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, 1998.
- - 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 April 30, 1998, 6,996,200 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,
1998 1997
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,235 $ 6,741
Accounts receivable:
Oil and gas sales 1,151 1,464
Joint interest participants, net of allowance of
$8 and $8, respectively 2,358 2,406
Related parties 77 72
Other -- 7
Inventories 401 327
Other 182 46
Total current assets 5,404 11,063
Property and equipment:
Oil and gas properties, full cost method 70,787 63,148
Natural gas processing plant 3,019 2,760
Other equipment 701 665
74,507 66,573
Less accumulated depreciation, depletion and amortization (27,538) (26,393)
46,969 40,180
Notes receivable-related parties 18 18
Other, net 158 165
Total Assets $ 52,549 $ 51,426
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,414 $ 6,797
Undistributed revenue 1,292 813
Current portion of installment obligation, less unamortized
discount of $17 and $22, respectively 383 378
Drilling advances 41 135
Accrued taxes and expenses 12 4
Current portion of lease obligation 1,697 1,746
Total current liabilities 10,839 9,873
Long-term bank debt 1 1
Accrued expenses 39 39
Total non-current liabilities 40 40
Total liabilities 10,879 9,913
Commitments and contingencies
Series B Mandatorily Redeemable Convertible Preferred Stock,
$0.01 par value, 500,000 shares authorized, 135,200 shares
issued and outstanding, respectively, liquidation preference
and mandatory redemption of $1,352,000 1,320 1,317
Shareholders' equity:
Common Stock, $0.01 par value, 25,000,000 shares
authorized; 6,996,200 and 6,995,264 shares issued
and outstanding, respectively 70 70
Additional paid-in capital 74,050 73,937
Accumulated deficit (33,770) (33,811)
Total shareholders' equity 40,350 40,196
Total Liabilities and Shareholders' Equity $ 52,549 $ 51,426
</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,
1998 1997
(Unaudited)
<S> <C> <C>
Revenues:
Oil and gas sales $3,069 $1,972
Interest and other 56 25
3,125 1,997
Costs and expenses:
Oil and gas production 1,163 697
Depreciation, depletion and amortization 1,153 555
Impairment of oil and gas properties -- 79
General and administrative 656 638
Interest and other 109 91
3,081 2,060
Equity in loss of affiliate -- (167)
Net income (loss) 44 (230)
Dividends on preferred stock and accretion (30) (95)
Net income (loss) attributable to common shareholders $ 14 $ (325)
Basic:
Net income (loss) per share attributable to common shareholders $ -- $(0.07)
Weighted average common shares outstanding 6,996 4,386
Diluted:
Net income (loss) per share attributable to common shareholders $ -- $(0.07)
Weighted average common shares outstanding 7,088 4,386
</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,
1998 1997
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 44 $ (230)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation, depletion and amortization 1,153 555
Impairment of oil and gas properties -- 79
Amortization of discount on installment obligation 6 11
Equity in loss of affiliate -- 167
Stock compensation expense 115 11
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 363 315
Inventory and other assets (211) (204)
Increase (decrease) in:
Trade accounts payable and undistributed revenue 1,096 1,929
Accrued taxes and expenses 6 (31)
Drilling advances (94) (34)
Net cash provided by operating activities 2,478 2,568
Cash flows from investing activities:
Additions to property and equipment (7,907) (3,644)
Purchase of subsidiary stock -- (55)
Other -- (47)
Net cash used in investing activities (7,907) (3,746)
Cash flows from financing activities:
Lease obligation payments (50) (6)
Payment of preferred dividends (27) (80)
Net cash used in financing activities (77) (86)
Net decrease in cash and cash equivalents (5,506) (1,264)
Cash and cash equivalents, beginning of period 6,741 2,771
Cash and cash equivalents, end of period $ 1,235 $ 1,507
Supplemental cash flow information:
Cash paid for interest $ 110 $ 113
Non-cash transactions:
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
Mallon Resources Corporation ("the Company") engages in oil
and gas exploration and production through its wholly-owned
subsidiary, Mallon Oil Company ("Mallon Oil"), whose oil and gas
operations are conducted primarily in the State of New Mexico.
