drilling funds months in advance of the receipt of
revenues from the production obtained by the drilling procedures.
The effect of this combination of factors was seen in the results
of the first three quarters, in which the Company recorded negative
cash flows.
The Company has drilling permits for six locations on its Quail
Ridge Field and is permitting an additional ten locations.
Drilling on the first three wells began in the third quarter, and
the Company expects production to begin in November 1994.
Additional cash flows from this new drilling is thus not expected
to be realized by the Company until the fourth quarter of this
year.
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.
On April 15, 1994, the Company completed the private placement
(the "Placement") of 400,000 shares of its Series B Mandatorily
Redeemable Convertible Preferred Stock, $0.01 par value per share
(the "Series B Stock"). The newly created Series B Stock bears an
8% dividend payable quarterly, and is convertible into shares of
the Company's common stock at a conversion price of $4.25 per
share. 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 redeemedGross
proceeds from the Placement were $4,000,000; net proceeds were
$3,790,000. The first $2,152,000 of net proceeds were applied to
retire the net profits interest held by Enron (see Note 4 to the
consolidated financial statements) that burdened certain of the
Company's producing oil and gas properties. The remaining net
proceeds have been used to drill development wells and engage in
other production enhancement operations on the Company's
properties.
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 will be the
Company's share of any costs related to that undertaking. 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.
As of September 30, 1994, the Company had a working capital
deficit of $543,000 compared to a working capital deficit of
$6,998,000 at September 30, 1993, and $462,000 at December 31,
1993. The decrease from year end was caused by an increase
accounts payable and accrued expenses of $752,000. Accounts
payable and accrued expenses increased due primarily to costs
incurred in drilling, reworking and development activities.
Accounts receivable increased, by $485,000, due to billing joint
interest partners for work performed and for an increase in oil and
gas sales as a result of the enhancement operations performed.
Inventory and other current assets increased $93,000.
Results of Operations:
Nine months ended September 30, 1994 compared with September 30,
1993
The Company used net cash in operations of $972,000 in the
first three quarters of 1994 compared with the total of $390,000
for the same period in 1993. Included in these losses is
depletion, depreciation and amortization of $1,126,000 and
$266,000, respectively. Amortization of deferred revenue of
$1,485,000 in 1994 negatively impacted cash flow from operations.
A loss of $427,000 was incurred this year, slightly less than the
loss of $463,000 experienced during the first nine months of 1993.
Cash flows from operations after adjustments to reconcile net loss
to cash provided by operations was $(780,000) in 1994 and
$(106,000) in 1993. Additionally, due to a shortfall in scheduled
volumes delivered on the volumetric production payment in April,
May and June, $276,000 was paid in the third quarter to satisfy the
Company's obligations under the production payment. In 1993,
proceeds from the volumetric production payment increased cash from
operations by $10,002,000. Other non-cash items were $(6,000) and
$90,000, respectively. An increase in accounts payable and accrued
expenses of $752,000 in 1994 increased cash flows from operations,
whereas increases in accounts receivable and other assets of
$666,000 decreased available cash flows.
The Company's investing activities used cash flows of
$1,428,000 in 1994 compared with $12,461,000 last year. The
Company invested significantly more in reworking, recompleting,
drilling and developing properties in 1994. However, the Company
completed a $22,400,000 acquisition in the third quarter of 1993
(of which $7,493,000 was in the form of a note).
Financing activities netted cash flows of $1,568,000 in the
first nine months of 1994, mainly due to the sale of the Company's
Series B Stock resulting in net proceeds of $3,790,000. Dividends
on the Series B Stock totaled $147,000. Also impacting cash flows
provided by financing activities was payment of the Company's net
profits interest and accrued interest, a change of $2,075,000 since
year end. In 1993, financing activities provided cash flows of
$2,918,000, reflecting the sale of $1,204,000 of the Company's
common stock and the the net profits interest of $1,998,000. Also
in 1993, deferred offering costs incurred of $223,000 and payments
on long-term debt of $61,000 decreased cash provided by financing
activities.
The September 1993 acquisition of producing oil and gas
properties has had a significant impact on the results of the
Company's operations. The Company began recording the results of
operations from the properties effective September 30, 1993. The
results of operations from the acquired properties were recorded as
a reduction of the purchase price.
