SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 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 October 31, 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>
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
<C> <S> <S>
Current assets:
Cash and cash equivalents $ 424 $ 2,771
Short-term investments 698 2,786
Accounts receivable:
Oil and gas sales 1,006 1,879
Joint interest participants, net of allowance of $8
and $8, respectively 1,595 827
Related parties 57 20
Other 11 45
Inventories 332 251
Other 80 104
Total current assets 4,203 8,683
Property and equipment:
Oil and gas properties, full cost method 57,766 46,175
Mining properties and equipment 11,348 10,114
Other equipment 708 559
69,822 56,848
Less accumulated depreciation, depletion and amortization (26,308) (24,406)
43,514 32,442
Notes receivable-related parties 18 17
Other, net 347 258
Total Assets $ 48,082 $ 41,400
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,512 $ 1,614
Undistributed revenue 701 1,502
Drilling advances 151 100
Accrued taxes and expenses 158 77
Current portion of capital lease obligation 19 25
Current portion of installment obligation, less unamortized
discount of $6 and $-0-, respectively 394 --
Total current liabilities 5,935 3,318
Long-term bank debt 8,369 3,269
Installment obligation, less unamortized discount of $27 and
$-0-, respectively 372 --
Notes payable 230 230
Capital lease obligation, net of current portion -- 12
Drilling advances 308 368
Accrued expenses 50 41
Total non-current liabilities 9,329 3,920
Total liabilities 15,264 7,238
Commitments and contingencies
Minority interest 7,921 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 1,314 3,900
Shareholders' equity:
Common Stock, $0.01 par value, 25,000,000
shares authorized; 4,695,264 and 4,384,562
shares issued and outstanding, respectively 47 44
Additional paid in capital 59,121 56,707
Accumulated deficit (35,585) (34,847)
Total shareholders' equity 23,583 21,904
Total Liabilities and Shareholders' Equity $ 48,082 $ 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>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<C> <S> <S> <S> <S>
Revenues:
Oil and gas sales $1,995 $1,263 $ 5,806 $ 4,098
Gain on sale of subsidiary stock -- 329 -- 329
Interest and other 35 76 122 105
2,030 1,668 5,928 4,532
Costs and expenses:
Oil and gas production 838 537 2,158 1,511
Mining project expenses 191 289 871 648
Depreciation, depletion and amortization 749 501 1,873 1,671
Impairment of oil and gas properties 4 -- 59 --
General and administrative 435 365 1,730 1,252
Interest and other 173 248 381 702
2,390 1,940 7,072 5,784
Minority interest in loss of consolidated
subsidiary 112 39 427 92
Loss before extraordinary item (248) (233) (717) (1,160)
Extraordinary loss on early retirement of debt -- -- -- (160)
Net loss (248) (233) (717) (1,320)
Dividends on preferred stock and accretion (30) (94) (155) (281)
Preferred stock conversion inducement -- -- (403) --
Net loss attributable to common shareholders $ (278) $ (327) $(1,275) $(1,601)
Per share:
Net loss attributable to common shareholders
before extraordinary item $(0.06) $(0.16) $ (0.28) $ (0.71)
Extraordinary loss -- -- -- (0.08)
Net loss attributable to common shareholders $(0.06) $(0.16) $ (0.28) $ (0.79)
Weighted average shares outstanding 4,695 2,084 4,576 2,032
</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 Nine Months
Ended September 30,
1997 1996
<C> <S> <S>
Cash flows from operating activities:
Net loss $ (717) $ (1,320)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation, depletion and amortization 1,873 1,671
Impairment of oil and gas properties 59 --
Gain on sale of subsidiary stock -- (329)
Amortization of discount on notes payable 33 --
Minority interest in loss of consolidated subsidiary (427) (92)
Stock compensation expense 111 293
Non-cash portion of extraordinary loss -- 160
Write-off of notes receivable - related parties -- 32
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 102 123
Inventory and other assets (171) (21)
Increase (decrease) in:
Trade accounts payable and undistributed revenue 2,097 (236)
Accrued taxes and expenses 89 125
Drilling advances (9) 19
Net cash provided by operating activities 3,040 425
Cash flows from investing activities:
Decrease in short-term investments 2,088 --
Increase in funds held in escrow -- (2,814)
