SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 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 September 30, 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>
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 834 $ 6,741
Accounts receivable:
Oil and gas sales 1,050 1,464
Joint interest participants, net of allowance of $8
and $8, respectively 1,745 2,406
Related parties 159 72
Other -- 7
Inventories 392 327
Other 64 46
Total current assets 4,244 11,063
Property and equipment:
Oil and gas properties, full cost method 88,094 63,148
Natural gas processing plant 4,630 2,760
Other equipment 929 665
93,653 66,573
Less accumulated depreciation, depletion and amortization (30,133) (26,393)
63,520 40,180
Notes receivable-related parties 19 18
Other, net 213 165
Total Assets $ 67,996 $ 51,426
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,876 $ 6,797
Undistributed revenue 918 813
Current portion of installment obligation, less unamortized
discount of $6 and $22, respectively 394 378
Drilling advances 12 135
Accrued taxes and expenses 125 4
Current portion of long-term bank debt 338 --
Current portion of lease obligation -- 1,746
Total current liabilities 9,663 9,873
Long-term bank debt 16,944 1
Accrued expenses 39 39
Total non-current liabilities 16,983 40
Total liabilities 26,646 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, liquidation preference and
mandatory redemption of $1,352,000 1,326 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 74,119 73,937
Accumulated deficit (34,165) (33,811)
Total shareholders' equity 40,024 40,196
Total Liabilities and Shareholders' Equity $ 67,996 $ 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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $3,620 $1,995 $ 9,602 $ 5,806
Interest and other 16 19 86 47
3,636 2,014 9,688 5,853
Costs and expenses:
Oil and gas production 1,488 838 3,847 2,158
Depreciation, depletion and amortization 1,430 699 3,764 1,775
Impairment of oil and gas properties -- 4 -- 59
General and administrative 613 435 1,802 1,730
Interest and other 337 166 620 372
3,868 2,142 10,033 6,094
Equity in loss of affiliate -- (120) -- (476)
Net loss (232) (248) (345) (717)
Dividends on preferred stock and accretion (30) (30) (90) (155)
Preferred stock conversion inducement -- -- -- (403)
Net loss attributable to common shareholders $ (262) $ (278) $ (435) $(1,275)
====== ====== ======= =======
Basic:
Net loss attributable to common shareholders
per share $ (.04) $(0.06) $ (0.06) $ (0.28)
====== ====== ======= =======
Weighted average shares outstanding 7,025 4,695 7,012 4,576
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (345) $ (717)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization 3,764 1,775
Impairment of oil and gas properties -- 59
Amortization of discount on installment obligation 17 33
Equity in loss of affiliate -- 476
Stock compensation expense 169 106
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,042 59
Inventory and other assets (155) (184)
Increase (decrease) in:
Trade accounts payable and undistributed revenue 1,185 2,206
Accrued taxes and expenses 117 19
Drilling advances (122) (9)
Net cash provided by operating activities 5,672 3,823
Cash flows from investing activities:
Additions to property and equipment (26,717) (10,953)
Purchase of subsidiary stock -- (55)
Other -- (47)
Increase in notes receivable-related parties (1) (1)
Net cash used in investing activities (26,718) (11,056)
Cash flows from financing activities:
Proceeds from long-term debt 17,281 5,100
Lease obligation payments (2,061) (18)
Payment of preferred dividends (81) (134)
Redemption of preferred stock -- (121)
Net cash provided by financing activities 15,139 4,827
Net decrease in cash and cash equivalents (5,907) (2,406)
Cash and cash equivalents, beginning of period 6,741 2,771
Cash and cash equivalents, end of period $ 834 $ 365
======== ========
Supplemental cash flow information:
Cash paid for interest $ 551 $ 341
======== ========
Non-cash transactions:
Installment obligation (less unamortized discount) in
exchange for property and equipment $ -- $ 733
======== ========
Acquisition of equipment under lease obligation $ 315 $ --
======== ========
</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 September 30, 1998, the Company owned approximately 46% 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 September 30, 1998, the amount outstanding under the
facility was $15,160,000, leaving the amount available under the
facility at $6,090,000.
In August 1998, the Company negotiated a term loan for
$6,500,000 with Bank One, Texas, N.A. to finance equipment for the
Company's gas sweetening plant. At September 30, 1998, the Company
had borrowed $1,967,000 on the term loan. The Company borrowed the
remaining $4,533,000 in October. On October 30, 1998, the balance
converted to a 5-year term loan with principal and interest
payments payable monthly. Interest on the loan is LIBOR plus 2%.
