______________________________________________________________________________
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 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 number 0-17267
Mallon Resources Corporation
(Exact name of registrant as specified in its charter)
Colorado 84-1095959
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
999 18th Street, Suite 1700 Denver, Colorado 80202
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (303) 293-2333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (l) 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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
[X] Yes [ ] No
As of the close of business on March 15, 2000, the aggregate market value
of the shares of voting stock held by non-affiliates of the registrant,
based upon the sales price for a share of the registrant's Common Stock as
reported on the Nasdaq National Market tier of the Nasdaq Stock Market, was
approximately $31,730,000.
As of March 15, 2000, 7,837,300 shares of the registrant's Common Stock,
par value $0.01 per share, were outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment hereto. [X]
Documents Incorporated By Reference:
Portions of the registrant's Proxy Statement relating to its 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
__________________________________________________
<PAGE>
Mallon Resources Corporation
Form 10-K
for the fiscal year ended
December 31, 1999
Table of Contents
PART I Page
Items 1 and 2 Business and Properties 1
General History 1
Business Strategies 1
Historical Highlights 2
Our Oil and Gas Properties 2
Gas Sweetening Plant 4
Acreage 4
Summary Oil and Gas Reserve Data 4
Drilling Activity 5
Recompletion Activity 5
Productive Wells 5
Production and Sales 6
Marketing 6
Corporate Offices; Officers, Directors and Key Employees 6
Laguna Gold Company 8
Cautionary Statement Regarding Forward-Looking Statements 8
Risk Factors 8
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters 16
Price Range of Common Stock 16
Holders 16
Dividend Policy 16
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Overview 18
Liquidity and Capital Resources 18
Results of Operations 19
Hedging Activities 22
Year 2000 22
Miscellaneous 23
Item 7A Quantitative and Qualitative Disclosure about Market Risk 23
Commodity Price Risk 23
Interest Rate Risk 24
Item 8 Financial Statements and Supplementary Data 24
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
PART III
Item 10 Directors and Executive Officers of the Registrant 25
Item 11 Executive Compensation 25
Item 12 Security Ownership of Certain Beneficial Owners and Management 25
Item 13 Certain Relationships and Related Transactions 25
PART IV
Item 14 Exhibits, Financial Statement Schedules, Reports on Form 8-K 25
SIGNATURES 27
EXHIBIT INDEX 28
GLOSSARY OF CERTAIN INDUSTRY TERMS 29
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
PART I
ITEMS 1 AND 2: BUSINESS AND PROPERTIES
General History
As used in this report, any reference to "Mallon," "we," "our" or the
"Company" means Mallon Resources Corporation and its subsidiaries, unless
the context suggests otherwise. We have included definitions of technical
terms and abbreviations important to an understanding of our business under
"Glossary of Certain Industry Terms."
We are an independent energy company engaged in oil and natural gas
exploration, development and production. We conduct our operations through
our wholly-owned subsidiary, Mallon Oil Company. We operate primarily in the
State of New Mexico where substantially all of our estimated proved reserves
are located in the San Juan and Delaware Basins. We have accumulated
significant acreage positions in these two basins, in which we have been
active since 1982. We believe our technical and operational experience and
our database of information enable us to effectively exploit and develop our
properties.
We have increased our estimated proved reserves from 34.5 Bcfe as of
December 31, 1996, to 103.9 Bcfe as of December 31, 1999, a 201% increase.
As of December 31, 1999, our proved reserves consisted of 92.5 billion cubic
feet of natural gas and 1.9 million barrels of crude oil, with a pre-tax PV-
10 of $72.4 million. At December 31, 1999, we owned interests in 302 gross
(150.8 net) producing wells and operated 186, or 62%, of them.
Our common stock is traded on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "MLRC." Our executive offices are at
999 18th Street, Suite 1700, Denver, Colorado 80202 (telephone 303/293-
2333). Our transfer agent is Securities Transfer Corporation, Dallas, Texas.
Business Strategies
Our primary business objective is to increase our proved oil and gas
reserves and cash flows. We pursue this objective by:
- - Conducting Exploration through Exploitation. Our primary operating
strategy is to increase our proved reserves through relatively low-risk
activities such as development drilling, recompletions, multi-zone
completions and enhanced recovery activities. Numerous potentially
productive geologic formations tend to be stacked atop one another in the
San Juan and Delaware Basins. This allows us to target multiple potential
pay zones in most wells, thus reducing drilling risks, and to conduct
exploration operations in conjunction with our development drilling. Wells
drilled to one horizon offer opportunities to examine up-hole zones or can
be drilled to deeper prospective formations for relatively little additional
cost. The recent increases in our estimated proved reserves and rates of
production are attributable primarily to oil and gas fields discovered or
extended by our exploration through exploitation activities.
- - Controlling Our Operations. For the year ended December 31, 1999,
approximately 91% of our production was from properties that we operate. We
believe that this level of operating control, combined with our operating
experience in the San Juan and Delaware Basins, allows us to better control
ongoing operations and costs, field development decisions, and the timing
and nature of capital expenditures.
- - Developing and Controlling Our Infrastructure. By owning and
controlling our critical infrastructure, such as gas gathering systems, gas
sweetening plants and saltwater disposal facilities, we believe that we can
reduce costs.
- - Making Strategic Acquisitions. We also make acquisitions of properties
located within our core areas of operations. We believe that our knowledge
of the San Juan and Delaware Basins allows us to effectively identify and
evaluate acquisition opportunities.
- - Having a Flexible Focus. Because we maintain inventories of both oil
and natural gas properties, we are able to re-direct our development
emphasis from one commodity to the other, as market conditions change.
<PAGE>
Historical Highlights
In September 1993, we purchased our core group of Delaware Basin
properties from Pennzoil Exploration and Production Company. In January
1997, we acquired additional interests in our key San Juan Basin gas
property, East Blanco Field, and became operator of the field. In October
1996 and December 1997, we completed public financings in which we sold an
aggregate of 4.6 million shares of common stock for combined net proceeds of
$32.8 million. These financings enabled us to accelerate the pace of our
development of our inventory of oil and gas properties.
In May 1998, we significantly increased our acreage in East Blanco Field
by entering into a Minerals Development Agreement with the Jicarilla Apache
Tribe. This acreage is adjacent to our original East Blanco acreage, and
brings our total acreage in the field to 68,900 gross acres. In late 1998
and early 1999, we drilled six exploratory wells to test our new acreage. We
discovered commercial quantities of natural gas in five of the wells, which
we believe confirms that East Blanco Field extends onto the new acreage. In
September 1999, we obtained $45.7 million of debt financing from Aquila
Energy Capital Corporation, with which we continued our development drilling
operations at East Blanco. Based on our operations to date, we have
identified more than 425 drilling targets on our East Blanco acreage.
Our Oil and Gas Properties
We are active in the San Juan Basin of northwestern New Mexico and in the
Delaware Basin of southeastern New Mexico. At December 31, 1999, these areas
accounted for substantially all of our estimated proved reserves, with 64.7
Bcfe attributable to our San Juan Basin properties and 39.0 Bcfe
attributable to our Delaware Basin properties.
San Juan Basin, Northwestern New Mexico
We have been active in the San Juan Basin since 1984, where our primary
area of interest is our East Blanco natural gas field. At December 31, 1999,
we owned interests in 76,000 gross (66,600 net) acres of oil and gas
properties in the San Juan Basin. Wells on this acreage produce from a
variety of zones in the San Jose, Nacimiento, Ojo Alamo, Pictured Cliffs,
Mesaverde, Mancos and Dakota formations. During the next year, we plan to
commence a pilot program to test the Fruitland Coal Formation that is
present throughout our East Blanco acreage at a depth of approximately 3,800
feet. We are actively involved in efforts to acquire additional acreage in
the East Blanco area and other portions of the San Juan Basin.
East Blanco Field, Rio Arriba County, New Mexico
We own interests in approximately 68,900 gross acres in the East Blanco
natural gas field on the eastern flank of the San Juan Basin. We have been
involved in the development of East Blanco Field since 1986. All production
in the field has been natural gas. East Blanco wells typically contain
reserves in one or more of the following productive zones: the Pictured
Cliffs Sandstone at approximately 3,600 feet, the Ojo Alamo Sandstone at
approximately 3,000 feet, the Nacimiento Formation at approximately 2,000
feet and the San Jose Formation at approximately 1,500 feet. The wells also
penetrate the Fruitland Coal Formation at approximately 3,800 feet, which is
productive in fields adjacent to East Blanco. We operate all of our East
Blanco wells, in which we have an average working interest of 93% and an
average net revenue interest of 72%. As of December 31, 1999, our estimated
proved reserves in East Blanco Field were 62.6 Bcfe, or 60% of our total
estimated proved reserves.
During 1999, we drilled 22 wells and recompleted 7 wells at East Blanco.
This drilling and recompletion work was done primarily to put Pictured
Cliffs, Ojo Alamo, Nacimiento and San Jose gas on production. In late 1998
and early 1999, we drilled six widely scattered wells to test the new
acreage block we acquired under our Minerals Development Agreement with the
Jicarilla Apache Tribe. We discovered commercial quantities of natural gas
in five of the wells, which we believe confirms that East Blanco Field
extends onto the new acreage. The sixth well, deemed non-commercial, marks
the southern limit of our current drilling program. Among the completed
wells, production was established in the San Jose, Nacimiento, Ojo Alamo,
and Pictured Cliffs Formations, at depths ranging between 1,200 and 3,600
feet. Under the terms of our Minerals Development Agreement with the
Jicarilla Apache Tribe, we are required to drill at least two wells in each
of the four acreage tracts covered by the agreement each year in order to
retain our interests in all of the acreage. Based upon our operations to
date, we have identified more than 425 drilling targets on our East Blanco
acreage, which we believe have the potential to contain substantial
quantities of recoverable natural gas.
<PAGE>
Other San Juan Basin Fields
Gavilan Field, Rio Arriba County, New Mexico. We own and operate seven
wells in this field, in which our average working interest is 37%. We have
leasehold interests in 2,400 gross (1,260 net) acres in this field. Current
production is primarily natural gas from the Mancos Shale at approximately
6,900 feet and from the Mesaverde Formation at approximately 5,400 feet. In
2000, we plan to recomplete additional wells in this field in the Mesaverde.
As of December 31, 1999, Gavilan Field contained 2.0 Bcfe or 2% of our total
estimated proved reserves.
Otero Field, Rio Arriba County, New Mexico. We own and operate three
wells in this field, in which our average working interest is 85%. We have
leasehold interests in 4,600 gross (3,700 net) acres in this field. The
wells produce oil from the Mancos Shale at approximately 4,700 feet. As of
December 31, 1999, Otero Field contained only a nominal portion of our total
estimated proved reserves.
Delaware Basin, Southeastern New Mexico
The Delaware Basin of southeast New Mexico, where we own interests in
approximately 34,000 gross (13,200 net) acres, containing 181 gross (62 net)
wells, has been an area of significant activity for us since 1982. Our
Delaware Basin properties are located primarily in fields with established
production histories, which typically contain multiple productive geologic
formations and zones. Our wells in the Delaware Basin produce from a variety
of formations, the principal of which are the Cherry Canyon, Brushy Canyon,
Bone Spring, Strawn and Morrow Formations. The Cherry Canyon, Brushy Canyon
and Bone Spring Formations primarily produce oil at shallow to medium
drilling depths, while the deeper Strawn and Morrow generally produce
natural gas. Our primary properties in the Delaware Basin are in the White
City, Black River, South Carlsbad, Lea Northeast, and Quail Ridge Fields. We
also continue to assess potential in our Shipp, Lovington Northeast and
Brushy Draw properties. Based upon our operations to date, we have
identified 76 drilling targets on our Delaware Basin acreage.
White City, Black River, and Carlsbad Fields, Eddy County, New Mexico. We
have leasehold interests in 8,480 gross (4,560 net) acres in these adjacent
fields. They were the focus of much of our recompletion and development
activities from 1993 through 1997. As of December 31, 1999, our estimated
proved reserves in these three fields were 18.0 Bcfe, or 17% of our total
estimated proved reserves. Because greater drilling densities were recently
approved in this area, much of our developed acreage in these fields now
contain additional drilling opportunities for Morrow Formation natural gas.
Lea Northeast Field, Lea County, New Mexico. We own and operate 2,200
gross (1,350 net) acres in this field. Our working interest averages 71% in
this field. Our Cherry Canyon play in this field began in 1994. During 2000,
we plan to initiate a pilot waterflood project in this field. As of
December 31, 1999, our estimated proved reserves in Lea Northeast Field were
2.4 Bcfe or 2% of our total estimated proved reserves.
Quail Ridge, Lea County, New Mexico. Adjacent to Lea Northeast, we
control an approximate 4,120 gross (1,970 net) acre block on which we
operate wells producing from the Bone Spring and Morrow. The Quail Ridge
Field has primarily produced gas from the Morrow at depths of approximately
13,500 feet. We currently have an interest in 11 wells in this area and
operate six of them. We control an approximate 50% working interest in this
acreage. As of December 31, 1999, our estimated proved reserves in Quail
Ridge Field were 10.7 Bcfe or 10% of our total estimated proved reserves.
Because greater drilling densities were recently approved in this area, much
of our developed acreage in this field now offers additional drilling
opportunities for Morrow Formation natural gas. Our acreage also has
additional Bone Spring Formation drilling opportunities.
Shipp and Lovington Northeast Fields, Lea County, New Mexico. Shipp and
Lovington Fields are comprised of a collection of individual reservoirs, or
algal mounds, in a Strawn Formation interval at depths of approximately
11,500 feet. The mounds range in size from 100 to 700 acres. We have
interests in 30 wells and operate 20 wells in these adjacent fields. During
1996, we initiated a low cost pilot waterflood project on one of these
mounds, which has yet to show a significant response. Our working interest
averages 41% in Lovington Northeast and 63% in Shipp. As of December 31,
1999, these fields contained only a nominal portion of our total estimated
proved reserves.
Brushy Draw Field, Eddy County, New Mexico. Our initial drilling and
field development began here in 1982. Current production is from the base of
the Cherry Canyon Formation, at a depth of approximately 5,000 feet. We
operate 14 wells with an average working interest of 66%. As of December 31,
1999, Brushy Draw Field contained only a nominal portion of our total
estimated proved reserves.
<PAGE>
Other Areas
All of our oil and gas operations are currently conducted on-shore in the
United States. In addition to the properties described above, we have
properties in the states of Colorado, Oklahoma, Wyoming, North Dakota and
Alabama. While we intend to continue to produce our existing wells in those
states, we currently do not expect to engage in any development activities
in those areas. In 1999, we bid to obtain certain oil and gas concession
rights in Costa Rica. The concessions have yet to be awarded.
Gas Sweetening Plant
We designed, constructed, own and operate an amine plant to remove the
hydrogen sulfide from the gas produced at East Blanco. This plant treats
substantially all of the natural gas we produce at East Blanco. The plant's
current capacity is 32 MMcf per day. With added compression, the plant's
capacity can be increased to approximately 60 MMcf per day, without
requiring substantial expansion.
Acreage
We believe we have satisfactory title to our oil and gas properties based
on standards prevalent in the oil and gas industry, subject to exceptions
that do not detract materially from the value of the properties. The
following table summarizes our oil and gas acreage holdings as of December 31,
1999:
<TABLE>
<CAPTION>
Developed Undeveloped
Area Gross Net Gross Net
<S> <C> <C> <C> <C>
San Juan Basin 20,151 17,488 55,836 49,099
Delaware Basin 28,046 9,224 6,000 3,943
Other 10,979 1,096 1,927 324
Total 59,176 27,808 63,763 53,366
</TABLE>
Summary Oil and Gas Reserve Data
The following table sets forth summary information concerning our
estimated proved oil and gas reserves as of December 31, 1999, based on a
report prepared by Reed W. Ferrill & Associates, Inc., independent petroleum
engineers. Ferrill & Associates is sometimes referred to herein as the
"Independent Engineer," and its report is sometimes referred to herein as
the "Reserve Report." All calculations in the Reserve Report have been made
in accordance with the rules and regulations of the Securities and Exchange
Commission and give no effect to federal or state income taxes otherwise
attributable to estimated future net revenues from the sale of oil and gas.
The present value of estimated future net revenues has been calculated using
a discount factor of 10%. The commodity prices used in this calculation were
$2.10 per Mcf for natural gas and $23.94 per barrel for oil.
<TABLE>
<CAPTION>
December 31, 1999
<S> <C>
Proved Reserves:
Natural gas (MMcf) 92,525
Oil (MBbl) 1,896
Total (MMcfe) 103,901
Proved Developed Reserves:
Natural gas (MMcf) 38,539
Oil (MBbl) 1,204
Total (MMcfe) 45,763
PV-10 (in thousands): $ 72,364
</TABLE>
<PAGE>
Drilling Activity
The following table sets forth, for each of the last three years, our
development drilling activities:
<TABLE>
<CAPTION>
Gross Wells Net Wells
Productive Dry Total Productive Dry Total
<S> <C> <C> <C> <C> <C> <C>
1997 (1) 23 3 26 12.99 0.84 13.83
1998 (2) (3) 37 7 44 32.64 5.59 38.23
1999 (4) 21 1 22 18.05 1.00 19.05
</TABLE>__________________
(1) Includes 1 gross (0.0225 net) dry exploratory well.
(2) Includes 2 gross (2 net) dry exploratory wells.
(3) Includes 3 gross (3 net) productive exploratory wells.
(4) Includes 3 gross (3 net) productive exploratory wells.
From January 1, 2000 through March 21, 2000, we engaged in the drilling
of 12 gross (11.75 net) wells that are not reflected in the foregoing table.
Recompletion Activity
The following table contains information concerning our well recompletion
activities for each of the last three years:
<TABLE>
<CAPTION>
Gross Wells Net Wells
Productive Dry Total Productive Dry Total
<S> <C> <C> <C> <C> <C> <C>
1997 19 3 22 13.76 1.90 15.66
1998 28 2 30 25.10 1.83 26.93
1999 (1) 6 1 7 5.67 0.92 6.59
</TABLE>___________________
(1) Includes 1 gross (1 net) productive exploratory well.
Productive Wells
The following table summarizes our gross and net interests in productive
wells at December 31, 1999. Net interests represented in the table are net
"working interests" which bear the cost of operations.
<TABLE>
<CAPTION>
Gross Wells Net Wells
Oil Natural Gas Total Oil Natural Gas Total
<S> <C> <C> <C> <C> <C> <C>
San Juan Basin 4 95 99 3.14 83.93 87.07
Delaware Basin 111 70 181 47.27 14.34 61.61
Other 14 8 22 1.48 0.64 2.12
Total 129 173 302 51.89 98.91 150.80
</TABLE>
In addition, we own interests in four waterflood units in the Delaware
Basin, which contain a total of 550 gross wells (8.5 net wells), and 6 gross
(3.31 net) salt water disposal wells.
Production and Sales
The following table sets forth information concerning our total oil and
gas production and sales for each of the last three fiscal years:
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1999 1998 1997
<S> <C> <C> <C>
Net Production:
Natural gas (MMcf) 5,600 5,852 2,350
Oil (MBbl) 172 230 196
Total (MMcfe) 6,632 7,232 3,526
Average Sales Price Realized (1):
Natural gas (per Mcf) $ 1.81 $ 1.72 $ 2.04
Oil (per Bbl) $17.38 $12.99 $19.31
Per Mcfe $ 1.98 $ 1.81 $ 2.43
Average Cost (per Mcfe):
Production tax and marketing expense $ 0.25 $ 0.26 $ 0.32
Lease operating expense $ 0.52 $ 0.47 $ 0.54
Depletion $ 0.65 $ 0.73 $ 0.74
</TABLE>___________________
(1) Includes effects of hedging.
Marketing
Our natural gas is generally sold on the spot market or pursuant to
short-term contracts. Oil and liquids are generally sold on the open market
to unaffiliated purchasers, generally pursuant to purchase contracts that
are cancelable on 30 days notice. The price paid for this production is
generally an established or posted price that is offered to all producers in
the field, plus any applicable differentials. Prices paid for crude oil and
natural gas fluctuate substantially.
Because future prices are difficult to predict, we hedge a portion of our
oil and gas sales to protect against market downturns. The nature of hedging
transactions is such that producers forego the benefit of some price
increases that may occur after the hedging arrangement is in place. We
nevertheless believe that hedging is prudent in certain circumstances in
order to minimize the risk of falling prices. Under our credit agreement
with Aquila Energy Capital Corporation, we are required to maintain price
hedging arrangements in place with respect to up to 65% of our oil and gas
production. In addition, we also entered into an agency agreement with
Aquila under which we pay a marketing fee equal to 1% of the net proceeds
from the sale of our oil and gas production.
Corporate Offices; Officers, Directors and Key Employees
Our executive offices are located at 999 18th Street, Suite 1700, Denver,
Colorado 80202, where our phone number is (303) 293-2333. We employ 25
employees at this office. We maintain field operations offices in Durango,
Colorado, and in Carlsbad, New Mexico, where we employ a total of 23
individuals.
The following are the members of Mallon's board of directors and its
executive officers:
Name Age Title(s)
George O. Mallon, Jr 55 Director, Chairman of the Board,
CEO and President
Kevin M. Fitzgerald 45 Director, COO and Executive
Vice President
Roy K. Ross 49 Director, Executive Vice President,
Secretary and General Counsel
Frank Douglass 66 Director
Roger R. Mitchell 67 Director
Francis J. Reinhardt, Jr. 70 Director
Peter H. Blum 42 Director
Alfonso R. Lopez 51 Vice President - Finance and Treasurer
The directors serve until the next annual meeting of shareholders.
Following are brief descriptions of the business experience of our directors
and executive officers:
George O. Mallon, Jr. has been the President and Chairman of the Board of
Mallon since December 1988, when it was organized. He formed Mallon Oil in
1979 and was a co-founder of Laguna Gold Company in 1980. He is now a
director of Laguna. Mr. Mallon earned a B.S. degree in Business from the
University of Alabama in 1965 and an M.B.A. degree from the University of
Colorado in 1977.
<PAGE>
Kevin M. Fitzgerald has been Executive Vice President of Mallon since
June 1990. He joined Mallon Oil in 1983 as Petroleum Engineer and served as
Vice President of Engineering from 1987 through December 1988, when he
became President of Mallon Oil and a Vice President of Mallon. Mr.
Fitzgerald earned a B.S. degree in Petroleum Engineering from the University
of Oklahoma in 1978.
Roy K. Ross has been Executive Vice President and General Counsel of
Mallon since 1992. He was named Secretary of Mallon in 1997. From June 1976
through September 1992, Mr. Ross was an attorney in private practice with
the Denver-based law firm of Holme Roberts & Owen. Mr. Ross is also
Executive Vice President, Secretary, General Counsel and a director of
Mallon Oil and Laguna. He earned his B.A. degree in Economics from Michigan
State University in 1973 and his J.D. degree from Brigham Young University
in 1976.
Frank Douglass has been a director of Mallon since its formation in 1988.
In 1998, he retired as a Senior Partner in the Texas law firm of Scott,
Douglass & McConnico, LLP, where he had been a partner since 1976. Mr.
Douglass earned a B.B.A. degree from Southwestern University in 1953 and a
L.L.B. degree from the University of Texas School of Law in 1958.
Roger R. Mitchell has been a director of Mallon since 1990. Prior to
1989, Mr. Mitchell served as a co-general partner with Mallon of a series of
private oil and gas drilling limited partnerships sponsored by Mallon. Mr.
Mitchell has participated in or managed a number of real estate, insurance
and investment companies, including Mitchell Management Company, which he
currently owns. He earned a B.S. degree in Business from Indiana University
in 1954 and an M.B.A. degree from Indiana University in 1956.
Francis J. Reinhardt, Jr. has been a director of Mallon since 1994. He is
with the New York investment banking firm of Carl H. Pforzheimer & Co.,
where he has been a partner since 1966. He is a member and past president of
the National Association of Petroleum Investment Analysts. Mr. Reinhardt is
also a director of The Exploration Company of Louisiana, a public company
engaged in the oil and gas business. Mr. Reinhardt holds a B.S. degree from
Seton Hall University and an M.B.A. from New York University.
Peter H. Blum became a director of Mallon in January 1998. Since October
1998, Mr. Blum, a financial consultant, has been President of Bear Ridge
Capital LLC. From April 1997 to October 1998, Mr. Blum was Senior Managing
Director, head of investment banking, for the investment banking firm
Gaines, Berland Inc. From 1995 to 1997, Mr. Blum held the position of
Managing Director, head of energy banking, with the investment banking firm
Rodman & Renshaw, Inc. From 1992 to 1995, Mr. Blum held various positions
with the investment banking firm Mabon Securities, Inc. Mr. Blum earned a
B.B.A. degree in accounting from the University of Wisconsin in 1979.
Alfonso R. Lopez joined Mallon in July 1996 as Vice President-Finance and
Treasurer. He was Vice President - Finance for Consolidated Oil & Gas, Inc.
(now Chesapeake Energy Corporation) from 1993 to 1995. Mr. Lopez was a
consultant from 1991 to 1992. From 1981 to 1990, he was Controller for
Decalta International Corporation, a Denver-based exploration and production
company. He served as Controller for Western Crude Oil, Inc. (now Texaco
Trading and Transportation, Inc.) from 1978 to 1981. Mr. Lopez is a
certified public accountant and was with Arthur Young & Company (now Ernst &
Young) from 1970 to 1978. Mr. Lopez earned his B.A. degree in Accounting and
Business Administration from Adams State College in Colorado in 1970.
Key Employees
Employees who are instrumental to our success include the following
individuals:
Ray E. Jones is Vice President - Engineering of Mallon Oil. Before
joining Mallon in January 1994, Mr. Jones spent eight years with Jerry R.
Bergeson & Associates (now GeoQuest), an independent consulting firm. Mr.
Jones graduated from Colorado School of Mines in 1979 and is a registered
professional engineer.
Wendell A. Bond has been Vice President - Exploration of Mallon Oil since
December 1996. Prior to joining Mallon on a full-time basis, Mr. Bond was an
independent geological consultant to Mallon since July 1994. Mr. Bond has
more than 25 years of experience in the petroleum industry, both
domestically and internationally. Prior to joining Mallon, he
<PAGE>
was president of Wendell A. Bond, Inc., a company specializing in petroleum
geological consulting services that he formed in 1988. Prior to 1988, Mr.
Bond had been employed in a variety of positions for several independent and
major oil and gas companies, including Project Geologist for Webb Resources,
District Geologist for Sohio Petroleum and Chief Geologist for Samuel Gary
Jr. & Associates. Mr. Bond earned his B.S. degree in geology from Capital
University, Columbus, Ohio and his M.S. degree in geology from the
University of Colorado.
Donald M. Erickson, Jr. has been Vice President - Operations of Mallon
Oil since February 1997. Mr. Erickson has more than 20 years of experience
in oil field operations. Prior to joining Mallon, he was Operations Manager
for Presidio Exploration, Inc. (which was merged into Tom Brown Inc.) from
December 1988 to January 1997. Mr. Erickson earned a Heating and Cooling
Technical Degree from Central Technical Community College in Hastings,
Nebraska in 1975 and has studied Mechanical Engineering at the University of
Denver.
Laguna Gold Company
We currently own 12,332,203 shares (or about 35%) of the common stock of
Laguna Gold Company, a company whose common shares are listed on The Toronto
Stock Exchange under the trading symbol "LGC." As a result of significant
net losses, our investment in Laguna is recorded at $0. We have no
contractual obligation to finance Laguna's future operations and we have no
intention of doing so.
Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934, including statements regarding, among other items, our
growth strategies, the potential for the recovery of additional volumes of
hydrocarbons, anticipated trends in our business and our future results of
operations, market conditions in the oil and gas industry, our ability to
make and integrate acquisitions, the outcome of litigation and the impact of
governmental regulation. These forward-looking statements are based largely
on our expectations and are subject to a number of risks and uncertainties,
many of which are beyond our control. Actual results could differ materially
from these forward-looking statements as a result of, among other things:
- - a decline in natural gas production or natural gas prices,
- - incorrect estimates of required capital expenditures,
- - increases in the cost of drilling, completion and gas collection or other
costs of production and operations,
- - an inability to meet growth projections, and
- - other risk factors set forth under "Risk Factors" below.