Additions to property and equipment (12,246) (2,752)
Proceeds from sale of subsidiary stock -- 372
Proceeds from sale of property and equipment -- 11
Purchase of subsidiary stock (55) --
Increase (decrease) in notes receivable-related parties (1) --
Net cash used in investing activities (10,214) (5,183)
Cash flows from financing activities:
Proceeds from long-term debt 5,100 10,570
Payment of long-term debt (18) (10,017)
Debt issue costs paid -- (83)
Net proceeds from sale of subsidiary special warrants -- 4,325
Payment of preferred dividends (134) (240)
Redemption of preferred stock (121) --
Net cash provided by financing activities 4,827 4,555
Net decrease in cash and cash equivalents (2,347) (203)
Cash and cash equivalents, beginning of period 2,771 1,269
Cash and cash equivalents, end of period $ 424 $ 1,066
Supplemental cash flow information:
Cash paid for interest $ 341 $ 637
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 $ -- $ 2,300
</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 September 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 general
and administrative expense was made to the statements of operations
for the three and nine months ended September 30, 1996 to conform
to the September 30, 1997 presentation. In addition, certain
reclassifications were made to the September 30, 1996 statement of
cash flows to conform to the September 30, 1997 presentation.
Note 2. LONG-TERM BANK DEBT
Effective September 1997, the borrowing base under the
Company's revolving credit facility was increased to $10,830,000.
Beginning November 30, 1997, the borrowing base will decrease by
$170,000 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 September 30, 1997,
the amount outstanding under the facility was $8,369,000, leaving
the amount available under the facility at $2,461,000.
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 nine months ended
September 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. The Series B
Stock is convertible to common stock automatically if the common
stock trades at a price in excess of 140% of the then applicable
conversion price for each day in a period of 10 consecutive trading
days. The conversion price, as adjusted to reflect the offering of
common stock discussed in Note 8, is currently $11.18 per share.
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 nine months ended September 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 and reducing its work force. 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 nine months ended September 30, 1997. Laguna made payments of
approximately $103,000 during the third quarter of 1997 related to
this liability. No payments were made in October 1997.
The Company has engaged a Canadian investment banking firm to
explore strategic alternatives relating to the Company's interest
in Laguna, which may include a sale of the Company's Laguna stock,
a reorganization or merger of Laguna with a third party, or other
transaction. No assurance can be given that any such transaction
will be arranged, or as to the terms of any arrangement that may be
made. In connection with any potential disposition of the
Company's interest in Laguna, the Company may incur a loss on the
recovery of its investment. Pending the receipt of an offer to
purchase Laguna, or the negotiation of the terms of a merger or
other transaction, no estimate of whether such a loss will be
incurred, or the amount of such loss, if any, can be made.
The value of the Company's interest in Laguna will be affected by
the business results of Laguna and by changes in the markets for
gold and junior gold mining companies. There are many
uncertainties in any mineral exploration and development program,
such as the location of economic ore bodies, the receipt of
necessary government permits and the construction of mining and
processing facilities, as well as widely fluctuating prices of
minerals. Because Laguna's properties are not in the United
States, additional uncertainties include currency risks, risks of
changes in foreign laws and the risk of expropriation. Substantial
expenditures will be required to pursue Laguna's exploration and
development activities, and substantial time may elapse from the
initial phases of development until Laguna's activities are fully
operational. The Company does not have any obligation or intention
to finance Laguna's future operations.