However, effective October 30, 1998, the Company also entered into
a 5-year interest rate swap agreement which will fix the interest
rate on the term loan at an effective 7.88%. The notional amount
of the interest rate swap is $6,500,000 and declines monthly by the
amount of principal payments.
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 nine
months ended September 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. NEW ACCOUNTING STANDARDS:
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.
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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion is intended to assist in understanding
the Company's consolidated financial position at September 30, 1998
and December 31, 1997, results of operations for the three and nine
months ended September 30, 1998 and 1997 and cash flows for the
nine months ended September 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, 2001. At November 14, 1998, the principal amount
outstanding was $18,845,000, leaving the amount remaining available
under the Facility at $2,405,000. The Company is currently in
compliance with the covenants of the Facility.
Capital expenditures related to the Company's drilling and
development programs totaled approximately $26,574,000 for the nine
months ended September 30, 1998 and $10,267,000 for the nine months
ended September 30, 1997. The Company's current budget for
drilling and development capital expenditures in 1998 is
approximately $32,530,000. During the nine months ended
September 30, 1998, the Company completed 35 of the 40 wells
drilled and recompleted 32 wells. During the nine months ended
September 30, 1997, the Company completed 18 of the 20 development
wells it drilled and recompleted 13 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 45 wells and recomplete
approximately 42 wells during fiscal 1998.
In August 1998, the Company negotiated a $6,500,000 term loan
with Bank One, Texas, N.A. to finance equipment for the Company's
gas sweetening plant. At September 30, 1998, the Company had
borrowed $1,967,000 on the term loan. The Company borrowed the
remaining $4,533,000 in October. On October 30, 1998, the balance
converted to a 5-year term loan with principal and interest
payments payable monthly. Interest on the loan is LIBOR plus 2%.
However, effective October 30, 1998, the Company also entered into
a 5-year interest rate swap agreement which will fix the interest
rate on the term loan at an effective 7.88%. The notional amount
of the interest rate swap is $6,500,000 and declines monthly by the
amount of principal payments.
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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(In thousands, except per unit data)
<S> <C> <C> <C> <C>
Results of Operations from Oil and Gas Producing Activities:
Oil and gas sales $3,620 $1,995 $9,602 $5,806
Production tax and marketing expense 508 281 1,414 739
Lease operating expense 980 557 2,433 1,419
Depletion 1,387 668 3,611 1,698
Depreciation 16 -- 80 --
Net Production:
Oil (MBbl) $ 51 $ 50 $ 180 $ 131
Natural gas (MMcf) 1,810 575 4,056 1,553
MBOE 353 146 856 390
Mmcfe 2,116 875 5,136 2,339
Average Sales Price Realized: (1)
Oil (per Bbl) $12.69 $19.08 $13.46 $20.15
Natural gas (per Mcf) 1.64 1.81 1.77 2.04
Per BOE 10.25 13.66 11.22 14.89
Per Mcfe 1.71 2.28 1.87 2.48
Average cost data (per BOE):
Production tax and marketing expense $ 1.44 $ 1.92 $ 1.65 $ 1.89
Lease operating expense 2.78 3.82 2.84 3.64
Depletion 3.93 4.58 4.22 4.35
Depreciation 0.05 -- 0.09 --
Average Cost Data (per Mcfe):
Production tax and marketing expense $ 0.24 $ 0.32 $ 0.28 $ 0.32
Lease operating expense 0.46 0.64 0.47 0.61
Depletion 0.66 0.76 0.70 0.73
Depreciation 0.01 -- 0.02 --
</TABLE>_________________
1) Includes effects of hedging.