In addition, the words "believe," "may," "will," "estimate," "continue,"
"anticipate," "intend," "expect" and similar expressions, as they relate to
Mallon, our business or our management, are intended to identify forward-
looking statements. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information,
future events or otherwise after the date of this report. In light of these
risks and uncertainties, the forward-looking events and circumstances
discussed in this report may not occur and actual results could differ
materially from those anticipated or implied in the forward-looking
statements.
Risk Factors
In evaluating us and our common stock, readers should consider carefully,
among other things, the following risk factors.
Oil and gas prices are volatile, and an extended decline in prices could
adversely affect our revenue, cash flows and profitability.
<PAGE>
Our revenues, operating results, profitability, future rate of growth and
the carrying value of our oil and gas properties depend heavily on
prevailing market prices for oil and gas. We expect the markets for oil and
gas to continue to be volatile. Any substantial or extended decline in the
price of oil or gas would have a material adverse effect on our financial
condition and results of operations. It could reduce our cash flow and
borrowing capacity, as well as the value and the amount of our reserves. At
December 31, 1999, approximately 89% of our estimated proved reserves were
natural gas. Accordingly, we are impacted more directly by volatility in the
price of natural gas.
We cannot predict future oil and natural gas prices. Various factors
beyond our control that could affect prices of oil and gas include:
- - worldwide and domestic supplies of oil and gas,
- - the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls,
- - political instability or armed conflict in oil or gas producing regions,
- - the price and level of foreign imports,
- - worldwide economic conditions,
- - marketability of production,
- - the level of consumer demand,
- - the price, availability and acceptance of alternative fuels,
- - the availability of pipeline capacity,
- - weather conditions, and
- - actions of federal, state, local and foreign authorities.
These external factors and the volatile nature of the energy markets make
it difficult to estimate future prices of oil and gas. We enter into energy
swap agreements and other financial arrangements at various times to attempt
to minimize the effect of oil and natural gas price fluctuations. We cannot
assure you that such transactions will reduce risk or minimize the effect of
any decline in oil or natural gas prices. Any substantial or extended
decline in oil or natural gas prices would have a material adverse effect on
our business and financial results. Energy swap arrangements may limit the
risk of declines in prices, but such arrangements may also limit revenues
from price increases.
Lower oil and gas prices may cause us to record ceiling limitation write-
downs.
We periodically review the carrying value of our oil and gas properties
under the full cost accounting rules of the Securities and Exchange
Commission. Under these 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%, plus the lower of cost or fair market value of the proved properties,
as adjusted for related tax effects. Application of the ceiling test
generally requires pricing future revenue at the unescalated prices in
effect as of the end of each fiscal quarter and requires a write-down for
accounting purposes if the ceiling is exceeded. We may be required to write
down the carrying value of our oil and gas properties when oil and gas
prices are depressed or unusually volatile. If a write-down is required, it
would result in a charge to earnings, but would not impact cash flow from
operating activities. Once incurred, a write-down of oil and gas properties
is not reversible at a later date. We recorded a $16.8 million write-down of
the carrying value of our oil and gas properties in December 1998.
Our operations require large amounts of capital.
Our current development plans will require us to make large capital
expenditures for the exploration and development of our properties.
Historically, we have funded our capital expenditures through a combination
of funds generated internally from sales of production, equity offerings,
and long and short-term debt financing arrangements.
<PAGE>
We currently do not have any sources of additional financing other than
our existing credit agreement with Aquila and our equipment leases. We
cannot be sure that any additional financing will be available to us on
acceptable terms. Future cash flows and the availability of financing will
be subject to a number of variables, such as:
- - the level of production from existing wells,
- - prices of oil and natural gas, and
- - our results in locating and producing new reserves and the results of our
natural gas development project at East Blanco Field.
Issuing equity securities to satisfy our financing requirements could
cause substantial dilution to our existing shareholders. Debt financing
could lead to:
- - a substantial portion of our operating cash flow being dedicated to the
payment of principal and interest,
- - our being more vulnerable to competitive pressures and economic
downturns, and
- - restrictions on our operations.
If our revenues were to decrease due to lower oil and natural gas prices,
decreased production or other reasons, and if we could not obtain capital
through our credit facility or otherwise, our ability to execute our
development plans, replace our reserves or maintain production levels could
be greatly limited.
Estimates in this report concerning our oil and gas reserves and future net
revenue estimates are uncertain.
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves and their values, including many factors
beyond our control. Estimates of proved undeveloped reserves, which comprise
a significant portion of our reserves, are by their nature uncertain. The
reserve information included or incorporated by reference in this report are
only estimates and are based upon various assumptions, including assumptions
required by the Securities and Exchange Commission, relating to oil and gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. Although we believe they are reasonable, actual
production, revenues and expenditures will likely vary from estimates, and
these variances may be material.
Estimates of oil and natural gas reserves, by necessity, are projections
based on geologic and engineering data, and there are uncertainties inherent
in the interpretation of such data as well as the projection of future rates
of production and the timing of development expenditures. Reserve
engineering is a subjective process of estimating underground accumulations
of oil and natural gas that are difficult to measure. The accuracy of any
reserve estimate is a function of the quality of available data, engineering
and geological interpretation and judgment. Estimates of economically
recoverable oil and natural gas reserves and future net cash flows
necessarily depend upon a number of variable factors and assumptions, such
as historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies
and assumptions governing future oil and natural gas prices, future
operating costs, severance and excise taxes, development costs and workover
and remedial costs, all of which may in fact vary considerably from actual
results. For these reasons, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom may vary
substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and such variances may be material.
In addition, you should not construe PV-10 as the current market value of
the estimated oil and natural gas reserves attributable to our properties.
We have based the estimated discounted future net cash flows from proved
reserves on prices and costs as of the date of the estimate, in accordance
with applicable regulations, whereas actual future prices and costs may be
materially higher or lower. Many factors will affect actual future net cash
flow, including:
<PAGE>
- - prices for oil and natural gas,
- - the amount and timing of actual production,
- - supply and demand for oil and natural gas,
- - curtailments or increases in consumption by crude oil and natural gas
purchasers, and
- - changes in governmental regulations or taxation.
The timing of the production of oil and natural gas properties and of the
related expenses affect the timing of actual future net cash flow from
proved reserves and, thus, their actual present value. In addition, the 10%
discount factor, which we are required to use to calculate PV-10 for
reporting purposes, is not necessarily the most appropriate discount factor
given actual interest rates and risks to which our business or the oil and
natural gas industry in general are subject.
Our long-term financial success will depend on our ability to replace the
reserves we produce.
In general, the volume of production from oil and gas properties declines
as reserves are depleted. The decline rates depend on reservoir
characteristics. Our reserves will decline as they are produced unless we
acquire properties with proved reserves or conduct successful development
and exploration activities. Our future natural gas and oil production is
highly dependent upon our level of success in finding or acquiring
additional reserves. The business of exploring for, developing or acquiring
reserves is capital intensive and uncertain. We may be unable to make the
necessary capital investment to maintain or expand our oil and gas reserves
if cash flow from operations is reduced and external sources of capital
become limited or unavailable. We cannot assure you that our future
development, acquisition and exploration activities will result in
additional proved reserves or that we will be able to drill productive wells
at acceptable costs.
We depend heavily on successful development of our San Juan Basin
properties.
Our future success depends in large part on our ability to develop
additional natural gas reserves on our San Juan Basin properties that are
economically recoverable. Most of our proved reserves are in the San Juan
Basin, and our development plans make our future growth highly dependent on
increasing production and reserves in the San Juan Basin. Our proved
reserves will decline as reserves are depleted, except to the extent we
conduct successful exploration or development activities or acquire other
properties containing proved reserves. Our development plan includes
increasing our reserve base through continued drilling and development of
our existing properties in the San Juan Basin. Our San Juan Basin properties
can only be effectively developed and evaluated by drilling activities and
the evaluation of drilling results. Less costly means of evaluation, such as
3-D seismic, are not helpful on properties such as ours. We cannot be sure
that our planned projects will lead to significant additional reserves or
that we will be able to continue drilling productive wells at acceptable
finding and development costs.
The oil and gas exploration business involves a high degree of business
and financial risk.
The business of exploring for and, to a lesser extent, developing oil and
gas properties is an activity that involves a high degree of business and
financial risk. Property acquisition decisions generally are based on
various assumptions and subjective judgments that are speculative. Although
available geological and geophysical information can provide information
about the potential of a property, it is impossible to predict accurately
the ultimate production potential, if any, of a particular property or well.
Moreover, the successful completion of an oil or gas well does not ensure a
profit on investment. A variety of factors, both geological and market-
related, can cause a well to become uneconomic or only marginally economic.
<PAGE>
Our industry is subject to numerous hazards.
The oil and natural gas industry involves operating hazards such as well
blowouts, craterings, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pipeline ruptures
or spills, pollution, releases of toxic gas and other environmental hazards
and risks, any of which could cause us substantial losses. In addition, we
may be liable for environmental damage caused by previous owners of property
we own or lease. As a result, we may face substantial liabilities to third
parties or governmental entities, which could reduce or eliminate funds
available for exploration, development or acquisitions or cause us to incur
losses. In accordance with industry practice, we maintain insurance against
some, but not all, of the risks described above. An event that is not fully
covered by insurance -- for instance, losses resulting from pollution and
environmental risks, which are not fully insurable -- could have a material
adverse effect on our financial condition and results of operations.
Further, our insurance may not be adequate to cover losses or liabilities
and the insurance we do have may not continue to be available at premium
levels that justify its purchase.
Exploratory drilling is an uncertain process with many risks.
Exploratory drilling involves numerous risks, including the risk that we
will not find any commercially productive natural gas or oil reservoirs. The
cost of drilling, completing and operating wells is often uncertain, and a
number of factors can delay or prevent drilling operations, including:
- - unexpected drilling conditions,
- - pressure or irregularities in formations,
- - equipment failures or accidents,
- - adverse weather conditions,
- - compliance with governmental requirements, and
- - shortages or delays in the availability of drilling rigs and the
delivery of equipment.
Our future drilling activities may not be successful, nor can we be sure
that our overall drilling success rate, or our drilling success rate for
activity within a particular area, will not decline. Unsuccessful drilling
activities could have a material adverse effect on our results of operations
and financial condition. Also, we may not be able to obtain any options or
lease rights in potential drilling locations that we identify. Although we
have identified numerous potential drilling locations, we cannot be sure
that we will ever drill them or that we will produce oil or natural gas from
them or any other potential drilling locations.
Our key assets are concentrated in a small geographic area.
The majority of our natural gas production is processed through our East
Blanco gas sweetening plant. Our production, revenue and cash flow will be
adversely affected if this plant's operation is shut down, curtailed or
limited for any reason. Substantially all of our operations are currently
located in two geologic basins in New Mexico. Because of this geographic
concentration, any regional events that increase costs, reduce availability
of equipment or supplies, reduce demand or limit production, including
weather and natural disasters, may impact us more than if our operations
were more geographically diversified.
The availability of markets for our natural gas is beyond our control.
Substantially all of our gas is produced in the San Juan Basin in the State
of New Mexico and, consequently, we are particularly sensitive to marketing
constraints that exist or may arise in the future in that area.
Historically, due to the San Juan Basin's relatively isolated location and
the resulting limited access of its natural gas production to the
marketplace, natural gas produced in the San Juan Basin has tended to
command prices that are lower than natural gas prices that prevail in other
areas.
<PAGE>
Our business depends on transportation facilities owned by others.
The marketability of our gas production depends in part on the
availability, proximity and capacity of pipeline systems owned by third
parties. Although we have some contractual control over the transportation
of our product, material changes in these business relationships could
materially affect our operations. Federal and state regulation of gas and
oil production and transportation, tax and energy policies, changes in
supply and demand and general economic conditions could adversely affect our
ability to produce, gather and transport natural gas.
We face marketing, trading and credit risks.
The marketability of our production depends in part upon the
availability, proximity and capacity of gas gathering systems, pipelines and
processing facilities. Federal, state and tribal regulation of oil and gas
production and transportation could adversely affect our ability to produce
and market oil and natural gas.
In addition, the marketing of our oil and natural gas requires us to
assess and respond to changing market conditions, including credit risks. If
we are unable to respond accurately to changing conditions in the commodity
markets, our results of operations could be materially adversely affected.
We try to limit our exposure to price risk by entering into various hedging
arrangements. We are exposed to credit risk because the counterparties to
agreements might not perform their contractual obligations.
Our hedging arrangements might limit the benefit of increases in
commodity prices.
To reduce our exposure to short-term fluctuations in the price of oil and
natural gas, we enter into hedging arrangements from time to time with
regard to a portion of our oil and natural gas production. These hedging
arrangements limit the benefit of increases in the price of oil or natural
gas while providing only partial protection against declines in prices.
Under our credit agreement with Aquila Energy Capital Corporation, we are
required to maintain price hedging arrangements in place with respect to up
to 65% of our oil and gas production.
Our industry is heavily regulated.
Federal, state, tribal and local authorities extensively regulate the oil
and gas industry. Legislation and regulations affecting the industry are
under constant review for amendment or expansion, raising the possibility of
changes that may affect, among other things, the pricing or marketing of oil
and gas production. Noncompliance with statutes and regulations may lead to
substantial penalties, and the overall regulatory burden on the industry
increases the cost of doing business and, in turn, decreases profitability.
State, tribal and local authorities regulate various aspects of oil and gas
drilling and production activities, including the drilling of wells (through
permit and bonding requirements), the spacing of wells, the unitization or
pooling of oil and gas properties, environmental matters, safety standards,
the sharing of markets, production limitations, plugging and abandonment,
and restoration.
We must comply with complex environmental regulations.
Our operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state, tribal and
local governmental authorities. New laws or regulations, or changes to
current legal requirements, could have a material adverse effect on our
business. We could face significant liabilities to the government and third
parties for discharging oil, natural gas or other pollutants into the air,
soil or water, and we could have to spend substantial amounts of monies on
investigations, litigation and remediation. Our failure to comply with
applicable environmental laws and regulations could result in the assessment
of administrative, civil or criminal penalties. We cannot be sure that
existing environmental laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations will not
materially adversely affect our results of operations and financial
condition or that we will not face material indemnity claims with respect to
properties we own or lease or have owned or leased.
<PAGE>
Our industry is highly competitive.
We operate in a highly competitive environment. Major oil companies,
independent producers, and institutional and individual investors are
actively seeking oil and gas properties throughout the world, along with the
equipment, labor and materials required to operate properties. Many of our
competitors have financial and technological resources vastly exceeding
those available to us. Many oil and gas properties are sold in competitive
bidding processes, as to which we may lack technological information or
expertise available to other bidders. We cannot be sure that we will be
successful in acquiring and developing profitable properties in the face of
this competition.
We depend on key personnel.
Our success will continue to depend on the continued services of our
executive officers and a limited number of other senior management and
technical personnel. Loss of the services of any of these people could have
a material adverse effect on our operations. Unlike many other companies in
our industry, we do not maintain "key man" insurance on the lives of any of
our employees. We have employment agreements with our three most senior
executive officers.
Our operations have not been profitable.
We recorded net losses for 1995, 1996, 1997, 1998 and 1999, of
$1,929,000, $1,837,000, $3,704,000, $18,186,000 and $2,777,000,
respectively. Our ability to continue in business and maintain our financing
arrangements may be adversely affected by a continued lack of profitability.
We do not pay dividends.
We have never declared or paid any cash dividends on our common stock and
have no intention to do so in the foreseeable future.
Our articles of incorporation have provisions that discourage corporate
takeovers and could prevent shareholders from realizing a premium on their
investment.
Our articles of incorporation contain provisions that may have the effect
of delaying or preventing a change in control. Our articles of incorporation
authorize the board of directors to issue up to 10,000,000 shares of
preferred stock without shareholder approval and to set the rights,
preferences and other designations, including voting rights, of those shares
as the board may determine. These provisions, alone or in combination with
each other and with the rights plan described below, may discourage
transactions involving actual or potential changes of control, including
transactions that otherwise could involve payment of a premium over
prevailing market prices to shareholders for their common stock. Our board
of directors adopted a shareholder rights agreement designed to enhance the
board's ability to prevent an acquirer from depriving shareholders of the
long-term value of their investment and to protect shareholders against
attempts to acquire Mallon by means of unfair or abusive takeover tactics.
However, the existence of the rights plan may impede a takeover of Mallon
not supported by the board, including a takeover that may be desired by a
majority of our shareholders or involving a premium over the prevailing
stock price.
In certain circumstances, the holders of our Series B Preferred Stock may
have the right to elect members of our board of directors.
Under the terms of our Series B Preferred Stock, if we do not pay
dividends on the Series B Preferred Stock for three quarterly dividend
periods, then, until such dividends have been paid in full, the holders of
Series B Preferred Stock have the right to elect two additional members to
our board of directors. While any such directors would not constitute a
majority of our board, it is probable that they would attempt to influence
the board, as a whole, to support the satisfaction of the claims of the
holders of the Series B Preferred Stock.
ITEM 3: LEGAL PROCEEDINGS
In December 1998, Del Mar Drilling Company, Inc. ("Plaintiff") filed a
civil action against Mallon Oil in the 118th Judicial District Court of
Howard County, Texas. Plaintiff's Original Petition seeks damages for an
alleged breach of contract in the amount of $348,100, plus interest, costs,
and attorney's fees. We have engaged a law firm in Midland, Texas, to defend
this matter. The case has been removed to the 142nd Judicial District Court
in Midland
<PAGE>
County, Texas, where it is Case Number CV-42.482. The matter arises out of a
contract for oil and gas drilling services performed by Plaintiff. Plaintiff
did not have the equipment necessary to perform the work required under the
contract, and, due to its financial limitations, was unable to acquire the
requisite equipment. We leased the necessary equipment from a third party to
enable Plaintiff to proceed. In using the leased equipment, Plaintiff
damaged it. We sought to offset the amounts we paid to the third party
equipment provider as lease payments and damage reimbursements against the
contract amount payable to Plaintiff. Plaintiff refused to recognize the
offsets, and claims the full contract amount. We believe the Plaintiff's
case is without merit, and intend to contest the claims, vigorously. The
final outcome of this matter cannot yet be predicted.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "MLRC." The following table sets
forth, for the periods indicated, the high and low sale prices of the common
stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ending December 31, 1998:
First Quarter $ 9.469 $ 7.250
Second Quarter 12.875 9.000
Third Quarter 12.625 7.875
Fourth Quarter 9.500 6.375
Year Ending December 31, 1999:
First Quarter 8.750 5.938
Second Quarter 9.438 5.750
Third Quarter 9.125 6.625
Fourth Quarter 8.500 4.000
Year Ending December 31, 2000:
First Quarter (through March 15) 6.000 3.813
</TABLE>
Holders
As of March 15, 2000, there were approximately 600 shareholders of record
of the common stock.
Dividend Policy
We do not intend to pay cash dividends on our common stock in the
foreseeable future. We instead intend to retain any earnings to support our
growth. Any future cash dividends would depend on future earnings, capital
requirements, our financial condition and other factors deemed relevant by
our board of directors.
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
each of the years in the five-year period ended December 31, 1999. This
information should be read in conjunction with the Consolidated Financial
Statements and "Management's Discussion of Financial Condition and Results
of Operations," included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 (1) 1995 (1)
Selected Statements of Operations Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 13,138 $ 13,069 $ 8,582 $ 5,854 $ 4,800
Other 160 109 69 512 470
13,298 13,178 8,651 6,366 5,270
Costs and expenses:
Oil and gas production 5,107 5,273 3,037 2,249 1,868
Mining project expenses -- -- -- 1,014 838
Depreciation, depletion and amortization 4,822 5,544 2,725 2,095 2,340
Impairment of oil and gas properties -- 16,842 24 264 --
Impairment of mining properties -- -- 350 -- --
General and administrative 2,915 2,562 2,274 1,845 1,467
Interest and other 3,126 1,143 701 842 433
15,970 31,364 9,111 8,309 6,946
Minority interest in loss of consolidated subsidiary -- -- -- 266 --
Equity in loss of affiliate -- -- (3,244) -- --
Loss before extraordinary item (2,672) (18,186) (3,704) (1,677) (1,676)
Extraordinary loss on early retirement of debt (105) -- -- (160) (253)
Net loss (2,777) (18,186) (3,704) (1,837) (1,929)
Accretion of mandatorily redeemable common stock (116) -- -- -- --
Dividends and accretion on preferred stock (120) (120) (185) (376) (360)
Preferred stock conversion inducement -- -- (403) -- --
Gain on redemption of preferred stock -- -- -- 3,743 --
Net income (loss) attributable to common
shareholders $ (3,013) $(18,306) $(4,292) $ 1,530 $(2,289)
Basic loss per share (2):
Loss attributable to common shareholders
before extraordinary item $ (0.40) $ (2.61) $ (0.92) $ (0.82) $ (1.05)
Extraordinary loss (0.01) -- -- (0.06) (0.13)
Net loss attributable to common shareholders $ (0.41) $ (2.61) $ (0.92) $ (0.88) $ (1.18)
Weighted average shares outstanding 7,283 7,015 4,682 2,512 1,947
Selected Other Data:
Capital expenditures $ 9,826 $ 36,354 $20,169 $ 6,339 $ 3,995
Selected Balance Sheet Data:
Working capital (deficit) $ (2,678) $ (3,782) $ 1,190 $ 5,365 $ (476)
Total assets 65,426 58,452 51,426 41,400 31,635
Long-term debt (3) 34,874 27,183 1 3,511 10,037
Mandatorily redeemable preferred stock 1,341 1,329 1,317 3,900 3,844
Mandatorily redeemable common stock 3,450 -- -- -- --
Shareholders' equity 19,490 22,164 40,196 21,904 11,760
(1) The financial information for 1995 and 1996 is consolidated information that includes the accounts of Laguna
Gold Company. See Note 3 to our consolidated financial statements.
(2) As adjusted for four-to-one reverse stock split that occurred on September 9, 1996.
(3) Long-term debt includes long-term debt net of current maturities and unamortized discount, notes payable-
other and lease obligations net of current portion.
</TABLE>
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding our
historical consolidated financial position at December 31, 1999 and 1998,
and results of operations and cash flows for each of the years ended
December 31, 1999, 1998 and 1997. Our historical Consolidated Financial
Statements and notes thereto included elsewhere in this report contain
detailed information that should be referred to in conjunction with the
following discussion.
Overview
Our revenues, profitability and future growth rates will be substantially
dependent upon our 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 our control, such as economic, political and
regulatory developments and competition from other sources of energy. The
energy markets have historically been volatile, and oil and gas prices can
be expected to continue to 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 our financial position, results of operations and access
to capital, as well as the quantities of oil and gas reserves that we may
produce economically.
Liquidity and Capital Resources
Our operations are capital intensive. Historically, our principal sources
of capital have been cash flow from operations, a revolving line of credit
and proceeds from sales of common and preferred stock. Our principal uses of
capital have been for the acquisition, exploration and development of oil
and gas properties and related facilities.
During 1999, our costs incurred in oil and gas producing activities were
$9.8 million. Our 2000 capital expenditure budget is $23.4 million. During
1999, we drilled or recompleted a total of 29 wells. In 2000, we plan to
drill or recomplete approximately 50 wells. We expect to fund our capital
requirements for the next 12 months out of cash flow from operations and
borrowings, as described below.
In September 1999, we established a credit agreement with Aquila Energy
Capital Corporation. The initial amount available under the agreement was
$45.7 million. At December 31, 1999, we had drawn $32.9 million under the
Aquila agreement, of which $28.0 million was used to retire the outstanding
balance due under our line of credit with Bank One, Texas, N.A.
Approximately $1.7 million was used to pay transaction costs and $1.0
million was used to pay outstanding accounts payable. The amount available
under the Aquila agreement may be increased to as much as $60 million as new
reserves are added through our development drilling program. Our planned
capital expenditures during 2000 anticipate that at least $53 million will
be available to us under this credit agreement. We expect these additional
funds to be made available as our drilling program proceeds. Principal
payments on the four-year loan began in November 1999 and are based on our
cash flow from operations, as defined, less advances for our drilling
program. We do not anticipate making any principal payments for the next 12
months because we expect drilling expenditures to equal or surpass defined
cash flow from operations during that period. The Aquila facility is secured
by substantially all of our oil and gas properties. Interest on the Aquila
facility accrues at prime plus 2% and will be added to the loan balance. The
outstanding loan balance is due in full on September 9, 2003. As part of the
transaction, we also entered into a four year agency agreement with Aquila
under which we pay a marketing fee equal to 1% of the net proceeds from the
sale of all of our oil and gas production. In addition, we also issued to
Aquila 420,000 shares of common stock. Aquila also has a one-time right to
require us to purchase 420,000 of our common shares from Aquila at $12.50
per share during the 30-day period beginning September 9, 2003.
In September 1999 we also entered into a five year, $5.5 million master
rental contract with Universal Compression, Inc. to refinance our East
Blanco gas sweetening plant. The proceeds from that financing were used to
repay a term loan from Bank One, Texas, N.A. that was secured by the plant.
The master rental contract bears interest at a imputed rate of 12.8%.
Payments under the master rental contract commenced in September 1999. We
made principal payments totaling $110,000 to Universal Compression during
1999. During 1999, prior to its retirement, we made principal payments of
$783,000 on the Bank One term loan.
In July 1998, we negotiated an unsecured term loan for up to $205,000
with Bank One, Colorado, N.A. to finance the purchase of land and a building
for our field office. We drew $155,000 on this loan during 1998. Principal
and interest
<PAGE>
(at 8.5%) is payable quarterly beginning October 1, 1998. We repaid $11,000
and $5,000 of this loan during 1999 and 1998, respectively. In March 1999,
the due date of the loan was extended from July 1999 to April 2002.
During fourth quarter 1997, we realized net proceeds of $19.6 million
from the sale of 2.3 million shares of common stock in a public offering. A
portion of the proceeds was used to repay substantially all of our then
outstanding long-term bank debt.
Under the mandatory redemption feature of our Series B Mandatorily
Redeemable Convertible Preferred Stock we will be required to redeem 55,200
shares in April 2000, and the remaining 80,000 shares in April 2001. The
mandatory redemption price is $10.00 per share, plus any accrued but unpaid
dividends. We plan to make the April 2000 redemption with available funds.
The Series B Stock is convertible to common stock automatically if the
common stock trades at a price in excess of 140% of the then applicable
conversion price for each day in a period of 10 consecutive trading days.
The conversion price is currently $10.28.
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
(In thousands, except per unit data)
<S> <C> <C> <C>
Operating Results from Oil and Gas Operations:
Oil and gas revenues $13,138 $13,069 $8,582
Production tax and marketing expense 1,682 1,901 1,122
Lease operating expense 3,425 3,372 1,915
Depletion 4,319 5,303 2,604
Depreciation 268 140 21
Impairment -- 16,842 24
Net Production:
Natural gas (MMcf) 5,600 5,852 2,350
Oil (MBbl) 172 230 196
Total (MMcfe) 6,632 7,232 3,526
Average Sales Price Realized (1):
Natural gas (per Mcf) $1.81 $1.72 $2.04
Oil (per Bbl) $17.38 $12.99 $19.31
Per Mcfe $1.98 $1.81 $2.43
Average Cost Data (per Mcfe):
Production tax and marketing expense $0.25 $0.26 $0.32
Lease operating expense $0.52 $0.47 $0.54
Depletion $0.65 $0.73 $0.74
</TABLE>________________
(1) Includes effects of hedging. See "Hedging Activities."
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Revenues. Total revenues for the year ended December 31, 1999 increased
1% to $13,298,000 from $13,178,000 for the year ended December 31, 1998. Oil
and gas sales for the year ended December 31, 1999 increased 1% to
$13,138,000 from $13,069,000. The increase was due to higher oil and gas
prices. Oil production for the year ended December 31, 1999 decreased 25% to
172,000 barrels from 230,000 barrels for the year ended December 31, 1998
and gas production for the year ended December 31, 1999 decreased 4% to
5,600,000 Mcf from 5,852,000 Mcf for the year ended December 31, 1998.
Production for 1999 was down from 1998 because our 1999 drilling and
recompletion program was delayed pending the receipt of additional
financing, which we received in September 1999. During fourth quarter 1999,
we drilled or recompleted 19 wells with funds from the refinancing.
Production decreases were offset by increases in average oil and gas prices
realized in 1999 from those realized in 1998. Average oil prices for the
year ended December 31, 1999 increased 34% to $17.38 per barrel from $12.99
per barrel for the year ended December 31, 1998 and average gas prices for
the year ended December 31, 1999 increased 5% to $1.81 per Mcf from $1.72
per Mcf for the year ended December 31, 1998.