The following table summarizes the revenues from of oil and gas
operations for the first nine months of the Company's fiscal year:
<TABLE>
<CAPTION>
For the Nine Months For the Nine Months
Ended Ended
September 30 , 1993 September 30 1994*
<S> <C> <C>
Gas revenues $467,000 $ 867,000
Gas production (mcf) 350,000 639,000
Average price per mcf $1.33 $1.36
Oil revenues $503,000 $1,113,000
Oil production (bbl) 29,000 71,000
Average price per bbl $17.30 $15.67
</TABLE>
* Does not include 566,000 mcf and 39,000 bbls. delivered to Enron
pursuant to the terms of the volumetric production payment
agreement.
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 1994 to $1,980,000 from
$970,000 in 1993, representing a $1,010,000 (or 104%) increase.
This increase is due primarily to the September 1993 acquisition,
and enhancement operations completed. Oil production net to Mallon
increased by 42,000 barrels or approximately 145%. Average oil
prices, however, decreased $1.63 per barrel (or 9%). Gas
production net to Mallon increased by 78,000 mcf (or 22%). Natural
gas production delivered to meet the demand of the volumetric
production payment was 566,000 mcf in the first three quarters,
thereby limiting the net amount to the Company. Further,
production was curtailed in the Company's Burns Ranch area, further
reducing gas production for the Company's account. Gas prices
improved slightly by $.03 per mcf (or 4%). The decrease in oil
prices have, obviously, decreased the Company's potential to
generate cash flows.
Included in total revenues for 1994 is $1,485,000 from the
amortization of the Company's deferred revenues. Deferred revenues
were recorded from the sale of a volumetric production payment
covering approximately 4.3 MMBTU of gas and 215,000 barrels of oil.
The deferred revenue is amortized over eight years based on the
units-of-production method as the scheduled deliveries are made to
the purchaser. The Company delivered approximately 566,000 mcf
and 39,000 barrels to Enron in the first three quarters of 1994.
The quantities to be delivered were at their highest level in the
second quarter of 1994. However, all of the scheduled production
from certain properties was not delivered. Thus, in accordance
with the terms of the volumetric production payment, the Company
made a $276,000 payment in the third quarter, which reduced the
balance of the deferred revenue. The Company incurs all costs
related to the production and delivery of these quantities.
Further limiting the Company's ability to generate cash flows
is the fact that certain of the Company's significant properties,
including the Mobil '12' well, the White Baby Comm. #1 and #2, the
Eddy '21' Federal #1, and the Allied '21' Federal #1 were shut-in
during the first part of 1994 while production enhancement
operations were performed. Also, the South Carlsbad compressor was
taken out of service for repairs. Of note is the fact that the
Mobil '12' recompletion has produced significantly higher
quantities than before. Some additional workover and recompletion
operations will be performed, but the bulk of this work has been
completed.
Lease operating expense per equivalent barrel average was $5.21
in the first three quarters of 1994 compared to $5.92 during the
first three quarters of 1993. The decrease of $.71 (or 12%) is due
primarily to the lower operating costs of the acquired properties.
This reduction occurred notwithstanding substantial costs for
significant workovers and repairs on the Company's properties in
the first nine months.
The improvement in the gross margin generated from oil and gas
operations will enhance the Company's ability to further improve
and develop properties and meet its obligations.
There were no sales of gold and silver during the first nine
months of 1994 or 1993, and no sales are expected in the immediate
future. The Company recognized management fees of $81,000
associated with the Newmont operation in 1993. This agreement
expired as of March 31, 1993. Direct costs related to the mining
operation were $116,000 in 1994 and $102,000 in 1993, and no
significant change in mining costs is anticipated.
Depletion, depreciation and amortization went to $3.37 per
barrel of oil equivalent for the first three quarters of 1994, up
from $2.83 in 1993. The increase of $.54 (or 19%) reflects an
increase in production in relation to the underlying reserve base.
Interest and other expense of $125,000 was up significantly in
the first nine months of 1994 ($5,000 was incurred in the first
nine months of 1993) as the Company incurred interest at 15% on its
net profits interest. The net profits interest was paid in April
1994 and interest will not be a significant factor in the
foreseeable future as the Company has no other significant interest
bearing debt.
