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, 1999.
- - 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 April 30, 1999, 7,023,940 shares of the registrant's common
stock, par value $0.01 per share, were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 -- Financial Statements
MALLON RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,436 $ 1,733
Accounts receivable:
Oil and gas sales 955 1,076
Joint interest participants, net of allowance of
$43 and $43, respectively 532 650
Related parties 87 89
Other 9 --
Inventories 379 375
Other 152 32
Total current assets 3,550 3,955
Property and equipment:
Oil and gas properties, full cost method 96,101 93,624
Natural gas processing plant 8,569 8,275
Other property and equipment 1,013 989
105,683 102,888
Less accumulated depreciation, depletion and amortization (50,045) (48,748)
55,638 54,140
Notes receivable-related parties 83 89
Other, net 263 268
Total Assets $ 59,534 $ 58,452
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,746 $ 4,424
Undistributed revenue 655 945
Accrued taxes and expenses 221 149
Deferred revenue 682 909
Current portion of long-term debt 1,315 1,310
Total current liabilities 5,619 7,737
Long-term bank debt 31,233 27,183
Accrued expenses 40 39
Total non-current liabilities 31,273 27,222
Total liabilities 36,892 34,959
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 1,332 1,329
Shareholders' equity:
Common Stock, $0.01 par value, 25,000,000 shares
authorized; 7,023,940 and 7,021,065 shares issued
and outstanding, respectively 70 70
Additional paid-in capital 74,123 74,103
Accumulated deficit (52,883) (52,009)
Total shareholders' equity 21,310 22,164
Total Liabilities and Shareholders' Equity $ 59,534 $ 58,452
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1999 1998
(Unaudited)
<S> <C> <C>
Revenues:
Oil and gas sales $ 3,020 $ 3,069
Interest and other 18 56
3,038 3,125
Costs and expenses:
Oil and gas production 1,345 1,163
Depreciation, depletion and amortization 1,306 1,153
General and administrative 700 656
Interest and other 558 109
3,909 3,081
Net (loss) income (871) 44
Dividends on preferred stock and accretion (30) (30)
Net (loss) income attributable to common shareholders $ (901) $ 14
======== =======
Basic:
Net (loss) income per share attributable to common shareholders $ (0.13) $ --
Weighted average common shares outstanding 7,022 6,996
Diluted:
Net (loss) income per share attributable to common shareholders $ (0.13) $ --
Weighted average common shares outstanding 7,022 7,088
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1999 1998
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (871) $ 44
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation, depletion and amortization 1,306 1,153
Amortization of discount on installment obligation -- 6
Stock compensation expense 41 115
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 232 363
Inventory and other assets (127) (211)
(Decrease) increase in:
Trade accounts payable and undistributed revenue (1,968) 1,096
Accrued taxes and expenses 68 6
Deferred revenue (227) --
Drilling advances -- (94)
Net cash (used in) provided by operating activities (1,546) 2,478
Cash flows from investing activities:
Additions to property and equipment (2,785) (7,907)
Other 6 --
Net cash used in investing activities (2,779) (7,907)
Cash flows from financing activities:
Proceeds from long-term debt 4,380 --
Payments of long-term debt (325) --
Lease obligation payments -- (50)
Payment of preferred dividends (27) (27)
Net cash provided by (used in) financing activities 4,028 (77)
Net decrease in cash and cash equivalents (297) (5,506)
Cash and cash equivalents, beginning of period 1,733 6,741
Cash and cash equivalents, end of period $ 1,436 $ 1,235
======= =======
Supplemental cash flow information:
Cash paid for interest $ 480 $ 110
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
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 operates its business and reports its operations as
one business segment. 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, 1999, the Company owned approximately 45% of
Laguna. As discussed in the Company's annual report on Form 10-K
for the year ended December 31, 1998 (the "1998 Form 10-K"), the
Company's share of Laguna's net losses exceed the carrying value
of its investment in and advances to Laguna. 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 1998 Form
10-K.
Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the presentation
used in 1999.
Note 2. LONG-TERM BANK DEBT
The Company has a revolving line of credit (the "Facility")
with Bank One, Texas, N.A. (the "Bank'). The Facility consists
of two separate lines of credit: a primary revolving line of
credit (the "Revolver") and a term loan commitment of $6.5
million (the "Equipment Loan"). The borrowing base under the
Revolver is currently $30,000,000 and is under review. At
March 31, 1999, the amount outstanding under the Revolver was
$26,440,000, leaving the amount available under the Revolver at
$3,560,000. At March 31, 1999, the Company was not in compliance
with the minimum net equity and debt service ratio covenants of
the Facility. The Bank has agreed to waive any non-compliance
with the debt service ratio that may occur during calendar year
1999, and to amend the minimum net equity covenant in such a way
that management believes that, based on its current projections,
the Company will meet it for all reporting periods in 1999.
<PAGE>
In connection with the Bank's waiver of the Company's non-
compliance with certain covenants mentioned above, the following
provisions of the Revolver are in the process of being amended:
- - Beginning May 1, 1999, the borrowing base will be subject to
redetermination quarterly, at February 1, May 1, August 1 and
November 1 of each year, or at such other times as the Bank may
determine.
- - Effective March 31, 1999, the Company will pay a fee of
0.625% per annum, up from 0.375%, on the daily average of the
unused amount of the borrowing base. If the borrowing base is
increased, the Company will pay a fee of 0.50% per annum, up from
0.25%, of the amount of such increase over the previously
established borrowing base.
- - Effective March 31, 1999, the interest rate on amounts drawn
under the Revolver is, at the Company's election, either the
Bank's base rate plus 0.25% or LIBOR plus a margin ranging from
1.375% to 2.125%, up from 1.125% to 1.875%, depending on the
total Revolver balance outstanding.
- - In consideration of the waivers and amendments mentioned
above, the Company will pay the Bank a fee of $25,000.
During first quarter 1999, the Company repaid $325,000 of the
Equipment Loan.
Note 3. EARNINGS (LOSS) PER SHARE
Under the provisions of Statement of Financial Accounting
Standards ("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.
The following table reconciles the net (loss) income and
common shares outstanding used in the calculations of basic and
diluted net (loss) income per share for the three months ended
March 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
Net Common Net Common
(In thousands, except per share amounts) Loss Shares EPS Income Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(871) $ 44
Dividends on preferred stock and accretion (30) (30)
Basic (loss) income per share (901) 7,022 (.13) 14 6,996 $ --
Warrants -- -- -- 16
Stock options -- -- -- 76
Diluted (loss) income per share $(901) 7,022 (.13) $ 14 7,088 $ --
</TABLE>
All options, warrants, and Series B Convertible Preferred Stock
were excluded from the calculation for the first quarter of 1999
because they were antidilutive as a result of the Company's net
loss for that period.
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.
<PAGE>
Note 4. HEDGING ACTIVITIES:
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 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. SFAS No. 133 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, but early adoption is
permitted. SFAS No. 133 cannot be applied retroactively.
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 5. OIL AND GAS PROPERTIES:
Under the full cost accounting rules of the Securities and
Exchange Commission, 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, net capitalized costs
of oil and gas properties, less related deferred income taxes,
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. 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. However, if
prices increase subsequent to quarter end, but before a quarter-
end report is filed, the higher prices may be used. Using prices
in effect at March 31, 1999 of $14.74 per barrel of oil and $1.23
per Mcf of gas, the Company's oil and gas properties exceeded the
"ceiling" by approximately $8,239,000. However, subsequent to
quarter-end, prices recovered to $17.60 per barrel of oil and
$1.71 per Mcf of gas. Using the subsequent prices, the Company's
oil and gas properties were under the ceiling by approximately
$13,576,000; accordingly, no ceiling limitation write-down was
required.
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, 1999
and December 31, 1998, and results of operations and cash flows
for the three months ended March 31, 1999 and 1998. 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.
