SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 1997.
- - or -
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _____________ to _________________.
Commission File No. 0-17267
MALLON RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1095959
(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)
999 18th Street, Suite 1700
Denver, Colorado 80202
(Address of principal executive offices)
(303) 293-2333
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period of time registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
As of August 11, 1997, 4,695,264 shares of registrant's common
stock, par value $0.01 per share, were outstanding.
PART I - FINANCIAL INFORMATION
Item 1 -- Financial Statements
MALLON RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
ASSETS
<C> <S> <S>
Current assets:
Cash and cash equivalents $ 211 $ 2,771
Short-term investments 1,256 2,786
Accounts receivable:
Oil and gas sales 1,129 1,879
Joint interest participants, net of
allowance of $8 and $8, respectively 1,603 827
Related parties 46 20
Other 34 45
Inventories 281 251
Other 81 104
Total current assets 4,641 8,683
Property and equipment:
Oil and gas properties, full cost method 53,093 46,175
Mining properties and equipment 11,012 10,114
Other equipment 698 559
64,803 56,848
Less accumulated depreciation, depletion
and amortization (25,567) (24,406)
39,236 32,442
Notes receivable-related parties 17 17
Other, net 325 258
Total Assets $ 44,219 $ 41,400
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,905 $ 1,614
Undistributed revenue 268 1,502
Drilling advances 166 100
Accrued taxes and expenses 247 77
Current portion of capital lease obligation 25 25
Current portion of installment obligation,
less unamortized discount of $11 and
$-0-, respectively 389 --
Total current liabilities 4,000 3,318
Long-term bank debt 6,069 3,269
Installment obligation, less unamortized
discount of $33 and $-0-, respectively 367 --
Notes payable 230 230
Capital lease obligation, net of current portion -- 12
Drilling advances 368 368
Accrued expenses 44 41
Total non-current liabilities 7,078 3,920
Total liabilities 11,078 7,238
Commitments and contingencies -- --
Minority interest 8,032 8,358
Series B Mandatorily Redeemable Convertible
Preferred Stock, $0.01 par value, 500,000
shares authorized, 135,200 and 400,000
shares issued and outstanding, respectively,
liquidation preference and mandatory
redemption of $1,352,000 and $4,000,000,
respectively 1,311 3,900
Shareholders' equity:
Common Stock, $0.01 par value, 25,000,000
shares authorized; 4,694,264 and
4,384,562 shares issued and outstanding,
respectively 47 44
Additional paid in capital 59,085 56,707
Accumulated deficit (35,334) (34,847)
Total shareholders' equity 23,798 21,904
Total Liabilities and Shareholders' Equity $ 44,219 $ 41,400
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
<C> <S> <S> <S> <S>
Revenues:
Oil and gas sales $ 1,839 $ 1,477 $ 3,811 $ 2,834
Interest and other 28 15 87 30
1,867 1,492 3,898 2,864
Costs and expenses:
Oil and gas production 623 548 1,320 973
Mining project expenses 353 265 680 359
Depreciation, depletion and amortization 544 592 1,124 1,170
Impairment of oil and gas properties (24) -- 55 --
General and administrative 657 409 1,295 876
Interest and other 117 252 208 465
2,270 2,066 4,682 3,843
Minority interest in loss of consolidated
subsidiary 164 54 315 54
Loss before extraordinary item (239) (520) (469) (925)
Extraordinary loss on early retirement of debt -- -- -- (160)
Net loss (239) (520) (469) (1,085)
Dividends on preferred stock and accretion (30) (96) (125) (186)
Preferred stock conversion inducement (403) -- (403) --
Net loss attributable to common shareholders $ (672) $ (616) $ (997) $(1,271)
======= ======= ======= =======
Per share:
Net loss attributable to common shareholders
before extraordinary item $ (0.14) $ (0.30) $ (0.22) $ (0.55)
Extraordinary loss -- -- -- (0.08)
Net loss attributable to common shareholders $ (0.14) $ (0.30) $ (0.22) $ (0.63)
======= ======= ======= =======
Weighted average shares outstanding 4,642 2,039 4,515 2,005
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1997 1996
<C> <S> <S>
Cash flows from operating activities:
Net loss $ (469) $(1,085)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,124 1,170
Impairment of oil and gas properties 55 --
