SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the quarterly period ended June 30, 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 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 July 31, 1998, 7,024,665 shares of registrant's common stock,
par value $0.01 per share, were outstanding.
PART I - FINANCIAL INFORMATION
Item 1 -- Financial Statements
MALLON RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
ASSETS
<T> <C> <C>
Current assets:
Cash and cash equivalents $ 276 $ 6,741
Accounts receivable:
Oil and gas sales 981 1,464
Joint interest participants, net of allowance of $8 and
$8, respectively 1,999 2,406
Related parties 134 72
Other -- 7
Inventories 411 327
Other 148 _ 46
Total current assets 3,949 11,063
Property and equipment:
Oil and gas properties, full cost method 78,970 63,148
Natural gas processing plant 3,847 2,760
Other equipment 899 665
83,716 66,573
Less accumulated depreciation, depletion and amortization (28,712) (26,393)
55,004 40,180
Notes receivable-related parties 19 18
Other, net 152 165
Total Assets $ 59,124 $ 51,426
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,530 $ 6,797
Undistributed revenue 851 813
Current portion of installment obligation, less unamortized
discount of $11 and $22, respectively 389 378
Drilling advances 16 135
Accrued taxes and expenses 32 4
Current portion of lease obligation 1,848 1,746
Total current liabilities 10,666 9,873
Long-term bank debt 6,850 1
Accrued expenses 39 39
Total non-current liabilities 6,889 40
Total liabilities 17,555 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 1,323 1,317
Shareholders' equity:
Common Stock, $0.01 par value, 25,000,000
shares authorized; 7,024,665 and 6,995,264
shares issued and outstanding, respectively 70 70
Additional paid in capital 74,106 73,937
Accumulated deficit (33,930) (33,811)
Total shareholders' equity 40,246 40,196
Total Liabilities and Shareholders' Equity $ 59,124 $ 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)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
<T> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 2,913 $ 1,839 $ 5,982 $ 3,811
Interest and other _ 14 3 70 28
2,927 1,842 6,052 3,839
Costs and expenses:
Oil and gas production 1,196 623 2,359 1,320
Depreciation, depletion and amortization 1,181 521 2,334 1,076
Impairment of oil and gas properties -- (24) -- 55
General and administrative 533 657 1,189 1,295
Interest and other 174 115 283 206
3,084 1,892 6,165 3,952
Equity in loss of affiliate -- (189) -- (356)
Net loss (157) (239) (113) (469)
Dividends on preferred stock and accretion (30) (30) (60) (125)
Preferred stock conversion inducement -- (403) -- (403)
Net loss attributable to common shareholders $ (187) $ (672) $ (173) $ (997)
======= ======= ======= =======
Basic:
Net loss attributable to common shareholders $ (.03) $ (0.14) $ (0.02) $ (0.22)
======= ======= ======= =======
Weighted average shares outstanding 7,010 4,642 7,004 4,515
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1998 1997
<T> <C> <C>
Cash flows from operating activities:
Net loss $ (113) $ (469)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization 2,334 1,076
Impairment of oil and gas properties -- 55
Amortization of discount on installment obligation 11 22
Equity in loss of affiliate -- 356
Stock compensation expense 142 44
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 881 (95)
Inventory and other assets (189) (110)
Increase (decrease) in:
Trade accounts payable and undistributed revenue 771 41
Accrued taxes and expenses 28 57
Drilling advances (119) 66
Net cash provided by operating activities 3,746 1,043
Cash flows from investing activities:
Additions to property and equipment (16,908) (6,203)
Purchase of subsidiary stock -- (55)
Other -- (47)
Increase in notes receivable-related parties (1) (1)
Net cash used in investing activities (16,909) (6,306)
Cash flows from financing activities:
Proceeds from long-term debt 6,849 2,800
Lease obligation payments (97) (12)
Payment of preferred dividends (54) (107)
Redemption of preferred stock -- (121)
Net cash provided by financing activities 6,698 2,560
Net decrease in cash and cash equivalents (6,465) (2,703)
Cash and cash equivalents, beginning of period 6,741 2,771
Cash and cash equivalents, end of period $ 276 $ 68
======== ========
Supplemental cash flow information:
Cash paid for interest $ 265 $ 141
======== ========
Non-cash transactions:
Installment obligation (less unamortized discount) in
exchange for property and equipment $ -- $ 733
======== ========
Acquisition of equipment under lease obligations $ 199 $ --
======== ========
</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 June 30, 1998, the Company owned approximately 49% of Laguna
and has subsequently reduced its ownership interest to
approximately 46%. 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 June 30, 1998, the amount outstanding under the
facility was $6,850,000, leaving the amount available under the
facility at $14,400,000.