<PAGE>
Oil and Gas Production Expenses. Oil and gas production expenses for the
year ended December 31, 1999 decreased 3% to $5,107,000 from $5,273,000 for
the year ended December 31, 1998. The decrease was primarily attributable to
one-time production tax credits. Production tax and marketing expense per
Mcfe decreased $.01, or 4%, to $0.25 for the year ended December 31, 1999
from $0.26 for the year ended December 31, 1998. Lease operating expense per
Mcfe increased $0.05, or 11%, to $0.52 for the year ended December 31, 1999
from $0.47 for the year ended December 31, 1998. LOE per Mcfe in 1999 is
higher primarily due to workovers.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1999 decreased 13% to
$4,822,000 from $5,544,000 for the year ended December 31, 1998, primarily
due to lower depletion expense. Depletion per Mcfe for the year ended
December 31, 1999 decreased 11% to $0.65 from $0.73 for the year ended
December 31, 1998, due primarily to a lesser cost base resulting from the
write-down of oil and gas properties of $16.8 million in fourth quarter
1998, discussed below.
Impairment of Oil and Gas Properties. Under the full cost accounting
rules of the S.E.C., we review the carrying value of our oil and gas
properties each quarter on a country-by-country basis. 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%, 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 and requires
a write-down if the "ceiling" is exceeded, even if prices declined for only
a short period of time. We made a non-cash charge in fourth quarter 1998 to
write down our U.S. oil and gas properties by $16,842,000. In applying the
"ceiling test," we used December 31, 1998 oil and gas prices of $10.03 per
barrel of oil and $1.43 per Mcf of gas. We currently operate only in the
continental United States.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1999 increased 14% to $2,915,000 from
$2,562,000 for the year ended December 31, 1998. The increase is primarily
due to stock compensation expense of $217,000 recognized in fourth quarter
1999 related to the extension of the expiration date of certain warrants to
purchase our common stock. In addition, in fourth quarter of 1999 we
expensed $177,000 of costs related to an equity offering which we did not
consummate.
Interest and Other Expenses. Interest and other expenses for the year
ended December 31, 1999 increased 173% to $3,126,000 from $1,143,000 for the
year ended December 31, 1998. The increase is primarily due to higher
outstanding borrowings.
Income Taxes. We 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.
Our ability to realize the benefit of our deferred tax asset will depend on
the generation of future taxable income through profitable operations and
the expansion of our oil and gas producing activities. The market and
capital risks associated with achieving the above requirement are
considerable, resulting in our decision to provide a valuation allowance
equal to the net deferred tax asset. Accordingly, we did not recognize any
tax benefit in our consolidated statements of operations for the years ended
December 31, 1999 and 1998. At December 31, 1999, we had an NOL carryforward
for U.S. Federal income tax purposes of $28,000,000, which will begin to
expire in 2001.
Extraordinary Loss. We incurred an extraordinary loss of $105,000 during
the year ended December 31, 1999, as a result of the refinancing of our debt
with a new lender.
Net Loss. Net loss for the year ended December 31, 1999 decreased 85% to
$2,777,000 from $18,186,000 for the year ended December 31, 1998 as a result
of the factors discussed above. The net loss for the year ended December 31,
1998, includes $16,842,000 relating to a non-cash write down of oil and gas
properties discussed above. We paid the 8% dividend of $108,000 on
$1,341,000 and $1,329,000 face amount Series B Mandatorily Redeemable
Convertible Preferred Stock in each of the years ended December 31, 1999 and
1998, respectively, and realized accretion of $12,000 in each year. In 1999,
we issued 420,000 shares of mandatorily redeemable common stock, in
conjunction with a refinancing. The difference between the value of the
shares at the redemption price of $12.50 per share and the market value of
the shares at the date of issuance will be accreted over a period of 49
months. During 1999, we realized accretion of $116,000 related to these
shares. Net loss attributable to common shareholders for the year ended
December 31, 1999 was $3,013,000 compared to net loss attributable to common
shareholders of $18,306,000 for the year ended December 31, 1998.
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues for the year ended December 31, 1998 increased 52%
to $13,178,000 from $8,651,000 for the year ended December 31, 1997. Oil and
gas sales for the year ended December 31, 1998 increased 52% to $13,069,000
from $8,582,000. The increase was due to higher oil and gas production due
to our drilling and recompletion program in 1998. Oil production for the
year ended December 31, 1998 increased 17% to 230,000 barrels from 196,000
barrels for the year ended December 31, 1997 and gas production for the year
ended December 31, 1998 increased 149% to 5,852,000 Mcf from 2,350,000 Mcf
for the year ended December 31, 1997. These increases were somewhat offset
by a decline in average oil and gas prices realized in 1998 from those
realized in 1997. Average oil prices for the year ended December 31, 1998
decreased 33% to $12.99 per barrel from $19.31 per barrel for the year ended
December 31, 1997 and average gas prices for the year ended December 31,
1998 decreased 16% to $1.72 per Mcf from $2.04 per Mcf for the year ended
December 31, 1997.
Oil and Gas Production Expenses. Oil and gas production expenses for the
year ended December 31, 1998 increased 74% to $5,273,000 from $3,037,000 for
the year ended December 31, 1997. The increase was primarily attributable to
increased operating costs related to new wells drilled in 1998 and expansion
and operation of our gas sweetening plant. Production tax and marketing
expense per Mcfe decreased $0.06, or 19%, to $0.26 for the year ended
December 31, 1998 from $0.32 for the year ended December 31, 1997. Lease
operating expense per Mcfe decreased $0.07, or 13%, to $0.47 for the year
ended December 31, 1998 from $0.54 for the year ended December 31, 1997. LOE
per Mcfe in 1998 is lower due to higher average production rates per well
for 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 year ended December 31, 1998 increased 103% to
$5,544,000 from $2,725,000 for the year ended December 31, 1997 due to
increased oil and gas production. Depletion per Mcfe for the year ended
December 31, 1998 decreased slightly to $0.73 from $0.74 for the year ended
December 31, 1997, due to a higher ratio of reserve increases to capital
expenditures in 1998. Due to the impairment of oil and gas properties in
fourth quarter 1998, discussed below, the depletion rate per Mcfe is
expected to decline in future periods.
Impairment of Oil and Gas Properties. Impairment of oil and gas
properties was $16,842,000 for the year ended December 31, 1998 compared to
$24,000 for the year ended December 31, 1997. Under the full cost accounting
rules of the Securities and Exchange Commission, we review the carrying
value of our oil and gas properties each quarter on a country-by-country
basis. 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%, 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 and requires a write-down if the "ceiling" is exceeded.
We recorded a non-cash charge in fourth quarter 1998 to write down our oil
and gas properties by $16,842,000. In applying the "ceiling test," we used
December 31, 1998 oil and gas prices of $10.03 per barrel of oil and $1.43
per Mcf of gas. The full cost ceiling is not intended to represent an
estimate of the fair market value of our oil and gas properties. It is
possible that we may incur additional ceiling test write-downs in the
future. The impairment amount of $24,000 in 1997 relates to additional
charges that came in after we impaired the costs incurred in 1996 related to
an exploration venture in Belize, which drilled a dry hole. We currently
operate only in the continental United States.
Impairment of Mining Properties. In second quarter 1997, we reduced our
note receivable from Laguna by $350,000, including accrued interest, in
exchange for an overriding royalty interest in Laguna's mineral properties.
Due to continued depressed gold prices, in fourth quarter 1997, we impaired
this amount.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1998 increased 13% to $2,562,000 from
$2,274,000 for the year ended December 31, 1997 due to the hiring of
additional personnel because of expanded operations. For the year ended
December 31, 1998, we capitalized $884,000 more of general and
administrative expenses directly related to our drilling program than was
capitalized for the year ended December 31, 1997.
<PAGE>
Interest and Other Expenses. Interest and other expenses for the year
ended December 31, 1998 increased 63% to $1,143,000 from $701,000 for the
year ended December 31, 1997. The increase is primarily due to higher
outstanding borrowings under our revolving line of credit and term loans in
1998.
Equity in Loss of Affiliate. As a result of reducing our ownership
interest in Laguna, for the years ended December 31, 1998 and 1997, we
accounted for our investment in Laguna using the equity method of
accounting. Our share of Laguna's 1997 net loss was in excess of the
carrying value of our investment in and advances to Laguna by $2,733,000.
Our share of Laguna's 1997 losses, up to the carrying amount of our
investment in and advances to Laguna, totaled $3,244,000. We will not
reflect our share of Laguna's future losses and may only reflect our share
of Laguna's future earnings to the extent that they exceed our share of
Laguna's 1997 and future net losses not recognized.
Income Taxes. We incurred net operating losses 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. Our
ability to realize the benefit of our deferred tax asset will depend on the
generation of future taxable income through profitable operations and the
expansion of our oil and gas producing activities. The market and capital
risks associated with achieving the above requirement are considerable,
resulting in our decision to provide a valuation allowance equal to the net
deferred tax asset. Accordingly, we did not recognize any tax benefit in our
consolidated statement of operations for the years ended December 31, 1998
and 1997. At December 31, 1998, we had an NOL carryforward for U.S. Federal
income tax purposes of $19,000,000, which will begin to expire in 2001.
Net Loss. Net loss for the year ended December 31, 1998 increased 391% to
$18,186,000 from $3,704,000 for the year ended December 31, 1997 as a result
of the factors discussed above. Of the net loss for the year ended
December 31, 1998, $16,842,000 relates to a non-cash write down of oil and
gas properties discussed above. Of the net loss for the year ended
December 31, 1997, $3,634,000 relates to Laguna losses and impairments. As
discussed above, we will not reflect our share of Laguna's losses in the
future and may only reflect our share of Laguna's future earnings to the
extent that they exceed our share of Laguna's 1997 and future losses not
recognized. We paid the 8% dividend of $108,000 and $161,000 on our
$1,329,000 and $1,317,000 face amount Series B Mandatorily Redeemable
Convertible Preferred Stock in each of the years ended December 31, 1998 and
1997, respectively, and realized accretion of $12,000 and $24,000,
respectively. Beginning in April 1997, preferred dividend payments were
reduced as a result of the conversion into common stock and redemption of
Series B Preferred Stock, as discussed in Note 6 of the consolidated
financial statements. 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, has been reflected on the consolidated statement of operations for
the year ended December 31, 1997 as an increase to the net loss attributable
to common shareholders. Net loss attributable to common shareholders for the
year ended December 31, 1998 was $18,306,000 compared to net loss
attributable to common shareholders of $4,292,000 for the year ended
December 31, 1997.
Hedging Activities
We use hedging instruments to manage commodity price risks. We have 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 our financial interests from the volatility of oil and gas
prices. Under our credit agreement with Aquila, we agreed to maintain price
hedging arrangements in place with respect to up to 65% of our oil and gas
production upon terms satisfactory to us and Aquila.
We recognized hedging (losses) gains of ($102,000), $481,000 and
($615,000) for the years ended December 31, 1999, 1998 and 1997,
respectively. In December 1998, we terminated an energy swap entered into
earlier in the year for 1999 production and received proceeds of $909,000,
all of which is included in deferred revenue on our December 31, 1998
balance sheet and in oil and gas sales in our 1999 statement of operations.
<PAGE>
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 (so called "IT" systems)
such as computer systems used for accounting, land and engineering, but also
systems that contain embedded chips.
We relied upon our internal staff to assess our Year 2000 readiness. The
costs associated with assessing our Year 2000 internal compliance and
related systems modification, upgrading and testing were under $50,000. To
date, we have not experienced any significant disruptions of our operations
due to Year 2000 issues and do not anticipate any significant disruptions in
the future.
Miscellaneous
Our oil and gas operations are significantly affected by certain
provisions of the Internal Revenue Code that are applicable to the oil and
gas industry. Current law permits our intangible drilling and development
costs to be deducted currently, or capitalized and amortized over a five
year period. We, as an independent producer, are 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 our taxable income. Any depletion disallowed under the
65% limitation, however, may be carried over indefinitely.
Inflation has not historically had a material impact on our financial
statements, and management does not believe that we will be materially more
or less sensitive to the effects of inflation than other companies in the
oil and gas industry.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We use commodity derivative financial instruments, including swaps, to
reduce the effect of natural gas price volatility on a portion of our
natural gas production. Commodity swap agreements are generally used to fix
a price at the natural gas market location or to fix a price differential
between the price of natural gas at Henry Hub and the price of gas at its
market location. Settlements are based on the difference between a fixed and
a variable price as specified in the agreement. The following table
summarizes our derivative financial instrument position on our natural gas
and crude oil production as of December 31, 1999. The fair value of these
instruments reflected below is the estimated amount that we would receive
(or pay) to settle the contracts as of December 31, 1999. Actual settlement
of these instruments when they mature will differ from these estimates
reflected in the table. Gains or losses realized from these instruments
hedging our production are expected to be offset by changes in the actual
sales price received by us for our natural gas and crude oil production. See
"Hedging Activities" above.
<TABLE>
<CAPTION>
Natural Gas:
Fixed Price
Year MMBtu per MMBtu Fair Value
<S> <C> <C> <C>
2000 5,400,000 $2.02 $(702,000)
2001 1,452,000 $2.55 100,000
2002 1,188,000 $2.55 64,000
2003 996,000 $2.55 2,000
2004 852,000 $2.55 (21,000)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Crude Oil:
Fixed Price
Year MMBtu per MMBtu Fair Value
<S> <C> <C> <C>
2000 84,000 $18.73 - $22.35 $(219,000)
2001 60,000 $17.38 - $18.61 (58,000)
2002 60,000 $17.40 (74,000)
2003 48,000 $17.40 (44,000)
2004 48,000 $17.40 (38,000)
</TABLE>
Under our credit agreement with Aquila, we are required to maintain price
hedging arrangements in place with respect to up to 65% of our oil and gas
production. Accordingly, included above are agreements to hedge a total of
300,000 barrels of oil related to production for 2000 -- 2004 at fixed
prices ranging from $17.40 - $22.35 per barrel and to hedge a total of
4,488,000 MMBtu of gas related to production for 2001 -- 2004 at a fixed
price of $2.55 per MMBtu. In addition, we entered into a basis swap to fix
the differential between the NYMEX price and the index price at which the
hedged gas is to be sold for 4,488,000 MMBtu for 2001 -- 2004 with a fair
value of $(191,000).
Interest Rate Risk
The table below provides information about our financial instruments
sensitive to changes in interest rates, including debt obligations. The
table presents principal cash flows and related weighted average interest
rates by expected maturity dates.
<TABLE>
<CAPTION>
Expected Maturity
(In thousands)
2000 2001 2002 2003 2004 Thereafter Fair value
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate $399 $455 $609 $569 $3,497 -- $ 5,529
Average interest
rate 12.7% 12.7% 12.1% 12.8% 12.8% --
Variable rate $ -- $ -- $ -- $32,890 $ -- -- $32,890
Average interest
rate -- -- -- 10.8% -- --
</TABLE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements that constitute Item 8 follow the
text of this Annual Report on Form 10-K. An index to the Consolidated
Financial Statements appears at page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in
our Proxy Statement for our June 2000, Annual Meeting of Shareholders, which
is to be filed with the S.E.C. pursuant to Regulation 14A under the
Securities Exchange Act of 1934, is incorporated herein by reference.
Information concerning our executive officers is set forth in Item 1 of
Part I of this report. Additional information concerning executive officers
set forth in our Proxy Statement for our June 2000 Annual Meeting of
Shareholders, which is to be filed with the S.E.C. pursuant to Regulation
14A under the Securities Exchange Act of 1934, is incorporated herein by
reference.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in
our Proxy Statement for our June 2000 Annual Meeting of Shareholders, which
is to be filed with the S.E.C., pursuant to Regulation 14A under the
Securities Exchange Act of 1934, is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Principal Shareholders" in
our Proxy Statement for our June 2000 Annual Meeting of Shareholders, which
is to be filed with the S.E.C., pursuant to Regulation 14A under the
Securities Exchange Act of 1934, is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Party Transactions" in our Proxy Statement for our June 2000 Annual
Meeting of Shareholders, which is to be filed with the S.E.C., pursuant to
Regulation 14A under the Securities Exchange Act of 1934, is incorporated
herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements
See the accompanying "Index to Consolidated Financial Statements" at
page F-1, which lists the documents that are filed as a part of this report.
(2) Financial Statement Schedules
The Financial Statements for the year ended December 31, 1999 of Laguna
Gold Company are filed as financial statement schedules to this report.
(3) Exhibits
See the Exhibit Index that follows the signature page to this report
and is incorporated herein by this reference.
<PAGE>
(b) Reports on Form 8-K:
Since September 30, 1999, we have filed the following Periodic Reports on
Form 8-K:
Date of Report Item(s) Reported
December 2, 1999 Form 8K/A, amendment
February 22, 2000 "Other Events" - Drilling Results
March 20, 2000 "Other Events" - 1999 Results
(c) Exhibits:
See the Exhibit Index that follows the signature page to this report and
is incorporated herein by this reference.
(d) Financial statements of 50-percent-or-less-owned persons:
The Financial Statements for the year ended December 31, 1999 of Laguna
Gold Company are filed as financial statement schedules to this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 30, 2000 By: /s/ George O. Mallon, Jr.
-----------------------------------
George O. Mallon, Jr.
Principal Executive Officer
Date: March 30, 2000 By: /s/ Alfonso R. Lopez
-----------------------------------
Alfonso R. Lopez
Principal Financial Officer
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Date: March 30, 2000 By: /s/ George O. Mallon, Jr.
-----------------------------------
George O. Mallon, Jr.
Director
Date: March 30, 2000 By: /s/ Kevin M. Fitzgerald
-----------------------------------
Kevin M. Fitzgerald
Director
Date: March 30, 2000 By: /s/ Roy K. Ross
-----------------------------------
Roy K. Ross
Director
Date: March 30, 2000 By: /s/ Peter H. Blum
-----------------------------------
Peter H. Blum
Director
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description Location
- ---------------------------------------------------------------------------
* 3.01 Amended and Restated Articles of Incorporation of the Company (1)
* 3.02 Bylaws of the Company (1)
* 3.03 Statement of Designations--Series B Preferred Stock (2)
* 3.04 Shareholder Rights Agreement (3)
10.01 Mallon Employee Bonus Pool #
* 10.02 Equity Participation Plan, amended November 2, 1990 (4)
* 10.03 Stock Compensation Plan for Outside Directors (5)
* 10.04 1997 Equity Participation Plan (6)
10.05 Employment Contract with CEO #
10.06 Employment Contract with COO #
10.07 Employment Contract of Executive Vice President #
10.08 Consulting Agreement with Bear Ridge Capital LLC #
10.09 Severance and Sale Program #
* 10.10 Stock Ownership Encouragement Program (7)
* 10.11 Promissory Note and Stock Pledge of CEO #
* 10.12 Promissory Note and Stock Pledge of COO #
* 10.13 Promissory Note and Stock Pledge of Executive Vice President #
* 10.14 Aquila Energy Capital Credit Agreement,
dated as of September 9, 1999 (8)
* 10.15 Master Rental Contract with Universal Compression
dated September 9, 1999 (8)
* 21.01 Subsidiaries (9)
____________________________
* These exhibits were filed in previous filings with the S.E.C.
identified below.
1. Incorporated by reference from Mallon Resources Corporation Exhibits to
Registration Statement on Form S-4 (S.E.C. File No. 33-23076) filed on
August 15, 1988.
2. Incorporated by reference from Mallon Resources Corporation (S.E.C. File
No. 0-17267) Form 8-K dated August 24, 1995.
3. Incorporated by reference from Mallon Resources Corporation (S.E.C. File
No. 0-17267) Form 8-K dated April 22, 1997.
4. Incorporated by reference from Mallon Resources Corporation (S.E.C. File
No. 0-17267) Form 10-K for fiscal year ended December 31, 1990.
5. Incorporated by reference from Mallon Resources Corporation Exhibits to
Registration Statement on Form S-8 (S.E.C. File No. 33-39635) filed on
March 28, 1991.
6. Incorporated by reference from Mallon Resources Corporation (S.E.C. File
No. 0-17267) definitive proxy statement for annual meeting of shareholders
held June 6, 1997.
7. Incorporated by reference from Mallon Resources Corporation (S.E.C. File
No. 0-17267) Form 8-K dated July 19, 1999.
8. Incorporated by reference from Mallon Resources Corporation (S.E.C. File
No. 0-17267) Form 8-K dated September 9, 1999.
9. Incorporated by reference from Mallon Resources Corporation (S.E.C. File
No. 0-17267) Form 10-K for fiscal year ended December 31, 1990.
# Filed herewith.
<PAGE>
GLOSSARY OF CERTAIN INDUSTRY TERMS
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees
Fahrenheit.
Development location. A location on which a development well can be
drilled.
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in
an attempt to recover proved undeveloped reserves.
Dry hole. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.
Estimated future net revenues. Revenues from production of oil and gas,
net of all production-related taxes, lease operating expenses and capital
costs.
Exploratory well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known
reservoir.
Gross acres. An acre in which a working interest is owned.
Gross well. A well in which a working interest is owned.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet of natural gas equivalent, determined
using the ratio of six Mcf of natural gas (including natural gas liquids) to
one Bbl of crude oil or condensate.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet.
MMcfe. One million cubic feet of natural gas equivalent.
Net acres or net wells. The sum of the fractional working interests
owned in gross acres or gross wells.
PV-10 or present value of estimated future net revenues. Estimated
future net revenues discounted by a factor of 10% per annum, before income
taxes and with no price or cost escalation or de-escalation, in accordance
with guidelines promulgated by the S.E.C.
Production costs. All costs necessary for the production and sale of oil
and gas, including production and ad valorem taxes.
Productive well. A well that is producing oil or gas or that is capable
of production.
<PAGE>
Proved developed reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped reserves. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing wellbore in
another formation from that in which the well has previously been completed.
S.E.C. The United States Securities and Exchange Commission.
Undeveloped acreage. Lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest which gives the owner the right
to drill, produce and conduct operating activities on the property and a
share of production.
Index to Consolidated Financial Statements
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Mallon Resources Corporation:
We have audited the accompanying consolidated balance sheets of Mallon
Resources Corporation (a Colorado corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States . Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mallon
Resources Corporation and its subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States .
ARTHUR ANDERSEN LLP
Denver, Colorado
March 17, 2000
<PAGE>
MALLON RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,230 $ 1,733
Accounts receivable:
Oil and gas sales 1,315 1,076
Joint interest participants, net of allowance of $43 and $43, respectively 559 650
Related parties 53 89
Other 153 --
Inventories 200 375
Other 83 32
Total current assets 3,593 3,955
Property and equipment:
Oil and gas properties, full cost method 103,315 93,624
Natural gas processing plant 8,341 8,275
Other property and equipment 1,084 989
112,740 102,888
Less accumulated depreciation, depletion and amortization (53,428) (48,748)
59,312 54,140
Notes receivable-related parties 84 89
Debt issuance costs 1,885 61
Other, net 552 207
Total Assets $ 65,426 $ 58,452
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,883 $ 4,424
Undistributed revenue 934 945
Accrued taxes and expenses 55 149
Deferred revenue -- 909
Current portion of long-term debt 399 1,310
Total current liabilities 6,271 7,737
Long-term debt, net of unamortized discount of $3,146 and $-0-, respectively 34,874 27,183
Accrued expenses -- 39
Total non-current liabilities 34,874 27,222
Total liabilities 41,145 34,959
Commitments and contingencies (Note 5)
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 1,341 1,329
Mandatorily Redeemable Common Stock, $0.01 par value, 420,000 shares authorized,
issued and outstanding, mandatory redemption of $5,250 3,450 --
Shareholders' equity:
Common Stock, $0.01 par value, 25,000,000 shares authorized, 7,413,300 and 7,021,065
shares issued and outstanding, respectively 74 70
Additional paid-in capital 77,013 74,103
Accumulated deficit (54,914) (52,009)
Notes receivable from shareholders (2,683) --
Total shareholders' equity 19,490 22,164
Total Liabilities and Shareholders' Equity $ 65,426 $ 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 Years Ended
December 31,
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Oil and gas sales $13,138 $13,069 $ 8,582
Interest and other 160 109 69
13,298 13,178 8,651
Costs and expenses:
Oil and gas production 5,107 5,273 3,037
Depreciation, depletion and amortization 4,822 5,544 2,725
Impairment of oil and gas properties -- 16,842 24
Impairment of mining properties -- -- 350
General and administrative, net 2,915 2,562 2,274
Interest and other 3,126 1,143 701
15,970 31,364 9,111
Equity in loss of affiliate -- -- (3,244)
Loss before extraordinary item (2,672) (18,186) (3,704)
Extraordinary loss on early retirement of debt (105) -- --
Net loss (2,777) (18,186) (3,704)
Accretion of mandatorily redeemable common stock (116) -- --
Dividends and accretion on preferred stock (120) (120) (185)
Preferred stock conversion inducement -- -- (403)
Net loss attributable to common shareholders $ (3,013) $(18,306) $(4,292)
Basic loss per share:
Loss attributable to common shareholders before extraordinary item $ (0.40) $ (2.61) $ (0.92)
Extraordinary loss (0.01) -- --
Net loss attributable to common shareholders $ (0.41) $ (2.61) $ (0.92)
Basic weighted average common shares outstanding 7,283 7,015 4,682
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Notes
Additional Receivable
Common Stock Paid-In Accumulated from
Shares Amount Capital Deficit Shareholders Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 4,384,562 $ 44 $56,707 $(34,847) $ -- $ 21,904
Employee stock options exercised 3,650 -- -- -- -- --
Stock issued to directors 1,305 -- 6 -- -- 6
Employee stock options granted -- -- 82 -- -- 82
Issuance of common stock in
public offering 2,300,000 23 19,566 -- -- 19,589
De-consolidation of Laguna Gold
Company -- -- (4,808) 4,764 -- (44)
Issuance of restricted common
stock to officers 25,000 -- 62 -- -- 62
Issuance of common stock in exchange
for Series B preferred stock 280,747 3 2,483 -- -- 2,486
Dividends on preferred stock -- -- (161) -- -- (161)
Accretion of preferred stock -- -- -- (24) -- (24)
Net loss -- -- -- (3,704) -- (3,704)
Balance, December 31, 1997 6,995,264 70 73,937 (33,811) -- 40,196
Employee stock options granted -- -- 195 -- -- 195
Employee stock options exercised 13,657 -- 12 -- -- 12
Stock issued to directors 729 -- -- -- -- --
Conversion of warrants 11,415 -- -- -- -- --
Issuance of restricted common stock
to officers -- -- 67 -- -- 67
Dividends on preferred stock -- -- (108) -- -- (108)
Accretion of preferred stock -- -- -- (12) -- (12)
Net loss -- -- -- (18,186) -- (18,186)
Balance, December 31, 1998 7,021,065 70 74,103 (52,009) -- 22,164
Employee stock options granted -- -- 66 -- -- 66
Employee stock options exercised 392,235 4 2,673 -- (2,622) 55
Accrued interest receivable on notes
from shareholders -- -- -- -- (61) (61)
Warrants issued to director -- -- 25 -- -- 25
Extension of warrants' expiration date -- -- 217 -- -- 217
Accretion of mandatorily redeemable
common stock -- -- -- (116) -- (116)
Issuance of restricted common stock
to officers -- -- 37 -- -- 37
Dividends on preferred stock -- -- (108) -- -- (108)
Accretion of preferred stock -- -- -- (12) -- (12)
Net loss -- -- -- (2,777) -- (2,777)
Balance, December 31, 1999 7,413,300 $ 74 $77,013 $(54,914) $(2,683) $19,490
</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 Years Ended
December 31,
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,777) $(18,186) $(3,704)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization 4,822 5,544 2,725
Impairment of mining properties -- -- 350
Impairment of oil and gas properties -- 16,842 24
Accrued interest expense added to long-term debt 998 -- --
Accrued interest income added to notes receivable from shareholders (60) -- --
Extraordinary loss 105 -- --
Equity in loss of affiliate -- -- 3,244
Stock compensation expense 323 196 101
Amortization of discount on long-term debt and installment obligation 188 22 22
Provision for losses on accounts receivable -- 35 --
Other -- -- 40
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (540) 2,097 (1,098)
Inventory and other current assets (22) (169) (176)
Increase (decrease) in:
Trade accounts payable and undistributed revenue 408 (2,240) 4,579
Accrued taxes and expenses (97) 147 (36)
Deferred revenue (909) 909 --
Drilling advances (1) (132) (333)
Net cash provided by operating activities 2,438 5,065 5,738
Cash flows from investing activities:
Additions to property and equipment (9,826) (35,977) (17,251)
Proceeds from sale of property and equipment -- 40 --
Purchase of subsidiary stock -- -- (55)
Decrease (increase) in notes receivable-related parties 5 (71) (1)
Other -- -- (47)
Net cash used in investing activities (9,821) (36,008) (17,354)
Cash flows from financing activities:
Proceeds from long-term debt 43,332 28,714 6,340
Payments of long-term debt (34,404) (222) (9,608)
Payment of installment obligation -- (400) (377)
Payment of lease obligations -- (2,061) (76)
Debt issuance costs (1,995) -- --
Net proceeds from sale of common stock in public offering -- -- 19,589
Payment of preferred dividends (108) (108) (161)
Redemption of preferred stock -- -- (121)
Proceeds from stock option exercises 55 12 --
Net cash provided by financing activities 6,880 25,935 15,586
Net (decrease) increase in cash and cash equivalents (503) (5,008) 3,970
Cash and cash equivalents, beginning of year 1,733 6,741 2,771
Cash and cash equivalents, end of year $ 1,230 $ 1,733 $ 6,741
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1999 1998 1997
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for interest $ 1,988 $ 1,066 $ 659
Non-cash transactions:
Acquisition of equipment under lease obligations $ -- $ 315 $1,785
Installment obligation (less unamortized discount) in exchange for property
and equipment -- -- 733
Reduction of note receivable from affiliate in exchange for mining properties -- -- 350
Sale of common stock in exchange for notes receivable from shareholders 2,622 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MALLON RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations:
Mallon Resources Corporation ("Mallon" or the "Company") was incorporated
on July 18, 1988 under the laws of the State of Colorado. 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. Mallon operates its
business and reports its operations as one business segment. The Company
also has an interest in Laguna Gold Company ("Laguna"), a company that holds
mineral interests in Costa Rica.