Amortization of discount on notes payable 22 --
Minority interest in loss of consolidated
subsidiary (315) (54)
Stock compensation expense 47 272
Non-cash portion of extraordinary loss -- 160
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (41) 185
Inventory and other assets (89) (91)
Increase (decrease) in:
Trade accounts payable and
undistributed revenue 57 24
Accrued taxes and expenses 173 189
Drilling advances 66 (56)
Net cash provided by operating activities 630 714
Cash flows from investing activities:
Decrease in short-term investments 1,530 --
Increase in funds held in escrow -- (3,750)
Additions to property and equipment (7,224) (1,719)
Purchase of subsidiary stock (55) --
Increase (decrease) in notes receivable-
related parties (1) 15
Net cash used in investing activities (5,750) (5,454)
Cash flows from financing activities:
Proceeds from long-term debt 2,800 10,231
Payment of long-term debt (12) (10,011)
Debt issue costs paid -- (82)
Net proceeds from sale of subsidiary
special warrants -- 4,325
Payment of preferred dividends (107) (160)
Redemption of preferred stock (121) --
Net cash provided by financing activities 2,560 4,303
Net decrease in cash and cash equivalents (2,560) (437)
Cash and cash equivalents, beginning of period 2,771 1,269
Cash and cash equivalents, end of period $ 211 $ 832
======= =======
Supplemental cash flow information:
Cash paid for interest $ 141 $ 383
Non-cash transactions:
Issuance of common stock in exchange
for consultants' accounts payable $ -- $ 791
Installment obligation (less
unamortized discount) in exchange
for property and equipment $ 733 $ --
Acquisition of Red Rock Ventures, Inc.
for subsidiary common stock and
notes payable $ -- $ 2,230
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
___________
Note 1. GENERAL
The Company engages in oil and gas exploration and production
through its wholly-owned subsidiary, Mallon Oil Company ("Mallon
Oil"). The Company also has interests in gold and silver
exploration through its majority-owned subsidiary, Laguna Gold
Company ("Laguna"). At June 30, 1997, the Company owned
approximately 56% of Laguna. The significant majority of the
Company's assets and revenues are utilized in its oil and gas
operations, which are conducted primarily in the State of New
Mexico. Mining operations, conducted through Laguna in Costa Rica,
are in the pre-production stage. All significant intercompany
balances and transactions have been eliminated from the
consolidated financial statements.
These unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, such
interim statements reflect all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the financial
position and the results of operations and cash flows for the
interim periods presented. The results of operations for these
interim periods are not necessarily indicative of the results to be
expected for the full year. 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, 1996.
A reclassification from operating service revenue to oil and
gas production expense was made to the statements of operations for
the three and six months ended June 30, 1996 to conform to the
June 30, 1997 presentation. In addition, certain reclassifications
were made to the June 30, 1996 statement of cash flows to conform
to the June 30, 1997 presentation.
Note 2. LONG-TERM BANK DEBT
Effective January 1997, the borrowing base under the Company's
revolving credit facility was increased to $10,000,000. Beginning
July 31, 1997, the borrowing base will decrease by $140,000 per
month. The Company is not required to make debt service payments
unless the outstanding balance under the facility exceeds the
borrowing base, as adjusted. At June 30, 1997, the amount
outstanding under the facility was $6,069,000, leaving the amount
available under the facility at $3,931,000.
Note 3. OIL AND GAS PROPERTIES
In January 1997, the Company acquired certain oil and gas
properties for consideration of $1,300,000 in cash and conveyance
of its interest in certain other oil and gas properties. Cash
consideration of $500,000 was paid at closing in January 1997 and
installment obligations of $400,000 will be paid on each of
January 1, 1998 and January 1, 1999. The installment obligations
include an imputed interest rate of 6%. There was no gain or loss
relative to the conveyance of the interest in the oil and gas
properties.