Note 8. COMMON STOCK OFFERING
The Company has filed a registration statement with the
Securities and Exchange Commission for a public offering of
2,300,000 shares of its common stock. The registration statement
has not yet become effective. If completed, the net proceeds from
the offering would be used to fund exploitation and development
activities and to repay indebtedness under the Company's line of
credit.
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 September 30, 1997 and
December 31, 1996, results of operations for the three and nine
months ended September 30, 1997 and 1996 and cash flows for the
nine months ended September 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.
Overview
The Company's revenues, profitability and future rate of growth
will be substantially dependent upon its drilling success in the
San Juan and Delaware Basins of New Mexico, and prevailing prices
for oil and gas, which are in turn dependent upon numerous factors
that are beyond the Company's control, such as economic, political
and regulatory developments and competition from other sources of
energy. The energy markets have historically been volatile, and
there can be no assurance that oil and gas prices will not be
subject to wide fluctuations in the future. A substantial or
extended decline in oil or gas prices could have a material effect
on the Company's financial position, results of operations and
access to capital, as well as the quantities of oil and gas
reserves that the Company may economically produce.
Liquidity and Capital Resources
The Company has filed a registration statement with the Securities
and Exchange Commission for a public offering of 2.3 million shares
of its common stock. The registration statement has not yet become
effective. If completed, the net proceeds from the offering would
be used to pay down the Company's revolving line of credit (the
"Facility") with Bank One, Texas, N.A. (the "Bank") and to finance
the Company's oil and gas exploitation activities in the San Juan
and Delaware Basins of New Mexico. Although no acquisitions are
pending, a portion of the net proceeds may be used to make
strategic acquisitions of oil and gas interests in such basins.
The borrowing base under the Facility 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 November 7, 1997, the
redetermined borrowing base under the facility was $10,830,000, and
the principal amount outstanding was $9,384,000, leaving the amount
remaining available under the Facility at $1,446,000. 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, when it will be required to redeem all
Series B Stock outstanding in excess of 80,000 shares. The Series
B Stock is convertible to common stock automatically if the common
stock trades at a price in excess of 140% of the then applicable
conversion price for each day in a period of 10 consecutive trading
days. The conversion price, as adjusted to reflect the stock
offering discussed above, is currently $11.18 per share.
Capital expenditures related to the Company's drilling and
development programs totaled $10,280,000 during the first nine
months of 1997. The Company expects to spend approximately
$14,000,000 for drilling and development in all of 1997. The
Company's current budget for drilling and development capital
expenditures in 1998 is approximately $24,700,000. During the
first nine months of 1997, the Company completed 18 of the 20
development wells it drilled. The Company recompleted 13 wells
during the first nine months of 1997, all of which are on
production. In addition, the Company completed a gas sweetening
plant in the East Blanco Field, which will allow acceleration of
the Company's Ojo Alamo recompletion program. The Company expects
to drill a total of 31 wells and recomplete 26 wells in 1997. The
Company currently plans to drill 53 wells and recomplete six wells
in 1998.
The Company believes that, with the net proceeds of the common
stock offering, borrowings available under the Facility, and the
operating cash flows that are expected to be generated by the
application of such funds to the Company's drilling program, the
Company will have sufficient capital to fund the continued
development of its current properties and to meet the Company's
liquidity requirements through 1998.