Three and Nine Months Ended September 30, 1998 Compared to September 30, 1997
Revenues. Total revenues increased 81% to $3,636,000 for the
three months ended September 30, 1998 from $2,014,000 for the three
months ended September 30, 1997 and increased 66% to $9,688,000 for
the nine months ended September 30, 1998 from $5,853,000 for the
nine months ended September 30, 1997. Oil and gas sales increased
81% to $3,620,000 for the 1998 quarter from $1,995,000 for the 1997
quarter due primarily to higher oil and gas production in the 1998
quarter. Oil and gas sales increased 65% to $9,602,000 for the
nine months ended September 30, 1998 from $5,806,000 for the nine
months ended September 30, 1997, due to higher oil and gas
production in the 1998 period. Average oil prices realized per
barrel decreased 33% to $12.69 in the fiscal 1998 quarter, from
$19.08 in the fiscal 1997 quarter; and average gas prices realized
per Mcf decreased 9% to $1.64 in the 1998 quarter from $1.81 in the
1997 quarter. Average oil prices realized per barrel decreased 33%
to $13.46 for the nine months ended September 30, 1998, from $20.15
for the comparable 1997 period, and average gas prices realized per
Mcf decreased 13% to $1.77 in the 1998 period from $2.04 for the
nine months ended September 30, 1997. Oil production increased 2%
to 51,000 barrels in the 1998 quarter from 50,000 barrels in the
1997 quarter and gas production increased 215% to 1,810,000 Mcf in
the 1998 quarter from 575,000 Mcf in the 1997 quarter. Oil
production increased 37% to 180,000 barrels for the nine months
ended September 30, 1998 from 131,000 barrels for the nine months
ended September 30, 1997; and gas production increased 161% to
4,056,000 Mcf for the nine months ended September 30, 1998 from
1,553,000 Mcf for the same period a year ago. The oil and gas
production increases are due to the Company's successful drilling
and recompletion program in 1998.
Oil and Gas Production Expenses. Oil and gas production
expenses, including production tax and marketing expenses,
increased 78% to $1,488,000 for the three months ended
September 30, 1998 from $838,000 for the 1997 quarter, and
increased 78% to $3,847,000 for the nine months ended September 30,
1998 from $2,158,000 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, decreased $1.52, or 26%, to $4.22 for the 1998
quarter from $5.74 for the 1997 quarter. Production tax and
marketing expense per BOE decreased $0.48 to $1.44 per BOE, or 25%,
for the 1998 quarter from $1.92 for the 1997 quarter because of
lower oil and gas prices in the 1998 quarter. LOE per BOE
decreased 27% to $2.78 for the 1998 quarter from $3.82 for the 1997
quarter. Oil and gas production expenses per BOE decreased $1.04,
or 19%, to $4.49 for the nine months ended September 30, 1998 from
$5.53 for the nine months ended September 30, 1997. Production tax
and marketing expense decreased $0.24 per BOE, or 13%, during the
nine months ended September 30, 1998 as a result of lower oil and
gas prices. LOE decreased $0.80 per BOE, or 22%, during the nine
months ended September 30, 1998. LOE per BOE in the 1998 periods
is lower due to higher average production rates per well for the
new wells and a higher proportion of gas production in 1998, which
is less costly to produce than oil.
Depreciation, Depletion and Amortization. Depreciation,
depletion and amortization for the three months ended September 30,
1998 increased 105% to $1,430,000 from $699,000 in the 1997
quarter, and increased 112% to $3,764,000 for the nine months ended
September 30, 1998 from $1,775,000 for the nine months ended
September 30, 1997. Depletion per BOE decreased 14% to $3.93 for
the fiscal 1998 quarter from $4.58 for the fiscal 1997 quarter and
decreased 3% to $4.22 for the nine months ended September 30, 1998
from $4.35 for the nine months ended September 30, 1997, primarily
due to a higher ratio of reserve increases to capital expenditures
in the 1998 periods.
Impairment of Oil and Gas Properties. Impairment of oil and
gas properties was $4,000 and $59,000, respectively, for the three
and nine months ended September 30, 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 the first quarter of 1997. Accordingly, the
Company reduced the carrying amount of its capitalized costs.
During the three and nine months ended September 30, 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 September 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 three months ended September 30,
1998 increased 41% to $613,000 from $435,000 in the 1997 quarter,
and increased 4% to $1,802,000 for the nine months ended
September 30, 1998 from $1,730,000 for the same period in 1997 due
to the hiring of additional personnel because of expanded
operations. During the quarter and nine months ended September 30,
1998, the Company capitalized $161,000 and $763,000, respectively,
more of general and administrative expenses directly related to its
drilling program than was capitalized in the 1997 periods.
Interest and Other Expenses. Interest and other expenses for
the three months ended September 30, 1998 increased 103% to
$337,000 from $166,000 for the three months ended September 30,
1997 and increased 67% to $620,000 for the nine months ended
September 30, 1998 from $372,000 for the nine months ended
September 30, 1997. The increase was primarily due to interest on
the Company's equipment lease obligations and higher outstanding
borrowings under the Company's credit facility in the 1998 periods.