Principles of Consolidation:
The consolidated financial statements include the accounts of Mallon Oil
and all of its wholly-owned subsidiaries. The Company accounts for its
investment in Laguna using the equity method of accounting. All significant
intercompany transactions and accounts have been eliminated from the
consolidated financial statements.
Cash, Cash Equivalents and Short-term Investments:
Cash and cash equivalents include investments that are readily
convertible into cash and have an original maturity of three months or less.
All short-term investments are held to maturity and are reported at cost.
Fair Value of Financial Instruments:
The Company's on-balance sheet financial instruments consist of cash,
cash equivalents, accounts receivable, notes receivable, inventories,
accounts payable, other accrued liabilities and long-term debt. Except for
long-term debt, the carrying amounts of such financial instruments
approximate fair value due to their short maturities. At December 31, 1999
and 1998, based on rates available for similar types of debt, the fair value
of long-term debt was not materially different from its carrying amount. The
Company's off-balance sheet financial instruments consist of derivative
instruments which are intended to manage commodity price risks (see Note 12).
Inventories:
Inventories, which consist of oil and gas lease and well equipment, are
valued at the lower of average cost or estimated net realizable value.
Oil and Gas Properties:
Oil and gas properties are accounted for using the full cost method of
accounting. Under this method, all costs associated with property
acquisition, exploration and development are capitalized, including general
and administrative expenses directly related to these activities. All such
costs are accumulated in one cost center, the continental United States.
Proceeds on disposal of properties are ordinarily accounted for as
adjustments of capitalized costs, with no gain or loss recognized, unless
such adjustment would significantly alter the relationship between
capitalized costs and proved oil and gas reserves. 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 (see Note 2).
Depletion is calculated using the units-of-production method based upon
the ratio of current period production to estimated proved oil and gas
reserves expressed in physical units, with oil and gas converted to a common
unit of measure using one barrel of oil as an equivalent to six thousand
cubic feet of natural gas (see Note 2).
<PAGE>
Estimated abandonment costs (including plugging, site restoration, and
dismantlement expenditures) are accrued if such costs exceed estimated
salvage values, as determined using current market values and other
information. Abandonment costs are estimated based primarily on
environmental and regulatory requirements in effect from time to time. At
December 31, 1999 and 1998, in management's opinion, the estimated salvage
values equaled or exceeded estimated abandonment costs.
Other Property and Equipment:
Other property and equipment is recorded at cost and depreciated over the
estimated useful lives (generally three to seven years) using the straight-
line method. Costs incurred relating to a natural gas processing plant are
being depreciated over twenty-five years using the straight-line method.
The cost of normal maintenance and repairs is charged to expense as
incurred. Significant expenditures that increase the life of an asset are
capitalized and depreciated over the estimated useful life of the asset.
Upon retirement or disposition of assets, related gains or losses are
reflected in operations.
Gas Balancing:
The Company uses the entitlements method of accounting for recording
natural gas sales revenues. Under this method, revenue is recorded based on
the Company's net working interest in field production. Deliveries of
natural gas in excess of the Company's working interest are recorded as
liabilities while under-deliveries are recorded as receivables.
Concentration of Credit Risk:
As an operator of jointly owned oil and gas properties, the Company sells
oil and gas production to numerous oil and gas purchasers and pays vendors
for oil and gas services. The risk of non-payment by the purchaser is
considered minimal and the Company does not generally obtain collateral for
sales to them. Joint interest receivables are subject to collection under
the terms of operating agreements which provide lien rights, and the Company
considers the risk of loss likewise to be minimal.
The Company is exposed to credit losses in the event of non-performance
by counterparties to financial instruments, but does not expect any
counterparties to fail to meet their obligations. The Company generally does
not obtain collateral or other security to support financial instruments
subject to credit risk but does monitor the credit standing of
counterparties.
Stock-Based Compensation:
As required, the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation" in 1996. As permitted under SFAS No. 123, the Company
has elected to continue to measure compensation cost using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has made pro forma
disclosures of net income (loss) and net income (loss) per share as if the
fair value based method of accounting as defined in SFAS No. 123 had been
applied (see Note 10).
General and Administrative Expenses:
General and administrative expenses are reported net of amounts allocated
to working interest owners of the oil and gas properties operated by the
Company, and net of amounts capitalized pursuant to the full cost method of
accounting.
Hedging Activities:
The Company's use of derivative financial instruments is limited to
management of commodity price and interest rate risks. Gains and losses on
such transactions are accounted for as part of the transaction being hedged.
If an instrument is settled early, any gains or losses are deferred and
recognized as part of the transaction being hedged (see Note 12).
<PAGE>
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
all fiscal quarters of fiscal years beginning after June 15, 2000, 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.
Comprehensive Income:
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.
Per Share Data:
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 consolidated statement of operations for
1999, 1998 and 1997 reflect only basic earnings per share because the
Company was in a loss position for all years presented and all common stock
equivalents are anti-dilutive.
Use of Estimates and Significant Risks:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
significant estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. The more significant
areas requiring the use of estimates relate to oil and gas reserves, fair
value of financial instruments, valuation allowance for deferred tax assets,
and useful lives for purposes of calculating depreciation, depletion and
amortization. Actual results could differ from those estimates.
The Company and its operations are subject to numerous risks and
uncertainties. Among these are risks related to the oil and gas business
(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, the effects of competition and extensive
environmental regulation, and many other factors, many of which are
necessarily out of the Company's control. The nature of oil and gas drilling
operations is such that the expenditure of substantial drilling and
completion costs are required well in advance of the receipt of revenues
from the production developed by the operations. Thus, it will require more
than several quarters for the financial success of that strategy to be
demonstrated. Drilling activities are subject to numerous risks, including
the risk that no commercially productive oil or gas reservoirs will be
encountered.
Reclassifications:
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the presentation used in 1999.
NOTE 2. 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
<PAGE>
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 and requires a write-down if the "ceiling" is exceeded, even if
prices declined for only a short period of time. The Company recorded a
charge in the fourth quarter of 1998 to write down its oil and gas
properties by $16,842,000. In applying the "ceiling test," the Company used
December 31, 1998 oil and gas prices of $10.03 per barrel of oil and $1.43
per Mcf of gas.
In January 1997, the Company acquired certain oil and gas properties for
consideration of $1,300,000 in cash and conveyance of its interest in
certain other oil and gas properties. Cash consideration of $500,000 was
paid at closing in January 1997. Installment obligation payments of
$400,000 were made on December 31, 1998 and 1997. The installment
obligations included an imputed interest rate of 6%. There was no gain or
loss relative to the conveyance of the interest in the oil and gas
properties.
NOTE 3. LAGUNA GOLD COMPANY
Mallon owns an approximate 35% interest in Laguna and accounts for its
interest in Laguna using the equity method. The Company's share of Laguna's
cumulative net loss is in excess of Mallon's carrying value of its
investment in and advances to Laguna. As a result, the Company will not
reflect its share of Laguna's future 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 1997 and future net losses not recognized.
A summary of the results of operations and assets, liabilities and
shareholders' equity of Laguna follows (unaudited):
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Results of operations:
Revenues $ 120 $ 237 $ 91
Net loss (295) (1,259) (10,702)
Assets, liabilities and shareholders' equity
(end of period):
Current assets 886 4,232 485
Other assets 322 3,624 999
Total assets 1,208 7,856 1,484
Current liabilities 788 999 62
Other liabilities -- 6,086 2,167
Shareholders' equity (deficit) 420 771 (745)
</TABLE>
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
**
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Note payable to Aquila Energy Capital Corporation,
due 2003 $32,890 $ --
Less unamortized discount (effective rate of 13.8%) (3,146) --
29,744 --
Lease obligation to Universal Compression, Inc. 5,390 --
8.5% unsecured note payable to Bank One, Colorado, N.A.,
due 2002 139 150
Bank One revolving line of credit -- 22,060
Bank One equipment loan -- 6,283
35,273 28,493
Less current portion (399) (1,310)
Total $34,874 $27,183
</TABLE>
The Company had a revolving line of credit (the "Bank One Facility") with
Bank One, Texas, N.A. The Bank One Facility consisted of two separate lines
of credit: a primary revolving line of credit and a term loan commitment of
$6.5 million (the "Equipment Loan").
<PAGE>
In September 1999, the Company established a credit agreement (the
"Aquila Credit Agreement") with Aquila Energy Capital Corporation
("Aquila"). The initial amount available under the agreement is $45.7
million. The amount available may be increased to as much as $60 million as
new reserves are added through the Company's planned development drilling
program. The borrowing base is subject to redetermination annually on or
before April 30. At December 31, 1999, the Company had drawn $32.9 million,
including accrued interest, under the Aquila Credit Agreement, of which
$28.0 million was used to retire the Bank One Facility. Unamortized loan
origination fees of $105,000 related to the Bank One Facility are included
in extraordinary loss on early retirement of debt in the Company's
consolidated statement of operations for 1999. Approximately $1.7 million
of the initial funds drawn under the Aquila Credit Agreement was used to pay
transaction costs and $1.0 million was used to pay outstanding accounts
payable. Additional funds will be advanced as the Company's development
drilling program proceeds. Principal payments on the four-year loan began
in November 1999 based on the Company's cash flow from operations, as
defined, less advances for the Company's development drilling program. The
Company's management does not anticipate making any principal payments for
the next 12 months because it expects drilling expenditures to equal or
surpass defined cash flow from operations during that period. The Aquila
Credit Agreement is secured by substantially all of the Company's oil and
gas properties and contains various covenants and restrictions, including
ones that could limit the Company's ability to incur other debt, dispose of
assets, or change management. Interest on the amounts outstanding under the
Aquila Credit Agreement accrues at prime plus 2% and will be added to the
loan balance. The weighted average interest rate for borrowings outstanding
under the Aquila Credit Agreement at December 31, 1999 was 10.5%. The
outstanding loan balance is due in full on September 9, 2003. As part of
the transaction, the Company also entered into an Agency Agreement with
Aquila under which the Company pays a marketing fee equal to 1% of the net
proceeds from the sale of the Company's oil and gas production.
The Company paid approximately $2.0 million in debt issue costs in
connection with the establishment of the Aquila Credit Agreement. These
costs are reflected, net of amortization, in the Company's December 31, 1999
consolidated balance sheet, as debt issuance costs. The costs are being
amortized over a 48-month period using the effective interest rate method.
Amortization expense of $109,000 is included in the Company's 1999
consolidated statement of operations related to these costs.
In conjunction with the establishment of the Aquila Credit Agreement, the
Company issued to Aquila 420,000 shares of the Company's common stock (see
Note 7).
In September 1999, the Company also entered into a sale-leaseback
agreement with Universal Compression, Inc. to refinance and retire the
Equipment Loan under the Bank One Facility. The Company also terminated its
interest rate swap agreement related to the Equipment Loan in September 1999
for a gain of $3,500. The sale-leaseback was recorded as a financing under
the provisions of SFAS No. 98, "Accounting for Leases." The $5.5 million
obligation has a five-year term with monthly payments beginning in September
1999. The Company made principal payments totaling $110,000 to Universal
Compression during 1999. The obligation bears interest at an imputed
interest rate of 12.8%. During 1999, prior to its retirement, the Company
made principal payments of $783,000 on the Equipment Loan.
In July 1998, the Company negotiated an unsecured term loan for up to
$205,000 with Bank One, Colorado, N.A. to finance the purchase of land and a
building for the Company's field office. The Company drew $155,000 on this
loan during 1998. Principal and interest (at 8.5%) is payable quarterly
beginning October 1, 1998. The Company repaid $11,000 and $5,000 of this
loan during 1999 and 1998, respectively. In March 1999, the due date of the
loan was extended from July 1999 to April 2002.
Outstanding debt at December 31, 1999 is payable as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000 $ 399
2001 455
2002 609
2003 33,459
2004 3,497
Thereafter --
$38,419
</TABLE>
<PAGE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company leases office space, office equipment and vehicles under non-
cancelable leases which expire in 2002. Rental expense is recognized on a
straight-line basis over the terms of the leases. The total minimum rental
commitments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000 $366
2001 315
2002 77
2003 2
2004 --
Thereafter --
$760
</TABLE>
Rent expense was $313,000, $233,000 and $156,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Contingencies:
In December 1998, Del Mar Drilling Company ("Plaintiff") filed a civil
action against Mallon Oil. Plaintiff seeks damages for an alleged breach of
contract in the amount of $348,100, plus interest, costs and attorney's
fees. The Company believes the Plaintiff's case is without merit, and
intends to defend itself, vigorously. Mediated settlement negotiations have
been unsuccessful and a trial in the late summer of 2000 is anticipated.
The final outcome of this matter cannot yet be predicted, however the
Company believes that the final results of the lawsuit will not have a
material adverse effect on the Company's financial position or results of
operations.
In April 1999, Mallon Oil filed a civil action that is now pending. The
action is to collect approximately $265,000 of unpaid joint-interest
billings from Wadi Petroleum, Inc. in certain oil and gas properties
operated by the Company. The defendant has filed counter-claims, in which
it alleges fraud and other claims against the Company. The Company believes
that it has reached agreement with the defendant as to a complete settlement
of the matter, but final documents effectuating the agreement are still
being negotiated. The settlement, if finally implemented, will result in a
judgment in favor of the Company in the amount of $150,000 being entered
against the defendant, the defendant assigning to the Company certain
interests it owns in certain oil and gas properties, and the Company
agreeing to refrain from seeking to collect on the judgement for a period of
two years.
In 1992, the Minerals Management Service commenced an audit of royalties
payable on production from certain oil and gas properties in which the
Company owns an interest. The audit was initiated against the predecessor
operator of the properties, but the Company has since undertaken primary
responsibility for resolving matters that arise out of the audit. The
Company's liability with respect to the predecessor operator's liability is
limited to $100,000. However, the Company may have an additional liability
with respect to transactions that have occurred subsequent to its purchase
of the oil and gas properties in question. The audit focused on several
matters, the most significant of which were the manner in which production
is measured and the manner in which royalties are calculated and accounted
for. Certain alleged deficiencies preliminarily suggested by the audit were
contested. Determinations contrary to several of the Company's positions
were rendered in June 1999, which the Company has determined not to appeal.
Certain key items relating to the calculation of royalty issue have yet to
be determined. The Company believes it can negotiate a measurement protocol
that is acceptable to all interested parties, which will not have a material
adverse effect on the Company. The Company has recently determined to also
attempt to negotiate a private protocol addressing the manner in which
royalties are calculated and accounted for, as well. Until a final ruling
is rendered or a new protocol is agreed upon, it is not possible for the
Company to estimate its potential liability relating to these issues with
any certainty.
<PAGE>
NOTE 6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In April 1994, the Company completed the private placement of 400,000
shares of Series B Mandatorily Redeemable Convertible Preferred Stock, $0.01
par value per share (the "Series B Stock"). The Series B Stock bears an 8%
dividend payable quarterly, and is convertible into shares of the Company's
common stock at a current adjusted conversion price of $10.28 per share.
Proceeds from the placement were $3,774,000, net of stock issue costs of
$226,000. In connection with the Series B Stock, dividends of $108,000,
$108,000 and $161,000 were paid in 1999, 1998 and 1997, respectively.
Accretion of preferred stock issue costs was $12,000, $12,000 and $24,000 in
1999, 1998 and 1997, respectively.
Mandatory redemption of the Company's Series B Stock was to begin in
April 1997, when 20% of the outstanding shares, or 80,000 shares, were to be
redeemed for $800,000. The Company extended an offer to all holders of the
Series B Stock to convert their shares into shares of the Company's common
stock at a conversion price of $9.00, rather than the $11.31 conversion
price otherwise then in effect. In April 1997, holders of 252,675 shares of
Series B Stock elected to convert their shares into 280,747 shares of the
Company's common stock. 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 statement of operations for the year ended
December 31, 1997 as an increase to the net loss attributable to common
shareholders for preferred stock conversion inducement. In addition, the
Company redeemed 12,125 shares of Series B Stock at $10.00 per share. After
these transactions, 135,200 shares of Series B Stock remain outstanding.
The Company will be required to redeem 55,200 shares in April 2000 and the
remaining 80,000 shares in April 2001. The Company plans to make the April
2000 redemption with available funds. The Series B Stock is convertible to
common stock automatically if the common stock trades at a price in excess
of 140% of the then applicable conversion price for each day in a period of
10 consecutive trading days.
NOTE 7. MANDATORILY REDEEMABLE COMMON STOCK
In September 1999, in conjunction with the establishment of the Aquila
Credit Agreement, the Company issued to Aquila 420,000 shares of the
Company's common stock, which were recorded as Mandatorily Redeemable Common
Stock in the accompanying consolidated balance sheet, based on the market
value of the Company's common stock on the date of issuance. Aquila has a
one-time right to require the Company to purchase the 420,000 shares at
$12.50 per share during the 30-day period beginning September 9, 2003. The
difference between the value of the shares at the redemption price of $12.50
per share and the market value of the shares on the date of issuance will be
accreted to the redemption date using the effective interest method.
Accretion of $116,000 was recorded during the year ended December 31, 1999
as a direct charge to retained earnings and was included in the net loss
attributable to common shareholders in the Company's consolidated statement
of operations for 1999.
NOTE 8. CAPITAL
Preferred Stock:
The Board of Directors is authorized to issue up to 10,000,000 shares of
preferred stock having a par value of $.01 per share, to establish the
number of shares to be included in each series, and to fix the designation,
rights, preferences and limitations of the shares of each series. None of
these shares of preferred stock were outstanding at December 31, 1999 or
1998.
Common Stock:
The Company has reserved approximately 131,518 shares, as adjusted, of
common stock for issuance upon possible conversion of the remaining Series B
Stock.
In December 1997, the Company sold 2,300,000 shares of its common stock
in a public offering at $9.25 per share. The Company received proceeds of
approximately $19,589,000, net of offering costs of $1,686,000. The net
proceeds were used primarily to finance the drilling and development of the
Company's New Mexico oil and gas properties.
<PAGE>
Warrants:
The Company has outstanding warrants to purchase an aggregate of 278,023
shares of common stock, as described below.
In July 1999, the Company entered into a financial consulting services
contract with Bear Ridge Capital LLC. Under the contract, Bear Ridge
Capital is paid a monthly retainer and was issued warrants to purchase an
aggregate of 40,000 shares of the Company's common stock at a per share
exercise price of $0.01. Warrants covering 10,000 shares vest on July 1,
2001. The remaining warrants do not vest except in the event of certain
corporate transactions. The warrants expire December 31, 2004. Bear Ridge
Capital is wholly-owned by one of the Company's directors. During 1999, the
Company recorded $25,000 of stock compensation expense related to these
warrants.
Warrants to purchase an aggregate of 78,023 shares of the Company's
common stock at an adjusted exercise price of $8.01 per share were issued in
June 1995 to the holders of Laguna's Series A Preferred Stock in connection
with the private placement of that stock. The warrants expire June 30,
2000.
In October 1998, several members of the Company's Board of Directors
purchased from a third party 40,000 (of 160,000) warrants with an exercise
price of $7.80 per share issued by the Company in October 1996. On
December 11, 1998, the exercise price of all 160,000 outstanding warrants
was reduced to $6.88 per share, the closing price of the Company's stock on
that day. The repricing of the warrants was done in conjunction with the
repricing of the Company's stock options as discussed in Note 10. The
warrants originally were to expire on October 16, 2000. In October 1999,
the Company extended the expiration date of all 160,000 outstanding warrants
from October 16, 2000 to December 31, 2002. As a result of the extension,
the Company recorded approximately $217,000 of stock compensation expense in
fourth quarter 1999.
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 9. SHAREHOLDER RIGHTS PLAN
In April 1997, the Company's Board of Directors declared a dividend on
its shares of common stock (the "Common Shares") of preferred share purchase
rights (the "Rights") as part of a Shareholder Rights Plan (the "Plan"). The
Plan is designed to insure that all shareholders of the Company receive fair
value for their Common Shares in the event of a proposed takeover of the
Company and to guard against the use of partial tender offers or other
coercive tactics to gain control of the Company without offering fair value
to the Company's shareholders. At the present time, the Company knows of no
proposed or threatened takeover, tender offer or other effort to gain
control of the Company. Under the terms of the Plan, the Rights will be
distributed as a dividend at the rate of one Right for each Common Share
held. Shareholders will not actually receive certificates for the Rights,
but the Rights will become part of each Common Share. All Rights expire on
April 22, 2001.
Each Right will entitle the holder to buy shares of common stock at an
exercise price of $40.00. The Rights will be exercisable and will trade
separately from the Common Shares only if a person or group acquires
beneficial ownership of 20% or more of the Company's Common Shares or
commences a tender or exchange offer that would result in such a person or
group owning 20% or more of the Common Shares. Only when one or more of
these events occur will shareholders receive certificates for the Rights.
If any person actually acquires 20% or more of Common Shares -- other
than through a tender or exchange offer for all Common Shares that provides
a fair price and other terms for such shares -- or if a 20% or more
shareholder engages in certain "self-dealing" transactions or engages in a
merger or other business combination in which the Company survives and its
Common Shares remain outstanding, the other shareholders will be able to
exercise the Rights and buy Common Shares of the Company having twice the
value of the exercise price of the Rights. In other words, payment of the
$40.00 per Right exercise price will entitle the holder to acquire $80.00
worth of Common
<PAGE>
Shares. Additionally, if the Company is involved in certain
other mergers where its shares are exchanged, or certain major
sales of assets occur, shareholders will be able to purchase the
other party's common shares in an amount equal to twice the
value of the exercise price of the Rights.
The Company will be entitled to redeem the Rights at $.01 per Right at
any time until the tenth day following public announcement that a person has
acquired a 20% ownership position in Common Shares of the Company. The
Company in its discretion may extend the period during which it can redeem
the Rights.
NOTE 10. STOCK COMPENSATION
At December 31, 1999, the Company had two stock-based compensation plans.
As permitted under SFAS No. 123, the Company has elected to continue to
measure compensation costs using the intrinsic value method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under that method, the difference between the exercise price
and the estimated market value of the shares at the date of grant is charged
to compensation expense, ratably over the vesting period, with a
corresponding increase in shareholders' equity. Compensation costs charged
against income for all plans were $21,000, $128,000 and $38,000 for 1999,
1998 and 1997, respectively.
Under the Mallon Resources Corporation 1988 Equity Participation Plan
(the "1988 Equity Plan"), 250,000 shares of common stock have been reserved
in order to provide for incentive compensation and awards to employees and
consultants. The 1988 Equity Plan provides that a three-member committee may
grant stock options, awards, stock appreciation rights, and other forms of
stock-based compensation in accordance with the provisions of the 1988
Equity Plan. The options vest over a period of up to four years and expire
over a maximum of 10 years from the date of grant.
In June 1997, the shareholders approved the Mallon Resources Corporation
1997 Equity Participation Plan (the "1997 Plan") under which shares of
common stock have been reserved to provide employees, consultants and
directors of the Company with incentive compensation. The 1997 Plan is
administered by a Committee of the Board of Directors who may, in its sole
discretion, select the participants, and determine the number of shares of
common stock to be subject to incentive stock options, non-qualified
options, stock appreciation rights and other stock awards in accordance with
the provisions of the 1997 Plan. The aggregate number of shares of common
stock that may be issued under the 1997 Plan is equal to 11% of the number
of outstanding shares of common stock from time to time. This authorization
may be increased from time to time by approval of the Board of Directors and
by the ratification of the shareholders of the Company. No options were
granted under the 1997 Plan during 1999. In 1998, the Committee approved
the grant of 271,842 stock options at fair market value. In 1997, the
Committee approved the grant of 501,850 stock options of which 481,850 were
granted at fair market value and 20,000 were granted with an exercise price
of $0.01 each. The options vest over a period of up to five years and
expire over a maximum of 10 years from the date of grant.
On December 11, 1998, the Company's Board of Directors reduced the
exercise price of substantially all outstanding options to purchase shares
of the Company's common stock to $6.88 per share, the closing price of the
stock on that day. A total of 230,629 options with an original exercise
price of $7.50 and 478,850 options with an original exercise price of $8.38
were repriced.
<PAGE>
The following table summarizes activity with respect to all outstanding
stock options.
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
<S> <C> <C>
Outstanding at December 31, 1996 69,577 0.04
Granted 501,850 6.88
Exercised (3,650) 0.04
Forfeited (19,500) 0.04
Outstanding at December 31, 1997 548,277 6.06
Granted 282,784 6.36
Exercised (13,657) 0.89
Forfeited -- --
Outstanding at December 31, 1998 817,404 6.25
Granted 3,000 8.50
Exercised (392,235) 6.82
Forfeited (10,200) 6.88
Outstanding at December 31, 1999 417,969 $5.71
Options exercisable:
December 31, 1997 160,277 $5.89
December 31, 1998 497,304 $6.16
December 31, 1999 200,017 $4.95
</TABLE>
The weighted average remaining contractual life of the options
outstanding under both the 1988 Equity Plan and 1997 Plan at December 31,
1999 is approximately 7 years.
In 1997, the Company granted to a consultant options to purchase 3,000 of
the Company's common shares at $8.50 per share, exercisable from November
1997 to December 2000. In 1999, the Company granted this same individual
additional options to purchase 3,000 of the Company's common shares at $8.50
per share, exercisable from January 1999 to December 2001. These options
were not part of either the 1988 Equity Plan or the 1997 Plan. During 1999,
the Company recorded $22,000 of compensation expense related to these
options.
In 1992, the Company granted to a consultant an option to purchase 12,500
of the Company's common shares at $26.00 per share, exercisable from
November 1993 through October 1997. The options expired unexercised. In
1994, the Company granted this individual an additional option to purchase
6,250 shares at $16.00 per share, exercisable from January 1995 to December
1998. The option granted in 1994 expired in 1998 unexercised. These
options were not part of either the 1988 Equity Plan or the 1997 Plan.
The Stock Compensation Plan for Outside Directors ("the Stock
Compensation Plan") provides that the Company's outside directors will be
compensated by periodically granting them shares of the Company's $0.01 par
value common stock worth $1,000 for each board meeting, but no less than
$4,000 per year, for each outside director. The Company expensed $-0-, $-0-
and $6,000 for the years 1999, 1998 and 1997, respectively, in relation to
the Stock Compensation Plan. In July 1997, the Company started compensating
the outside directors in cash and discontinued the stock grants under this
plan. In 1998, 10,942 stock options under this plan were issued to the
outside directors at fair market value. All available awards under this
plan have been granted.