Results of Operations
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(In thousands, except per unit data)
<C> <S> <S> <S> <S>
Results of Operations, Consolidated:
Revenues $ 2,030 $ 1,668 $ 5,928 $ 4,532
Costs and expenses 2,390 1,940 7,072 5,784
Net loss (248) (233) (717) (1,320)
Net loss attributable to common shareholders (278) (327) (1,275) (1,601)
Net loss per share attributable to common
shares (0.06) (0.16) (0.28) (0.79)
EBITDA (1) 677 516 1,595 1,209
Capital expenditures-cash basis (3) 5,022 1,033 12,246 2,752
Results of Operations from Oil and Gas Producing Activities:
Oil and gas sales 1,995 1,263 5,806 4,098
Production tax and marketing expense 281 176 739 499
Lease operating expense 557 361 1,419 1,012
Depletion 668 461 1,698 1,546
Impairment of oil and gas properties 4 -- 59 --
Net Production:
Oil (MBbl) 50 44 131 135
Natural gas (MMcf) 575 234 1,553 934
MBOE 146 83 390 291
Average Sales Price Realized:
Oil (per Bbl) $ 19.08 $ 17.70 $ 20.15 $ 17.21
Natural gas (per Mcf) 1.81 2.07 2.04 1.90
Per BOE 13.66 15.22 14.89 14.08
Average cost data (per BOE):
Production tax and marketing expense 1.92 2.12 1.89 1.71
Lease operating expense 3.82 4.35 3.64 3.48
Depletion 4.58 5.55 4.35 5.31
Results of Operations, Excluding Laguna (2):
Revenues $ 2,012 $ 1,598 $ 5,850 $ 4,445
Costs and expenses 2,142 1,632 6,093 5,065
Net loss (130) (34) (243) (780)
Net loss attributable to common shareholders (160) (128) (801) (1,061)
Net loss per share attributable to common
shares (0.03) (0.06) (0.18) (0.52)
EBITDA (1) 738 691 1,961 1,690
Capital expenditures-cash basis (3) 4,677 546 10,937 1,455
</TABLE>
_________________
1) EBITDA is earnings 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 Nine Months Ended September 30, 1997 Compared to
September 30, 1996
Revenues. Total revenues increased 22% to $2,030,000 for the three
months ended September 30, 1997 from $1,668,000 for the three
months ended September 30, 1996 and increased 31% to $5,928,000 for
the nine months ended September 30, 1997 from $4,532,000 for the
nine months ended September 30, 1996. Oil and gas sales increased
58% to $1,995,000 for the 1997 quarter from $1,263,000 for the 1996
quarter due primarily to higher oil and gas production in the 1997
quarter. Oil and gas sales increased 42% to $5,806,000 for the
nine months ended September 30, 1997 from $4,098,000 for the nine
months ended September 30, 1996, due to higher oil and gas prices
realized and higher gas production in the 1997 period. Average oil
prices realized per barrel increased 8% to $19.08 in the fiscal
1997 quarter, from $17.70 for the fiscal 1996 quarter; however,
average gas prices realized per Mcf decreased 13% to $1.81 in the
1997 quarter from $2.07 in the 1996 quarter. Average oil prices
realized per barrel increased 17% to $20.15 for the nine months
ended September 30, 1997, from $17.21 for the comparable 1996
period, and average gas prices realized per Mcf increased 7% to
$2.04 in the 1997 period from $1.90 for the nine months ended
September 30, 1996. Oil production increased 14% to 50,000 barrels
in the 1997 quarter from 44,000 barrels in the 1996 quarter and gas
production increased 146% to 575,000 Mcf in the 1997 quarter from
234,000 Mcf in the 1996 quarter. Oil production decreased 3% to
131,000 barrels for the nine months ended September 30, 1997 from
135,000 barrels for the nine months ended September 30, 1996;
however, gas production increased 66% to 1,553,000 Mcf for the nine
months ended September 30, 1997 from 934,000 Mcf for the same
period a year ago. Oil production was constrained by a delay in
planned drilling during the first five months of fiscal 1997 while
additional land acquisitions were made. However, the normal
production declines for the nine-month period ended September 30,
1997 were mostly offset by new production. The gas production
increases are due to the Company's successful drilling and
recompletion program in 1997. During the three and nine months
ended September 30, 1996, the Company sold 400,000 of its shares of
Laguna common stock and realized a gain of $329,000. Excluding
Laguna, total revenues for the three months ended September 30,
1997 increased 26% to $2,012,000 from $1,598,000 for the 1996