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 consolidated statement of operations for the three and six
months ended June 30, 1998 and 1997 reflect only basic earnings per
share because the Company was in a loss position for all periods
presented and all common stock equivalents are anti-dilutive.
Note 4. WARRANTS:
In August 1995, the Company issued warrants to purchase an
aggregate of 31,824 shares of common stock at an adjusted exercise
price of $7.86 per share to an affiliate of Midland Bank plc, New
York Branch, as an "equity kicker" in connection with the
establishment of a now terminated line of credit with that bank.
In May 1998, the holder of the warrants opted to convert them into
shares of common stock through a cashless conversion whereby they
received 11,415 shares of common stock, which were the equivalent
in value to the difference between the 31,824 shares of common
stock at the defined current market price of $12.25 per share and
the exercise price of $7.86 per share.
Note 5. 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.
Note 6. HEDGING ACTIVITIES:
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. A company may also implement the Statement as of
the beginning of any fiscal quarter after issuance (that is, fiscal
quarters beginning June 16, 1998 and thereafter). SFAS No. 133
cannot be applied retroactively. SFAS No. 133 must be applied to
(a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or
substantially modified after December 31, 1997 (and, at the
company's election, before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS
No. 133 on its financial statements and has not determined the
timing or method of adoption of SFAS No. 133. However, SFAS No.
133 could increase volatility in earnings and other comprehensive
income.
Note 7. SUBSEQUENT EVENT:
In August 1998, the Company negotiated a term loan with Bank
One, Texas, N.A. to finance equipment for the Company's gas
sweetening plant. The Company may borrow up to $6,500,000 until
October 30, 1998, at which time the balance converts to a 5-year
term loan with principal and interest payments payable monthly.
Interest on the loan is to be computed based on LIBOR plus 2%.
However, effective October 30, 1998, the Company entered into a 5-
year interest rate swap agreement which will fix the interest rate
on the term loan at an effective 8%. The initial notional amount
of the interest rate swap is $5,000,000, with the option to
increase it up to $6,500,000 by October 30, 1998.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion is intended to assist in understanding
the Company's consolidated financial position at June 30, 1998 and
December 31, 1997, results of operations for the three and six
months ended June 30, 1998 and 1997 and cash flows for the six
months ended June 30, 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, 2003. At August 14, 1998, the principal amount
outstanding was $10,860,000, leaving the amount remaining available
under the Facility at $10,390,000. The Company is currently in
compliance with the covenants of the Facility.
Capital expenditures related to the Company's drilling and
development programs totaled $16,489,000 for the six months ended
June 30, 1998 and $5,645,000 for the six months ended June 30,
1997. The Company's current budget for drilling and development
capital expenditures in 1998 is approximately $36,623,000. During
the six months ended June 30, 1998, the Company completed 27 of the
28 wells drilled and recompleted 18 wells. Fourteen of the wells
completed were shut-in awaiting the completion of gas plant
expansion, which occurred toward the end of the second quarter.
During the six months ended June 30, 1997, the Company completed 12
of the 13 development wells it drilled and recompleted 7 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 approximately 60 wells
and recomplete approximately 30 wells during fiscal 1998.
In August 1998, the Company negotiated a term loan with Bank
One, Texas, N.A. to finance equipment for the Company's gas
sweetening plant. The Company may borrow up to $6,500,000 until
October 30, 1998, at which time the balance converts to a 5-year
term loan with principal and interest payments payable monthly.
Interest on the loan is to be computed based on LIBOR plus 2%.