In April 1997, the Company granted a total of 25,000 shares of restricted
common stock to three of its officers as an inducement to continue in its
employ. The fair market value of the shares at the date of grant will be
charged ratably over the vesting period of three years. The Company charged
$37,000, $67,000 and $62,000 against income in 1999, 1998 and 1997,
respectively, related to this grant. The grant of restricted stock is not a
part of the Company's equity plans.
<PAGE>
Had compensation expense for the Company's 1999, 1998 and 1997 grants of
stock-based compensation been determined consistent with the fair value
based method under SFAS No. 123, the Company's net loss, net loss
attributable to common shareholders, and the net loss per share attributable
to common shareholders would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
1999 1998 1997
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Net loss $(2,777) $(3,266) $(18,186) $(19,107) $(3,704) $(4,048)
Net loss attributable to
common shareholders (3,013) (3,502) (18,306) (19,227) (4,292) (4,636)
Net loss per share attributable to
common shareholders (0.41) (0.48) (2.61) (2.74) (0.92) (0.99)
</TABLE>
The fair value of each option is estimated as of the grant date, using
the Black-Scholes option-pricing model, with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate 6.3% 4.75% 6.0%
Expected life (in years) 5 4 4
Expected volatility 69.5% 64.6% 59.0%
Expected dividends 0.0% 0.0% 0.0%
Weighted average fair value
of options granted $5.28 $3.59 $4.49
</TABLE>
In July 1999, the Company adopted a Stock Ownership Encouragement Program
to encourage holders of options to exercise their rights to purchase shares
of the Company's common stock. Under the program, the Company may lend
option holders the funds necessary to exercise their options. Funds
advanced are immediately paid to the Company in connection with the exercise
of the options. As a result, the Company incurs no cash outlay. Loans made
under the program must be approved by the Board of Directors or by its
Compensation Committee, and are represented by secured, interest-bearing,
full recourse promissory notes from the participants.
In September 1999, certain officers of the Company exercised options to
purchase 381,360 shares of common stock at an exercise price of $6.88 per
share, and borrowed funds from the Company to do so. The notes bear
interest at 7%, which is due along with the principal in August 2002. The
notes and accrued interest have been reflected as a reduction of
shareholders' equity in the accompanying consolidated balance sheet.
NOTE 11. BENEFIT PLANS
Effective January 1, 1989, the Company and its affiliates established the
Mallon Resources Corporation 401(k) Profit Sharing Plan (the "401(k) Plan").
The Company and its affiliates match contributions to the 401(k) Plan in an
amount up to 25% of each employee's monthly contributions. The Company may
also contribute additional amounts at the discretion of the Compensation
Committee of the Board of Directors, contingent upon realization of earnings
by the Company which, at the sole discretion of the Compensation Committee,
are adequate to justify a corporate contribution. For the years ended
December 31, 1999, 1998 and 1997, the Company made matching contributions of
$32,000, $28,000 and $22,000, respectively. No discretionary contributions
were made during any of the three years ended December 31, 1999.
The Company maintains a program which provides bonus compensation to
employees from oil and gas revenues which are included in a pool to be
distributed at the discretion of the Chairman of the Board. For the years
ended December 31, 1999, 1998 and 1997, a total of $141,000, $130,000 and
$89,000, respectively, was distributed to employees.
<PAGE>
NOTE 12. HEDGING ACTIVITIES
The Company periodically enters into commodity derivative contracts and
fixed-price physical contracts to manage its exposure to oil and gas price
volatility. Commodity derivatives contracts, which are generally placed
with major financial institutions or with counterparties of high credit
quality that the Company believes are minimal credit risks, may take the
form of futures contracts, swaps or options. The oil and gas reference
prices of these commodity derivatives contracts are based upon crude oil and
natural gas futures which have a high degree of historical correlation with
actual prices received by the Company. The Company accounts for its
commodity derivatives contracts using the hedge (deferral) method of
accounting. Under this method, realized gains and losses from the Company's
price risk management activities are recognized in oil and gas revenue when
the associated production occurs and the resulting cash flows are reported
as cash flows from operating activities. Gains and losses from commodity
derivatives contracts that are closed before the hedged production occurs
are deferred until the production month originally hedged. In the event of
a loss of correlation between changes in oil and gas reference prices under
a commodity derivatives contract and actual oil and gas prices, a gain or
loss would be recognized currently to the extent the commodity derivatives
contract did not offset changes in actual oil and gas prices.
Under the Aquila Credit Agreement, the Company is required to maintain
price hedging arrangements in place with respect to up to 65% of its oil and
gas production. Accordingly, in September 1999, the Company entered into
agreements to hedge a total of 300,000 barrels of oil related to production
for 2000-2004 at fixed prices ranging from $17.40-$22.35 per barrel and to
hedge a total of 4,488,000 MMBtus of gas related to production for 2001-2004
at a fixed price of $2.55 per MMBtu. In addition, the Company entered into
a basis swap to fix the differential between the NYMEX price and the index
price at which the hedged gas is to be sold for 4,488,000 MMBtu for 2001-
2004.
The following table indicates the Company's outstanding energy swaps at
December 31, 1999:
<TABLE>
<CAPTION>
Annual Market Price
Product Production Fixed Price Duration Reference
<S> <C> <C> <C> <C>
Gas (MMbtu) 5,400,000 $2.02 1/00-12/00 El Paso Natural Gas (San Juan)
Gas (MMbtu) 1,452,000 $2.55 1/01-12/01 NYMEX (Henry Hub)
Gas (MMbtu) 1,188,000 $2.55 1/02-12/02 NYMEX (Henry Hub)
Gas (MMbtu) 996,000 $2.55 1/03-12/03 NYMEX (Henry Hub)
Gas (MMbtu) 852,000 $2.55 1/04-12/04 NYMEX (Henry Hub)
Oil (Bbls) 84,000 $18.73-$22.35 1/00-12/00 NYMEX
Oil (Bbls) 60,000 $17.38-$18.61 1/01-12/01 NYMEX
Oil (Bbls) 60,000 $17.40 1/02-12/02 NYMEX
Oil (Bbls) 48,000 $17.40 1/03-12/03 NYMEX
Oil (Bbls) 48,000 $17.40 1/04-12/04 NYMEX
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the Company's
(losses) gains under its swap agreements were $(102,000), $481,000 and
$(615,000), respectively, and are included in oil and gas sales in the
Company's consolidated statements of operations. At December 31, 1999, the
estimated net amount the Company would have paid to terminate its
outstanding energy swaps and basis swaps, described above, was approximately
$1,181,000.
In December 1998, the Company terminated an energy swap entered into
earlier in the year for 1999 production and received proceeds of $909,000,
all of which is included in deferred revenue on the Company's December 31,
1998 balance sheet and is included in oil and gas sales in the Company's
1999 consolidated statement of operations.
<PAGE>
NOTE 13. MAJOR CUSTOMERS
Sales to customers in excess of 10% of total revenues for the years ended
December 31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Customer A $4,087 $ -- $ --
Customer B 2,368 6,610 --
Customer C 2,347 -- --
Customer D 2,025 2,155 1,887
Customer E -- -- 1,335
</TABLE>
NOTE 14. INCOME TAXES
The Company incurred a loss for book and tax purposes in all periods
presented. There is no income tax benefit or expense for the years ended
December 31, 1999, 1998 or 1997.
Deferred tax assets are comprised of the following as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforward $ 10,395 $ 7,098
Oil, gas and other property basis differences 1,718 3,600
Other 249 171
Total deferred tax assets 12,362 10,869
Less valuation allowance (12,362) (10,869)
Net deferred tax assets $ -- $ --
</TABLE>
At December 31, 1999, for Federal income tax purposes, the Company had a
net operating loss ("NOL") carryforward of approximately $28,000,000, which
expires in varying amounts between 2001 and 2020.
NOTE 15. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in 1998. SFAS No. 131 changes the way
the Company reports information about its operating segments. The Company's
reportable business segments have been identified based on the differences
in products provided. For all periods presented, the Company has one
reportable segment - oil and gas exploration and production. Refer to Note
17 for information on the Company's oil and gas exploration and production
activities for 1999, 1998 and 1997.
NOTE 16. RELATED PARTY TRANSACTIONS
The accounts receivable from related parties consists primarily of joint
interest billings to directors, officers, shareholders, employees and
affiliated entities for drilling and operating costs incurred on oil and gas
properties in which these related parties participate with Mallon Oil as
working interest owners. These amounts will generally be settled in the
ordinary course of business, without interest.
During the years ended December 31, 1999, 1998 and 1997, the Company paid
legal fees of $-0-, $-0- and $4,000, respectively, to a law firm of which a
director of the Company is a senior partner.
In July 1999, the Company entered into a financial consulting services
contract with Bear Ridge Capital LLC., which is wholly-owned by one of the
Company's directors. Under the contract, Bear Ridge Capital is paid a
monthly retainer and was issued warrants to purchase an aggregate of 40,000
shares of the Company's common stock at a per share exercise price of $0.01
(see Note 8). During 1999, the Company paid Bear Ridge Capital $110,000 in
fees and expensed $25,000 in stock compensation expense related to the
warrants.
<PAGE>
In 1997, the Company paid fees of $72,500 to two investment banking firms
in which one of the Company's current directors was a principal. In
addition, one of these investment banking firms earned commissions and other
fees of approximately $388,000 in connection with the Company's December
1997 public stock sale. At the time such amounts were paid or earned, the
individual was not a director of the Company.
NOTE 17. SUPPLEMENTARY INFORMATION ON OIL AND GAS OPERATIONS
Certain historical costs and operating information relating to the
Company's oil and gas producing activities as of and for the years ended
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Capitalized Costs Relating to Oil and Gas Activities:
Oil and gas properties (2) (3) $103,315 $ 93,624 $ 63,148
Natural gas processing plant 8,341 8,275 2,760
Accumulated depreciation, depletion and amortization (52,884) (48,297) (26,011)(1)
$ 58,772 $ 53,602 $ 39,897
Costs Incurred in Oil and Gas Producing Activities:
Property acquisition costs $ 123 $ 1,459 $ 1,847
Exploration costs 2,080 2,091 59(1)
Development costs:
Gas plant processing 80 5,497 2,760
Pipeline 1,646 3,970 --
Salt water disposal 326 1,527 --
Drilling 5,502 21,447 15,067
$ 9,757 $ 35,991 $ 19,733
Results of Operations from Oil and Gas Producing Activities:
Oil and gas sales $ 13,138 $ 13,069 $ 8,582
Lease operating expense (5,107) (5,273) (3,037)
Depletion and depreciation (4,587) (5,443) (2,625)
Impairment of oil and gas properties -- (16,842) (24)
Results of operations from oil and gas producing activities $ 3,444 $(14,489) $ 2,896
</TABLE>__________
(1) Offshore Belize -- all other items relate to U.S. operations.
(2) At December 31, 1998, the net book value of the Company's oil and gas
properties exceeded the net present value of the underlying reserves by
$16,842,000. Accordingly, the Company wrote-down its oil and gas properties
at December 31, 1998. At December 31, 1999 and 1997, the net present value
of the underlying reserves exceeded the net book value of the Company's oil
and gas properties.
(3) Includes $1,285,000 of unevaluated property cost not being amortized at
December 31, 1999, of which $111,000, $661,000 and $265,000 were incurred in
1999, 1998 and 1997, respectively. The Company anticipates that
substantially all unevaluated costs will be classified as evaluated costs
within 5 years.
Estimated Quantities of Proved Oil and Gas Reserves (unaudited):
Set forth below is a summary of the changes in the net quantities of the
Company's proved crude oil and natural gas reserves estimated by independent
consulting petroleum engineering firms for the years ended December 31,
1999, 1998 and 1997. All of the Company's reserves are located in the
continental United States.
<PAGE>
<TABLE>
<CAPTION>
Oil Gas
(MBbls) (MMcf)
<S> <C> <C>
Proved Reserves
Reserves, December 31, 1996 1,707 24,285
Acquisitions of reserves in place -- 3,968
Extensions, discoveries and additions 340 29,858
Production (196) (2,350)
Revisions (470) (5,889)
Reserves, December 31, 1997 1,381 49,872
Acquisitions of reserves in place 17 1,119
Extensions, discoveries and additions 7 43,510
Production (230) (5,852)
Revisions 89 (4,488)
Reserves, December 31, 1998 1,264 84,161
Extensions, discoveries and additions 482 47,020
Production (172) (5,600)
Revisions 322 (33,056)
Reserves, December 31, 1999 1,896 92,525
Proved Developed Reserves
December 31, 1997 1,110 24,709
December 31, 1998 945 65,786
December 31, 1999 1,204 38,539
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves (unaudited):
The following summary sets forth the Company's unaudited future net cash
flows relating to proved oil and gas reserves, based on the standardized
measure prescribed in SFAS No. 69, for the years ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Future cash in-flows $240,007 $133,311 $119,335
Future production costs (80,667) (47,850) (31,041)
Future development costs (31,059) (13,627) (8,967)
Future income taxes (16,514) -- (11,140)
Future net cash flows 111,767 71,834 68,187
Discount at 10% (48,719) (28,495) (27,022)
Standardized measure of discounted future
net cash flows, end of year $ 63,048 $ 43,339 $ 41,165
</TABLE>
Future net cash flows were computed using yearend prices and yearend
statutory income tax rates (adjusted for permanent differences, operating
loss carryforwards and tax credits) that relate to existing proved oil and
gas reserves in which the Company has an interest. The Company's oil and gas
hedging agreements at December 31, 1999 described in Note 12, do not have a
material effect on the determination of future oil and gas sales.
<PAGE>
The following are the principal sources of changes in the standardized
measure of discounted future net cash flows for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Standardized measure, beginning of year $ 43,339 $ 41,165 $ 36,011
Net revisions to previous quantity estimates and other (10,881) (3,159) 2,022
Extensions, discoveries, additions, and changes in timing of production,
net of related costs 30,107 21,189 27,642
Purchase of reserves in place -- 617 1,720
Net change in future development costs (11,759) 461 (793)
Sales of oil and gas produced, net of production costs (8,031) (5,545) (5,545)
Net change in prices and production costs 25,374 (22,643) (23,496)
Accretion of discount 4,215 4,529 341
Net change in income taxes (9,316) 6,725 3,263
Standardized measure, end of year $ 63,048 $ 43,339 $ 41,165
</TABLE>
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting the future rates of
production, particularly as to natural gas, and timing of development
expenditures. Such estimates may not be realized due to curtailment, shut-in
conditions and other factors which cannot be accurately determined. The
above information represents estimates only and should not be construed as
the current market value of the Company's oil and gas reserves or the costs
that would be incurred to obtain equivalent reserves.
<PAGE>
LAGUNA GOLD COMPANY
FINANCIAL SECTION
Expressed in U.S. Dollars, unless otherwise stated.
PAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 6
CONSOLIDATED BALANCE SHEETS -
December 31, 1999 and 1998 7
CONSOLIDATED STATEMENTS OF OPERATIONS -
For the Years Ended December 31, 1999, 1998 and 1997 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997 9
CONSOLIDATED STATEMENTS OF CASH FLOWS -
For the Years Ended December 31, 1999, 1998 and 1997 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
The following is a discussion of the significant factors influencing the
operating results of Laguna Gold Company ("Laguna" or the "Company") for the
years ended December 31, 1999, 1998 and 1997. In 1999, a decision was made
to suspend operations at the Rio Chiquito gold mine in Costa Rica. The
majority of the Company's capital has been used for payment of exploration,
mine development, equipment, materials, construction, mining and general and
administrative expense ("G&A"). This discussion should be read in
conjunction with the consolidated financial statements and related notes
included herein.
The Company and its operations are subject to numerous risks and
uncertainties. Among these are risks related to the mining business
(including operating risks and hazards and the regulations imposed thereon),
risks and uncertainties related to the volatility of commodity prices,
uncertainties related to the estimation of reserves and the value of such
reserves, the effects of competition and extensive environmental regulation,
the uncertainties related to foreign operations, and many other factors,
many of which are necessarily out of the Company's control. Exploration
activities are subject to numerous risks, including the risk that no
commercially viable ore bodies will be discovered.
Liquidity and Capital Resources
In March 1999, the crushing plant at Rio Chiquito had been
completed and placement of ore on the heap leach pad had begun.
In May 1999, the Company suspended operations at the Rio
Chiquito Gold Mine in Costa Rica. Following commencement of ore
mining, variances between actual and predicted gold grade and
recovery were encountered. The Company started a confirmation
drilling program and suspended operations to evaluate these
findings. The Company retained The Winters Company (TWC) of
Tucson, Arizona to review the mine production data to determine
the reasons for the variances. Concurrently, the Company
retained JAC International L.L.C. (JAC) to develop a new higher-
resolution resource block model to investigate the underground
mining potential. The Company also commissioned TWC to review
the new resource block model and to study an underground mine
and milling scenario. Based on the results of the studies
performed by TWC, management determined that the Rio Chiquito
open pit mine plan was not feasible and any development of the
Rio Chiquito ore body would be on the basis of an underground
mine plan. Consequently, the Company proceeded to write down
the capital investment related to the tangible and intangible
costs associated with the open pit mine plan. Presently, the
Company's operations in Costa Rica are on a standby status for
an indefinite period.
In July 1999, the Company entered into discussions with
noteholders to negotiate Debt Settlement Agreements. In mid-
July 1999, the Company received a formal notice of default from
one noteholder on a promissory note dated June 30, 1998. In
August 1999, the Company signed Memorandums of Understanding
with all the noteholders. In September 1999, the Company
completed the closings in connection with all the Debt
Settlement Agreements. The agreements arranged for the
forgiveness of US $7.5 million of principal and accrued interest
and the cancellation of 9.9 million share purchase warrants.
The Company agreed to the following:
- - The payment of a total of US$1.24 million in cash in
exchange for the forgiveness of a total of principal and accrued
interest of US$6.7 million. An initial payment of US$417,000
was made at closing and future payments totaling US$825,000 will
be paid by July 31, 2000 from the net proceeds of certain asset
sales. As of December 31, 1999, the Company paid down $200,000
against the secured promissory note leaving a remaining note
balance of $625,000 at December 31, 1999.
- - The issuance of 7.65 million shares of common stock which
was recorded at a fair market value of $418,000 and the issuance
of 991,000 five-year share purchase warrants with an exercise
price of US$0.25 per share which was recorded at a fair market
value of $50,000 in exchange for the forgiveness of US$766,000
of principal and accrued interest.
Subsequent to December 31, 1999, the Company has completed three
payments of principal and interest totaling $323,000, reducing
the note payable balance to $313,000.
In 1999, the Company completed sales of assets totaling
approximately $1.0 million. The sales were comprised of
$374,000 in cash and $625,000 in the form of a secured
promissory note. The primary asset sale consisted of the sale
of the crushing circuit for $875,000. The Company received a
cash down payment of $250,000 and a secured promissory note for
$625,000 bearing an interest rate of 10% per annum. The note
shall be satisfied through a series of six equal payments to the
Company beginning in January 2000 and ending in June 2000. As
of March 31, 2000, the Company has received three note
receivable payments including principal and interest of
$323,0000 leaving a note receivable balance of $313,000. Also
in November 1999, mine inventory parts and supplies were
returned and the Letter of Credit for $80,000 related to the
parts expired and $82,000 (including interest) became
unrestricted cash.
<PAGE>
The Company has experienced recurring losses and negative cash
flow from operations that raise serious doubt about its ability
to continue as a going concern. The Company's cash position at
December 31, 1999 was approximately $221,000, which at its
current monthly expenditure rate will be exhausted within five
months. In order to meet its financial needs during 2000, the
Company must obtain some form of debt or equity financing or
combination thereof, or complete a sale of assets, a merger or
other transaction. Presently, management is searching for new
assets to bring into the Company and subsequently will attempt
to raise funds to advance the assets. However, there is no
assurance that the Company will be successful in its fund
raising efforts. In conjunction with attempts to secure
financing, the Company may need to initiate further reductions
in its workforce and other areas of costs to reduce future
financial requirements.
The following table summarizes selected financial information as of
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands of U.S. dollars):
1999 1998 1997
<S> <C> <C> <C>
Working capital $ 98 $ 3,233 $ 423
Mineral properties 160 416 254
Mining equipment 175 612 737
Construction in progress -- 2,708 --
Total assets 1,208 7,856 1,484
Long-term liabilities -- 6,086 2,167
Share capital 17,705 17,761 14,986
Accumulated deficit (17,285) (16,990) (15,731)
</TABLE>
Results of Operations
The following table summarizes selected financial data of the Company for
the years ended December 31, 1999, 1998 and 1997 (In thousands of U.S.
dollars, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues $ 120 $ 237 $ 91
Write-down of mining assets 4,054 -- 9,319
General and administrative 666 675 985
Mining 212 -- --
Pre-feasibility 505 -- --
Care and maintenance 128 -- --
Exploration -- 181 234
Reclamation 50 -- --
Depreciation and amortization 90 143 139
Interest and other 512 497 116
Net loss before extraordinary item (6,097) -- --
Gain on debt settlement 5,802 -- --
Net loss (295) (1,259) (10,702)
Net loss before extraordinary item per
common share (0.21) -- --
Gain on debt settlement per common share 0.20 -- --
Net loss per common share (0.01) (0.05) (0.43)
Weighted average shares outstanding 29,321 26,648 25,000
</TABLE>
<PAGE>
1999 COMPARED TO 1998
The Company reported a net loss of $6.1 million before extraordinary item of
$5.8 million, or $0.21 per share, and net loss after extraordinary item of
$295,000 for 1999, or $0.01 per share. The Company reported an
extraordinary gain from debt settlements of $5.8 million, or $0.20 per
share. In comparison, the Company reported a net loss of $1.3 million, or
$0.05 per share, for 1998. The decrease in the reported net loss of $1.0
million for 1999 is primarily a result of the extraordinary gain of $5.8
million. This gain was substantially offset by a write-down of mining
assets of $4.1 million, mining costs of $212,000, pre-feasibility costs of
$505,000, care and maintenance costs of $128,000 and an increase in interest
and other expense of $15,000.
There were no sales of gold and silver during 1999 and 1998. Revenue was
$120,000 for 1999 compared to $237,000 for 1998, representing a $117,000
(49%) decrease. Revenues for 1999 consist primarily of interest income of
$69,000, other income of $56,000 and loss on sale of assets of $4,500. Sale
of assets consisted of proceeds of $1,029,000. Revenue for 1998 consists
primarily of interest income of $153,000 and drilling revenue and geological
consulting income of $79,000.
Effective June 30, 1999, the Company recognized a write-down of $4.1 million
affecting its mineral properties and mining equipment. The write-down was
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121. Based on the results of the studies performed by TWC,
management determined that the Rio Chiquito open pit mine plan was not
feasible and any development of the Rio Chiquito ore body would be on the
basis of an underground mine plan. Consequently, the Company proceeded to
write down the capital investment related to the tangible and intangible
costs associated with the open pit mine plan.
G&A was $666,000 for 1999 compared to $675,000 for 1998, representing a
$9,000 (1%) decrease. The decrease in G&A is primarily due to a reduction
in the workforce and other corporate costs during 1999. This decrease is
primarily due to the Company's effort to conserve cash through reduction of
costs.
The Company reported mining costs of $212,000, pre-feasibility costs of
$505,000, care and maintenance costs of $128,000 and reclamation cost of
$50,000 for 1999. No costs for these categories were reported in 1998. The
Company reported no exploration costs for 1999, compared to $181,000 in
1998. The Company's focus for 1999 was putting Rio Chiquito into production
and addressing the ore reserve problems encountered thereafter.
Depreciation and amortization was $90,000 for 1999 compared to $143,000 for
1998, representing a $53,000 (37%) decrease. Interest and other was
$512,000 for 1999 compared to $497,000 for 1998, representing a $15,000 (3%)
decrease. The increase in interest and other is primarily due to the
increase in interest expense ($335,000) related to the Company's increase in
debt during 1998 and due to amortization of the debt discount of $158,000
associated with the warrants issued in connection with the Company's $6.5
million financing in July 1998.
1998 COMPARED TO 1997
There were no sales of gold and silver during 1998 and 1997. Revenue was
$237,000 for 1998 compared to $91,000 for 1997, representing a $146,000
(160%) increase. Revenue for 1998 consists primarily of interest income of
$153,000 and drilling revenue and geological consulting income of $79,000.
Revenue for 1997 consists primarily of interest income of $79,000.
G&A was $675,000 for 1998 compared to $985,000 for 1997, representing a
$310,000 (31%) decrease. The decrease in G&A is primarily due to a
reduction in the workforce and other corporate costs during 1998.
Exploration costs were $181,000 for 1998 compared to $234,000 for 1997,
representing a $53,000 (23%) decrease. This decrease is primarily due to
the Company's effort to conserve cash through reduction of costs.
Depreciation and amortization was $143,000 for 1998 compared to $139,000 for
1997, representing a $4,000 (3%) increase. Interest and other was $497,000
for 1998 compared to $116,000 for 1997, representing a $381,000 (328%)
increase. The increase in interest and other is primarily due to the
increase in interest expense ($325,000) related to the Company's increase in
debt during 1998 and due to amortization of the debt discount of $135,000
associated with the warrants issued in connection with the Company's $6.5
million financing in July 1998.
Market Conditions, Risks and Environmental
Gold Price
The Company's future profitability is significantly affected by changes in
the market price of gold. Gold prices can fluctuate widely and are affected
by numerous factors, such as demand, forward selling by producers, central
bank sales and purchases, investor sentiment and production levels. During
1997 and early 1998, the market price of gold declined to its lowest level
in 18 years and remained at these depressed prices throughout 1998. Several
central banks sold a portion of their gold reserves and others discussed
proposals to sell. Producer hedging and short-selling by speculators, both
of which are sustained by central bank lending,
<PAGE>
were at record levels during 1998 and 1997. The perception that central
banks may further reduce their gold reserves and the belief that major world
economies can sustain a low-inflationary environment could continue to
adversely impact the market price of gold. A sustained period of low gold
prices could have a material adverse effect on the Company's financial
position and results of operations.
Environmental
In Costa Rica the two regulatory agencies that most directly affect mining
are the Directorate of Geology and Mines (DGM) and the Environmental
National Technical Secretariat (SETENA). Both agencies are directed by the
National Ministry of Energy and the Environment (MINAE).
The exploitation concession where the mine is located is valid through 2011.
Semestral and annual reports are submitted to the DGM for all Company
exploration concessions and the exploitation concession. These reports
discuss what areas were impacted by exploration and mining activities and
what measures were taken to minimize and remediate that impact, including
voluntary reforestation and revegetation programs undertaken by the Company.
Also reported for the exploitation concession are the results of the
monitoring and water sampling programs which include multi-element analyses,
pH monitoring, and piezometer readings. The Environmental Impact Study and
Plan of Operations originally approved for the Rio Chiquito Mine remain
valid until 2011. Laguna has a reclamation bond in place with the Costa
Rican government to guarantee completion of reclamation.
The Company has reclamation commitments for the year 2000 related to the
1998 and 1999 mine operations. The Company is in the process of reclaiming
areas where mining took place. The Company is expected to complete the
reclamation program in 2000. This reclamation work is comprised of site
drainage/erosion control, reforestation and revegetation programs. At
December 31, 1999, the Company had accrued $50,000 associated with the
reclamation program. Management believes that amount is sufficient to cover
all reclamation costs.
<PAGE>
LAGUNA GOLD COMPANY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Laguna Gold Company:
We have audited the accompanying consolidated balance sheets of Laguna Gold
Company (a Colorado corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Laguna Gold Company and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses and negative cash flow from operations and has shut down
its only operating mineral asset, all of which raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amounts and classification
of liabilities that might result should the Company be unable to continue as
a going concern.