Note 4. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatory redemption of the Company's Series B Preferred Stock
(the "Series B Stock") was to begin in April 1997, when 20% of the
outstanding shares, or 80,000 shares, were to be redeemed for
$800,000. The Company extended an offer to all holders of the
Series B Stock to convert their shares into shares of the Company's
common stock at a conversion price of $9.00, rather than the $11.31
conversion price otherwise then in effect. In April 1997, holders
of 252,675 shares of Series B Stock elected to convert their shares
into 280,747 shares of the Company's common stock. The excess of
the fair value of the common stock issued at the $9.00 conversion
price over the fair value of the common stock that would have been
issued at the $11.31 conversion price, totaling $403,000, has been
reflected on the statements of operations for the three and six
months ended June 30, 1997 as an increase to the net loss
attributable to common shareholders for preferred stock conversion
inducement. In addition, the Company redeemed 12,125 shares of
Series B Stock at $10.00 per share. After these transactions,
135,200 shares of Series B Stock remain outstanding and the Company
has no further obligation to redeem any shares until April 2000.
Note 5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," which establishes new standards for computing
and presenting earnings per share. The new Statement is intended
to simplify the standard for computing earnings per share and will
require the presentation of basic and diluted earnings per share on
the face of the income statement, including all prior periods
presented. The Statement is effective for financial statements
issued for periods ending after December 15, 1997, and earlier
adoption is not permitted. Had the calculation of earnings per
share been prepared in accordance with the provisions of SFAS No.
128 for the three and six months ended June 30, 1997 and 1996,
earnings per share would have been the same as what was reported on
the consolidated statements of operations.
Note 6. SHAREHOLDER RIGHTS PLAN
In April 1997, the Company's Board of Directors declared a
dividend on its shares of Common Stock (the "Common Shares") of
preferred share purchase rights (the "Rights") as part of a
Shareholder Rights Plan (the "Plan"). The Plan is designed to
insure that all shareholders of the Company receive fair value for
their Common Shares in the event of a proposed takeover of the
Company and to guard against the use of partial tender offers or
other coercive tactics to gain control of the Company without
offering fair value to the Company's shareholders. At the present
time, the Company knows of no proposed or threatened takeover,
tender offer or other effort to gain control of the Company. Under
the terms of the Plan, the Rights will be distributed as a dividend
at the rate of one Right for each Common Share held. Shareholders
will not actually receive certificates for the Rights at this time,
but the Rights will become part of each Common Share. All Rights
expire on April 22, 2001.
Each Right will entitle the holder to buy shares of Common
Stock at an exercise price of $40.00. The Rights will be
exercisable and will trade separately from the Common Shares only
if a person or group acquires beneficial ownership of 20% or more
of the Company's Common Shares or commences a tender or exchange
offer that would result in such a person or group owning 20% or
more of the Common Shares. Only when one or more of these events
occur will shareholders receive certificates for the Rights.
If any person actually acquires 20% or more of Common Shares --
other than through a tender or exchange offer for all Common Shares
that provides a fair price and other terms for such shares -- or if
a 20%-or-more shareholder engages in certain "self-dealing"
transactions or engages in a merger or other business combination
in which the Company survives and its Common Shares remain
outstanding, the other shareholders will be able to exercise the
Rights and buy Common Shares of the Company having twice the value
of the exercise price of the Rights. In other words, payment of
the $40.00 per Right exercise price will entitle the holder to
acquire $80.00 worth of Common shares. Additionally, if the
Company is involved in certain other mergers where its shares are
exchanged, or certain major sales of assets occur, shareholders
will be able to purchase the other party's common shares in an
amount equal to twice the value of the exercise price of the
Rights.
The Company will be entitled to redeem the Rights at $.01 per
Right at any time until the tenth day following public announcement
that a person has acquired a 20% ownership position in Common
Shares of the Company. The Company in its discretion may extend
the period during which it can redeem the Rights.
Note 7. LAGUNA
In June 1997, pending an improvement in the financial markets,
Laguna started a program to conserve capital by curtailing its
mining operations in Costa Rica. As a result, a reduction in the
work force has been required. Under Costa Rican Labor Law, Laguna
is obligated to make certain payments to Costa Rican employees who
are dismissed. The Company has estimated this amount at $134,000,
and has included it on the Company's statements of operations in
mining project expenses for the three and six months ended June 30,
1997. Laguna made payments of approximately $46,000 and $34,000
during July and August 1997, respectively, related to this
liability.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion is intended to assist in understanding the
Company's consolidated financial position at June 30, 1997 and
December 31, 1996, results of operations for the three and six
months ended June 30, 1997 and 1996 and cash flows for the six
months ended June 30, 1997 and 1996. The Company's Consolidated
Financial Statements and notes thereto should be referred to in
conjunction with the following discussion. Except as noted, the
financial information discussed below is consolidated information,
which includes the accounts of Laguna Gold Company ("Laguna").