The Company also has an interest in Laguna Gold Company
("Laguna"). All significant intercompany balances and
transactions have been eliminated from the consolidated financial
statements.
At March 31, 1998, the Company owned approximately 49% of
Laguna. As discussed in the Company's annual report on Form 10-K
for the year ended December 31, 1997 (the "1997 Form 10-K"), the
Company's share of Laguna's net losses exceeded the carrying value
of its investment in and advances to Laguna because of Laguna's
decision to write-down its mining assets. Accordingly, the
Company no longer reflects its share of Laguna's net losses and
may only reflect its share of Laguna's future earnings to the
extent that they exceed the Company's share of Laguna's current
and future net losses not recognized.
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 1997 Form 10-K.
Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the presentation
used in 1998.
Note 2. LONG-TERM BANK DEBT
Effective March 1998, the borrowing base under the Company's
revolving credit facility was increased to $21,250,000, and the
amount of the monthly reduction to the borrowing base was reduced
to zero, until redetermined in connection with the next borrowing
base review. Previously, the amount of the reduction was $170,000
per month. At March 31, 1998, the amount outstanding under the
facility was $1,000, leaving the amount available under the
facility at $21,249,000.
Note 3. EARNINGS (LOSS) PER SHARE
In fourth quarter 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." Under the provisions of SFAS No. 128, basic earnings per
share is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if the Company's
outstanding stock options and warrants were exercised (calculated
using the treasury stock method) or if the Company's Series B
Convertible Preferred Stock were converted to common stock. SFAS
No. 128 requires a restatement of all periods presented.
The following table reconciles the net income (loss) and
common shares outstanding used in the calculations of basic and
diluted net income (loss) per share for the three months ended
March 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
Net Common Net Common
(In thousands) Income Shares EPS Loss Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 44 $(230)
Dividends on preferred
stock and accretion (30) (95)
Basic income (loss)
per share 14 6,996 $-- (325) 4,386 $(.07)
Warrants -- 16 -- --
Stock options -- 76 -- --
Diluted income (loss)
per share $14 7,088 $-- $(325) 4,386 $(.07)
</TABLE>
Options to purchase 479,000 shares of common stock and Series
B Convertible Preferred Stock convertible into 131,000 shares of
common stock were excluded from the calculation for the first
quarter of 1998 because they were antidilutive. All options,
warrants, and Series B Convertible Preferred Stock were excluded
from the calculation for the first quarter of 1997 because they
were antidilutive as a result of the Company's net loss in that
period.
Note 4. COMPREHENSIVE INCOME:
The Company adopted SFAS No. 130, "Comprehensive Income,"
beginning with the first quarter of 1998. There are no components
of comprehensive income which have been excluded from net income
and, therefore no separate statement of comprehensive income has
been presented.
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, 1998
and December 31, 1997, and results of operations and cash flows
for the three months ended March 31, 1998 and 1997. The Company's
Consolidated Financial Statements and notes thereto should be
referred to in conjunction with the following discussion.
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, 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
adverse 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 a revolving credit facility (the "Facility") with
Bank One, Texas, N.A. (the "Bank"). 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. Effective March 1998, the borrowing base under the
Facility was increased to $21,250,000 and the term extended to
April 30, 2001. At May 11, 1998, the principal amount outstanding
was $3,250,000, leaving the amount remaining available under the
Facility at $18,000,000. The Company is currently in compliance
with the covenants of the Facility.
Capital expenditures related to the Company's drilling and
development programs totaled $7,667,000 for first quarter 1998 and
$3,073,000 for first quarter 1997. The Company's current budget
for drilling and development capital expenditures in 1998 is
approximately $25,341,000. During first quarter 1998, the Company
completed all of the 15 wells drilled and recompleted 6 wells.