Arthur Andersen, LLP
Denver, Colorado
March 17, 2000
<PAGE>
LAGUNA GOLD COMPANY
CONSOLIDATED BALANCE SHEETS
At December 31, 1999 and 1998
(In thousands of U.S. dollars, except share and per share amounts)
___________
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 221 $ 3,984
Notes receivable 625 200
Accounts receivable 15 31
Inventories 20 --
Other 5 17
Total current assets 886 4,232
Mineral properties 160 416
Mining equipment 175 612
Construction in progress -- 2,708
Less accumulated depreciation, depletion and amortization (25) (139)
310 3,597
Other assets 12 27
Total Assets $ 1,208 $ 7,856
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 625 $ --
Accrued interest -- 325
Accounts payable and accrued liabilities 163 674
788 999
Long-term liabilities:
Notes payable, net -- 5,824
Other convertible notes payable -- 230
Accrued interest -- 32
-- 6,086
Commitments and contingencies (Note 11)
Stockholders' equity:
Series A Convertible Preferred Stock, $0.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding -- --
Common Stock, $0.01 par value, 200,000,000 shares authorized;
34,980,081 and 27,329,703 shares issued and outstanding, respectively 350 273
Additional paid-in capital 17,355 17,488
Accumulated deficit (17,285) (16,990)
Total stockholders' equity 420 771
Total Liabilities and Stockholders' Equity $ 1,208 $ 7,856
</TABLE>
Approved on behalf of the Board:
Stephen R. Stine, Director Roy K. Ross, Director
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
LAGUNA GOLD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands of U.S. dollars, except per share amounts)
_______________
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Interest and other $ 120 $ 237 $ 91
Costs and expenses:
Write-down of mining assets 4,054 -- 9,319
General and administrative 666 675 985
Mining 212 -- --
Pre-feasibility 505 -- --
Care and maintenance 128 -- --
Exploration -- 181 234
Reclamation 50 -- --
Depreciation and amortization 90 143 139
Interest and other 512 497 116
6,217 1,496 10,793
Net loss before extraordinary item (6,097) (1,259) (10,702)
Gain on debt settlement 5,802 -- --
Net loss $ (295) $(1,259) $(10,702)
Basic and diluted net loss per share attributable to
common stockholders:
Net loss before extraordinary item $ (0.21) $ (0.05) $ (0.43)
Gain on debt settlement 0.20 -- --
Net loss $ (0.01) $ (0.05) $ (0.43)
Weighted average common shares outstanding (000's) 29,321 26,648 25,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
LAGUNA GOLD COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of U.S. dollars, except share amounts)
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 -- $ -- 25,000,000 $250 $14,545 $ (5,029) $ 9,766
Stock option compensation expense -- -- -- -- 191 -- 191
Net loss -- -- -- -- -- (10,702) (10,702)
Balance, December 31, 1997 -- -- 25,000,000 250 14,736 (15,731) (745)
Stock option compensation expense -- -- -- -- 39 -- 39
Conversion of note payable due Mallon
Resources Corporation to common stock -- -- 1,744,703 17 1,902 -- 1,919
Stock options exercised -- -- 585,000 6 -- -- 6
Fair value of warrants issued with corporate
notes -- -- -- -- 811 -- 811
Net loss -- -- -- -- -- (1,259) (1,259)
Balance, December 31, 1998 -- -- 27,329,703 273 17,488 (16,990) 771
Cancellation of warrants in connection with
debt settlement -- -- -- -- (699) -- (699)
Issuance of common stock pursuant to
debt settlement -- -- 7,650,378 77 516 -- 593
Fair value of warrants issued in connection
with debt settlement -- -- -- -- 50 -- 50
Net loss -- -- -- -- -- (295) (295)
Balance, December 31, 1999 -- $ -- 34,980,081 $350 $ 17,355 $(17,285) $ 420
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
LAGUNA GOLD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (295) $(1,259) $(10,702)
Adjustments to reconcile net loss to net cash used in operating activities:
Write-down of mining assets 4,054 -- 9,319
Depreciation and amortization 90 143 139
Bad debt 8 -- --
Gain on debt settlement (5,802) -- --
Loss on sale of assets 4 33 (12)
Stock option compensation expense -- 39 191
Amortization of debt discount 158 135 --
Loss on theft of assets -- 6 --
Changes in operating assets and liabilities:
Decrease (increase) in:
Notes receivable 200 (200) --
Accounts receivable 16 (12) 36
Inventories (20) 12 6
Other assets 27 (17) 38
Increase (decrease) in:
Accrued interest -- 338 108
Accounts payable and accrued liabilities (511) 612 (98)
Net cash used in operating activities (2,071) (170) (975)
Cash flows from investing activities:
Additions to property and equipment (1,399) (182) (1,439)
Short-term investments -- -- 2,786
Construction in progress -- (2,708) --
Proceeds from sale of assets 404 103 16
Net cash (used in) provided by investing activities (995) (2,787) 1,363
Cash flows from financing activities:
Debt settlement payments (617) -- --
Proceeds from private placement -- 6,500 --
Issuance of letter of credit (80) -- --
Proceeds from exercise of stock options -- 6 --
Net cash provided by (used in) financing activities (697) 6,506 --
Net increase (decrease) in cash and cash equivalents (3,763) 3,549 388
Cash and cash equivalents, beginning of year 3,984 435 47
Cash and cash equivalents, end of year $ 221 $ 3,984 $ 435
Supplemental non-cash transactions:
Conversion of notes payable to equity and forgiveness of debt $ 6,411 $ -- $ --
Note payable related to debt settlement $ 625 $ -- $ --
Conversion of note payable to Mallon Resources
Corporation by issuance of common stock $ -- $ 1,919 $ --
Fair value of warrants issued with corporate notes $ -- $ 811 $ --
Sale of 1% net smelter return royalty by forgiveness of a portion
of the principal amount of a convertible note payable and
accrued interest to Mallon Resources Corporation $ -- $ -- $ 350
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION, OPERATIONS AND LIQUIDITY
Laguna Gold Company (the "Company" or "Laguna") is a Denver
based company engaged in the exploration for and development of
precious mineral properties in Costa Rica and Panama. The
Company was incorporated under the laws of the State of Colorado
on October 15, 1980. At December 31, 1999, Mallon Resources
Corporation ("Mallon") owned approximately 35% of the Company's
outstanding common stock.
The Company's principal precious metals property is the Rio
Chiquito project located in Guanacaste Province, Costa Rica
where the Company holds 18 exploration concessions and one
exploitation concession covering 277 square kilometers. The
Company believes that it has valid rights to the Rio Chiquito
concessions, and that all necessary exploration work has been
performed to retain title to the concessions. The Company owns
100% of the project.
Upon receiving financing in July 1998, the Company purchased property,
equipment, materials and supplies for Rio Chiquito. These costs, including
labor, relate to the construction of the mine, crusher, heap leach pad,
solution ponds, gold recovery plant and related facilities. In March 1999,
the crushing plant at Rio Chiquito was completed and placement of ore on the
pad began.
In May 1999, the Company suspended operations at the Rio
Chiquito Gold Mine in Costa Rica. Following commencement of
mining, variances between actual and predicted gold grade and
recovery were encountered. The Company started a confirmation
drilling program and suspended operations to evaluate these
findings. The Company retained The Winters Company (TWC) of
Tucson, Arizona to review the mine production data to determine
the reasons for the variances. Concurrently, the Company
retained JAC International L.L.C. (JAC) to develop a new higher-
resolution resource block model to investigate the underground
mining potential. The Company also commissioned TWC to review
the new resource block model and to study an underground mine
and milling scenario. Based on the results of the studies
performed by TWC, management determined that the Rio Chiquito
open pit mine plan was not feasible and any development of the
Rio Chiquito ore body would be on the basis of an underground
mine plan. Consequently, the Company proceeded to write down
the capital investment related to the tangible and intangible
costs associated with the open pit mine plan. Presently, the
Company's operations in Costa Rica are on a standby status for
an indefinite period.
The mine closure together with the Company's recurring losses
and negative cash flow from operations raise serious doubt about
its ability to continue as a going concern. The Company's cash
position at December 31, 1999 was approximately $221,000, which
at its current monthly expenditure rate will be exhausted within
five months. In order to meet its financial needs during 2000,
the Company must obtain some form of debt or equity financing or
combination thereof, or complete sales of assets, a merger or
other transaction. Presently, management is searching for new
assets to bring into the Company and subsequently will attempt
to raise funds to advance or develop the assets. However, there
is no assurance that the Company will be successful in its
search for new assets or in its fund raising efforts. In
conjunction with attempts to secure financing, the Company has
reduced its corporate G&A and other areas of costs to reduce
future financial requirements.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Laguna Costa Rica Corp., a Colorado
corporation, Corporacion de Minerales Mallon, S.A., a Costa Rica
corporation, Industrial Platoro, S.A., a Costa Rica corporation, Compania
Minera Veta Charcones, a Costa Rica corporation and Laguna Panama, S.A., a
Panama corporation. All significant intercompany transactions and accounts
have been eliminated in consolidation.
Generally Accepted Accounting Principles.
The consolidated financial statements have been prepared with accounting
principles generally accepted in the United States. Had the Company
followed accounting principles generally accepted in Canada, there would not
have been any significant effect on earnings or financial statement
presentation.
Cash and Cash Equivalents:
Cash and cash equivalents include investments which are readily convertible
into cash and have an original maturity of three months or less.
Investments are held to maturity and are reported at the lower of cost or
market.
<PAGE>
Fair Value of Financial Instruments:
The Company's on-balance sheet financial instruments consist of
cash and cash equivalents, notes receivable, accounts receivable
and accounts payable and long-term debt. Except for long-term
debt, the carrying amounts of such financial instruments
approximate fair value due to their short maturities. At
December 31, 1998, based on rates available for similar types of
debt, the fair value of long-term debt was not materially
different from its carrying amount.
Inventories:
Inventories, which consist of mining materials and supplies, are valued at
the lower of average cost or estimated net realizable value.
Property and Equipment:
The Company expenses general prospecting costs and exploration
costs on unevaluated mining properties. When, based on
management's evaluation of geological studies, resource and
reserve reports (both Company and third party reports),
metallurgical studies, environmental issues, estimated capital
requirements, estimated mining and production costs, estimated
commodity prices, and other matters, it appears likely that a
mineral property can be economically developed, the costs
incurred to acquire and develop such property, including costs
to further delineate the ore body, are capitalized. When
commercially profitable ore reserves are developed and
operations commence, capitalized costs are amortized using the
units-of-production method over the life of the mine. Upon
abandonment or sale of projects, all capitalized costs relating
to the specific project are removed from the accounts in the
year abandoned or sold and any gain or loss is recognized.
Mining equipment is depreciated using the units-of-production method, except
during suspended operations. When not in production, this equipment is
maintained and depreciated at approximately 2% per year. Other property and
equipment is recorded at cost, and depreciated over their estimated useful
lives (five to seven years) using the straight-line method.
The cost of normal maintenance and repairs is charged to expense as
incurred. Significant expenditures that increase the life of an asset are
capitalized and depreciated over the estimated useful life of the asset.
Upon retirement or disposition of assets, related gains or losses are
reflected in operations.
The Company analyzes the realizability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 prescribes that an impairment loss
is recognized in the event that facts and circumstances indicate that the
carrying amount of an asset may not be recoverable, and an estimate of
future undiscounted cash flows is less than the carrying amount of the
asset. Impairment is recorded based on an estimate of future discounted
cash flows. (See Note 5.)
Income Taxes:
Income taxes are calculated in accordance with the provisions
set forth in SFAS No. 109, "Accounting for Income Taxes." Under
SFAS No. 109, deferred income taxes are determined using an
asset and liability approach. This method gives consideration
to the future tax consequences associated with differences
between the financial accounting and the tax basis of assets and
liabilities, as determined through income tax filings by the
Company with relevant tax authorities, and gives immediate
effect to changes in income tax laws.
Stock-Based Compensation:
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
in 1996. As permitted under SFAS No. 123, the Company has elected to
continue to measure compensation cost using the intrinsic value based method
of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has made pro forma disclosures of net loss and
loss per share as if the fair value based method of accounting as defined in
SFAS No. 123 had been applied. (See Note 12.)
Foreign Currency Translation:
Management has determined that the U.S. dollar is the functional currency
for Costa Rican operations. Accordingly, the assets, liabilities and
results of operations of the Costa Rica subsidiaries are measured in U.S.
dollars. Transaction gains and losses are not material for any of the
periods presented.
Per Share Data:
The Company adopted SFAS 128, "Earnings Per Share" beginning in
the fourth quarter of 1997. All prior period earnings per share
have been restated to conform to the provisions of the
statement. Basic earnings per share is computed based on the
weighted average number of common shares outstanding. Diluted
earnings per share is computed based on the weighted average
number of common shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common
stock. All
<PAGE>
options to purchase common shares were excluded from the
computation of diluted earnings per share in all years presented
because they were antidilutive as a result of the Company's net
loss in those years.
Use of Estimates and Significant Risks:
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make significant estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. The more significant areas
requiring the use of estimates relate to mineral reserves, fair
value of financial instruments, future cash flows associated
with long-lived assets, valuation allowance for deferred tax
assets, and useful lives for depreciation and amortization.
Actual results could differ from those estimates.
The Company and its operations are subject to numerous risks and
uncertainties. Among these are risks related to the mining business
(including operating risks and hazards and the regulations imposed thereon),
risks and uncertainties related to the volatility of the prices of metals,
uncertainties related to the estimation of reserves of minerals and the
value of such reserves, the effects of competition and extensive
environmental regulation, the uncertainties related to foreign operations,
and many other factors, many of which are necessarily out of the Company's
control. Exploration activities are subject to numerous risks, including
the risk that no ore bodies will be encountered.
New Accounting Pronouncements:
The FASB issued SFAS No. 130 "Reporting Comprehensive Income" in
June 1997 which established standards for reporting and
displaying comprehensive income and its components in a full set
of general purpose financial statements. In addition to net
income, comprehensive income includes all changes in equity
during a period, except those resulting from investments by and
distributions to owners. The Company adopted SFAS 130 in the
first quarter of 1998, and the adoption had no impact on the
consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131") was issued and establishes standards for
reporting information about operating segments in annual and interim
financial statements. SFAS 131 also establishes standards for related
disclosures about product and services, geographic areas and major
customers. SFAS 131 is effective for fiscal years beginning after
December 15, 1997, and was adopted in fiscal 1998. However, the Company
currently has only one reportable segment.
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 on the balance sheet as either an asset or
liability measured at its fair value. It also 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 hedged accounting. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management does not
expect the adoption to have a material impact on its financial statements.
Start-Up Costs:
American Institute of Certified Public Accounts Statement of Position 98-5
("SOP 98-5") provides guidance on the financial reporting of start-up and
organizations costs. SOP 98-5 broadly defines start-up activities and
requires the costs of such start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning
after December 15, 1998 and the initial application is reported as a
cumulative effect of a change in accounting principles. The Company adopted
this policy January 1, 1999 with no significant impact.
Reclassification of Prior Year Amounts:
Certain amounts reported in the prior year consolidated financial statements
have been reclassified to correspond to the December 31, 1999 presentation.
Note 3. PRIVATE PLACEMENT FINANCING AND SUBSEQUENT DEBT SETTLEMENT
On July 7, 1998, the Company completed a private placement
financing. The Company issued US$6.5 million of 10% corporate
notes due June 30, 2001. Of the $6.5 million financing, three
directors participated in the private placement in the amount of
$150,000 and a private company participated in the amount of
$5.85 million. In conjunction with the $5.85 million
investment, Harry H. Stine, president and owner of Stine Seed
Company, the private company investor, became a director of
Laguna. The remaining $500,000 of the private placement came
from an institutional fund. The corporate notes were issued
with detachable warrants to
<PAGE>
purchase 11.05 million shares of Laguna common stock at an
exercise price of US$0.04 during year 1 through year 4. The
exercise price in year 5 is US$0.05. The proceeds from the
private placement were used to construct processing facilities
at the Company's Rio Chiquito Mine where the Company started
commercial production of gold and silver in the second quarter
of 1999. In May 1999, the Company suspended operations at the
Rio Chiquito Gold Mine in Costa Rica (see Note 1).
The corporate notes totaling $6.5 million related to the private placement
financing were reported in the consolidated financial statements net of an
original debt discount of $811,000 as a result of the relative fair value
allocated to the 11,050,000 warrants attached to the corporate notes and
500,000 Laguna common shares awarded to the lead investor. The relative
fair value associated with the warrants was computed using the Black-Scholes
model and the value for the common shares awarded was based on the current
share price on July 7,1998. No principal payments are due until June 30,
2001. The first interest payment of $650,000 was due June 30, 1999 and the
remaining interest payments are due semi-annually on December 31 and June 30
in the amount of $325,000 each through June 30, 2001.
In July 1999, because of the problems encountered with the ore
reserves at Rio Chiquito, the Company entered into discussions
with noteholders to negotiate Debt Settlement Agreements. In
mid-July 1999, the Company received a formal notice of default
from one noteholder on a promissory note dated June 30, 1998.
In August 1999, the Company signed Memorandums of Understanding
with all the noteholders. In September 1999, the Company
completed the closings in connection with all the Debt
Settlement Agreements. The agreements arranged for the
forgiveness of US $7.5 million of principal and accrued interest
and the cancellation of 9.9 million share purchase warrants.
The Company agreed to the following:
- - The payment of a total of US$1.24 million in cash in
exchange for the forgiveness of a total of principal and accrued
interest of US$6.7 million. An initial payment of US$417,000
was made at closing and future payments totaling US$825,000 will
be paid by July 31, 2000 from the net proceeds of certain asset
sales. As of December 31, 1999, the Company paid down $200,000
against the secured promissory note leaving a remaining note
balance of $625,000 at December 31, 1999.
- - The issuance of 7.65 million shares of common stock which
was recorded at a fair market value of $418,000 and the issuance
of 991,000 five-year share purchase warrants with an exercise
price of US$0.25 per share which was recorded at a fair market
value of $50,000 in exchange for the forgiveness of US$766,000
of principal and accrued interest.
The difference between the debt and accrued interest forgiven and the cash
and fair market value of the common shares and warrants issued was
approximately $5.9 million. This difference was apportioned between related
parties, relative to which $67,000 was charged to paid in capital, and
unrelated parties, relative to which $5.8 million was recorded as a gain on
debt forgiveness. Prior to the debt settlement, Harry Stine resigned as a
director of the Company.
Subsequent to December 31, 1999, the Company has completed three
payments of principal and interest totaling $323,000, reducing
the note payable balance to $313,000.
Note 4. SALE OF ASSETS AND NOTE RECEIVABLE
In 1999, the Company completed sales of assets totaling
approximately $1.0 million. The sales were comprised of
$374,000 in cash and $625,000 in the form of a secured
promissory note. The primary asset sale consisted of the sale
of the crushing circuit at the Rio Chiquito mine for $875,000.
The Company received a cash down payment of $250,000 and a
secured promissory note for $625,000 bearing an interest rate of
10% per annum. The note shall be satisfied through a series of
six equal payments to the Company beginning in January 2000 and
ending in June 2000. As of March 31, 2000, the Company has
received three note receivable payments including principal and
interest of $323,000 leaving a note receivable balance of
$313,000. The note was structured to correspond to the payments
required on the note payable discussed in Note 3. Also in
November 1999, mine inventory parts and supplies were returned
and the Letter of Credit for $80,000 related to the parts
expired and $82,000 (including interest) became unrestricted
cash.
<PAGE>
Note 5. WRITE-DOWN OF MINING ASSETS
The Company evaluates its long-lived assets for write-down when
events or changes in circumstances indicate that the related
carrying amount may not be recoverable. If the sum of estimated
future cash flows on an undiscounted basis is less than the
carrying amount of the related asset, an asset write-down is
considered necessary. The related write-down is measured by
comparing estimated future cash flows on a discounted basis to
the carrying amount of the assets. Effective December 31, 1997,
the Company's Board of Directors approved a write-down for a
portion of its long-lived assets based upon an analysis
completed in March 1998. The Company recognized a write-down of
$8.8 million and $0.5 million affecting its mineral properties
and mining equipment, respectively. The write-down was required
primarily as a result of the sustained depressed gold price.
Effective June 30, 1999, the Company recognized a write-down of $4.1 million
affecting its mineral properties and mining equipment. The write-down was
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121. Based on the results of the studies performed by TWC,
management determined that the Rio Chiquito open pit mine plan was not
feasible and any development of the Rio Chiquito ore body would be on the
basis of an underground mine plan. Consequently, the Company proceeded to
write down the capital investment related to the tangible and intangible
costs associated with the open pit mine plan.
Note 6. EXTRAORDINARY ITEM
The Company reported an extraordinary gain from debt settlements of $5.8
million, or $0.20 per share for the year ended December 31, 1999.
Note 7. IMPORT/EXPORT AGREEMENT
The Company's Import/Export Agreement allows the Company to import mining
equipment and supplies free of import taxes and custom duties and to receive
a 10% bonus on the export of precious metals precipitates revenues. In
November 1998, the Company's Import/Export Agreement was unexpectedly
canceled by the Costa Rican government. Subsequently, the Company appealed
this action through the proper governmental agencies. During this period of
dispute, all import taxes and custom duties associated with equipment and
supplies imported (approximately $270,000) were required to be paid by the
Company and held in escrow in a Costa Rican bank account. In February 1999,
the appeal was resolved in favor of the Company with regard to exoneration
of taxes on equipment and supplies imported. The Company voluntarily
renounced the 10% bonus credit on gold and silver revenues in order to get
the tax exoneration reinstated. The value of the bonus credit given up was
approximately $150,000. Subsequent to the favorable February 1999
resolution, the Company collected the $270,000 amount in escrow. The
Import/Export Agreement with the Costa Rican government ended in September
1999.
Note 8. SHARE CAPITAL
The Company's authorized capital consists of 200,000,000 shares
of $.01 par value common stock and 1,000,000 shares of preferred
stock, par value $.01 per share, with designations, rights,
preferences and limitations as may be determined by the
Company's Board of Directors. In June 1995, the Company
privately placed 25,000 shares of its Series A Convertible
Preferred Stock for $2,400,000. The shares of Series A
Convertible Preferred Stock were convertible into 3,600,000
shares of the Company's common stock and this conversion
occurred automatically upon the Company's successful initial
public offering in September 1996, as discussed below. Each
share of Series A Convertible Preferred Stock included
detachable warrants to purchase shares of Mallon's common stock
at an adjusted exercise price of $8.01 per share. The warrants
expire in June 2000.
In May 1996, the Company sold 5,000,000 Special Warrants for $1.00 per
Warrant. The Company received proceeds of $4,339,000, net of offering costs
of $661,000. In September 1996, the Company completed the registration of
the Special Warrants with The Ontario Securities Commission. Upon exercise,
each Special Warrant is convertible into one share of the Company's common
stock and one Common Share Purchase Warrant. Each Common Share Purchase
Warrant entitled the holder to purchase one share of common stock for $1.50
(subject to adjustment) on or before November 24, 1997. In connection with
the sale of the Special Warrants, the Company issued to the underwriters
non-assignable warrants that entitle the holders to purchase 500,000 shares
of the Company's common stock on or before November 24, 1997 at $1.00 per
share. As of November 24, 1997, none of the Common Share Purchase Warrants
nor the Special Warrants were exercised and subsequently all the warrants
expired.
Until June 1996, the Company owned a 90% interest in the Rio Chiquito
concessions, and Red Rock, a private company, owned a 10% interest. In June
1996, the Company acquired Red Rock for 2,000,000 shares of the Company's
common stock, valued at $1.00 per share, and convertible secured promissory
notes in the aggregate principal amount of $230,000, for a total
consideration of $2,230,000. The interest rate on the note was at 5% per
annum. Principal and accrued interest were due December 31, 2000. The
note, including accrued interest, was exchanged for shares and warrants
which were recorded at fair market value as part of the debt settlement
discussed in Note 3, with the difference recorded as an additional capital
contribution of $108,000.
<PAGE>
Note 9. INCOME TAXES
The Company incurred a loss for book and tax purposes in 1998 and 1997. In
1999, the Company expects to report taxable income which will be fully
offset by net operating loss carryforwards. There is no income tax benefit
or expense for the years ended December 31, 1999, 1998 and 1997.
Deferred tax assets consisted of the following as of December 31, 1999 and
1998 (In thousands of U.S. dollars):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net operating loss carryforward $ -- $ 1,382
Mining properties basis differences 6,522 5,057
6,522 6,439
Less valuation allowance (6,522) (6,439)
$ -- $ --
</TABLE>
The Company's net operating loss carryforwards have been reduced
to zero as of December 31, 1999.
Note 10. RELATED PARTY TRANSACTIONS
In June 1997, Mallon discontinued its allocation of G&A to the
Company since Laguna was no longer sharing office space,
expenses or employees. The G&A allocation from Mallon to the
Company for 1997 was $58,000. During 1997, none of the G&A
allocation was recorded as a capital contribution by Mallon. As
of December 31, 1999 and 1998, approximately $3,700 and $1,227
were due from Mallon, respectively. As of December 31, 1998,
$908 was payable to Mallon. Subsequent to year end, the
intercompany receivable of $3,700 has not been collected. As of
December 31, 1999, no amount was due to Mallon.
In December 1995, the Company exchanged its intercompany payable to Mallon
of $5,639,000 for a $2,070,000 Convertible Secured Promissory Note ("Note")
to Mallon. The difference of $3,569,000 was recorded as a capital
contribution by Mallon. The Note accrued interest at 5% per annum, and
principal and accrued interest was due December 31, 2000. The Note was
convertible into shares of the Company's common stock, at either the
Company's or Mallon's option. The conversion price, which was subject to
anti-dilution adjustments, was $1.10. The Note was collateralized by a
general security agreement encumbering all of the assets of the Company.
The intercompany payable to Mallon arose principally through the purchase of
mineral properties and the allocation of common expenses. Mallon did not
charge interest on the intercompany payable prior to the exchange noted
above. In March 1998, the Company exercised its option under the terms of
the Note to pay off all of the principal and accrued interest due under the
Note as of December 31, 1997 with shares of its $0.01 par value per share
common stock. The total principal and accrued interest due under the Note
as of December 31, 1997, was $1,919,173. Accordingly, the Company
authorized 1,744,703 shares of its common stock to be issued to Mallon in
full satisfaction of all of its obligations under the Note.
In January 1998, the Company entered into a sublease agreement with Mallon.
This agreement continued until September 30, 1999, whereby Mallon entered
into a new separate lease agreement with Denver Place Associates to assume
Laguna's office space.
Note 11. COMMITMENTS AND CONTINGENCIES
In December 1999, the Company entered into an agreement to
terminate its corporate office lease with an effective date of
September 30, 1999. The Company incurred no penalty or
termination fees as a result of this transaction. The Company
has no significant future minimum lease payments.
For the year ended December 31, 1998, the Company's rent expense
was $27,837, net of $14,724 received from Mallon on sublet of
office. For the year ended December 31, 1997, the Company's
rent expense was included in the general and administrative
expense allocated from Mallon. In January 1998, the Company
began subletting approximately one-third of the Company's office
space to Mallon for a period of 12 months at a rate of $1,227
per month. The sublease rate was based on current office lease
rates. Since January 1, 1999, the Company continued to sublet
to Mallon on a month-to-month basis at the rate of $1,249 per
month until September 30, 1999. Effective October 1, 1999,
Mallon entered into a new separate lease agreement with Denver
Place Associates to assume Laguna's office space.
<PAGE>
Under the terms of the Costa Rican Labor Code, the Company may be obligated
to make certain payments in the event of the death or dismissal of Costa
Rican employees. No estimate of this liability can be made at this time.
It is the policy of the Company to expense any such payments as incurred.
The Company has future reclamation commitments related to its current mine
operations. The Company is in the process of reclaiming areas and expects
to complete this process by December 31, 2000. At December 31, 1999, the
Company had accrued $50,000 associated with the reclamation program.
Management believes that amount is sufficient to cover all reclamation
costs.
Subsequent to December 31, 1999, a former employee filed a lawsuit against
the Company for various claims. Management believes the suit has no merit
and the Company plans to defend the action vigorously.