Total general and administrative costs were $1,255,000 for the
first three quarters of 1994, an increase of $485,000 (or 63%) over
the $770,000 for the same period of 1993. The increase is due
primarily to increased salaries for additional personnel directly
related to the September 1993 acquisition. Legal fees increased
significantly as the Company is plaintiff in a complex lawsuit in
which it seeks substantial damages. Travel expenses increased
significantly due to the management of the Company investing
significant time, money and effort in pursuing the realization of
the mining property.
The factors discussed above combined to result in a net loss of
$427,000 for the first three quarters of 1994, compared to a net
loss of $463,000 for the comparable period in 1993. This
represents a $36,000 (or 8%) reduction in net loss over the first
three quarters of the prior year.
The Company paid the 8% dividend on its $4,000,000 face value
Series B Stock. This amount totaled $147,000 for the period from
April 16, 1994 to September 30, 1994. The annual dividend is
$320,000, payable quarterly.
Three months ended September 30, 1994 compared to September 30,
1993
The Company used cash flows in operations of $371,000 in the
third quarter of 1994. Net loss was $185,000 in the third quarter
of 1994 . Included in this loss is amortization of deferred
revenues of $353,000, depletion, depreciation and amortization of
$538,000 and other non-cash items of $(11,000). Cash flows from
operations after adjustments to reconcile net loss to cash provided
by operations was $11,000. The primary reasons for the use of cash
in operations in the third quarter was due to an increase in
accounts receivable of $541,000, which was partially offset by
reductions (payments) in accounts payable and accrued expenses of
$435,000.
The Company's investing activities provided cash flows of
$392,000 in the third quarter of 1994. The Company sold its
marketable securities, which provided cash of $1,000,000. As with
the first three quarters of the year, the Company has invested
significantly more ($608,000) in reworking and developing
properties in 1994 than in 1993.
Financing activities used cash flows of $85,000 in 1994,
primarily the result of the payment of the second dividend on the
preferred stock ($80,000).
The following table summarizes the results of oil and gas
operations for the third quarter:
<TABLE>
<CAPTION>
For the quarter ended For the quarter ended
September 30, 1993 September 30, 1994*
<S> <C> <C>
Gas revenues $135,000 $562,000
Gas production (mcf) 108,000 436,000
Average price per mcf $1.25 $1.29
Oil revenues $145,000 $417,000
Oil production (bbl) 10,000 24,000
Average price per bbl $15.32 $17.42
</TABLE>
* Does not include 78,000 mcf and 12,000 bbls. delivered to Enron
pursuant to the terms of the volumetric production payment
agreement.
Exclusive of quantities produced and delivered pursuant to the
Company's volumetric production payment, oil and gas sales
increased during the third quarter of 1994 to $979,000 from
$280,000 in 1993, representing a $699,000 (or 250%) increase. Oil
production net to Mallon increased by 14,000 barrels or
approximately 140%. Average oil prices increased $2.10 per barrel
(or 14%). Gas production net to Mallon increased by 322,000 mcf or
approximately 303%. These increases are due primarily to the
September 1993 acquisition, and subsequent enhancement of
production. Gas prices improved by $.04 per mcf (or 3%).
Included in total revenues for the third quarter of 1994 is
$353,000 from the amortization of the Company's deferred revenues.
Deferred revenues were recorded from the sale of a volumetric
production payment covering approximately 4.3 MMBTU of gas and
215,000 barrels of oil. The deferred revenue is amortized based on
the units-of-production method as the scheduled deliveries are made
to the purchaser. The Company delivered approximately 78,000 mcf
and 12,000 barrels to Enron in the third quarter of 1994. However,
all of the scheduled production from certain properties was not
delivered. Thus, in accordance with the terms of the volumetric
production payment, the Company made a $276,000 payment in the
third quarter, which reduced the balance of the deferred revenue.
The Company incurs all costs related to the production and delivery
of these quantities.
Lease operating expense per equivalent barrel average was $4.43
in the third quarter of 1994 compared to $6.11 during the first
three quarters of 1993. The decrease of $1.68 (or 27%) is due
primarily to the lower operating costs of the acquired properties.
