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 March 31, 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 (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 May 12, 1997, 4,693,864 shares of the 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)
ASSETS
______
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,607 $ 2,771
Short-term investments 2,153 2,786
Accounts receivable:
Oil and gas sales 1,162 1,879
Joint interest participants, net of allowance
of $8 and $8, respectively 1,119 827
Related parties 51 20
Other 66 45
Inventories 454 251
Other 87 104
Total current assets 6,699 8,683
Property and equipment:
Oil and gas properties, full cost method 50,481 46,175
Mining properties and equipment 10,547 10,114
Other equipment 692 559
61,720 56,848
Less accumulated depreciation, depletion and amortization (25,058) (24,406)
36,662 32,442
Notes receivable-related parties 17 17
Other, net 246 258
Total Assets $ 43,624 $ 41,400
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
____________________________________
Current liabilities:
Trade accounts payable $ 3,336 $ 1,614
Undistributed revenue 1,824 1,502
Drilling advances 66 100
Accrued taxes and expenses 55 77
Current portion of capital lease obligation 25 25
Current portion of installment obligation, less unamortized
discount of $17 and $-0-, respectively 383 --
Total current liabilities 5,689 3,318
Long-term bank debt 3,269 3,269
Installment obligation, less unamortized discount of $39 and
$-0-, respectively 361 --
Notes payable 230 230
Capital lease obligation, net of current portion 6 12
Drilling advances 368 368
Accrued expenses 42 41
Total non-current liabilities 4,276 3,920
Total liabilities 9,965 7,238
Commitments and contingencies -- --
Minority interest 8,195 8,358
Series B Mandatorily Redeemable Convertible Preferred Stock,
$0.01 par value, 500,000 shares authorized, 400,000 shares
issued and outstanding, respectively, liquidation
preference and mandatory redemption of $4,000,000 3,915 3,900
Shareholders' equity:
Common Stock, $0.01 par value, 25,000,000 shares
authorized; 4,388,117 and 4,384,562 shares issued
and outstanding, respectively 44 44
Additional paid-in capital 56,597 56,707
Accumulated deficit (35,092) (34,847)
Total shareholders' equity 21,549 21,904
Total Liabilities and Shareholders' Equity $ 43,624 $ 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)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1997 __1996
(Unaudited)
<S> <C> <C>
Revenues:
Oil and gas sales $ 1,972 $ 1,357
Interest and other 59 12
2,031 1,369
Costs and expenses:
Oil and gas production 697 422
Mining project expenses 327 95
Depreciation, depletion and amortization 580 578
Impairment of oil and gas properties 79 --
General and administrative 638 467
Interest and other 91 212
2,412 1,774
Minority interest in loss of consolidated subsidiary 151 --
Loss before extraordinary item (230) (405)
Extraordinary loss on early retirement of debt -- (160)
Net loss (230) (565)
Dividends on preferred stock and accretion (95) (90)
Net loss attributable to common shareholders $ (325) $ (655)
======= =======
Per share:
Loss attributable to shareholders before extraordinary item $ (0.07) $ (0.26)
Extraordinary loss -- (0.08)
Net loss attributable to common shareholders $ (0.07) $ (0.34)
======= =======
Weighted average common shares outstanding 4,386 1,955
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1997 __1996
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (230) $ (565)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization 580 578
Impairment of oil and gas properties 79 --
Amortization of discount on notes payable 11 --
Minority interest in loss of consolidated subsidiary (151) --
Stock compensation expense 13 64
Non-cash portion of extraordinary loss -- 160
Other -- (13)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 373 115
Inventory and other assets (181) 11
Increase (decrease) in:
Trade accounts payable and undistributed revenue 2,045 (435)
Accrued taxes and expenses (22) 156
Drilling advances (34) (58)
Net cash provided by operating activities 2,483 13
Cash flows from investing activities:
Decrease in short-term investments 633 --
Additions to property and equipment (4,139) (661)
Purchase of subsidiary stock (55) --
Net cash used in investing activities (3,561) (661)
Cash flows from financing activities:
Proceeds from long-term debt -- 231
Payments of long-term debt (6) (10)
Debt issue costs paid -- (50)
Payment of preferred dividends (80) (80)
Net cash provided by (used in) financing activities (86) 91
Net decrease in cash and cash equivalents (1,164) (557)
Cash and cash equivalents, beginning of period 2,771 1,269
Cash and cash equivalents, end of period $ 1,607 $ 712
======= =======
Supplemental cash flow information:
Cash paid for interest $ 113 $ 150
Non-cash transactions:
Issuance of common stock in exchange for consultants'
accounts payable $ -- $ 345
Installment obligation (less unamortized discount) in
exchange for property and equipment $ 733 $ --
</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 March 31, 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.