However, effective October 30, 1998, the Company entered into a 5-
year interest rate swap agreement which will fix the interest rate
on the term loan at an effective 8%. The initial notional amount
of the interest rate swap is $5,000,000, with the option to
increase it up to $6,500,000 by October 30, 1998.
The Company believes that, with the net proceeds of the
December 1997 common stock sale, borrowings available under the
Facility and term loan, 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 Six Months
Ended June 30, Ended June 30,
(In thousands, except per unit data) 1998 1997 1998 1997
<T> <C> <C> <C> <C>
Results of Operations from Oil and Gas Producing Activities:
Oil and gas sales $ 2,913 $ 1,839 $ 5,982 $ 3,811
Production tax and marketing expense 427 195 906 458
Lease operating expense 769 428 1,453 862
Depletion 1,124 500 2,224 1,030
Depreciation 34 -- 64 --
Net Production:
Oil (MBbl) 61 44 129 81
Natural gas (MMcf) 1,160 567 2,246 978
MBOE 254 139 503 244
MMcfe 1,526 831 3,020 1,464
Average Sales Price Realized (1):
Oil (per Bbl) $ 13.21 $ 19.32 $ 13.77 $ 20.81
Natural gas (per Mcf) 1.82 1.74 1.87 2.17
Per BOE 11.47 13.23 11.89 15.62
Per Mcfe 1.91 2.21 1.98 2.60
Average Cost Data (per BOE):
Production tax and marketing expense $ 1.68 $ 1.40 $ 1.80 $ 1.88
Lease operating expense 3.03 3.08 2.89 3.53
Depletion 4.43 3.60 4.42 4.22
Depreciation .13 -- .13 --
Average Cost Data (per Mcfe):
Production tax and marketing expense $ 0.28 $ 0.23 $ 0.30 $ 0.31
Lease operating expense 0.50 0.52 0.48 0.59
Depletion 0.74 0.60 0.74 0.70
Depreciation 0.02 -- 0.02 --
</TABLE>_________________
1)
1) Includes effects of hedging.
Three and Six Months Ended June 30, 1998 Compared to June 30, 1997
Revenues. Total revenues increased 59% to $2,927,000 for the
three months ended June 30, 1998 from $1,842,000 for the three
months ended June 30, 1997 and increased 58% to $6,052,000 for the
six months ended June 30, 1998 from $3,839,000 for the six months
ended June 30, 1997. Oil and gas sales increased 58% to $2,913,000
for the 1997 quarter from $1,839,000 for the 1997 quarter due to
higher gas prices realized and higher oil and gas production in the
1998 quarter. Oil and gas sales increased 57% to $5,982,000 for
the six months ended June 30, 1998 from $3,811,000 for the six
months ended June 30, 1997, due to higher oil and gas production in
the 1998 period. Average oil prices realized per barrel decreased
32% to $13.21 in the fiscal 1998 quarter from $19.32 for the fiscal
1997 quarter; however, average gas prices realized per Mcf
increased 5% to $1.82 in the 1998 quarter from $1.74 in the 1997
quarter. Average oil prices realized per barrel decreased 34% to
$13.77 for the six months ended June 30, 1998, from $20.81 for the
comparable 1997 period, and average gas prices realized per Mcf
decreased 14% to $1.87 in the 1998 period from $2.17 for the six
months ended June 30, 1997. Oil production increased 39% to 61,000
barrels in the 1998 quarter from 44,000 barrels in the 1997 quarter
and gas production increased 105% to 1,160,000 Mcf in the 1998
quarter from 567,000 in the 1997 quarter. Oil production
increased 59%, to 129,000 barrels for the six months ended June 30,
1998 from 81,000 barrels for the six months ended June 30, 1997,
and gas production increased 130% to 2,246,000 Mcf for the six
months ended June 30, 1998 from 978,000 Mcf for the same period a
year ago. The oil and gas production increases are due to the
Company's successful drilling program in 1998.