Depletion, depreciation and amortization increased to $4.50 per
barrel of oil equivalent for the third quarter of 1994, up from
$3.21 in 1993. The increase of $1.29 (or 40%) is the result of an
increase in production in relation to the underlying reserve basis.
Interest and other expense was not significant in either the
third quarter of 1994 or 1993. The Company has no significant
interest bearing debt.
Total general and administrative expenses were $493,000 for the
third quarter 1994, an increase of $276,000 (or 56%) over the
$217,000 for the third quarter of 1993. The increase is due
primarily to increased salaries for new personnel directly related
to the September 1993 acquisition. Legal fees increased as the
Company is the plaintiff in a complex lawsuit in which it seeks
substantial damages. Travel expense was also higher than expected
as management of the Company invested time, money and effort in
pursuing the realization of the mining property.
The factors discussed above combined to result in a net loss of
$185,000 for the third quarter of 1994, compared to a net loss of
$187,000 for the comparable period in 1993.
As noted earlier, the Company paid an 8% dividend on its
$4,000,000 face value Series B Stock, which amounted to $80,000 for
the quarter.
Miscellaneous:
Commencing with the previous quarterly report, the Company has
excluded from the Company's reported reserve quantities those
reserves that are to be delivered to third parties in satisfaction
of the Company's obligations under volumetric production payments
(see Note 5 to the consolidated financial statements). The
Company's standardized measure of discounted future net cash flows
will no longer include deferred revenues to be amortized as
production and delivery of volumetric production payment quantities
occurs in the future. Nevertheless, all costs relating to the
production and delivery of such reserves for which the Company is
obligated, including income taxes, are included in such
calculations.
While the Company accepts that the foregoing treatment of
volumetric production payment reserve is appropriate from an
accounting presentation perspective, the Company believes that it
would be misleading to exclude such reserves from presentations of
the Company's reserves prepared for other purposes. Accordingly,
the Company will continue its policy of clearly disclosing reserves
that are to be delivered to third parties in satisfaction of the
Company's obligations under volumetric production payments.
The Company's oil and gas operations are significantly affected
by certain provisions of the Internal Revenue Code of 1986, as
amended (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, 1993, the Company had a net operating loss
("NOL") carryforward of approximately $4,500,000, 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. As a result of the sale of
common stock in the private placement and the sale of the Series B
Stock, an "ownership change" may have occurred, although that
conclusion is not certain. If an ownership change occurred, 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.
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 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.
PART II
OTHER INFORMATION
Item 5. Other Information -- Change in Certifying Accountant
Effective November 10, 1994, the Company dismissed HEIN +
ASSOCIATES LLP (H+A) as its independent certified public accounting
firm. H+A's report on the consolidated financial statements for
the past two years contained an explanatory paragraph to the effect
that the recovery of the Company's investment in mineral properties
is dependent upon achieving and maintaining profitable operations
at the mine or sale of the property. During the two most recent
fiscal years, there were no disagreements with H+A on any matter of
accounting principles or practices, financial statement disclosure,
or auditing scope or procedure. The dismissal of H+A was approved
by the Company's Board of Directors at its November 9, 1994
meeting.
Effective November 10, 1994, the Company appointed the independent
certified public accounting firm of Price Waterhouse LLP as the
principal accountants to audit the Company's consolidated financial
statements.
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: November 11, 1994 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: November 11, 1994 By: /s/ Duane C. Knight, Jr.
Duane C. Knight, Jr.
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 132
<SECURITIES> 0
<RECEIVABLES> 1,363
<ALLOWANCES> 0
<INVENTORY> 32
<CURRENT-ASSETS> 1,723
<PP&E> 45,739
<DEPRECIATION> (18,551)
<TOTAL-ASSETS> 29,210
<CURRENT-LIABILITIES> 2,266
<BONDS> 8,392
<COMMON> 77
3,790
5,730
<OTHER-SE> 8,955
<TOTAL-LIABILITY-AND-EQUITY> 2,921
<SALES> 3,465
<TOTAL-REVENUES> 3,816
<CGS> 1,621
<TOTAL-COSTS> 2,497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> (427)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (427)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> 0
</TABLE>