Overview
Historically, the Company has engaged in two separate and distinct
facets of the natural resources business. Through Mallon Oil
Company, the Company has pursued its core oil and gas business.
Through Laguna, the Company has engaged in mining activities. By
early 1996, the Company concluded that the level of capital and
management resources required to fully develop each of these
businesses made it inadvisable for the Company to continue to
pursue both. Accordingly, the Company separated the businesses by
establishing the financial independence of Laguna and having the
Company focus its efforts on the oil and gas business. Laguna's
1996 Canadian financing, and listing on The Toronto Stock Exchange,
were the key steps toward the accomplishment of that goal and
should permit Laguna to operate independently without further
reliance on the Company for financial support. The Company does
not have any obligation or intention to finance Laguna's future
operations.
In light of the recent implementation of this fundamental change in
the manner in which the Company will henceforth pursue its
business, the Company's past financial performance is not
necessarily indicative of its future operations.
Liquidity and Capital Resources
Until its October 1996 equity offering, the Company had, since
inception, been significantly constrained by a continued shortage
of capital. The October 1996 financing remedied that problem, at
least for the foreseeable future. For the first time in the
Company's history, the Company has funds available to develop and
exploit the Company's substantial inventory of oil and gas
properties. Management is of the view that the Company's chronic
liquidity problem can now be solved, on a long term basis, by the
Company's development of its oil and gas properties. Management
believes that such operations will increase cash flow and improve
liquidity, and thereby allow the Company to avoid future working
capital short-falls. The Company had working capital surpluses of
$641,000 and $5,365,000 at June 30, 1997 and December 31, 1996,
respectively.
The Company has a revolving credit facility (the "Facility") with
Bank One, Texas, N.A. (the "Bank'). The borrowing base under the
revolver is subject to redetermination every six months, or at such
other times as the Bank may determine. The Company is obligated to
maintain certain financial and other covenants, including a minimum
current ratio, minimum net equity, a debt coverage ratio and a
total bank debt ceiling. The Facility is collateralized by
substantially all of the Company's oil and gas properties and
expires March 31, 1999. At August 11, 1997, the borrowing base
under the facility was $9,860,000, and the principal amount
outstanding was $6,669,000, leaving the amount remaining available
under the Facility at $3,191,000. The Company is currently in
compliance with the covenants of the Facility.
Mandatory redemption of the Company's Series B Mandatorily
Redeemable Convertible Preferred Stock (the "Series B Stock") was
to begin in April 1997, when 20% of the outstanding shares, or
80,000 shares, were to be redeemed for $800,000. The Company
extended an offer to all holders of the Series B Stock to convert
their shares into shares of the Company's common stock at a
conversion price of $9.00, rather than the $11.31 conversion price
otherwise then in effect. In April 1997, holders of 252,675 shares
of Series B Stock elected to convert their shares into 280,747
shares of the Company's common stock. In addition, the Company
redeemed 12,125 shares of Series B Stock at $10.00 per share.
After these transactions, 135,200 shares of Series B Stock remain
outstanding and the Company has no further obligation to redeem any
shares until April 2000.
Historically, the Company's involvement in both oil and gas and
mining activities has hampered its ability to raise capital due to
the complexity of the Company's financial structure and apparent
market perceptions that the Company was too small to effectively
pursue two such disparate businesses. By establishing independent
financing arrangements for Laguna, management hopes to overcome
these problems, and place the Company in a position to exploit its
oil and gas acreage. The elimination of the Company's commitment
to fund Laguna's operations should assist the Company in these
efforts.
To implement its planned drilling and development programs, the
Company expended $5,684,000 during the first six months of 1997.
The Company completed 12 of the 14 development wells it drilled.
One well not completed was abandoned due to mechanical problems
encountered while running casing, and one well is presently being
evaluated in shallower uphole zones. The Company recompleted 8
wells during the first six months of 1997, all of which are on
production in the third quarter. In addition, the Company
completed permitting and began construction of a gas sweetening
plant in the San Juan Basin, which will go on production in the
third quarter. This will allow acceleration of the recompletion
program for the balance of the year. Currently, the Company is
drilling 4 additional wells and is conducting work on 2
recompletions.