Nine of the wells completed were shut-in awaiting the completion
of gas plant expansion, which is expected to occur toward the end
of the second quarter. During first quarter 1997, the Company
completed 6 of the 7 development wells it drilled and recompleted
4 wells. In addition, the Company participated in the drilling of
an exploratory well in first quarter 1997 which was abandoned as a
dry hole. The Company currently plans to drill or recomplete more
than 60 wells during fiscal 1998.
The Company believes that, with the net proceeds of the December
1997 common stock sale, 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>
Three Months
Ended March 31,
1998 1997
(In thousands,
except per unit data)
<S> <C> <C>
Operating Results from Oil and Gas Operations:
Oil and gas sales $ 3,069 $ 1,972
Production tax and marketing expense 479 263
Lease operating expense 684 434
Depletion 1,100 530
Depreciation 30 --
Net Production:
Oil (MBbl) 68 37
Natural gas (MMcf) 1,086 411
MBOE 249 106
MMcfe 1,494 633
Average Sales Price Realized (1):
Oil (per Bbl) $ 14.26 $ 22.59
Natural gas (per Mcf) 1.93 2.76
Per BOE 12.33 18.60
Per Mcfe 2.05 3.12
Average Cost Data (per BOE):
Production tax and marketing expense $ 1.92 $ 2.48
Lease operating expense 2.75 4.09
Depletion 4.42 5.00
Depreciation .12 --
Average Cost Data (per Mcfe):
Production tax and marketing expense $ .32 $ .42
Lease operating expense .46 .69
Depletion .74 .84
Depreciation .02 --
</TABLE>_________________
(1) Includes effects of hedging.
Three Months Ended March 31, 1998 Compared to March 31, 1997
Revenues. Total revenues for first quarter 1998 increased 56% to
$3,125,000 from $1,997,000 for first quarter 1997. Oil and gas
sales for first quarter 1998 increased 56% to $3,069,000 from
$1,972,000 for first quarter 1997 primarily due to higher oil and
gas production. Oil production for first quarter 1998 increased
84% to 68,000 barrels from 37,000 barrels for first quarter 1997
and gas production for first quarter 1998 increased 164% to
1,086,000 Mcf from 411,000 Mcf for first quarter 1997, due to the
Company's successful drilling and recompletion program in 1998 and
the latter part of 1997. Lower oil and gas prices in first
quarter 1998 partially offset the gains in production. Average
oil prices per barrel for first quarter 1998 decreased 37% to
$14.26 from $22.59 for first quarter 1997. Average gas prices per
Mcf for first quarter 1998 decreased 30% to $1.93 from $2.76 for
first quarter 1997.
Oil and Gas Production Expenses. Oil and gas production expenses,
including production tax and marketing expenses, increased 67% to
$1,163,000 from $697,000 in 1997. The increase was primarily due
to new wells drilled in 1998 and the latter part of 1997. Total
oil and gas production expenses per BOE decreased $1.90 per BOE,
or 29%, to $4.67 for the 1998 quarter from $6.57 for the 1997
quarter. Production tax and marketing expense per BOE decreased
23% to $1.92 from $2.48 due to lower oil and gas prices in the
1998 quarter. Lease operating expense per BOE decreased $1.34, or
33%, to $2.75 in the 1998 quarter from $4.09 in the 1997 quarter
due to more efficient operations and a higher proportion of gas
production in 1998, which is generally less costly to produce than
oil.
Depreciation, Depletion and Amortization. First quarter 1998
depreciation, depletion and amortization increased 108% to
$1,153,000 from $555,000 in first quarter 1997 due to higher oil
and gas production. Depletion per BOE decreased 12% to $4.42 from
$5.00, primarily due to an increase in oil and gas reserves.
Impairment of Oil and Gas Properties. Impairment of oil and gas
properties was $-0- for first quarter 1998 compared to $79,000 for
first quarter 1997. 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
first quarter 1997. Accordingly, the Company reduced the carrying
amount of its capitalized costs.