Note 12. STOCK BASED COMPENSATION
Under the Laguna Gold Company Equity Participation Plan (the
"Equity Plan"), shares of common stock have been reserved for
issuance in order to provide for incentive compensation and
awards to employees and consultants. The number of shares
reserved, as amended in March 1998, is 5,000,000 shares of
common stock. The Equity Plan provides that stock options,
stock bonuses and stock appreciation rights and other forms of
stock-based compensation may be granted in accordance with the
provisions of the Equity Plan. Effective January 1, 1995,
options to purchase a total of 1,620,000 shares of the Company's
common stock were granted to four officers of the Company,
exercisable at a price of $0.01 per share. Of these options,
718,750 vested immediately. The remainder of the options vest
over a period of up to four years. The maximum term for the
options is ten years from the date of grant. The options vest
in full if controlling interest in the Company or substantially
all of its assets are sold, or if the Company is merged into
another company, or if control of the Company's Board is
obtained by a person or persons not expressly approved by a
majority of the members of the Board. As permitted under SFAS
No. 123, the Company has elected to continue to measure
compensation expense using the intrinsic value method of
accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Under that method, the difference
between the exercise price and the estimated fair value of the
shares at the date of grant is charged to compensation expense,
ratably over the vesting period. In 1998, 585,000 options were
exercised. As a result of the options exercised during 1998,
the number of common shares available under the Company's Equity
Plan was reduced by 585,000 shares from 5,000,000 to 4,415,000.
During 1999, no options were exercised and the number of common
shares available under the Company's Equity Plan remains at
4,415,000.
In September 1997, under the Equity Plan, options to purchase 160,000 shares
of the Company's common stock were granted to officers of the Company,
exercisable at a price of $0.16 per share. Of these options, 40,000 vested
immediately. The remainder of the options vest over periods of up to three
years. To date, none of these options have been exercised.
In January 1998, under the Equity Plan, options to purchase 919,999 shares
of the Company's common stock were granted to employees of the Company,
exercisable at a price of $0.045 per share. Of these options, 246,667
vested immediately. The remainder of options vest at various times or upon
the occurrence of various events. These grants were subject to stockholder
ratification at the Company's June 1998 annual meeting, which was received
in June 1998.
In March 1998, the Company's Board of Directors approved, subject to
stockholder ratification at the Company's June 1998 annual meeting, an
increase in the number of shares available for issuance under the Company's
Equity Plan from 2.5 million shares to 5.0 million shares. In addition, the
Board of Directors approved, subject to stockholder ratification, that the
exercise price of all options held by current employees and directors of the
Company be reduced to US$0.045 per share. The increase in the number of
shares available for issuance under the Company's Equity Plan and the re-
pricing of options received stockholder ratification in June 1998.
From July through December 1998, under the Equity Plan, options to purchase
330,000 shares of the Company's common stock were granted to employees of
the Company, exercisable at a price of $0.03-$0.07 per share. Of these
options, 80,000 vested immediately. The remainder of options vest over
periods of up to two years.
In January and July 1998, 225,000 and 360,000, respectively, of common stock
options were exercised by former officers of the Company at an exercise
price of $0.01 per share.
In 1999, under the Equity Plan, options to purchase 650,000 shares of the
Company's common stock were granted to employees of the Company, exercisable
at a price of $0.03-$0.06 per share. Of these options, 50,000 vested
immediately. The remainder of the options vest over a period of up to two
years. During 1999, options to purchase 550,000 shares of common stock were
canceled as a result of employee terminations.
<PAGE>
Changes during 1999, 1998 and 1997 in options outstanding under the Equity
Plan were as follows:
<TABLE>
<CAPTION>
Option Price
Share Per Share
(000's)
<S> <C> <C>
Outstanding at December 31, 1996 2,500 $0.01-$1.00
Granted 160 0.16
Exercised -- --
Forfeited 225 0.01
Outstanding at December 31, 1997 2,435 $0.01-$1.00
Granted 1,249 $0.03-$0.07
Exercised 585 $0.01
Forfeited 317 $0.04-$0.06
Outstanding at December 31, 1998 2,782 $0.03-$1.00
Granted 650 $0.03-$0.05
Exercised -- $0.00
Forfeited 550 $0.03-$0.06
Outstanding at December 31, 1999 2,882 $0.03-$1.00
Options exercisable:
December 31, 1997 2,203 $0.01-$1.00
December 31, 1998 2,072 $0.01-$1.00
December 31, 1999 2,482 $0.01-$1.00
</TABLE>
The weighted average remaining contractual life of the options under the
Equity Plan is 5.5 years.
Had compensation expense for the Company's 1999, 1998 and 1997 grants of
stock options been determined consistent with the fair value method under
SFAS No. 123, the Company's net loss and loss per common share would
approximate the pro forma amounts below (in thousands of U.S. dollars,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Net loss before extraordinary item $(6,097) $(6,126) $ -- $ -- $ -- $ --
Gain on debt settlement $ 5,802 $ 5,802 $ -- $ -- $ -- $ --
Net loss $ (295) $ (324) $(1,259) $(1,312) $(10,702) $(10,752)
Net loss before extraordinary item
per common share $ (0.21) $ (0.21) $ -- $ -- $ -- $ --
Gain on debt settlement
per common share $ 0.20 $ 0.20 $ -- $ -- $ -- $ --
Net loss per common share $ (0.01) $ (0.01) $ (0.05) $ (0.05) $ (0.43) $ (0.43)
</TABLE>
The fair value of each option is estimated as of the grant date
using the Black-Scholes option-pricing model with the following
assumptions.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C>
Risk-free interest rate 4.84% 5.12% 5.88%
Expected life (in years) 4 4 4
Expected volatility 452.58% 318.70% 133.28%
Expected dividend yield 0.00% 0.00% 0.00%
Weighted average fair value of options granted $0.04 $0.04 $0.16
</TABLE>
<PAGE>
In December 1997, Mallon granted to new management an option for three years
to purchase from Mallon 1.0 million shares of Laguna common stock owned by
Mallon ("Mallon's Laguna Common Stock") for a purchase price of US$1.00 per
share (see below). The grant of the 1.0 million options to new management
from Mallon is not reflected in the SFAS 123 disclosures above.
In December 1997, the Company engaged a new management team. Part of
management's compensation package was stock compensation effective
December 30, 1997. The compensation package provided the following: (1) a
grant of 2.4 million shares of Mallon's Laguna Common Stock; (2) a grant to
new management of an option for three years to purchase from Mallon 1.0
million shares of Mallon's Laguna Common Stock for a purchase price of
US$1.00 per share; and (3) a grant of 975,000 shares of Mallon's Laguna
Common Stock to new management upon the occurrence of certain events. For
the years ended December 31, 1998 and 1997, the Company's statement of
operations reflects stock compensation expense of approximately $39,000 for
Item 3 discussed above and approximately $210,000 for items (1) and (2)
discussed above. For the year ended December 31, 1999, the Company's
statement of operations does not reflect any stock compensation expense.
<PAGE>
EXHIBIT 10.01
The Mallon Employee Bonus Pool:
A Definitive Statement of its Characteristics and Rules
(Revised February 1998)
Recitals
A. As a means of compensating and motivating their employees, Mallon
Resources Corporation, a Colorado corporation, and its wholly-owned
subsidiary, Mallon Oil Company, a Colorado corporation (collectively, the
"Companies"), have since 1988 maintained a compensation plan (the "Plan")
pursuant to which they have irrevocably set apart for and allocated to The
Mallon Employees Bonus Pool (as hereinafter defined, "Beneficiary") a
portion of the gross proceeds derived from the sale of their hydrocarbon
production.
B. The purpose of this document is to delineate, define, clarify and
publish the characteristics of, and rules governing, the Plan.
I. Royalty
Effective with the organization of Mallon Resources Corporation ("MRC")
in December 1988, the Companies established the Plan by declaring and
dedicating a portion of the gross proceeds from the sale of any or all of
the hydrocarbons produced from any real property interest then owned or
thereafter acquired by the Companies were forever irrevocably set apart for,
and allocated to, Beneficiary as an unrecorded royalty (the "Royalty"), upon
the terms and conditions described as follows:
1. The Royalty is the right to receive an amount equal to 1.3% of the
actual cash received as gross revenue generated by the sale of any or
all of the Companies' hydrocarbons, free and clear of all costs of
development, production, and operation, net only of (a) production
taxes, transportation charges, and other similar revenue related
burdens incurred with regard to such production, and (b) the effects
of hedging and similar arrangements.
2. The Royalty is to be paid over to the Beneficiary not less often than
quarterly, within 60 days following the completion of each calendar
quarter.
3. The Royalty is intended to be the functional equivalent of a real
property right. The Companies' obligation to pay the Royalty is
binding upon, and enforceable against, the Companies and their
successors and assigns, and all assignments or transfers of interests
in any of the Companies' real property interests are to (a) be made
expressly subject to the obligation to pay the Royalty, or (b) be
made only after a ratable portion of the sales proceeds have been set
apart for and allocated to Beneficiary.
II. Beneficiary
The Mallon Employee Bonus Pool is maintained and administered by the
Chairman of the Board of Directors (the "Board") of MRC, in accordance with
the following:
1. Monies in the Pool are to be distributed among Qualified Participants
(as hereinafter defined) on a quarterly basis, or at such other times
as the Chairman shall determine.
2. The amount of money distributed from the pool to a Qualified
Participant, if any, is determined in the sole discretion of the
Chairman.
3. Qualified Participants are each employee of MRC or any of its
subsidiaries. Membership on the Board does not disqualify an employee
from being a Qualified Participant.
4. No Participant has any right to receive any money from the Pool,
except to the extent determined by the Chairman in his sole
discretion. No Participant has any right to assign, alienate,
transfer, encumber or anticipate his interest in any benefits under
the Pool, nor may any such possible benefits be subject to any legal
process to levy upon or attach the same for payment of any claim
against any Participant.
5. MRC may withhold taxes with respect to distributions from the Pool if
it determines it is (or may be) required to do so under any federal
or state law.
III. Termination, Amendment, Sale
1. The Plan may not be terminated, amended, sold or modified except with
the written consent of the Board, the Chairman, and at least three of
the five most senior (by length of employment with MRC) Qualified
Participants.
2. Upon a "takeover of MRC," an amount of cash equal to the fair future
value of the Royalty shall be immediately paid to Beneficiary for
prompt distribution to those who were Qualified Participants
immediately prior to the takeover of MRC in accordance with the
direction of the Chairman who was in office immediately prior to the
takeover of MRC. For the purposes of this section, the term "takeover
of MRC" shall mean any of the following:
<PAGE>
a) The acquisition or ownership of 50% or more of MRC's Common
Stock then issued and outstanding by any person or entity, or
group of persons or entities, not affiliated with MRC as of
the effective date of this document, without the express
approval of a majority of the members of Board who are
members of the Board as of the effective date of this
document or are members of the Board who, after the effective
date of this document, were recommended to the shareholders
for election to the Board by management of MRC, or
b) The election of individuals constituting a majority of the
members of the Board who were not either (i) members of the
Board as of the date of this document, or (ii) recommended to
the shareholders by management of MRC, or
c) A legally binding vote of the shareholders of MRC in favor of
selling all or substantially all of the assets of MRC.
VI. Miscellaneous
1. The Plan has been made under, and is to be construed in accordance
with, the laws of the State of Colorado.
2. The Plan was made for the benefit of Beneficiary and is intended to
be relied upon by the employees of the Companies as a condition of
their employment, and it is intended that its terms as delineated in
this document shall be enforceable in a court of law by them.
This document has been approved by (a) the Chairman and (b) the
employees of MRC noted below (for themselves and as representatives of all
of the Qualified Participants) as a true and complete statement of the terms
and conditions of the Plan. This document is made to be effective for all
purposes as of April 1, 1997 and as a confirmation of the Company's prior
practice with respect to the Plan.
END OF EXHIBIT 10.01
<PAGE>
EXHIBIT 10.05
Employment Agreement
(George O. Mallon, Jr.)
THIS EMPLOYMENT AGREEMENT, effective as of January 1, 2000, is between
Mallon Resources Corporation, a Colorado corporation (the "Company"), and
George O. Mallon, Jr. ("Employee").
1. Employment. The Company hereby employs Employee and Employee
hereby accepts employment from the Company on the terms and conditions set
forth in this Agreement.
2. Duties. (a) Employee shall be the Company's Chairman of the
Board, Chief Executive Officer and President. Employee's duties shall be
those typically performed by management personnel in like positions with
companies similar to the Company. Employee shall faithfully and diligently
perform such duties, subject to the direction and control of the Company's
board of directors (the "Board"). Additionally, Employee shall perform such
duties as shall be required by the Bylaws of the Company and such duties as
shall be assigned to him from time to time by the Board.
(b) Employee shall devote such working time to the business of the
Company as may reasonably be required by the nature of the Company's
business, from time to time. Employee shall not engage in any other business
activity requiring significant personal services by Employee that in the
judgment of the Board may conflict with the proper performance of Employee's
duties to the Company.
3. Compensation. Employee's compensation shall be as follows:
(a) Annual Base Salary. The Company shall pay to Employee a base
salary ("Annual Base Salary") at an annual rate of $175,000.00 for each year
of this Agreement, as it may be extended. The Annual Base Salary shall be
subject to such withholding regulations as are required by law and shall be
paid in installments in accordance with the Company's customary payroll. The
Company's Compensation Committee (the "Committee") shall review Employee's
work periodically (at least annually), and the Committee may, in its sole
discretion, increase Employee's Annual Base Salary if it determines such
adjustments are merited and consistent with the Company's executive
compensation policies, as they may change from time to time.
(b) Cash Bonuses. Employee shall be eligible to receive such cash
bonuses as may be determined by the Committee, acting in its sole
discretion, based upon Employee's performance and the success of the
Company. It is intended that any such bonuses may be commensurate with
Employee's position with the Company, and that they be generally
proportionate to bonuses awarded to other members of the Company's senior
management.
(c) Stock Compensation. Employee shall be eligible to participate in
such of the Company's stock-based compensation plans for which he is
otherwise qualified.
(d) Miscellaneous. Employee shall be entitled to participate in any
insurance plans, hospitalization plans, medical reimbursement plans, profit
sharing plans, retirement plans and other employee benefit plans for which
Employee is qualified. Nothing in this paragraph shall require the Company
to adopt or maintain any such plans.
4. Sick Leave and Vacation. Employee shall be entitled to sick
leave and annual vacation as determined from time to time by the Board,
consistent with the Company's sick leave and vacation policies, as they may
be changed from time to time.
5. Expenses. The Company shall reimburse Employee for all
reasonable entertainment, travel and lodging expenses incurred by Employee
in connection with the business of the Company, subject, however, to such
rules, regulations and record-keeping requirements as may be established
from time to time by the Company; and further subject to the limitation that
only such expenses as may be deducted by the Company shall be reimbursed.
6. Term. (a) The term of this Agreement shall commence as of the
date of this Agreement and shall continue for a period of 36 months from
that date. Notwithstanding the foregoing, on the last day of each month
during the term of this Agreement through and including December 31, 2002,
an additional month shall automatically be added to the term of this
Agreement unless written notice to the contrary has been given by the Board
to Employee prior to such month-end date. This "evergreen" provision is
intended to extend the term of this Agreement so that there are always
(until after January 31, 2003) 36 months remaining until expiration of this
Agreement.
(b) The Company shall have the right to terminate Employee's
employment by the Company by not less than 30 days prior written notice. A
termination "for cause" shall only be made if a majority of the Board
determines that Employee has (1) failed to perform his duties hereunder in a
proper and timely manner, and such failure has continued for more than 30
days following written notice in which the deficiencies were detailed with
reasonable particularity, (2) materially violated any of the covenants
described in paragraph 8, or (3) has been convicted of any felony or any
misdemeanor that involves moral turpitude. If Employee is terminated for
cause, Employee shall only be entitled to his Annual Base Salary through the
date of termination and the Company shall
<PAGE>
have no further obligations hereunder, including payment of any bonus amount
for such applicable year of termination. If the termination is for a reason
other than for cause, Employee shall be entitled to receive salary payments
at the rate of Employee's then current Annual Base Salary for the balance of
the then unexpired term of this Agreement, together with all such bonus
amounts as Employee may be entitled to as of the time of Employee's
termination.
(c) Employee may terminate this Agreement at any time upon not less
than 30 days' prior written notice. If Employee terminates this Agreement,
Employee shall only be entitled to his Annual Base Salary through the date
of termination. The Company shall have no further obligations hereunder,
including payment of any bonus amount for such applicable year of
termination.
(d) Notwithstanding the provisions of paragraphs 6 (b) and (c), upon the
occurrence of a Change of Control of the Company (as defined in the Company's
Bylaws) Employee may, at his election made within 30 days following consummation
of such event, terminate all of his obligations under this Agreement and receive
in one cash payment from the Company an amount equal to the lesser of (1) 100%
of all Annual Base Salary payments that would otherwise be paid to Employee
under this Agreement through-out the then unexpired term of this Agreement, as
it may have been extended, or (2) 299% of the Employee's base compensation
amount as defined in Section 280(G) of the Internal Revenue Code.
(e) Notwithstanding the provisions of paragraphs 6 (b), (c) and (d),
upon the occurrence of a Change of Control of the Company (as defined in the
Company's Bylaws) that is not supported by a majority of the members of the
Board in office immediately prior to the Change of Control, Employee may, at
his election made within 30 days following consummation of such event,
terminate all of his obligations under this Agreement, and receive in one
cash payment from the Company an amount equal to 300% of all Annual Base
Salary payments that would otherwise be paid to Employee under this
Agreement through-out the then unexpired term of this Agreement, as it may
have been extended.
7. Death or Incapacity. If Employee dies or (in the reasonable
judgment of the Board) is incapacitated during the term of this Agreement,
this Agreement shall terminate immediately and the Company shall pay to
Employee or his legal representative the Annual Base Salary that would
otherwise be payable to Employee through the last day of the calendar month
during which his death or incapacity occurs.
8. Confidentiality. (a) The relationship between the Company and
Employee is one of confidence and trust.
(b) As used herein, "Confidential Information" means information
about the Company's plans, properties, business contacts, business
objectives and goals, including information relating to business
opportunities and plans, and negotiating strategies and directives with
respect to any of the Company's business activities, whether relating to
past, present or prospective activities, and in addition including but not
limited to any potential purchases or sales, all geological data and maps,
all seismic data and maps, all engineering data, reserves calculations and
production methods, all oil and gas prospects, whether domestic or foreign.
The foregoing shall constitute Confidential Information whether it is known
by Employee prior to his employment by the Company, or otherwise.
(c) Employee agrees that he shall at no time during the term of his
employment by the Company or for a period of three years following the
termination of this Agreement disclose any Confidential Information or
component thereof to any person, firm or corporation to any extent or for
any reason or purpose, or otherwise use any Confidential Information for his
own benefit or in any way contrary to the best interest of the Company.
9. Enforcement of Covenants. In addition to any other remedies
available to the Company, it shall be entitled to specific performance of
the covenants contained in paragraph 8. If the Company is successful in
enforcing its rights under this paragraph 9, Employee shall reimburse the
Company for all of the costs of such enforcement, including but not limited
to reasonable attorney's fees.
10. Survival of Covenants. The provisions of paragraphs 8 and 9
shall survive the termination of Employee's employment by the Company.
11. Notices. All notices under this Agreement shall be delivered by
hand or by registered or certified mail and, if intended for Employee, shall
be addressed to Employee at the address contained in the Company's personnel
records and if intended for the Company, shall be addressed to the Company
at its corporate headquarters. All notices shall be effective upon actual
delivery if by hand or, if by mail, five days after being deposited in the
United States mail, postage prepaid and addressed as required by this
paragraph.
12. Miscellaneous Provisions. (a) This Agreement contains the
entire agreement between the parties and supersedes all prior agreements,
including the Employment Agreement dated effective as of April 1, 1997. This
Agreement shall not be amended or otherwise modified in any manner except by
an instrument in writing executed by both parties.
<PAGE>
(b) Neither this Agreement not any rights or duties under this
Agreement may be assigned or delegated by either party unless the other
party consents in writing.
(c) Except as otherwise provided in this Agreement, this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective heirs, personal representatives, successors and assigns.
(d) This Agreement shall be governed by the laws of the State of
Colorado.
END OF EXHIBIT 10.05
<PAGE>
EXHIBIT 10.06
Employment Agreement
(Kevin M. Fitzgerald)
THIS EMPLOYMENT AGREEMENT, effective as of January 1, 2000, is between
Mallon Resources Corporation, a Colorado corporation (the "Company"), and
Kevin M. Fitzgerald ("Employee").
1. Employment. The Company hereby employs Employee and Employee
hereby accepts employment from the Company on the terms and conditions set
forth in this Agreement.
2. Duties. (a) Employee shall be the Company's Executive Vice
President. Employee's duties shall be those typically performed by
management personnel in like positions with companies similar to the
Company. Employee shall faithfully and diligently perform such duties,
subject to the direction and control of the Company's board of directors
(the "Board"). Additionally, Employee shall perform such duties as shall be
required by the Bylaws of the Company and such duties as shall be assigned
to him from time to time by the Board.
(b) Employee shall devote such working time to the business of the
Company as may reasonably be required by the nature of the Company's
business, from time to time. Employee shall not engage in any other business
activity requiring significant personal services by Employee that in the
judgment of the Board may conflict with the proper performance of Employee's
duties to the Company.
3. Compensation. Employee's compensation shall be as follows:
(a) Annual Base Salary. The Company shall pay to Employee a base
salary ("Annual Base Salary") at an annual rate of $145,000.00 for each year
of this Agreement, as it may be extended. The Annual Base Salary shall be
subject to such withholding regulations as are required by law and shall be
paid in installments in accordance with the Company's customary payroll. The
Company's Compensation Committee (the "Committee") shall review Employee's
work periodically (at least annually), and the Committee may, in its sole
discretion, increase Employee's Annual Base Salary if it determines such
adjustments are merited and consistent with the Company's executive
compensation policies, as they may change from time to time.
(b) Cash Bonuses. Employee shall be eligible to receive such cash
bonuses as may be determined by the Committee, acting in its sole
discretion, based upon Employee's performance and the success of the
Company. It is intended that any such bonuses may be commensurate with
Employee's position with the Company, and that they be generally
proportionate to bonuses awarded to other members of the Company's senior
management.
(c) Stock Compensation. Employee shall be eligible to participate in
such of the Company's stock-based compensation plans for which he is
otherwise qualified.
(d) Miscellaneous. Employee shall be entitled to participate in any
insurance plans, hospitalization plans, medical reimbursement plans, profit
sharing plans, retirement plans and other employee benefit plans for which
Employee is qualified. Nothing in this paragraph shall require the Company
to adopt or maintain any such plans.
4. Sick Leave and Vacation. Employee shall be entitled to sick
leave and annual vacation as determined from time to time by the Board,
consistent with the Company's sick leave and vacation policies, as they may
be changed from time to time.
5. Expenses. The Company shall reimburse Employee for all
reasonable entertainment, travel and lodging expenses incurred by Employee
in connection with the business of the Company, subject, however, to such
rules, regulations and record-keeping requirements as may be established
from time to time by the Company; and further subject to the limitation that
only such expenses as may be deducted by the Company shall be reimbursed.
6. Term. (a) The term of this Agreement shall commence as of the
date of this Agreement and shall continue for a period of 36 months from
that date. Notwithstanding the foregoing, on the last day of each month
during the term of this Agreement through and including December 31, 2002,
an additional month shall automatically be added to the term of this
Agreement unless written notice to the contrary has been given by the Board
to Employee prior to such month-end date. This "evergreen" provision is
intended to extend the term of this Agreement so that there are always
(until after January 31, 2003) 36 months remaining until expiration of this
Agreement.
(b) The Company shall have the right to terminate Employee's
employment by the Company by not less than 30 days prior written notice. A
termination "for cause" shall only be made if a majority of the Board
determines that Employee has (1) failed to perform his duties hereunder in a
proper and timely manner, and such failure has continued for more than 30
days following written notice in which the deficiencies were detailed with
reasonable particularity, (2) materially violated any of the covenants
described in paragraph 8, or (3) has been convicted of any felony or any
misdemeanor that involves moral turpitude. If Employee is terminated for
cause, Employee shall only be entitled to his Annual Base Salary through the
date of termination and the Company shall have no further obligations
hereunder, including payment of any bonus amount for such applicable year of
<PAGE>
termination. If the termination is for a reason other than for cause,
Employee shall be entitled to receive salary payments at the rate of
Employee's then current Annual Base Salary for the balance of the then
unexpired term of this Agreement, together with all such bonus amounts as
Employee may be entitled to as of the time of Employee's termination.
(c) Employee may terminate this Agreement at any time upon not less
than 30 days' prior written notice. If Employee terminates this Agreement,
Employee shall only be entitled to his Annual Base Salary through the date
of termination. The Company shall have no further obligations hereunder,
including payment of any bonus amount for such applicable year of
termination.
(d) Notwithstanding the provisions of paragraphs 6 (b) and (c), upon
the occurrence of a Change of Control of the Company (as defined in the
Company's Bylaws) Employee may, at his election made within 30 days
following consummation of such event, terminate all of his obligations under
this Agreement and receive in one cash payment from the Company an amount
equal to the lesser of (1) 100% of all Annual Base Salary payments that
would otherwise be paid to Employee under this Agreement through-out the
then unexpired term of this Agreement, as it may have been extended, or (2)
299% of the Employee's base compensation amount as defined in Section 280(G)
of the Internal Revenue Code.
(e) Notwithstanding the provisions of paragraphs 6 (b), (c) and (d), upon the
occurrence of a Change of Control of the Company (as defined in the Company's
Bylaws) that is not supported by a majority of the members of the Board in
office immediately prior to the Change of Control, Employee may, at his election
made within 30 days following consummation of such event, terminate all of his
obligations under this Agreement, and receive in one cash payment from the
Company an amount equal to 300% of all Annual Base Salary payments that would
otherwise be paid to Employee under this Agreement through-out the then
unexpired term of this Agreement, as it may have been extended.
7. Death or Incapacity. If Employee dies or (in the reasonable
judgment of the Board) is incapacitated during the term of this Agreement,
this Agreement shall terminate immediately and the Company shall pay to
Employee or his legal representative the Annual Base Salary that would
otherwise be payable to Employee through the last day of the calendar month
during which his death or incapacity occurs.
8. Confidentiality. (a) The relationship between the Company and
Employee is one of confidence and trust.
(b) As used herein, "Confidential Information" means information
about the Company's plans, properties, business contacts, business
objectives and goals, including information relating to business
opportunities and plans, and negotiating strategies and directives with
respect to any of the Company's business activities, whether relating to
past, present or prospective activities, and in addition including but not
limited to any potential purchases or sales, all geological data and maps,
all seismic data and maps, all engineering data, reserves calculations and
production methods, all oil and gas prospects, whether domestic or foreign.
The foregoing shall constitute Confidential Information whether it is known
by Employee prior to his employment by the Company, or otherwise.
(c) Employee agrees that he shall at no time during the term of his
employment by the Company or for a period of three years following the
termination of this Agreement disclose any Confidential Information or
component thereof to any person, firm or corporation to any extent or for
any reason or purpose, or otherwise use any Confidential Information for his
own benefit or in any way contrary to the best interest of the Company.
9. Enforcement of Covenants. In addition to any other remedies
available to the Company, it shall be entitled to specific performance of
the covenants contained in paragraph 8. If the Company is successful in
enforcing its rights under this paragraph 9, Employee shall reimburse the
Company for all of the costs of such enforcement, including but not limited
to reasonable attorney's fees.
10. Survival of Covenants. The provisions of paragraphs 8 and 9
shall survive the termination of Employee's employment by the Company.
11. Notices. All notices under this Agreement shall be delivered by
hand or by registered or certified mail and, if intended for Employee, shall
be addressed to Employee at the address contained in the Company's personnel
records and if intended for the Company, shall be addressed to the Company
at its corporate headquarters. All notices shall be effective upon actual
delivery if by hand or, if by mail, five days after being deposited in the
United States mail, postage prepaid and addressed as required by this
paragraph.
12. Miscellaneous Provisions. (a) This Agreement contains the
entire agreement between the parties and supersedes all prior agreements,
including the Employment Agreement dated effective as of April 1, 1997. This
Agreement shall not be amended or otherwise modified in any manner except by
an instrument in writing executed by both parties.
<PAGE>
(b) Neither this Agreement not any rights or duties under this
Agreement may be assigned or delegated by either party unless the other
party consents in writing.
(c) Except as otherwise provided in this Agreement, this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective heirs, personal representatives, successors and assigns.
(d) This Agreement shall be governed by the laws of the State of
Colorado.
END OF EXHIBIT 10.06
<PAGE>
EXHIBIT 10.07
Employment Agreement
(Roy K. Ross)
THIS EMPLOYMENT AGREEMENT, effective as of January 1, 2000, is between
Mallon Resources Corporation, a Colorado corporation (the "Company"), and
Roy K. Ross ("Employee").