During the first quarter 1997, the Company participated in one
exploratory well in Belize, which was abandoned as a dry hole.
The Company currently plans to drill approximately 20 wells and
recomplete 16 wells during the remainder of 1997, and has a capital
expenditure budget of approximately $11 million for the year.
Production for the first six months of 1997 averaged 1,348 BOE per
day, up from the year 1996 average of 1,060 BOE per day.
Currently, daily production is in excess of 1,800 BOE per day.
With the net proceeds of the equity offering, the Company's working
capital and credit facility and the operating cash flows that are
expected to be generated by the application of such funds to the
Company's drilling program, management anticipates that the Company
will have sufficient capital to fund the continued development of
its current properties and to meet the Company's liquidity
requirements for the next twelve months.
Results of Operations
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In thousands, except per unit data)
<C> <S> <S> <S> <S>
Results of Operations, Consolidated:
Revenues $1,867 $1,492 $3,898 $ 2,864
Costs and expenses 2,270 2,066 4,682 3,843
Net loss (239) (520) (469) (1,085)
Net loss attributable to
common shareholders (672) (616) (997) (1,271)
Net loss per share
attributable to
common shares (0.14) (0.30) (0.22) (0.63)
EBITDA (1) 398 321 918 706
Capital expenditures-
cash basis (3) 3,085 1,058 7,224 1,719
Results of Operations from Oil and Gas Producing Activities:
Oil and gas sales 1,839 1,477 3,811 2,834
Production tax and
marketing expense 195 167 458 323
Lease operating expense 428 381 862 650
Depletion 500 547 1,030 1,085
Impairment of oil and
gas properties (24) -- 55 --
Net Production:
Oil (MBbl) 44 46 81 91
Natural gas (MMcf) 567 378 978 700
MBOE 139 109 244 208
Average Sales Price Realized:
Oil (per Bbl) $19.32 $16.91 $20.81 $ 16.98
Natural gas (per Mcf) 1.74 1.85 2.17 1.84
Per BOE 13.23 13.55 15.62 13.63
Average production tax
and marketing expense
(per BOE): 1.40 1.53 1.88 1.55
Average lease operating
expense (per BOE): 3.08 3.50 3.53 3.13
Average depletion (per BOE):3.60 5.02 4.22 5.22
Results of Operations, Excluding Laguna (2):
Revenues $1,841 $1,489 $3,838 $ 2,847
Costs and expenses 1,891 1,765 3,951 3,432
Net loss (50) (276) (113) (745)
Net loss attributable
to common shareholders (483) (372) (641) (931)
Net loss per share
attributable to
common shares (0.10) (0.18) (0.14) (0.46)
EBITDA (1) 561 542 1,223 1,011
Capital expenditures-
cash basis (3) 2,616 685 6,260 909
</TABLE>_________
1) EBITDA is income before income taxes, interest expense,
depreciation, depletion and amortization, impairment, and
extraordinary loss. EBITDA is a financial measure commonly used in
the Company's industry and should not be considered in isolation or
as a substitute for net income, cash flow provided by operating
activities or other income or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a
company's profitability or liquidity.
2) Reflects oil and gas operations.
3) Includes expenditures for drilling, acquisitions, and furniture
and equipment.