quarter, primarily due to higher gas production. Excluding Laguna,
total revenues for the nine months ended September 30, 1997
increased 32% to $5,850,000 from $4,445,000 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 56% to
$838,000 for the three months ended September 30, 1997 from
$537,000 for the 1996 quarter, and increased 43% to $2,158,000 for
the nine months ended September 30, 1997 from $1,511,000 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
$0.73, or 11%, to $5.74 for the 1997 quarter from $6.47 for the
1996 quarter. However, oil and gas production expenses per BOE
increased $0.34, or 7%, to $5.53 for the nine months ended
September 30, 1997 from $5.19 for the nine months ended
September 30, 1996. Production tax and marketing expense increased
$0.18 per BOE, or 11%, during the nine months ended September 30,
1997 as a result of higher oil and gas prices. LOE increased $0.16
per BOE, or 5%, during the nine months ended September 30, 1997
primarily as a result of non-recurring repair and maintenance costs
totaling approximately $416,000, or $1.07 per BOE, during the nine
months ended September 30, 1997, compared to non-recurring repair
and maintenance costs of $194,000, or $0.50 per BOE, for the
comparable period in 1996. Of the non-recurring repair and
maintenance costs incurred during the nine months ended
September 30, 1997, approximately $151,000, or $0.39 per BOE,
related to remediation expenses. The remediation was essentially
completed in the third quarter of 1997. No remediation expenses
were incurred in the 1996 period.
Mining Project Expenses. Mining project expenses for the three
months ended September 30, 1997 decreased 34% to $191,000 from
$289,000 for the three months ended September 30, 1996, and
increased 34% to $871,000 for the nine months ended September 30,
1997 from $648,000 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 and reducing its work force. 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
nine months ended September 30, 1997. Additionally, mining project
expenses were higher during the nine months ended September 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 September 30, 1997
increased 50% to $749,000 from $501,000 in the 1996 quarter, and
increased 12% to $1,873,000 for the nine months ended September 30,
1997 from $1,671,000 for the nine months ended September 30, 1996.
Depletion per BOE decreased 17% to $4.58 for the fiscal 1997
quarter from $5.55 for the fiscal 1996 quarter and decreased 18% to
$4.35 for the nine months ended September 30, 1997 from $5.31 for
the nine months ended September 30, 1996, primarily due to an
increase in proved reserves.
Impairment of Oil and Gas Properties. Impairment of oil and gas
properties was $4,000 and $59,000 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 first quarter of 1997. Accordingly, the
Company reduced the carrying amount of its capitalized costs.
During the three and nine months ended September 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 September 30,
1997 increased 19% to $435,000 from $365,000 in the 1996 quarter,
and increased 38% to $1,730,000 for the nine months ended
September 30, 1997 from $1,252,000 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. During the third quarter of 1997, the
Company capitalized $253,000 of general and administrative expenses
directly related to its drilling program. No such costs were
capitalized during the first six months of 1997 or in fiscal 1996.
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 September 30, 1997 decreased 30% to $173,000
from $248,000 for the three months ended September 30, 1996 and
decreased 46% to $381,000 for the nine months ended September 30,
1997 from $702,000 for the nine months ended September 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 $112,000 and $427,000 in the three and nine
months ended September 30, 1997 from $39,000 and $92,000 for the
same periods in 1996 primarily due to increases in the minority
interest in Laguna beginning in June 1996, but not fully reflected
until 1997.
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 nine months ended September 30, 1997
and 1996.