1. Employment. The Company hereby employs Employee and Employee
hereby accepts employment from the Company on the terms and conditions set
forth in this Agreement.
2. Duties. (a) Employee shall be the Company's Executive Vice
President. Employee's duties shall be those typically performed by
management personnel in like positions with companies similar to the
Company. Employee shall faithfully and diligently perform such duties,
subject to the direction and control of the Company's board of directors
(the "Board"). Additionally, Employee shall perform such duties as shall be
required by the Bylaws of the Company and such duties as shall be assigned
to him from time to time by the Board.
(b) Employee shall devote such working time to the business of the
Company as may reasonably be required by the nature of the Company's
business, from time to time. Employee shall not engage in any other business
activity requiring significant personal services by Employee that in the
judgment of the Board may conflict with the proper performance of Employee's
duties to the Company.
3. Compensation. Employee's compensation shall be as follows:
(a) Annual Base Salary. The Company shall pay to Employee a base
salary ("Annual Base Salary") at an annual rate of $140,000.00 for each year
of this Agreement, as it may be extended. The Annual Base Salary shall be
subject to such withholding regulations as are required by law and shall be
paid in installments in accordance with the Company's customary payroll. The
Company's Compensation Committee (the "Committee") shall review Employee's
work periodically (at least annually), and the Committee may, in its sole
discretion, increase Employee's Annual Base Salary if it determines such
adjustments are merited and consistent with the Company's executive
compensation policies, as they may change from time to time.
(b) Cash Bonuses. Employee shall be eligible to receive such cash
bonuses as may be determined by the Committee, acting in its sole
discretion, based upon Employee's performance and the success of the
Company. It is intended that any such bonuses may be commensurate with
Employee's position with the Company, and that they be generally
proportionate to bonuses awarded to other members of the Company's senior
management.
(c) Stock Compensation. Employee shall be eligible to participate in
such of the Company's stock-based compensation plans for which he is
otherwise qualified.
(d) Miscellaneous. Employee shall be entitled to participate in any
insurance plans, hospitalization plans, medical reimbursement plans, profit
sharing plans, retirement plans and other employee benefit plans for which
Employee is qualified. Nothing in this paragraph shall require the Company
to adopt or maintain any such plans.
4. Sick Leave and Vacation. Employee shall be entitled to sick
leave and annual vacation as determined from time to time by the Board,
consistent with the Company's sick leave and vacation policies, as they may
be changed from time to time.
5. Expenses. The Company shall reimburse Employee for all
reasonable entertainment, travel and lodging expenses incurred by Employee
in connection with the business of the Company, subject, however, to such
rules, regulations and record-keeping requirements as may be established
from time to time by the Company; and further subject to the limitation that
only such expenses as may be deducted by the Company shall be reimbursed.
6. Term. (a) The term of this Agreement shall commence as of the
date of this Agreement and shall continue for a period of 36 months from
that date. Notwithstanding the foregoing, on the last day of each month
during the term of this Agreement through and including December 31, 2002,
an additional month shall automatically be added to the term of this
Agreement unless written notice to the contrary has been given by the Board
to Employee prior to such month-end date. This "evergreen" provision is
intended to extend the term of this Agreement so that there are always
(until after January 31, 2003) 36 months remaining until expiration of this
Agreement.
(b) The Company shall have the right to terminate Employee's
employment by the Company by not less than 30 days prior written notice. A
termination "for cause" shall only be made if a majority of the Board
determines that Employee has (1) failed to perform his duties hereunder in a
proper and timely manner, and such failure has continued for more than 30
days following written notice in which the deficiencies were detailed with
reasonable particularity, (2) materially violated any of the covenants
described in paragraph 8, or (3) has been convicted of any felony or any
misdemeanor that involves moral turpitude. If Employee is terminated for
cause, Employee shall only be entitled to his Annual Base Salary through the
date of termination and the Company shall have no further obligations
hereunder, including payment of any bonus amount for such applicable year of
<PAGE>
termination. If the termination is for a reason other than for cause,
Employee shall be entitled to receive salary payments at the rate of
Employee's then current Annual Base Salary for the balance of the then
unexpired term of this Agreement, together with all such bonus amounts as
Employee may be entitled to as of the time of Employee's termination.
(c) Employee may terminate this Agreement at any time upon not less
than 30 days' prior written notice. If Employee terminates this Agreement,
Employee shall only be entitled to his Annual Base Salary through the date
of termination. The Company shall have no further obligations hereunder,
including payment of any bonus amount for such applicable year of
termination.
(d) Notwithstanding the provisions of paragraphs 6 (b) and (c), upon
the occurrence of a Change of Control of the Company (as defined in the
Company's Bylaws) Employee may, at his election made within 30 days
following consummation of such event, terminate all of his obligations under
this Agreement and receive in one cash payment from the Company an amount
equal to the lesser of (1) 100% of all Annual Base Salary payments that
would otherwise be paid to Employee under this Agreement through-out the
then unexpired term of this Agreement, as it may have been extended, or (2)
299% of the Employee's base compensation amount as defined in Section 280(G)
of the Internal Revenue Code.
(e) Notwithstanding the provisions of paragraphs 6 (b), (c) and (d), upon the
occurrence of a Change of Control of the Company (as defined in the Company's
Bylaws) that is not supported by a majority of the members of the Board in
office immediately prior to the Change of Control, Employee may, at his election
made within 30 days following consummation of such event, terminate all of his
obligations under this Agreement, and receive in one cash payment from the
Company an amount equal to 300% of all Annual Base Salary payments that would
otherwise be paid to Employee under this Agreement through-out the then
unexpired term of this Agreement, as it may have been extended.
7. Death or Incapacity. If Employee dies or (in the reasonable
judgment of the Board) is incapacitated during the term of this Agreement,
this Agreement shall terminate immediately and the Company shall pay to
Employee or his legal representative the Annual Base Salary that would
otherwise be payable to Employee through the last day of the calendar month
during which his death or incapacity occurs.
8. Confidentiality. (a) The relationship between the Company and
Employee is one of confidence and trust.
(b) As used herein, "Confidential Information" means information
about the Company's plans, properties, business contacts, business
objectives and goals, including information relating to business
opportunities and plans, and negotiating strategies and directives with
respect to any of the Company's business activities, whether relating to
past, present or prospective activities, and in addition including but not
limited to any potential purchases or sales, all geological data and maps,
all seismic data and maps, all engineering data, reserves calculations and
production methods, all oil and gas prospects, whether domestic or foreign.
The foregoing shall constitute Confidential Information whether it is known
by Employee prior to his employment by the Company, or otherwise.
(c) Employee agrees that he shall at no time during the term of his
employment by the Company or for a period of three years following the
termination of this Agreement disclose any Confidential Information or
component thereof to any person, firm or corporation to any extent or for
any reason or purpose, or otherwise use any Confidential Information for his
own benefit or in any way contrary to the best interest of the Company.
9. Enforcement of Covenants. In addition to any other remedies
available to the Company, it shall be entitled to specific performance of
the covenants contained in paragraph 8. If the Company is successful in
enforcing its rights under this paragraph 9, Employee shall reimburse the
Company for all of the costs of such enforcement, including but not limited
to reasonable attorney's fees.
10. Survival of Covenants. The provisions of paragraphs 8 and 9
shall survive the termination of Employee's employment by the Company.
11. Notices. All notices under this Agreement shall be delivered by
hand or by registered or certified mail and, if intended for Employee, shall
be addressed to Employee at the address contained in the Company's personnel
records and if intended for the Company, shall be addressed to the Company
at its corporate headquarters. All notices shall be effective upon actual
delivery if by hand or, if by mail, five days after being deposited in the
United States mail, postage prepaid and addressed as required by this
paragraph.
12. Miscellaneous Provisions. (a) This Agreement contains the
entire agreement between the parties and supersedes all prior agreements,
including the Employment Agreement dated effective as of April 1, 1997. This
Agreement shall not be amended or otherwise modified in any manner except by
an instrument in writing executed by both parties.
<PAGE>
(b) Neither this Agreement not any rights or duties under this
Agreement may be assigned or delegated by either party unless the other
party consents in writing.
(c) Except as otherwise provided in this Agreement, this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective heirs, personal representatives, successors and assigns.
(d) This Agreement shall be governed by the laws of the State of
Colorado.
END OF EXHIBIT 10.07
<PAGE>
EXHIBIT 10.08
Peter H. Blum
Bear Ridge Capital LLC
4 Trapping Way
Pleasantville, NY 10570
Dear Peter:
The purpose of this letter is to restate and confirm the terms upon
which Bear Ridge Capital LLC ("BRC") will provide professional financial
consulting services to Mallon Resources Corporation ("Mallon"). Mallon
understands that BRC and Mallon have agreed to the following terms:
1. Term. This agreement shall be effective from March 1, 1999 through
December 31, 2000. The parties agree to review the nature and terms of
the contract in December 2000, and will mutually agree to appropriate
adjustments or termination depending on the results of BRC's efforts.
Either party, at any time, may terminate this agreement by giving the
other party written notice at least 30 days prior to the effective date
of termination. During the notice period, all other rights and duties of
the parties under this agreement shall continue. If either Mallon or BRC
desires to terminate work in process commenced before receipt of
termination, it may do so upon mutual consent of the parties.
2. Services. BRC shall provide professional financial consulting services to
Mallon. The services shall include advice and negotiating services with
respect to merger, acquisition and sale opportunities; advice concerning
the nature, timing and content of communications to the brokerage
industry; advice concerning brokerage industry services and service
providers; and advice concerning when and how to access the capital
markets. In providing these services, BRC shall be subject to the
reasonable supervision and direction of Mallon's Chief Executive Officer.
Notwithstanding the foregoing, BRC is intended to be a part-time
independent contractor to Mallon, not an employee of Mallon.
It is expected that BRC will devote all such time to the performance of
its obligations under this agreement as may reasonably be required.
3. Cash Compensation. BRC shall be paid $11,000 per month. Payments will be
made monthly, in arrears, on the last day of each month.
4. Stock Compensation. Mallon shall, by separate instrument, issue to BRC
warrants to purchase 40,000 shares of Mallon's $0.01 par value common
stock at an exercise price of $0.01 per share. These warrants, which
shall expire on December 31, 2004, shall vest in accordance with the
following schedule:
10,000 upon earlier of a Change of Control of Mallon or July 1,
2001;
10,000 upon a Change of Control of Mallon upon terms approved by
Mallon's Board of Directors; and
20,000 upon a Change of Control of Mallon in a transaction in
which, on a fully diluted basis, shares of Mallon's common stock are
valued at a price in excess of $11.50 per share.
If no Change of Control of Mallon has been closed by July 1, 2001, Mallon
will reconsider the vesting schedule for the second and third group of
warrants.
BRC shall vest in the warrants unless, prior to the vesting event, BRC
has terminated this agreement or Mallon has terminated this agreement
due to BRC's failure to perform its obligations hereunder in a manner
reasonably acceptable to Mallon.
For the purposes of this agreement, "a Change of Control of Mallon"
shall have the meaning set forth in Mallon's Bylaws, as amended.
5. Bonus. BRC will be eligible to receive bonus payments, from time to time,
upon the same basis as other members of management. Such payments, if
any, will be determined by the Compensation Committee of Mallon's board
of directors. No such payments are required to be made.
6. Expenses. BRC shall be reimbursed for its reasonable travel and out-of-
pocket expenses incurred in performance of its services under this
agreement, subject to BRC's compliance with Mallon's standard
requirements for expense reimbursements.
7. Governing Law. The validity, interpretation, and performance of this
letter agreement shall be controlled by and construed under the laws of
the State of Colorado.
If the foregoing accurately sets forth your understanding of our
agreement, please execute and return a copy of this letter, whereupon it
shall reflect an agreement between the parties.
END OF EXHIBIT 10.08
<PAGE>
EXHIBIT 10.09
MALLON RESOURCES CORPORATION
SEVERANCE AND SALE PROGRAM
1. Introduction
a) Recitals. Effective as of March 1, 2000, MALLON RESOURCES CORPORATION,
a Colorado corporation (the "Company"), hereby establishes the Mallon
Resources Corporation Severance and Sale Program (the "Program").
b) Purpose. The purpose of the Program is to encourage employees of the
Company to continue in the Company's employ and to expend their best
efforts on the Company's behalf during times of turmoil that may
effect the Company.
2. Definitions
a) Definitions. The following terms shall have the meanings set forth
below:
i) "Board" means the Board of Directors of the Company.
ii) "Change in Control of the Company" has the meaning set forth in
the Company's Bylaws.
iii) "Committee" means the Compensation Committee of the Board, or
the Board acting in such capacity as a whole.
iv) "Consultant" means a business consultant engaged to perform
consulting or other services for the Company.
v) "Directors" means directors of the Company, whether they are
Employees or Consultants, or not.
vi) "Eligible Person" means (1) Employees, (2) Consultants, and (3)
Directors.
vii) "Employee" means a person in the employ of the Company.
viii) "Outside Directors" means those Directors of the Company on
March 1, 2000, who are neither Employees of, nor paid Consultants
to, the Company.
ix) "Participant" means an Eligible Person designated by the
Committee from time to time during the term of the Program to
participate in one or more specified portions of the Program.
x) "Sale Value per Share" means, in connection with a Change in
Control of the Company, the value of all consideration payable to
the shareholders of the Company by virtue of their shareholdings
divided by the number of outstanding shares of the Company's common
stock, on a fully-diluted basis.
b) Gender and Number. Except when otherwise indicated by the context, the
masculine gender shall also include the feminine gender, and the
definition of any term herein in the singular shall also include the
plural.
3. Program Administration
The Program shall be administered by the Committee. In accordance with
the provisions of the Program, the Committee shall, in its sole
discretion after consultation with the Company's Chief Executive Officer,
select the Participants from Eligible Persons and establish such terms
and requirements as the Committee may deem necessary or desirable and
consistent with the terms of the Program. The Committee shall determine
the form or forms of the agreements with Participants which shall
evidence the particular provisions, terms, conditions, rights and duties
of the Company and the Participants, which provisions need not be
identical except as may be provided herein. The Committee may from time
to time adopt such rules and regulations for carrying out the purposes of
the Program as it may deem proper and in the best interests of the
Company. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Program or in any agreement entered
into hereunder in the manner and to the extent it shall deem expedient to
carry the Program into effect and it shall be the sole and final judge of
such expediency. No member of the Committee shall be liable for any
action or determination made in good faith. The determinations,
interpretations and other actions of the Committee pursuant to the
purposes and on all persons, subject only to the review and control of
the Board on all Program matters except selection of Participants.
4. Severance Payments
a) Upon any Change in Control of the Company, each Employee who has
theretofore been designated as a Participant in the Severance Payment
portion of the Program and has remained an Employee to the time of the
Change in Control of the Company shall be paid a one time cash payment
equal to one month of such Employee's standard wages in effect at the
time of the Change in Control of the Company for each full year of his
or her employment by the Company, up to a maximum of six months'
wages. A proportionate fraction of one month's wages will be paid for
fractional years of employment, provided that not more than a total of
six month's wages will be payable to any Employee.
b) Notwithstanding the foregoing, no Severance Payments under the
foregoing provision shall be paid to any employee who has an
employment contract with the Company that provides for severance
payments.
<PAGE>
c) Upon any Change in Control of the Company, each Outside Director who
has remained a Director to the time of the Change in Control of the
Company shall be paid a one time cash payment of $100,000.
5. Sales Assistance Units
a) Selection. The Committee may, in its sole discretion after
consultation with the Company's Chief Executive Officer, select
Eligible Persons to be Participants in the Sales Assistance portion of
the Program.
b) Units. A maximum of 3,000,000 Sales Assistance Units ("SAUs") may be
distributed to selected Participants in the Sales Assistance portion
of the Program. Upon the consummation of a Change in Control of the
Company, each outstanding SAU will be redeemed by the Company for a
payment determined in accordance with the following scale:
Sale Value per Share SAU Value
less than $10.00 $0.00
equal to or greater than $10.00, but less than $10.50 $0.10
equal to or greater than $10.50, but less than $11.00 $0.20
equal to or greater than $11.00, but less than $11.50 $0.50
equal to or greater than $11.50, but less than $12.00 $0.75
equal to or greater than $12.00 $1.00
c) Certificates. Certificates representing all SAUs that are issued, if
any, shall be executed and delivered by officers of the Company.
d) Forfeiture. If a holder of SAUs ceases to be an Eligible Person at any
time prior to the consummation of a Change in Control of the Company,
all SAUs theretofore held by such Participant shall be immediately
null, void and of no further effect.
e) Alternative Payments. In the discretion of the Committee, SAUs may be
redeemed for consideration other than cash, including the
consideration otherwise being received by shareholders of the Company
in connection with the Change in Control of the Company transaction.
f) Nontransferability. No right or interest of any Participant in an SAU
shall be assignable or transferable by the Participant, either
voluntarily or involuntarily, or subjected to any lien, directly or
indirectly, by operation of law, or otherwise, including execution,
levy, garnishment, attachment, pledge, or bankruptcy.
6. Program Amendment
The Board, upon recommendation of the Committee or at its own initiative,
at any time and from time to time and in any respect, may amend or modify
the Program.
7. Miscellaneous
a) Governing Law. The Program and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of
Colorado.
b) Effective Date. The Program shall be effective as of March 1, 2000.
(END)
END OF EXHIBIT 10.09
<PAGE>
EXHIBIT 10.10
PROMISSORY NOTE
$1,585,018.00 September 2, 1999
FOR VALUE RECEIVED, George O. Mallon, Jr. ("Maker"), hereby promises
to pay to the order of Mallon Resources Corporation, a Colorado corporation,
at 999 18th Street, Suite 1700, Denver, Colorado, or at such other place as
may be designated in writing by the holder of this note, the principal sum
of $1,585,018.00, together with interest thereon from the date of this note
until this note is paid in full, at an interest rate of 7.0% per annum,
compounded annually.
The principal and all accrued interest on this note shall be due and
payable in one payment due on August 31, 2002.
Upon any failure by Maker to pay any principal or interest under this
note when due, or upon the occurrence of any default under any deed of
trust, mortgage, pledge agreement, security agreement, or other encumbrance
or agreement securing Maker's payment of this note, the holder of this note
may at any time thereafter declare all unpaid principal and interest under
this note due and payable, immediately, without presentment, demand or
notice of any kind.
If this note is not paid in full when due or declared due, the unpaid
principal balance of this note, and the accrued interest thereon, shall
thereafter bear interest at the an annual rate equal to 5% greater than the
rate specified in the first paragraph of this note.
The principal of this note may be prepaid in full or in part at any
time without notice, penalty or premium. All amounts paid under this note
shall be applied first to accrued interest, and then to the reduction of
principal.
Payment of this note is secured by a Stock Pledge of even date (the
"Pledge").
Maker and each endorser and guarantor of this note, if any, waive
presentment of this note for payment, protest, and notice of nonpayment; and
agree to any extension of time for payment and partial payments before, at
or after maturity. Maker shall reimburse the holder of this note for all
costs incurred in collecting this note, including reasonable attorneys'
fees, whether suit is commenced, or otherwise.
This note shall be construed in accordance with Colorado law.
EXECUTED as of the date first set forth above.
Stock Pledge
THIS PLEDGE is given by the undersigned ("Debtor") for the benefit of
MALLON RESOURCES CORPORATION ("Beneficiary") for the purpose of securing
performance of Debtor's obligations under the promissory note of even date
from Debtor to Beneficiary in the original principal amount of $1,585,018.00
(the "Note"). Debtor hereby agrees as follows:
1. As security for Debtor's performance of Debtor's obligations under
the Note, Beneficiary is hereby given a lien upon and a security interest in
230,548 shares of the $0.01 par value per share common stock of Mallon
Resources Corporation (the "Shares"), all of which are owned by Debtor and
are in due form for transfer and all of which are herewith deposited with
Beneficiary. Stock dividends and other distributions on account of the
Shares shall be deemed an increment thereto, and if not received directly by
Beneficiary shall be delivered immediately to Beneficiary by Debtor in form
for transfer.
2. Upon the happening of any event of default under the terms of the
Note, Beneficiary shall have with respect to the Shares all of the rights
and remedies provided to a secured party by the Uniform Commercial Code in
effect in the State of Colorado at that time.
3. Beneficiary may, at Beneficiary's option and without obligation to
do so, transfer to or register in the name of Beneficiary's nominees all or
any part of the Shares and Beneficiary may do so before or after the
maturity of the Note and with or without notice to Debtor.
4. This Pledge shall be deemed to have been made under, and shall be
governed by, the laws of the State of Colorado in all respects, including
matters of construction, validity and performance, and none of its terms or
provisions may be waived, altered, modified, or amended, except as
Beneficiary may consent thereto in writing.
Dated September 2, 1999.
END OF EXHIBIT 10.10
<PAGE>
EXHIBIT 10.11
PROMISSORY NOTE
$645,548.75 September 2, 1999
FOR VALUE RECEIVED, Kevin M. Fitzgerald ("Maker"), hereby promises to
pay to the order of Mallon Resources Corporation, a Colorado corporation, at
999 18th Street, Suite 1700, Denver, Colorado, or at such other place as may
be designated in writing by the holder of this note, the principal sum of
$645,548.75, together with interest thereon from the date of this note until
this note is paid in full, at an interest rate of 7.0% per annum, compounded
annually.
The principal and all accrued interest on this note shall be due and
payable in one payment due on August 31, 2002.
Upon any failure by Maker to pay any principal or interest under this
note when due, or upon the occurrence of any default under any deed of
trust, mortgage, pledge agreement, security agreement, or other encumbrance
or agreement securing Maker's payment of this note, the holder of this note
may at any time thereafter declare all unpaid principal and interest under
this note due and payable, immediately, without presentment, demand or
notice of any kind.
If this note is not paid in full when due or declared due, the unpaid
principal balance of this note, and the accrued interest thereon, shall
thereafter bear interest at the an annual rate equal to 5% greater than the
rate specified in the first paragraph of this note.
The principal of this note may be prepaid in full or in part at any
time without notice, penalty or premium. All amounts paid under this note
shall be applied first to accrued interest, and then to the reduction of
principal.
Payment of this note is secured by a Stock Pledge of even date (the
"Pledge").
Maker and each endorser and guarantor of this note, if any, waive
presentment of this note for payment, protest, and notice of nonpayment; and
agree to any extension of time for payment and partial payments before, at
or after maturity. Maker shall reimburse the holder of this note for all
costs incurred in collecting this note, including reasonable attorneys'
fees, whether suit is commenced, or otherwise.
This note shall be construed in accordance with Colorado law.
EXECUTED as of the date first set forth above.
Stock Pledge
THIS PLEDGE is given by the undersigned ("Debtor") for the benefit of
MALLON RESOURCES CORPORATION ("Beneficiary") for the purpose of securing
performance of Debtor's obligations under the promissory note of even date
from Debtor to Beneficiary in the original principal amount of $645,548.75
(the "Note"). Debtor hereby agrees as follows:
1. As security for Debtor's performance of Debtor's obligations under
the Note, Beneficiary is hereby given a lien upon and a security interest in
93,898 shares of the $0.01 par value per share common stock of Mallon
Resources Corporation (the "Shares"), all of which are owned by Debtor and
are in due form for transfer and all of which are herewith deposited with
Beneficiary. Stock dividends and other distributions on account of the
Shares shall be deemed an increment thereto, and if not received directly by
Beneficiary shall be delivered immediately to Beneficiary by Debtor in form
for transfer.
2. Upon the happening of any event of default under the terms of the
Note, Beneficiary shall have with respect to the Shares all of the rights
and remedies provided to a secured party by the Uniform Commercial Code in
effect in the State of Colorado at that time.
3. Beneficiary may, at Beneficiary's option and without obligation to
do so, transfer to or register in the name of Beneficiary's nominees all or
any part of the Shares and Beneficiary may do so before or after the
maturity of the Note and with or without notice to Debtor.
4. This Pledge shall be deemed to have been made under, and shall be
governed by, the laws of the State of Colorado in all respects, including
matters of construction, validity and performance, and none of its terms or
provisions may be waived, altered, modified, or amended, except as
Beneficiary may consent thereto in writing.
END OF EXHIBIT 10.11
<PAGE>
EXHIBIT 10.12
PROMISSORY NOTE
$391,283.75 September 2, 1999
FOR VALUE RECEIVED, Roy K. Ross("Maker"), hereby promises to pay to
the order of Mallon Resources Corporation, a Colorado corporation, at 999
18th Street, Suite 1700, Denver, Colorado, or at such other place as may be
designated in writing by the holder of this note, the principal sum of
$391,283.75, together with interest thereon from the date of this note until
this note is paid in full, at an interest rate of 7.0% per annum, compounded
annually.
The principal and all accrued interest on this note shall be due and
payable in one payment due on August 31, 2002.
Upon any failure by Maker to pay any principal or interest under this
note when due, or upon the occurrence of any default under any deed of
trust, mortgage, pledge agreement, security agreement, or other encumbrance
or agreement securing Maker's payment of this note, the holder of this note
may at any time thereafter declare all unpaid principal and interest under
this note due and payable, immediately, without presentment, demand or
notice of any kind.
If this note is not paid in full when due or declared due, the unpaid
principal balance of this note, and the accrued interest thereon, shall
thereafter bear interest at the an annual rate equal to 5% greater than the
rate specified in the first paragraph of this note.
The principal of this note may be prepaid in full or in part at any
time without notice, penalty or premium. All amounts paid under this note
shall be applied first to accrued interest, and then to the reduction of
principal.
Payment of this note is secured by a Stock Pledge of even date (the
"Pledge").
Maker and each endorser and guarantor of this note, if any, waive
presentment of this note for payment, protest, and notice of nonpayment; and
agree to any extension of time for payment and partial payments before, at
or after maturity. Maker shall reimburse the holder of this note for all
costs incurred in collecting this note, including reasonable attorneys'
fees, whether suit is commenced, or otherwise.
This note shall be construed in accordance with Colorado law.
EXECUTED as of the date first set forth above.
Stock Pledge
THIS PLEDGE is given by the undersigned ("Debtor") for the benefit of
MALLON RESOURCES CORPORATION ("Beneficiary") for the purpose of securing
performance of Debtor's obligations under the promissory note of even date
from Debtor to Beneficiary in the original principal amount of $391,283.75
(the "Note"). Debtor hereby agrees as follows:
1. As security for Debtor's performance of Debtor's obligations under
the Note, Beneficiary is hereby given a lien upon and a security interest in
56,914 shares of the $0.01 par value per share common stock of Mallon
Resources Corporation (the "Shares"), all of which are owned by Debtor and
are in due form for transfer and all of which are herewith deposited with
Beneficiary. Stock dividends and other distributions on account of the
Shares shall be deemed an increment thereto, and if not received directly by
Beneficiary shall be delivered immediately to Beneficiary by Debtor in form
for transfer.
2. Upon the happening of any event of default under the terms of the
Note, Beneficiary shall have with respect to the Shares all of the rights
and remedies provided to a secured party by the Uniform Commercial Code in
effect in the State of Colorado at that time.
3. Beneficiary may, at Beneficiary's option and without obligation to
do so, transfer to or register in the name of Beneficiary's nominees all or
any part of the Shares and Beneficiary may do so before or after the
maturity of the Note and with or without notice to Debtor.
4. This Pledge shall be deemed to have been made under, and shall be
governed by, the laws of the State of Colorado in all respects, including
matters of construction, validity and performance, and none of its terms or
provisions may be waived, altered, modified, or amended, except as
Beneficiary may consent thereto in writing.
END OF EXHIBIT 10.11
<PAGE>
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,230
<SECURITIES> 0
<RECEIVABLES> 2,123
<ALLOWANCES> 43
<INVENTORY> 200
<CURRENT-ASSETS> 3,593
<PP&E> 112,740
<DEPRECIATION> 53,428
<TOTAL-ASSETS> 65,426
<CURRENT-LIABILITIES> 6,271
<BONDS> 0
<COMMON> 74
1,341
0
<OTHER-SE> 19,416
<TOTAL-LIABILITY-AND-EQUITY> 65,426
<SALES> 13,138
<TOTAL-REVENUES> 13,298
<CGS> 0
<TOTAL-COSTS> 12,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,101
<INCOME-PRETAX> (2,672)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,672)
<DISCONTINUED> 0
<EXTRAORDINARY> (105)
<CHANGES> 0
<NET-INCOME> (3,013)
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