Three and Six Months Ended June 30, 1997 Compared to June 30, 1996
Revenues. Total revenues increased 25% to $1,867,000 for the three
months ended June 30, 1997 from $1,492,000 for the three months
ended June 30, 1996 and increased 36% to $3,898,000 for the six
months ended June 30, 1997 from $2,864,000 for the six months ended
June 30, 1996. Oil and gas sales increased 25% to $1,839,000 for
the 1997 quarter from $1,477,000 for the 1996 quarter due to higher
gas production in the 1997 quarter. Oil and gas sales increased
34% to $3,811,000 for the six months ended June 30, 1997 from
$2,834,000 for the six months ended June 30, 1996, due to higher
oil and gas prices realized and higher gas production in the 1997
period. Average oil prices per barrel increased 14% to $19.32 in
the fiscal 1997 quarter, from $16.91 for the fiscal 1996 quarter;
however, average gas prices per Mcf decreased 6% to $1.74 in the
1997 quarter from $1.85 in the 1996 quarter. Average oil prices
per barrel increased 23% to $20.81 for the six months ended
June 30, 1997, from $16.98 for the comparable 1996 period, and
average gas prices per Mcf increased 18% to $2.17 in the 1997
period from $1.84 for the six months ended June 30, 1996. Oil
production decreased 4% to 44,000 barrels in the 1997 quarter from
46,000 barrels in the 1996 quarter; however, gas production
increased 50% to 567,000 Mcf in the 1997 quarter from 378,000 in
the 1996 quarter. Oil production decreased 11%, to 81,000 barrels
for the six months ended June 30, 1997 from 91,000 barrels for the
six months ended June 30, 1996; however, gas production increased
40% to 978,000 Mcf for the six months ended June 30, 1997 from
700,000 Mcf for the same period a year ago. The oil production
decreases are due to normal declines. Oil production was also
constrained by a delay in planned oil drilling during the first
five months of fiscal 1997 while additional land acquisitions were
made. The gas production increases are due to the Company's
successful drilling program in 1997. Excluding Laguna, total
revenues for the three months ended June 30, 1997 increased 24% to
$1,841,000 from $1,489,000 for the 1996 quarter, primarily due to
higher gas production. Excluding Laguna, total revenues for the
six months ended June 30, 1997 increased 35% to $3,838,000 from
$2,847,000 for the same period a year ago, primarily due to higher
oil and gas prices and higher gas production in the 1997 period.
There were no sales of gold and silver in 1997 or 1996, and no
sales are expected in the immediate future.
Oil and Gas Production Expenses. Oil and gas production expenses,
including production tax and marketing expenses, increased 14% to
$623,000 for the three months ended June 30, 1997 from $548,000 for
the 1996 quarter, and increased 36% to $1,320,000 for the six
months ended June 30, 1997 from $973,000 for the comparable 1996
period, due to new wells coming on line as a result of the 1997
drilling program. Per BOE, oil and gas production expense,
including production tax and marketing expense, decreased $0.55, or
11%, to $4.48 for the 1997 quarter from $5.03 for the 1996
quarter. However, oil and gas production expenses per BOE
increased $0.73, or 16%, to $5.41 for the six months ended June 30,
1997 from $4.68 for the six months ended June 30, 1996. Production
tax and marketing expense increased $0.33 per BOE, or 21%, during
the six months ended June 30, 1997 as a result of higher oil and
gas prices. LOE increased $0.40 per BOE, or 13%, during the six
months ended June 30, 1997 primarily as a result of non-recurring
repair and maintenance costs totaling approximately $275,000, or
$1.13 per BOE, during the six months ended June 30, 1997, compared
to non-recurring repair and maintenance costs of $177,000, or $0.85
per BOE, for the comparable period in 1996.
Mining Project Expenses. Mining project expenses for the three
months ended June 30, 1997 increased 33% to $353,000 from $265,000
for the three months ended June 30, 1996, and increased 89% to
$680,000 for the six months ended June 30, 1997 from $359,000 for
the comparable 1996 period. In June 1997, pending an improvement
in the financial markets, Laguna started a program to conserve
capital by curtailing its mining operations in Costa Rica. As a
result, a reduction in the work force has been required. Under
Costa Rican Labor Law, Laguna is obligated to make certain payments
to Costa Rican employees who are dismissed. The Company has
estimated this amount at $134,000, and has included it in mining
project expenses for the three and six months ended June 30, 1997.
Additionally, mining project expenses were higher during the six
months ended June 30, 1997 compared to the same period in 1996 due
to Laguna's drilling program in new exploration areas and business
development expenses related to reviewing other mineral
concessions.
Depreciation, Depletion and Amortization. Depreciation, depletion
and amortization for the three months ended June 30, 1997 decreased
8% to $544,000 from $592,000 in the 1996 quarter, and decreased 4%
to $1,124,000 for the six months ended June 30, 1997 from
$1,170,000 for the six months ended June 30, 1996. Depletion per
BOE decreased 28% to $3.60 for the fiscal 1997 quarter from $5.02
for the fiscal 1996 quarter and decreased 19% to $4.22 for the six
months ended June 30, 1997 from $5.22 for the six months ended
June 30, 1996, primarily due to an increase in proved reserves.