<PAGE>
Liquidity and Capital Resources
The Company's operations are capital intensive. Historically,
the Company's principal sources of capital have been cash flow
from operations, a revolving line of credit and proceeds from
sales of common and preferred stock. The Company's principal
uses of capital have been for the exploration, acquisition,
development and exploitation of oil and gas properties.
The Company's first quarter 1999 oil and gas capital expenditures
were $2.8 million and its net cash used by operations was $1.5
million. In addition, the Company repaid $325,000 in principal
payments on the Equipment Loan during the quarter. These
expenditures were funded primarily through borrowings under the
Company's revolving line of credit (described below). The
Company closed first quarter 1999 with a working capital deficit
of $2.1 million and long-term debt of $31.2 million.
The Company is currently in the process of securing additional
capital to enable it to continue its active drilling and
development program through 1999. The Company is considering bank
borrowings or the issuance of debt securities, or the sale of
preferred stock or other equity securities. There is no
assurance that the Company will be able to obtain the financing
it seeks upon satisfactory terms.
In first quarter 1999, three successful wells were drilled, of
which two exploratory wells were completed and one exploratory
well is awaiting completion. In addition, the Company
recompleted two wells. The Company currently has a $23.8 million
capital budget for 1999, and plans to drill or recomplete more
than 50 wells during the year. However, the Company's ability to
execute its plans is dependent on its ability to obtain
additional financing.
The borrowing base under the Revolver is subject to
redetermination every quarter, or at such other times as the Bank
may determine. The Revolver, which is secured by substantially
all of the Company's oil and gas properties, expires April 1,
2001. The Revolver's current borrowing base of $30.0 million is
under review. At March 31, 1999, borrowings under the Revolver
were $26.4 million, leaving available additional borrowings of
$3.6 million. As of May 11, 1999, the outstanding balance under
the Revolver was $27.0 million, leaving available additional
borrowings of $3.0 million. The Facility requires that the
Company maintain certain financial and other covenants, including
a minimum current ratio, a minimum net equity, and a debt service
ratio. At March 31, 1999, the Company was not in compliance with
the minimum net equity and the debt service ratio covenants. The
Bank has agreed to waive any non-compliance with the debt service
ratio that may occur during calendar year 1999, and to amend the
minimum net equity covenant in such a way that management
believes that, based on its current projections, the Company will
meet it for all reporting periods in 1999.
<TABLE>
<CAPTION>
Results of Operations
Three Months Ended March 31,
(In thousands, except per unit data) 1999 1998
<S> <C> <C>
Operating Results from Oil and Gas Operations:
Oil and gas sales $3,020 $3,069
Production tax and marketing expense 445 479
Lease operating expense 900 684
Depletion 1,211 1,100
Depreciation 67 30
Net Production:
Oil (MBbl) 47 68
Natural gas (MMcf) 1,686 1,086
MMcfe 1,968 1,494
Average Sales Price Realized (1):
Oil (per Bbl) $11.53 $14.26
Natural gas (per Mcf) 1.47 1.93
Per Mcfe 1.53 2.05
Average Cost Data (per Mcfe):
Production tax and marketing expense $ .22 $ .32
Lease operating expense .46 .46
Depletion .62 .74
Depreciation .03 .02
_________________
(1) Includes effects of hedging.
</TABLE>
<PAGE>
Three Months Ended March 31, 1999 Compared to March 31, 1998
Revenues. Total revenues for first quarter 1999 decreased 3% to
$3,038,000 from $3,125,000 for first quarter 1998. Oil and gas
sales for first quarter 1999 decreased 2% to $3,020,000 from
$3,069,000 for first quarter 1998 primarily due to lower oil and
gas prices realized. Oil production for first quarter 1999
decreased 31% to 47,000 barrels from 68,000 barrels for first
quarter 1998 and gas production for first quarter 1999 increased
55% to 1,686,000 Mcf from 1,086,000 Mcf for first quarter 1998,
due to the Company's successful drilling and recompletion program
in 1998 and 1999. Lower oil and gas prices in first quarter 1999
offset the gain in gas production. Average oil prices per barrel
for first quarter 1999 decreased 19% to $11.53 from $14.26 for
first quarter 1998. Average gas prices per Mcf for first quarter
1999 decreased 24% to $1.47 from $1.93 for first quarter 1998.