Reclassifications from operating service revenue to oil and
gas production and general and administrative expense were made to
the March 31, 1996 statement of operations to conform to the
March 31, 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 March 31, 1997, the
amount outstanding under the facility was $3,269,000, leaving the
amount available under the facility at $6,731,000.
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 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.
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 quarters ended March 31, 1997 and 1996,
earnings per share would have been the same as what was reported
on the consolidated statement of operations.
Note 6. SUBSEQUENT EVENTS
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.
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 March 31, 1997
and December 31, 1996, and results of operations and cash flows
for the three months ended March 31, 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
$1,010,000 and $5,365,000 at March 31, 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 May 9, 1997, the
borrowing base under the facility was $10,000,000, and the
principal amount outstanding was $4,669,000, leaving the amount
remaining available under the Facility at $5,331,000. 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 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 $3,073,000 during first quarter 1997. The
Company completed 5 of the 6 development wells it drilled. The
one well not completed was abandoned due to mechanical problems
encountered while running casing. The Company expects to re-drill
this well. The Company recompleted 5 wells during first quarter
1997, all of which are on production in the second quarter. In
addition, the Company spudded three development wells in first
quarter 1997 that are presently being completed. Currently, the
Company is drilling two additional wells and is conducting work on
three 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 25 wells and
recomplete 19 wells during the remainder of 1997, and has a
capital expenditure budget of approximately $11 million for the
year.
Production for first quarter 1997 averaged 1,172 BOE per day, up
from the year 1996 average of 1,060 BOE per day. Currently, daily
production is in excess of 1,500 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>
Three Months Ended March 31,
1997 1996
(In thousands, except per unit data)
<S> <C> <C>
Results of Operations, Consolidated:
Revenues $ 2,031 $ 1,369
Costs and expenses 2,412 1,774
Net loss (230) (565)
Net loss attributable to common shareholders (325) (655)
Net loss per share attributable to common shares (0.07) (0.34)
EBITDA (1) 520 385
Capital expenditures (3) 4,872 661
Results of Operations from Oil and Gas Producing Activities:
Oil and gas sales 1,972 1,357
Production tax and marketing expense 263 156
Lease operating expense 434 266
Depletion 530 538
Impairment of oil and gas properties 79 --
Net Production:
Oil (MBbl) 37 45
Natural gas (MMcf) 411 322
BOE 106 99
Average Sales Price Realized:
Oil (per Bbl) $ 22.59 $ 17.04
Natural gas (per Mcf) 2.76 1.83
Per BOE 18.60 13.71
Average production tax and marketing expense (per BOE): 2.48 1.58
Average lease operating expense (per BOE): 4.09 2.69
Average depletion (per BOE): 5.00 5.43
Results of Operations, Excluding Laguna (2):
Revenues $ 1,997 $ 1,358
Costs and expenses 2,060 1,667
Net loss (63) (469)
Net loss attributable to common shareholders (158) (559)
Net loss per share attributable to common shares (0.04) (0.29)
EBITDA (1) 662 469
Capital expenditures (3) 4,377 224
</TABLE>_________________
1)
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 Months Ended March 31, 1997 Compared to March 31, 1996
Revenues. Total revenues for the three months ended March 31,
1997 increased 48% to $2,031,000 from $1,369,000 in 1996. Oil and
gas sales in the 1997 quarter increased 45% to $1,972,000 from
$1,357,000 in the 1996 quarter primarily due to higher oil and gas
prices. Average oil prices per barrel for the three months ended
March 31, 1997 increased 33% to $22.59, from $17.04 for the three
months ended March 31, 1996. Average gas prices per Mcf for the
three months ended March 31, 1997 increased 51% to $2.76 from
$1.83 for the fiscal 1996 quarter. In addition, oil production
for the three months ended March 31, 1997 decreased 18% to 37,000
barrels from 45,000 barrels in the same period a year ago and gas
production for the 1997 quarter increased 28% to 411,000 Mcf from
322,000 Mcf in the 1996 quarter. The oil production decreases are
due to normal declines and the shutting-in of deeper zones to
allow recompletions in shallower zones. Oil production was also
constrained by a delay in planned oil drilling 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 March 31, 1997
increased 47% to $1,997,000 from $1,358,000 in the 1996 quarter,
primarily due to higher oil and gas prices. 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 65% to
$697,000 from $422,000 in 1996. The increase was primarily due to
non-recurring repair and maintenance costs totaling approximately
$137,000, or $1.29 per BOE, during the 1997 quarter, compared to
non-recurring repair and maintenance costs totaling approximately
$44,000, or $.44 per BOE, during the fiscal 1996 quarter.