Impairment of Oil and Gas Properties. Impairment of oil and gas
properties was $(24,000) and $55,000 during the fiscal 1997 periods
compared to $-0- for the fiscal 1996 periods. In 1996, the Company
acquired a 2.25% working interest in an exploration venture to
drill one or more wells offshore Belize. The joint venture drilled
a dry hole during the 1997 quarter. Accordingly, the Company
reduced the carrying amount of its capitalized costs. The credit
in the second quarter is due to a refund of a cash advance paid in
the first quarter which was in excess of the actual amounts spent
in the second quarter. During the three and six months ended
June 30, 1996, the Company's oil and gas activities were conducted
entirely in the United States.
General and Administrative Expenses. Total general and
administrative expenses for the three months ended June 30, 1997
increased 61% to $657,000 from $409,000 in the 1996 quarter, and
increased 48% to $1,295,000 for the six months ended June 30, 1997
from $876,000 for the same period in 1996, due to the hiring of
additional personnel because of expanded operations and less
sharing of expenses with Laguna now that Laguna is operating
independently. Laguna's general and administrative expenses are
included in mining project expenses on the consolidated statements
of operations.
Interest and Other Expenses. Interest and other expenses for the
three months ended June 30, 1997 decreased 54% to $117,000 from
$252,000 for the three months ended June 30, 1996 and decreased 55%
to $208,000 for the six months ended June 30, 1997 from $465,000
for the six months ended June 30, 1996. The decrease was primarily
due to lower outstanding borrowings under the Company's credit
facility in the 1997 periods.
Minority Interest. Minority interest in loss of consolidated
subsidiary represents the minority interest share in the Laguna
loss and increased to $164,000 and $315,000 in the three and six
months ended June 30, 1997 from $54,000 for the same periods in
1996 primarily due to an increase in the minority interest in
Laguna to approximately 44% in the 1997 periods from approximately
12% in the 1996 periods.
Income Taxes. The Company incurred net operating losses ("NOLs")
for U.S. Federal income tax purposes in 1997 and 1996, which can be
carried forward to offset future taxable income. Statement of
Financial Accounting Standards No. 109 requires that a valuation
allowance be provided if it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The
Company's ability to realize the benefit of its deferred tax asset
will depend on the generation of future taxable income through
profitable operations and the expansion of the Company's oil and
gas producing activities. The market and capital risks associated
with achieving the above requirement are considerable, resulting in
the Company's decision to provide a valuation allowance equal to
the net deferred tax asset. Accordingly, the Company did not
recognize any tax benefit in the consolidated statements of
operations for the three and six months ended June 30, 1997 and
1996.
Extraordinary Loss. The Company incurred an extraordinary loss of
$160,000 during the six months ended June 30, 1996, as a result of
the refinancing of its credit facility with a new lender.
Net Loss. Net loss for the three months ended June 30, 1997
decreased 54% to $239,000 from $520,000 for the three months ended
June 30, 1996, and decreased 57% to $469,000 for the six months
ended June 30, 1997 from $1,085,000 for the same period a year ago,
as a result of the factors discussed above. The Company paid the
8% dividend of $27,000 on its Series B Mandatorily Redeemable
Convertible Preferred Stock ("Series B Preferred Stock") in the
three months ended June 30, 1997, and realized accretion of $3,000,
compared to dividends of $80,000 and accretion of $16,000 in the
three months ended June 30, 1996. The Company paid dividends of
$107,000 and realized accretion of $18,000 during the six months
ended June 30, 1997 compared to dividends of $160,000 and accretion
of $26,000 during the six months ended June 30, 1996. Beginning in
April 1997, preferred dividend payments were reduced as a result of
the conversion into common stock and redemption of Series B
Preferred Stock, as discussed in Note 4 of the Consolidated
Financial Statements. The excess of the fair value of the common
stock issued at the $9.00 conversion price over the fair value of
the common stock that would have been issued at the $11.31
conversion price, totaling $403,000, has been reflected on the
statements of operations for the three and six months ended
June 30, 1997 as an increase to the net loss attributable to common
shareholders. As a result, net loss attributable to common
shareholders for the three months ended June 30, 1997 increased 9%
to $672,000 from $616,000 for the three months ended June 30, 1996,
and decreased 22% to $997,000 for the six months ended June 30,
1997 from $1,271,000 for the six months ended June 30, 1996.