General and Administrative Expenses. Total general and
administrative expenses for first quarter 1998 increased 3% to
$656,000 from $638,000 in first quarter 1997 due to the hiring of
additional personnel because of expanded operations. During first
quarter 1998, the Company capitalized approximately $200,000 more
of general and administrative expenses directly related to its
drilling program than was capitalized during first quarter 1997.
Interest and Other Expenses. Interest and other expenses for
first quarter 1998 increased 20% to $109,000 from $91,000 for
first quarter 1997. The increase was primarily due to interest
paid on the Company's lease obligations in the 1998 quarter.
Equity in Loss of Affiliate. Equity in loss of affiliate of
$167,000 in 1997 represents the equity in the Laguna loss.
Income Taxes. The Company incurred net operating losses ("NOLs")
for U.S. Federal income tax purposes in 1998 and 1997, 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 expense or benefit in the consolidated
statements of operations for the first quarters of 1998 and 1997.
Net Income (Loss). The Company had net income of $44,000 for
first quarter 1998 compared to a net loss of $230,000 for first
quarter 1997 as a result of the factors discussed above. The
Company paid the 8% dividend of $27,000 and $80,000 on its
$1,352,000 and $4,000,000 face amount Series B Mandatorily
Redeemable Convertible Preferred Stock ("Series B Preferred
Stock") in each of the quarters ended March 31, 1998 and 1997,
respectively, and realized accretion of $3,000 and $15,000,
respectively. Preferred dividend payments in the 1998 quarter
were reduced as a result of the conversion into common stock and
redemption in April 1997 of approximately 265,000 shares of Series
B Preferred Stock. Approximately 135,000 shares remain
outstanding. Net income attributable to common shareholders for
the quarter ended March 31, 1998 was $14,000 compared to a net
loss attributable to common shareholders of $325,000 for the
quarter ended March 31, 1997.
Miscellaneous
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 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 by limiting the Company's
exposure to future oil and gas price declines. However, such
hedging arrangements also limit the benefits the Company would
realize if prices increase. The Company recognized a hedging gain
of $79,000 in first quarter 1998 compared to a hedging loss of
$109,000 in first quarter 1997. These amounts are included in oil
and gas sales in the Company's consolidated statements of
operations.
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 preceding information contains forward-looking statements, the
realization of which cannot be assured. Actual results may differ
significantly from those forecast. 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 business generally (including operating risks and hazards
and the regulations imposed thereon), risks and uncertainties
related to the volatility of the prices of oil and gas,
uncertainties related to the estimation of reserves of oil and gas
and the value of such reserves, uncertainties relating to geologic
models and evaluations, the effects of competition and extensive
environmental regulation, and other factors, many of which are
necessarily beyond the Company's control. These and other risk
factors that affect the Company's business are discussed in the
Company's 1997 Form 10-K.
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 1998, the Company filed three Periodic
Reports on Form 8-K dated: January 9, 1998, January 15, 1998 and
March 16, 1998. Each Report related to an "Item 5. Other Events"
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: May 15, 1998 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: May 15, 1998 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-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,235
<SECURITIES> 0
<RECEIVABLES> 3,594
<ALLOWANCES> 8
<INVENTORY> 401
<CURRENT-ASSETS> 5,404
<PP&E> 74,507
<DEPRECIATION> 27,538
<TOTAL-ASSETS> 52,549
<CURRENT-LIABILITIES> 10,839
<BONDS> 0
<COMMON> 70
1,321
0
<OTHER-SE> 40,279
<TOTAL-LIABILITY-AND-EQUITY> 52,549
<SALES> 3,069
<TOTAL-REVENUES> 3,125
<CGS> 0
<TOTAL-COSTS> 2,972
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> 44
<INCOME-TAX> 0
<INCOME-CONTINUING> 44
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