Extraordinary Loss. The Company incurred an extraordinary loss of
$160,000 during the nine months ended September 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 September 30, 1997
increased 6% to $248,000 from $233,000 for the three months ended
September 30, 1996, and decreased 46% to $717,000 for the nine
months ended September 30, 1997 from $1,320,000 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 September 30, 1997, and realized
accretion of $3,000, compared to dividends of $80,000 and accretion
of $14,000 in the three months ended September 30, 1996. The
Company paid dividends of $134,000 and realized accretion of
$21,000 during the nine months ended September 30, 1997 compared to
dividends of $240,000 and accretion of $41,000 during the nine
months ended September 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 nine months ended September 30, 1997 as an
increase to the net loss attributable to common shareholders. Net
loss attributable to common shareholders for the three months ended
September 30, 1997 decreased 15% to $278,000 from $327,000 for the
three months ended September 30, 1996, and decreased 20% to
$1,275,000 for the nine months ended September 30, 1997 from
$1,601,000 for the nine months ended September 30, 1996. Excluding
Laguna, net loss attributable to common shareholders for the three
months ended September 30, 1997 increased 25% to $160,000 from
$128,000 in 1996 quarter, and decreased 25% to $801,000 for the
nine months ended September 30, 1997 from $1,061,000 during the
comparable 1996 period, due primarily to the factors discussed
above.
Hedging Activities
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 product 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.
The Company recognized hedging losses of $118,000 and $217,000
during the three and nine months ended September 30, 1997,
respectively, compared to losses of $176,000 and $401,000 during
the three and nine months ended September 30, 1996, respectively.
These losses are included in oil and gas sales in the Company's
consolidated statements of operations.
At September 30, 1997, the Company had outstanding swap agreements
covering 9,000 barrels of oil per month for the period from October
1997 to December 1997 at fixed prices ranging from $19.99 to
$20.39; 90,000 Mmbtu of gas per month for the period from October
1997 to December 1997 at fixed prices ranging from $1.50 to $1.79;
and 90,000 Mmbtu of gas per month at fixed prices ranging from
$1.77 to $2.44 for the period from October 1997 to August 1998.
The Company will receive the difference between the fixed price per
unit of production and a price based on an agreed upon third party
index if the index price is lower. If the index price is higher,
the Company will pay the difference. The Company's current swaps
are settled monthly.
Laguna
The Company has engaged a Canadian investment banking firm to
explore strategic alternatives relating to the Company's interest
in Laguna, which may include a sale of the Company's Laguna stock,
a reorganization or merger of Laguna with a third party, or other
transaction. No assurance can be given that any such transaction
will be arranged, or as to the terms of any arrangement that may be
made. In connection with any potential disposition of the
Company's interest in Laguna, the Company may incur a loss on the
recovery of its investment. Pending the receipt of an offer to
purchase Laguna, or the negotiation of the terms of a merger or
other transaction, no estimate of whether such a loss will be
incurred, or the amount of such loss, if any, can be made.
The value of the Company's interest in Laguna will be affected by
the business results of Laguna and by changes in the markets for
gold and junior gold mining companies. There are many
uncertainties in any mineral exploration and development program,
such as the location of economic ore bodies, the receipt of
necessary government permits and the construction of mining and
processing facilities, as well as widely fluctuating prices of
minerals. Because Laguna's properties are not in the United
States, additional uncertainties include currency risks, risks of
changes in foreign laws and the risk of expropriation. Substantial
expenditures will be required to pursue Laguna's exploration and
development activities, and substantial time may elapse from the
initial phases of development until Laguna's activities are fully
operational. The Company does not have any obligation or intention
to finance Laguna's future operations.
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 nine months ended September 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, that are 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.
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.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During third quarter 1997, the Company filed Periodic Reports on
Form 8-K dated August 14, 1997, August 28, 1997, September 8, 1997
and October 15, 1997. Each of those Reports related to an "Item 5.
Other Events" matter. On August 11, 1997, the Company filed a
Periodic Report on Form 8-K relating to an Item 4 and Item 7
matter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MALLON RESOURCES CORPORATION
Registrant
Date: November 14, 1997 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: November 14, 1997 By: /s/ Alfonso R. Lopez
Alfonso R. Lopez
Vice President-Finance/
Corporate Treasurer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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