Excluding Laguna, net loss attributable to common shareholders for
the three months ended June 30, 1997 increased 30% to $483,000 from
$372,000 in 1996 quarter, and decreased 31% to $641,000 for the six
months ended June 30, 1997 from $931,000 during the comparable 1996
period, due primarily to the factors discussed above.
Miscellaneous
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," which establishes new standards for computing
and presenting earnings per share. The new Statement is intended
to simplify the standard for computing earnings per share and will
require the presentation of basic and diluted earnings per share on
the face of the income statement, including all prior periods
presented. The Statement is effective for financial statements
issued for periods ending after December 15, 1997, and earlier
adoption is not permitted. Had the calculation of earnings per
share been prepared in accordance with the provisions of SFAS No.
128 for the three and six months ended June 30, 1997 and 1996,
earnings per share would have been the same as what was reported on
the consolidated statements of operations.
The Company's oil and gas operations are significantly affected by
certain provisions of the Internal Revenue Code of 1986, as
amended, 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 (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.
The Company uses hedging instruments to manage commodity price
risks. The Company has used energy swaps and other financial
arrangements to hedge against the effects of fluctuations in the
sales prices for oil and natural gas. Gains and losses on such
transactions are matched to produce sales and charged or credited
to oil and gas sales when that product is sold. Management
believes that the use of various hedging arrangements can be a
prudent means of protecting the Company's financial interests from
the volatility of oil and gas prices.
Inflation has not historically had a material impact on the
Company's financial statements, and management does not believe
that the Company will be materially more or less sensitive to the
effects of inflation than other companies in the oil and gas
business.
When evaluating the Company, its operations, or its expectations,
the reader should bear in mind that the Company and its operations
are subject to numerous risks and uncertainties. Among these are
risks related to the oil and gas and the mining businesses
(including operating risks and hazards and the 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 other factors, many of which are necessarily beyond
the Company's control.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
On April 22, 1997, a Form 8-K was filed related to the Company's
adoption of a Shareholders' Rights Plan.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on June 6, 1997. The six
individuals listed below were elected as directors. In addition,
the shareholders ratified the adoption of the Company's 1997 Equity
Participation Plan. The votes cast were as follows:
With respect to the election of directors:
<TABLE>
<CAPTION>
BROKER
NAME FOR AGAINST ABSTAIN NON-VOTES
<C> <S> <S> <S> <S>
George O. Mallon, Jr. 3,301,443 2,452 67,705
Kevin M. Fitzgerald 3,301,691 2,204 67,705
Roy K. Ross 3,299,491 4,404 67,705
Roger R. Mitchell 3,301,501 2,394 67,705
Frank Douglass 3,301,691 2,204 67,705
Francis J. Reinhardt, Jr. 3,301,691 2,204 67,705
With respect to the
ratification of the adoption
of the Company's 1997
Equity Participation Plan: 1,084,375 518,951 9,857 1,738,474
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During second quarter 1997, the Company filed Periodic Reports of
Form 8-K dated May 6, 1997, May 15, 1997 and June 25, 1997. Each
Report related to an "Item 5. Other Events" matter. On April 22,
1997, two separate Forms 8-K were filed, each due to an "Item 5.
Other Events" matter with related "Item 7. Exhibits" attached
thereto.
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.
MALLON RESOURCES CORPORATION
Registrant
Date: August 14, 1997 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: August 14, 1997 By: /s/ Alfonso R. Lopez
Alfonso R. Lopez
Vice President, Finance
Corporate 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 211
<SECURITIES> 1,256
<RECEIVABLES> 2,812
<ALLOWANCES> 8
<INVENTORY> 281
<CURRENT-ASSETS> 4,641
<PP&E> 64,803
<DEPRECIATION> 25,567
<TOTAL-ASSETS> 44,219
<CURRENT-LIABILITIES> 4,000
<BONDS> 0
<COMMON> 47
1,311
0
<OTHER-SE> 23,751
<TOTAL-LIABILITY-AND-EQUITY> 44,219
<SALES> 3,811
<TOTAL-REVENUES> 3,898
<CGS> 0
<TOTAL-COSTS> 4,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208
<INCOME-PRETAX> (469)
<INCOME-TAX> 0
<INCOME-CONTINUING> (469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (997)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