Production tax and marketing expense per BOE increased 57% to
$2.48 from $1.58 due to higher oil and gas prices in the fiscal
1997 quarter.
Mining Project Expenses. Mining project expenses for the three
months ended March 31, 1997 increased 244% to $327,000 from
$95,000 for the three months ended March 31, 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 increased slightly to $580,000 from $578,000.
Depletion per BOE decreased 8% to $5.00 from $5.43, primarily due
to an increase in oil and gas reserves.
Impairment of Oil and Gas Properties. Impairment of oil and gas
properties was $79,000 during the fiscal 1997 quarter compared to
$-0- for the fiscal 1996 quarter. 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. During the fiscal 1996
quarter, 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 March 31, 1997
increased 37% to $638,000 from $467,000 in the 1996 quarter 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 March 31, 1997 decreased 57% to $91,000 from
$212,000 for the three months ended March 31, 1996. The decrease
was primarily due to higher outstanding borrowings under the
Company's credit facility in the 1996 quarter.
Minority Interest. Minority interest in loss of consolidated
subsidiary of $151,000 represents the minority interest share in
the Laguna loss.
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 months ended March 31, 1997 and 1996.
Extraordinary Loss. The Company incurred an extraordinary loss of
$160,000 during the three months ended March 31, 1996, as a result
of the refinancing of its credit facility with a new lender.
Net Loss. Net loss for the three months ended March 31, 1997
decreased 59% to $230,000 from $565,000 for the three months ended
March 31, 1996 as a result of the factors discussed above. The
Company paid the 8% dividend of $80,000 on its $4,000,000 face
amount Series B Mandatorily Redeemable Convertible Preferred Stock
("Series B Preferred Stock") in each of the quarters ended
March 31, 1997 and 1996, and realized accretion of $15,000 and
$10,000, respectively. Preferred dividend payments in the future
will be reduced as a result of the conversion into common stock
and redemption in April 1997 of Series B Preferred Stock, as
discussed in Note 4 of the Consolidated Financial Statements. Net
loss attributable to common shareholders for the quarter ended
March 31, 1997 decreased 50% to $325,000 from $655,000 for the
quarter ended March 31, 1996. Excluding Laguna, net loss
attributable to common shareholders for the quarter ended
March 31, 1997 decreased 72% to $158,000 from $559,000 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 quarters ended March 31, 1997 and 1996,
earnings per share would have been the same as what was reported
on the consolidated statement 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 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During first quarter 1997, the Company filed four Periodic Reports
on Form 8-K dated: January 15, 1997, February 27, 1997, March 18,
1997, and May 6, 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: May 15, 1997 By: _/s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: May 15, 1997 By: _/s/ Alfonso R. Lopez
Alfonso R. Lopez
Vice President, Finance/Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
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<SECURITIES> 2,153
<RECEIVABLES> 2,406
<ALLOWANCES> 8
<INVENTORY> 454
<CURRENT-ASSETS> 6,699
<PP&E> 61,720
<DEPRECIATION> 25,058
<TOTAL-ASSETS> 43,624
<CURRENT-LIABILITIES> 5,689
<BONDS> 0
<COMMON> 44
3,915
0
<OTHER-SE> 21,505
<TOTAL-LIABILITY-AND-EQUITY> 43,624
<SALES> 1,972
<TOTAL-REVENUES> 2,031
<CGS> 0
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<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> (230)
<INCOME-TAX> 0
<INCOME-CONTINUING> (230)
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<EXTRAORDINARY> 0
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<NET-INCOME> (325)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
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