Equity in Loss of Affiliate. Equity in loss of affiliate of
$120,000 and $476,000 in the three and nine months ended
September 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 nine months ended
September 30, 1998 and 1997.
Net Loss. Net loss for the three months ended September 30,
1998 decreased 6% to $232,000 from $248,000 for the three months
ended September 30, 1997, and decreased 52% to $345,000 for the
nine months ended September 30, 1998 from $717,000 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
months ended September 30, 1998 and 1997, respectively. The
Company paid dividends of $81,000 and realized accretion of $9,000
during the nine months ended September 30, 1998 compared to
dividends of $134,000 and accretion of $21,000 during the nine
months ended September 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. 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 nine months ended September 30, 1997 as an
increase to the net loss attributable to common shareholders. Net
loss attributable to common shareholders for the three months ended
September 30, 1998 decreased 6% to $262,000 from $278,000 for the
three months ended September 30, 1997, and decreased 66% to
$435,000 for the nine months ended September 30, 1998 from
$1,275,000 for the nine months ended September 30, 1997.
Year 2000 Issues
Year 2000 issues result from the inability of computer programs
or equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. The erroneous date can be
interpreted in a number of different ways; typically the year 2000
is interpreted as the year 1900. This could result in a system
failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business.
Similar issues exist in embedded computer chips which operate many
common and specialized machines.
The Company has recently completed an assessment of its core
financial and operational software systems to ensure compliance.
The licensors of both the Company's core financial software system
and its underlying operating system have certified that such
software is Year 2000 compliant. The Company's core exploration
software system is not currently Year 2000 compliant, but the
licensor has indicated that such software will be compliant by
January 1999. Additionally, other less critical software systems
and various types of equipment have been assessed and are believed
to be compliant. The Company believes that the potential impact,
if any, of these less critical systems not being Year 2000
compliant will at most require employees to manually complete
otherwise automated tasks or calculations and it should not impact
the Company's ability to continue exploration, drilling, production
or sales activities.
The Company has initiated communications with its significant
suppliers, business partners and customers to determine the extent
to which the Company is vulnerable to those third parties' failure
to correct their own Year 2000 issues. There can be no guarantee,
however, that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the
Company's systems would not have a material adverse effect on the
Company. The Company has determined it has no exposure to
contingencies related to the Year 2000 issue with respect to
products sold to third parties.
The Company also relies on non-information technology systems,
such as office telephones, facsimile machines, air conditioning,
heating, elevators in its leased offices, which may have embedded
technology such as micro controllers. Some of these systems are
outside of the Company's control to assess or remedy. A failure of
one of these items might adversely impact the Company's business
but in management's opinion would not create a material disruption.
The Company has and will utilize both internal and external
resources to complete tasks and perform testing necessary to
address the Year 2000 issue. The Company has completed a majority
of its Year 2000 project. The Company has not incurred, and does
not anticipate that it will incur, significant costs relating to
the assessment and remediation of Year 2000 issues.
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 $217,000 in third quarter 1998 compared to a hedging loss of
$118,000 in third quarter 1997, and recognized a hedging gain of
$329,000 for the nine months ended September 30, 1998 compared to a
hedging loss of $217,000 for the nine months ended September 30,
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 third quarter 1998, the Company filed Periodic Reports on
Form 8-K dated July 8, 1998, August 13, 1998, August 14, 1998 and
September 28, 1998. Each of those reports 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: November 12, 1998 By: _/s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: November 12, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 834
<SECURITIES> 0
<RECEIVABLES> 2,962
<ALLOWANCES> 8
<INVENTORY> 392
<CURRENT-ASSETS> 4,244
<PP&E> 93,653
<DEPRECIATION> 30,133
<TOTAL-ASSETS> 67,996
<CURRENT-LIABILITIES> 9,663
<BONDS> 0
<COMMON> 70
1,326
0
<OTHER-SE> 39,954
<TOTAL-LIABILITY-AND-EQUITY> 67,996
<SALES> 9,602
<TOTAL-REVENUES> 9,688
<CGS> 0
<TOTAL-COSTS> 9,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 620
<INCOME-PRETAX> (345)
<INCOME-TAX> 0
<INCOME-CONTINUING> (345)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (435)
<EPS-PRIMARY> (.06)
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