Oil and Gas Production Expenses. Oil and gas production
expenses, including production tax and marketing expenses,
increased 16% to $1,345,000 from $1,163,000 in 1998. The
increase was primarily due to new wells drilled in 1998 and 1999.
Total oil and gas production expenses per Mmcfe decreased $.10,
or 13%, to $.68 for the 1999 quarter from $.78 for the 1998
quarter. Production tax and marketing expense per Mmcfe
decreased 31% to $.22 from $.32 due to lower oil and gas prices
in the 1998 quarter. Lease operating expense per Mmcfe remained
the same at $.46 per Mmcfe in the 1999 quarter.
Depreciation, Depletion and Amortization. First quarter 1999
depreciation, depletion and amortization increased 13% to
$1,306,000 from $1,153,000 in first quarter 1998 due to higher
oil and gas production. Depletion per Mmcfe decreased 16% to
$.62 from $.74, primarily due to the write-down of oil and gas
properties of $16.4 million in fourth quarter 1998, pursuant to
the rules of the Securities and Exchange Commission.
General and Administrative Expenses. Net general and
administrative expenses for first quarter 1999 increased 7% to
$700,000 from $656,000 in first quarter 1998 due to the hiring of
additional personnel because of expanded operations.
Interest and Other Expenses. Interest and other expenses for
first quarter 1999 increased 412% to $558,000 from $109,000 for
first quarter 1998. The increase was primarily due to a higher
outstanding debt balance in the 1999 quarter.
Income Taxes. The Company incurred net operating losses ("NOLs")
for U.S. Federal income tax purposes in 1999 and 1998, 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
1999 and 1998.
Net (Loss) Income. The Company had a net loss of $871,000 for
first quarter 1999 compared to net income of $44,000 for first
quarter 1998 as a result of the factors discussed above. The
Company paid the 8% dividend of $27,000 on its $1,352,000 face
amount Series B Mandatorily Redeemable Convertible Preferred
Stock in each of the quarters ended March 31, 1999 and 1998, and
realized accretion of $3,000 in each period. Net loss
attributable to common shareholders for the quarter ended
March 31, 1999 was $901,000 compared to net income attributable
to common shareholders of $14,000 for the quarter ended March 31,
1998.
<PAGE>
Hedging Activities
The Company uses hedging instruments to manage commodity price
risks. The Company has used energy swaps and other financial
arrangements to hedge against the effects of fluctuations in the
sales prices for oil and natural gas. Gains and losses on such
transactions are matched to product sales and charged or credited
to oil and gas sales when that product is sold. Management
believes that the use of various hedging arrangements can be a
prudent means of protecting the Company's financial interests
from the volatility of oil and gas prices. The Company
recognized hedging gains of $196,000 and $79,000 in first quarter
1999 and 1998, respectively. These amounts are included in oil
and gas sales in the Company's consolidated statements of
operations.
Year 2000
The following Year 2000 statements constitute a Year 2000
Readiness Disclosure within the meaning of the Year 2000
Information and Readiness Disclosure Act of 1998.
Year 2000 issues result from the inability of certain electronic
hardware and software to accurately calculate, store or use a
date subsequent to December 31, 1999. These dates can be
erroneously interpreted in a number of ways; e.g., the year 2000
could be interpreted as the year 1900. This inability could
result in a system failure or miscalculations that could in turn
cause operational disruptions. These issues could affect not
only information technology ("IT") systems, such as computer
systems used for accounting, land and engineering, but also
systems that contain embedded chips.