Oil and Gas Production Expenses. Oil and gas production
expenses, including production tax and marketing expenses,
increased 92% to $1,196,000 for the three months ended June 30,
1998 from $623,000 for the 1997 quarter, and increased 79% to
$2,359,000 for the six months ended June 30, 1998 from $1,320,000
for the comparable 1997 period, due to new wells coming on line as
a result of the 1998 drilling program. Per BOE, oil and gas
production expense, including production tax and marketing expense,
increased $0.23, or 5%, to $4.71 for the 1998 quarter from $4.48
for the 1997 quarter. Production tax and marketing expense per BOE
increased $0.28 per BOE, or 20%, for the 1998 quarter from the 1997
quarter because of higher gas prices and a higher proportion of
production from the East Blanco Field, which has a higher tax rate
than the Company's other properties. LOE per BOE decreased
slightly to $3.03 for the 1998 quarter from $3.08 for the 1997
quarter. Oil and gas production expenses per BOE decreased $0.64,
or 13%, to $4.69 for the six months ended June 30, 1998 from $5.41
for the six months ended June 30, 1997. Production tax and
marketing expense decreased $0.08 per BOE, or 4%, during the six
months ended June 30, 1998 as a result of lower oil and gas prices.
LOE decreased $0.64 per BOE, or 18%, during the six months ended
June 30, 1997 primarily because of 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. Depreciation,
depletion and amortization for the three months ended June 30, 1998
increased 127% to $1,181,000 from $521,000 in the 1997 quarter, and
increased 117% to $2,334,000 for the six months ended June 30, 1998
from $1,076,000 for the six months ended June 30, 1997. Depletion
per BOE increased 23% to $4.43 for the fiscal 1998 quarter from
$3.60 for the fiscal 1997 quarter and increased 5% to $4.42 for the
six months ended June 30, 1998 from $4.22 for the six months ended
June 30, 1997, primarily due to a higher ratio of capital
expenditures to reserve increases in the 1998 periods.
Impairment of Oil and Gas Properties. Impairment of oil and
gas properties of $(24,000) and $55,000 for the three and six
months ended June 30, 1997, respectively, relate to the Company's
investment in Belize. 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. The credit in second quarter 1997
is due to a refund of a cash advance paid in the first quarter
which was in excess of the actual amounts spent in the second
quarter. During the three and six months ended June 30, 1998, the
Company's oil and gas activities were conducted entirely in the
United States.
Under the full cost accounting rules of the Securities and
Exchange Commission (SEC), the Company reviews the carrying value
of its oil and gas properties each quarter on a country-by-country
basis. Under full cost accounting rules, capitalized costs of oil
and gas properties may not exceed the present value of estimated
future net revenues from proved reserves, discounted at 10 percent,
plus the lower of cost or fair market value of unproved properties,
as adjusted for related tax effects and deferred income taxes.
Application of these rules generally requires pricing future
production at the unescalated oil and gas prices in effect at the
end of each fiscal quarter and requires a write-down if the
"ceiling" is exceeded, even if prices declined for only a short
period of time. The Company did not have a write-down due to
ceiling test limitations as of June 30, 1998. Under current
pricing, there is the potential, while not a certainty, that a
write-down may occur. If a write-down is required, the one-time
charge to earnings would not impact cash flow from operating
activities.
General and Administrative Expenses. Total general and
administrative expenses for the quarter ended June 30, 1998
decreased 19% to $533,000 from $657,000 in the 1997 quarter, and
decreased 8% to $1,189,000 for the six months ended June 30, 1998
from $1,295,000 for the same period in 1997. During the quarter
and the six months ended June 30, 1998, the Company capitalized
$314,000 and $602,000, respectively, more of general and
administrative expenses directly related to its drilling program
than was capitalized during the 1997 periods.
Interest and Other Expenses. Interest and other expenses for
the quarter ended June 30, 1998 increased 51% to $174,000 from
$115,000 for the 1997 quarter and increased 37% to $283,000 for the
six months ended June 30, 1998 from $206,000 for the six months
ended June 30, 1997. The increase was primarily due to interest on
the Company's equipment lease obligations in the 1998 periods.
Equity in Loss of Affiliate. Equity loss of affiliate of
$189,000 and $356,000 in the three and six months ended June 30,
1997, respectively, 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 benefit in the consolidated
statements of operations for the three and six months ended
June 30, 1998 and 1997.
Net Loss. Net loss for the three months ended June 30, 1998
decreased 34% to $157,000 from $239,000 for the three months ended
June 30, 1997, and decreased 76% to $113,000 for the six months
ended June 30, 1998 from $469,000 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") and
realized accretion of $3,000 in each of the three month periods
ended June 30, 1998 and 1997. The Company paid dividends of
$54,000 and realized accretion of $6,000 during the six months
ended June 30, 1998 compared to dividends of $107,000 and accretion
of $18,000 during the six months ended June 30, 1997. Preferred
dividend payments were reduced beginning in April 1997 as a result
of the conversion into common stock and redemption of approximately
265,000 shares of Series B Preferred Stock. Approximately 135,000
shares remain outstanding. 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, is reflected on the statements
of operations for the three and six months ended June 30, 1997 as
an increase to the net loss attributable to common shareholders.
As a result, net loss attributable to common shareholders for the
three months ended June 30, 1998 decreased 72% to $187,000 from
$672,000 for the three months ended June 30, 1997, and decreased
83% to $173,000 for the six months ended June 30, 1998 from
$997,000 for the six months ended June 30, 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 $32,000 in second quarter 1998 compared to a hedging gain of
$10,000 in second quarter 1997, and recognized a hedging gain of
$112,000 for the six months ended June 30, 1998 compared to a
hedging loss of $99,000 for the six months ended June 30, 1997.
These amounts are included in oil and gas sales in the Company's
consolidated statements of operations.
The Company has initiated a review of its internal information
systems for Year 2000 transition problems and, although such review
is still in progress, believes that conversion requirements will
not result in significant disruption of the Company's business
operations or have a material adverse impact on its future
liquidity or results of operations. The Company has not
extensively investigated the Year 2000 compliance of its customers,
suppliers, and other third parties with whom it has business
relationships, but intends to make selected inquiries. Compliance
by such third parties is voluntary and failures could occur, in
which case there is the possibility of a material adverse impact on
the Company. However, the nature of the Company's business and its
business relationships are not such that the Company considers the
potential Year 2000 compliance failure of a third party with whom
it has a direct business relationship likely to have a material
adverse impact on the Company.
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 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on May 28, 1998. The seven
individuals listed below were elected as directors. The votes cast
were as follows:
With respect to the election of directors:
<TABLE>
<CAPTION>
BROKER
NAME FOR AGAINST ABSTAIN NON-VOTES
<T> <C> <C> <C> <C>
George O. Mallon, Jr. 5,370,313 4,929 9,129 -0-
Kevin M. Fitzgerald 5,370,313 4,929 9,129 -0-
Roy K. Ross 5,370,963 4,279 9,129 -0-
Roger R. Mitchell 5,366,971 8,271 9,129 -0-
Frank Douglass 5,367,163 8,079 9,129 -0-
Francis J. Reinhardt, Jr. 5,371,963 3,279 9,129 -0-
Peter H. Blum 5,370,053 5,189 9,129 -0-
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During second quarter 1998, the Company filed Periodic Reports of
Form 8-K dated May 14, 1998, June 15, 1998 and July 8, 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: August 14, 1998 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: August 14, 1998 By: /s/ Alfonso R. Lopez
Alfonso R. Lopez
Vice President, Finance/
Corporate Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 276
<SECURITIES> 0
<RECEIVABLES> 3,122
<ALLOWANCES> 8
<INVENTORY> 411
<CURRENT-ASSETS> 3,949
<PP&E> 83,716
<DEPRECIATION> 28,712
<TOTAL-ASSETS> 59,124
<CURRENT-LIABILITIES> 10,666
<BONDS> 0
<COMMON> 70
1,323
0
<OTHER-SE> 40,176
<TOTAL-LIABILITY-AND-EQUITY> 59,124
<SALES> 5,982
<TOTAL-REVENUES> 6,052
<CGS> 0
<TOTAL-COSTS> 5,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 283
<INCOME-PRETAX> 113
<INCOME-TAX> 0
<INCOME-CONTINUING> 113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