The Company has completed an assessment of its IT systems to
determine whether these systems are Year 2000 compliant. The
Company has determined that these systems are either compliant or
with relatively minor modifications or upgrades (many of which
would have been made in any event as part of the Company's
continuing effort to enhance its IT systems) will be compliant.
All necessary modifications and upgrades and the testing thereof
are expected to be completed by the end of the second quarter of
1999.
The Company is assessing its non-information systems to ascertain
whether these systems contain embedded computer chips that will
not properly function subsequent to December 31, 1999. These
systems include office equipment, the automatic wellhead
equipment used to operate wells, the Company-owned gas gathering
pipelines, and the Company's gas processing plant in the San Juan
Basin. All of these systems have been determined to be Year 2000
compliant based on information provided by third party vendors.
To date, the Company has relied upon its internal staff to assess
its Year 2000 readiness. The costs associated with assessing the
Company's Year 2000 internal compliance and related systems
modification, upgrading and testing are not currently expected to
exceed $50,000. Costs incurred through March 31, 1999 have been
minimal.
The Company is in the process of communicating with certain of
its significant suppliers, service companies, gas gatherers and
pipelines, electricity providers and financial institutions to
determine the vulnerability of the Company to third parties'
failure to address their Year 2000 issues. While the Company has
not yet received definitive responses indicating all such
entities are Year 2000 compliant, it has not received information
suggesting the Company is vulnerable to potential Year 2000
failure by these parties. These communications are expected to
continue into the second quarter of 1999. At this time, the
Company has not developed any contingency plans to address third
party non-compliance with Year 2000 matters. However, should its
communications with any third parties indicate significant
vulnerability, development of contingency plans will be
considered.
<PAGE>
The Company does not anticipate any significant disruptions of
its operations due to Year 2000 issues. Among the potential
"worst case" problems the Company could face would be the loss of
electricity used to power well pumps and compressors that would
result in wells being shut-in, or the inability of a third party
gas gathering company or pipeline to accept gas from the
Company's wells or gathering lines which would also result in the
Company's wells being shut-in. A disruption in production would
result in the loss of income.
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's intangible drilling and development costs
to be deducted currently, or capitalized and amortized over a
five year period. The Company, as an independent producer, is
also entitled to a deduction for percentage depletion with
respect to the first 1,000 barrels per day of domestic crude oil
(and/or equivalent units of domestic natural gas) produced (if
such percentage depletion exceeds cost depletion). Generally,
this deduction is 15% of gross income from an oil and gas
property, without reference to the taxpayer's basis in the
property. The percentage depletion deduction may not exceed 100%
of the taxable income from a given property. Further, percentage
depletion is limited in the aggregate to 65% of the Company's
taxable income. Any depletion disallowed under the 65%
limitation, however, may be carried over indefinitely.
Inflation has not historically had a material impact on the
Company's financial statements, and management does not believe
that the Company will be materially more or less sensitive to the
effects of inflation than other companies in the oil and gas
business.
The 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 1998 Form 10-K.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from those
reported on the Company's 1998 Form 10-K.
<PAGE>
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 1999, the Company filed three Periodic
Reports on Form 8-K dated: March 4, 1999, March 9, 1999 and
March 15, 1999. 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 14, 1999 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: May 14, 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,436
<SECURITIES> 0
<RECEIVABLES> 1,626
<ALLOWANCES> 43
<INVENTORY> 379
<CURRENT-ASSETS> 3,550
<PP&E> 105,683
<DEPRECIATION> 50,045
<TOTAL-ASSETS> 59,534
<CURRENT-LIABILITIES> 5,619
<BONDS> 0
<COMMON> 70
1,332
0
<OTHER-SE> 21,240
<TOTAL-LIABILITY-AND-EQUITY> 59,534
<SALES> 3,020
<TOTAL-REVENUES> 3,038
<CGS> 0
<TOTAL-COSTS> 3,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 558
<INCOME-PRETAX> (871)
<INCOME-TAX> 0
<INCOME-CONTINUING> (871)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (901)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
